Washington: The International Monetary Fund on Tuesday projected higher debt levels for the world's major economies, but said the global economic recovery was still too fragile to begin withdrawing fiscal support.
In its latest edition of "Cross-Country Fiscal Monitor," the IMF said major economies' government debt as a percentage of gross domestic product is projected to hit 118 percent by 2014.
Only Australia, Canada and South Korea would have debt ratios well below 90 percent, the IMF said.
Much of the increase in debt in the Group of Seven rich countries has come as governments bailed out banks and resuscitated economies while tax revenues have fallen.
New IMF research shows that if governments do not undertake fiscal adjustments and debt levels remain around 118 percent of GDP, then interest rates would rise by up to two percentage points over the medium term.
But for now, fiscal support in advanced economies was "appropriate" and should remain in place until the recovery was self-sustaining, said Carlo Cottarelli, director of the IMF's Fiscal Affairs Department.
Speaking on a conference call with reporters, he said fiscal policy in advanced economies would likely remain supportive through next year, but fiscal tightening is expected to begin in faster-growing, emerging market countries in 2010.
The average debt level for major emerging economies is likely to decline moderately after 2010 and remain below 40 percent of GDP, assuming discretionary fiscal tightening in some countries next year, the IMF said.
Cottarelli said it was important that governments design and communicate credible exit strategies to ensure the rise in public debt does not prompt concerns about fiscal policies, which could give rise to higher interest rates.
"That is why we believe it is important over the medium term that fiscal adjustment takes place," he added.
"This is not the moment to tighten fiscal policy, but it is the time to think how to adjust fiscal policy in the future if we want to avoid an increase in interest rates and for crowding-out effects which would lower potential growth over the medium term," he told a conference call with reporters.
Among the Group of 20 member countries, the IMF said the average overall deficit is projected to fall to 6.9 percent of GDP next year from 7.9 percent in 2009 due to declining losses from financial sector support in the United States.
Excluding losses from such support, however, deficits are likely to widen in advanced economies in 2010, the IMF said.
The fund said the biggest fiscal adjustments will need to be made in the United Kingdom, Ireland, Spain and Japan. Only Denmark, South Korea, Norway, Australia and Sweden will require little or no fiscal adjustments to keep debt at safe levels.
The IMF also said lowering debt levels below 60 percent over the next two decades will require raising the average structural primary balance in advanced economies by 8 percentage points of GDP until 2020, then keeping it there for another ten years.
"This is a fairly sizable adjustment and is the average for advanced economies," Cottarelli added.
According to the Organization for Economic Cooperation and Development, a primary balance is government net borrowing or net lending excluding interest repayments on total government liabilities.
To achieve this, the IMF said countries would need reforms to lower costs of pension and health spending, and tax increases averaging about three percentage points of GDP in major G20 countries.
Bureau Report