From a financial point of view, how can states best help their citizens in the face of high inflation and expensive energy? The International Monetary Fund recommends direct payments to those in need. Tax cuts, on the other hand, are expensive for public coffers and ultimately ineffective.
The International Monetary Fund (IMF) warns governments against easing the burden on consumers in the face of high inflation through tax cuts. In the face of "long-lasting supply shocks" and widespread inflation, "attempts to limit price increases through price controls, subsidies or tax cuts would be costly for the budget and ultimately ineffective," writes the IMF in its fiscal policy report. Rather, governments should allow prices to adjust and support those most in need with temporary direct payments.
As a result of the corona pandemic and the Russian war of aggression against Ukraine, consumer prices have risen in numerous countries. "Households are grappling with increased food and energy prices, which increases the risk of social unrest," states the IMF. A balance through budget and tax policy is becoming increasingly difficult. This applies in particular to indebted countries whose fiscal leeway has been exhausted after the years of the corona pandemic.
The report was released at the annual meetings of the IMF and World Bank in Washington. The International Monetary Fund issued a gloomy forecast for the development of the global economy on Tuesday and lowered its economic forecasts. "The worst is yet to come," warned IMF chief economist Pierre-Olivier Gourinchas.
The new report goes on to say that after the end of the corona pandemic, global debt fell as a result of high growth and inflation rates. The reduction of deficits, which is being promoted in many industrialized and emerging countries, is important because it helps to combat both inflation and excessive debt. "The consolidation of public finances sends a strong signal that policymakers are aligned in their fight against inflation, which in turn would reduce the size of the rate hikes needed," the IMF said.
According to the IMF projections, the euro area will have a budget deficit of 3.8 percent this year, which is expected to fall to 2.5 percent by the end of the projection period (2027). The IMF sees the debt level at 93.0 and 87.8 percent. According to the IMF, Germany's deficit will be 3.3 and 0.5 percent in 2022 and 2027, respectively, and the debt will be 71.1 and 59.7 percent. France is expected to have deficits of 5.1 and 5.0 percent and debt levels of 111.8 and 118.5 percent, and Italy deficits of 5.4 and 3.0 percent and debt levels of 147.2 and 142.5 percent.
The forecasts for the USA, on the other hand, envisage rising deficits and debt levels. Accordingly, the deficit will increase from 4.0 percent in the current year to 7.1 percent in 2027. Values of 122.1 and 134.9 percent are expected for debt. The IMF also expects relatively high budget deficits and a sharp increase in debt for China. The deficit is expected to be 8.9 percent this year and 7.1 percent in 2027. The IMF sees the level of debt in these years at 84.1 and 102.8 percent.
