Thaindian News

Washington, Jan 24 (IANS) In India, the cyclically adjusted deficit is projected to fall by about 0.50 percent of GDP this year, according to the International Monetary Fund (IMF).

However, the space for loosening fiscal policy in response to a growth slowdown is limited by still-high deficits and debt, it says in the latest Fiscal Monitor Update.

In case of a substantial fall in output, any prospective expansion should be small, and focused on high-multiplier items such as indirect taxes and backlogged capital projects, rather than additional subsidies, it said.

Deficits in many advanced economies fell significantly during 2011, and most plan substantial adjustment this year, the update noted.

Continued adjustment is necessary for medium-term debt sustainability, but should ideally occur at a pace that supports adequate growth in output and employment, it said.

Given the large adjustment already in train this year, governments should avoid responding to any unexpected downturn in growth by further tightening policies, and should instead allow the automatic stabilizers to operate, as long as financing is available and sustainability concerns permit, IMF said.

Countries with enough fiscal space, including some in the euro area, should reconsider the pace of near-term adjustment. At the same time, some countries — notably, the US and Japan — need to clarify their medium-term debt-reduction strategies, it said.

Adjustment should be supported by the availability of adequate non-market financing when, as in the euro area, market confidence is slow to respond to reforms.

In the US, the cyclically adjusted deficit is forecast to fall sharply this year, by around 1.50 percent of GDP, the IMF said.

These projections assume that Congress will extend payroll tax relief and jobless benefits for the long-term unemployed beyond their expiration date at the end of February.

Without these extensions, the cyclically adjusted deficit would decline by over 2 percentage points of GDP - the largest annual fall in at least four decades - with negative repercussions for the still unsettled economic outlook.

The risk of too rapid short-term adjustment stands in marked contrast to the continued lack of progress in clarifying a medium-term consolidation strategy, including the failure of the Joint Select Committee on Deficit Reduction to reach agreement on a medium-term programme to strengthen public finances, the IMF said.

(Arun Kumar can be contacted at arun.kumar@ians.in)