Some countries with high public debt levels might be able to “just live with it,” because cutting back carries its own risks, three IMF officials said in a paper that disputes decades of dogma about the benefits of austerity.
The euro zone and other advanced economies have struggled with ballooning debt in the wake of the 2007-09 global financial crisis. Some have faced pressure to satisfy markets through fast fiscal consolidation.
The International Monetary Fund has already cautioned that cutting back on spending or raising taxes too quickly after the crisis could hurt growth.
Now, IMF economists Jonathan Ostry, Atish Ghosh and Raphael Espinoza take that advice a step further, arguing that countries able to fund themselves in markets at reasonable costs should avoid the harmful economic impact of austerity.
“A radical solution for high debt is to do nothing at all,” they write in a blog accompanying a Staff Discussion Note, which does not represent the IMF’s official position, but could help shape its policies.
“Debt is bad for growth … but it does not follow that paying down debt is good for growth. This is a case where the cure may be worse than the disease: paying down the debt would require further distorting the economy, with a corresponding toll on investment and growth.”
Instead, countries can wait for their debt ratios to fall through higher economic growth or a boost in tax revenues over time.
The austerity debate has become a hot political topic in countries such as the United Kingdom and Greece as voters protest the pain of budget cuts.
Greece’s Syriza government swept to power in January promising an end to austerity, but now faces pressure for more cuts in exchange for cash from international lenders.
The IMF economists did not mention many specific countries, but cited a 2014 chart from Moody’s Analytics that put most advanced economies, including the United States, United Kingdom and Germany, solidly in the “green zone” of ample fiscal space, meaning there is no rush to cut back debt.
France, Spain, Ireland should be cautious about debt, while Portugal faces “significant risk.”
Japan, Italy, Greece and Cyprus face “grave risk,” meaning they must cut back, according to the chart.