Here's the Financial Times' take on the coming economic maelstrom....
FINANCIAL TIMES 4.11.09
Ten years of cuts and tax rises lie ahead, IMF says
By Krishna Guha in Washington
Sweeping spending cuts and tax increases will be required across the industrialised world over the next decade to bring public finances under control following the economic crisis, the International Monetary Fund warned yesterday.
The IMF projected that on current trends, even assuming some discretionary fiscal tightening next year, government debt in the advanced G20 economies would reach 118 per cent of gross domestic product in 2014.
It warned that such an increase would result in a big rise in government borrowing costs - with bond yields roughly 2 percentage points higher than they would otherwise have been.
In an interview with the Financial Times, Carlo Cottarelli, director of fiscal affairs at the IMF, acknowledged that there was no sign yet of rising bond yields but warned against assuming that current low rates would prevail in the future without big policy changes.
"The benign view is that the markets assume there will be fiscal adjustment. The alternative view is that markets react late and suddenly to changes in fundamentals," he said.
The IMF report came as Peter Orszag, the US White House budget director, gave a speech that suggested Barack Obama's administration intended to tighten fiscal policy by 1 to 2 percentage points of GDP over the medium term.
"Our current projections of 4 to 5 per cent of GDP in the out-years are well above the fiscally sustainable level of roughly 3 per cent," he said, adding: "We are currently considering a number of proposals to put our country back on firm fiscal footing."
The IMF analysis suggests that without a change of course all the leading economies except Germany will still be running large deficits in 2014, when the world economy is expected to be close to its potential level of output.
It puts the 2014 deficit - which is a rough proxy for the structural deficit - at 6.7 per cent of GDP in the US, 6.8 per cent in the UK, 8 per cent in Japan, 5.3 per cent in Italy and 5.2 per cent in France. The analysis suggests that interest payments on the increased stock of govern-ment debt will eat up a much larger share of tax revenues post-crisis than before the crisis - twice as much in the US and UK.
The fund said it would take spending cuts and tax increases equivalent to about 8 percentage points of GDP to bring the debt-to-GDP ratio back down to 60 per cent over a decade across the industrialised G20 nations as a whole.
A less ambitious plan to stabilise debt-to-GDP at 80 per cent would still require a 6.7 per cent adjustment, it said. These assessments are sensitive to increases in state borrowing costs relative to growth rates.
The IMF suggested a benchmark plan for an 8 percentage point turnround would involve allowing all stimulus measures to expire, freezing spending outside health and pensions in real terms for a decade, sharply reducing growth in spending on health and pensions to keep this in line with output growth, and tax increases worth 3 percentage points of GDP.
The IMF said "the adjustment needed in many advanced countries will be difficult but it is not unprecedented". However, it noted that adjustment "will be more challenging than in some past episodes because it will have to be undertaken in an environment of adverse demographics and potentially sluggish potential growth".