Governments Need Agile Fiscal Policies as Food and Fuel Prices Spike by Jean-Marc Fournier, Vitor Gaspar, Paulo Medas and Roberto Accioly Perrelli published by IMFBlog (4/2022).
“Spending imperatives from pandemic and war meet high debt and tight budget constraints.
Just as increasing vaccinations offered hope, Russia’s invasion of Ukraine disrupted the global economic recovery. One of the most visible global effects has been the acceleration of energy and food prices, triggering concerns about episodes of food shortages and increasing the risks of malnutrition and social unrest. World food prices surged by 33.6 percent in March from a year earlier, according to the Food and Agriculture Organization of the United Nations.
Highly uncertain fiscal outlook
Economies around the world have accumulated layer upon layer of legacies from past shocks since the global financial crisis. Extraordinary fiscal actions in response to the pandemic led to a surge in fiscal deficits and public debt in 2020.
Moreover, the outlook remained uncertain as the world navigated an unprecedented environment, with rising inflation and increasing divergence in recoveries—and then Russia invaded Ukraine, pushing geopolitical risks sharply up.
Global deficits and debt are falling from record levels, but the risks around the outlook are exceptionally high and vulnerabilities are rising. Global public debt is expected to fall in 2022 and then stabilize at about 95 percent of gross domestic product over the medium term, 11 percentage points higher than before the pandemic. Large inflation surprises in 2020-21 helped reduce debt ratios, but as monetary policy tightens to curb inflation, sovereign borrowing costs will rise, narrowing the scope for government spending and increasing debt vulnerabilities…”