Stimulus is not the bulk of debt: Fund’s Lipsky

The crisis would leave "heavy fiscal scars" on government finances, John Lipsky, a first deputy managing director of the International Monetary Fund (IMF), said on Tuesday in Paris.

The average debt-to-output ratio in the advanced countries was set to reach levels equalling 1950, when governments were saddled with the costs of the Second World War. "This surge in public debt is occurring at a time when pressures on health and pension spending are starting to accelerate, reflecting the combined effects of the aging population and of rapidly rising healthcare costs," Lipsky said. Based on current trends, this was expected to inflate spending by a further four or five percentage points of output over the next 20 years, he added.

Fiscal stimulus did not account for the bulk of the debt burden as commonly thought, Lipsky said. "Rather, the bulk [of advanced economy debt] is related to revenue losses from the output decline, lower tax payments from the financial sector, underlying spending increases and, increasingly, higher interest payments as debt rises," he said. As such, the easing of fiscal support measures alone would hardly redress the situation, he added.

While pushing debt ratios down below pre-crisis levels would undoubtedly be difficult, the strategy had benefits including eliminating vulnerability to future crises and keeping interest rates lower, he said.

Click here to read the speech