The IMF urges governments to rein in spending or risk investor distrust

Governments must place more emphasis on keeping their finances in shape or risk undermining the confidence of bond market investors buying their debt, the IMF warned.

Rising interest rates and high inflation have increased the importance of countries making their public finances more resilient so they can cope with a “more shock-prone” world, the IMF said in its annual Fiscal Monitor release on Wednesday.

Reversing the message of previous years, the IMF scrapped its calls for governments to borrow more, saying higher borrowing was no longer appropriate now that interest rates would need to rise to quell the widespread threat of inflation.

Vítor Gaspar, head of fiscal policy at the IMF, said: “In a shock-prone world, the trade-offs that fiscal policymakers face are much tougher than before.”

Policies that offered broad support for lower energy and food prices for all are costly and ineffective, the IMF said. Instead, governments should only offer targeted and temporary cost-of-living support for the most vulnerable. The whole world should help even the poorest countries to cope with higher food costs.

“For poor countries with food safety concerns, the trade-offs are literally a matter of life and death,” Gaspar added.

He acknowledged that it is difficult for politicians to put the recommendations into practice. However, rising interest rates would increase the cost of servicing debt, while any inflationary benefit from reducing debt burdens would provide only a temporary respite.

“When people adapt [to rapidly rising prices], inflation premiums are reflected in the interest cost of servicing debt, and . . .[investing]in government bonds is becoming less attractive,” he said.

Governments should not fight monetary policymakers who are trying to beat inflation.

“Fiscal consolidation sends a strong signal that policymakers are aligned in their fight against inflation,” the report said, adding that the alignment would keep inflation expectations better anchored and leave central bankers in a position to in which further rate hikes would be unnecessary.

Tax increases and spending cuts are a better alternative than losing investor confidence. The report states that “although politically difficult, a gradual and steady tightening of fiscal policy is less disruptive than an abrupt pullback in fiscal policy caused by a loss of market confidence.”

The words sounded like a thinly veiled criticism of Britain’s recent “mini” budget, which included unfunded permanent tax cuts amounting to nearly 2 percent of national income.

However, Gaspar preferred to focus on the steps ministers had taken to address market concerns and commended the UK government for working with its economic institutions and vowed to present a calculated financial plan by the end of the month. He said he was “reassured” by the UK government’s push to restore fiscal credibility.

Nor was he willing to end Germany’s broad-based energy subsidies of up to €200 billion.