China should use fiscal policy to boost growth: IMF

China should use fiscal policy to boost growth: IMF

China's central bank in Beijing -- part of a state that the head of the IMF's fiscal affairs section tells AFP has 'very strong fiscal capacity to act'
China's central bank in Beijing -- part of a state that the head of the IMF's fiscal affairs section tells AFP has 'very strong fiscal capacity to act'. Photo: ADEK BERRY / AFP/File
Source: AFP

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The Chinese government should use its tax-and-spend policies to help boost flagging economic growth, a senior IMF official told AFP ahead of key meetings this week in Washington.

The IMF has raised concern about the levels of global public debt, which it estimates will reach a record $100 trillion this year, with debt expected to rise in both the United States and China, the world's two largest economies.

"China is in the process of a major transition," Vitor Gaspar, head of the IMF's department that advises governments on fiscal affairs, said in an interview from his IMF headquarters office close to the White House.

"Fiscal capacity can help China reach a different plateau in terms of its economic ambition, in terms of its economic prosperity," he said ahead of the Monday opening of the International Monetary Fund and the World Bank annual meetings.

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Gaspar noted China's "very strong fiscal capacity to act."

The IMF estimates that China's economic growth will ease over the coming years, slowing from 5.2 percent in 2023 to 4.8 percent this year, and 4.5 percent in 2025.

Gaspar spoke to AFP from the IMF headquarters in Washington, D.C.
Gaspar spoke to AFP from the IMF headquarters in Washington, D.C.. Photo: Tierney CROSS / AFP
Source: AFP

Countries like China and the United States, which have rising levels of public debt while also being "safely away from debt distress," should move gradually but decisively to adjust fiscal policy to bring down their debt-to-GDP ratios, Gaspar said.

At the same time, China should also be looking to implement fiscal policies to help drive growth and reverse its expected economic slowdown.

"For a continental economy like China, the main driver of growth and development has to be domestic," he said, noting that if this issue was tackled it could help to rebalance the Chinese economy.

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China should also be looking to tackle "financial misallocations" stemming primarily from the country's struggling real estate sector, and also to tackle some of the "vulnerabilities and financial weaknesses" at the sub-national level, he said.

'Ample room'

US Vice President and Democratic presidential candidate Kamala Harris and former US President and Republican presidential candidate Donald Trump are into the final stretch of campaigning ahead of the US elections on November 5
US Vice President and Democratic presidential candidate Kamala Harris and former US President and Republican presidential candidate Donald Trump are into the final stretch of campaigning ahead of the US elections on November 5. Photo: DUSTIN FRANZ, Elijah Nouvelage / AFP/File
Source: AFP

Alongside China, the IMF sees the United States as a key driver of global public debt, and expects its gross general government debt-to-GDP ratio to hit 121 percent this year, and to approach 132 percent by the end of the decade, Gaspar said.

This figure does not include the trillion-dollar spending commitments made by both Democratic candidate Kamala Harris and Republican Donald Trump on the campaign trail ahead of the US presidential elections on November 5, Gaspar said.

Like China, "the US benefits from ample room to adjust fiscal policy instruments to bring US debt under control," he said, adding that the tax and spending choices would ultimately have to be made by politicians.

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"It's very important to have public support -- political support -- for fiscal adjustment, and that calls for a judicious mix of people- and growth-focused measures," he said, noting that this should include taxation that is seen to be "fair".

Agreeing with Draghi

Gaspar said the IMF agrees with the findings of a report published last month on the European Union's lack of competitiveness conducted by the former Italian premier Mario Draghi, which called for "massive" but targeted investment to fund the 27-member trading bloc's priorities.

"An emphasis on growth and competitiveness in Europe is just (and) appropriate," he said, despite the cost of these measures.

Gaspar also noted the Draghi report's calls to deepen the EU's single market -- something the IMF has long supported.

"The single market is one of the central cornerstones of European integration, one of the most important collective assets of Europe, and should be used to the fullest extent," he said.

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Asked during a press conference in Washington on Wednesday about the French government's recent proposals to bring its budget deficit under three percent of GDP by 2029, Gaspar said the plans showed the new government was moving in the right direction.

"But we are waiting for more clarity coming from actual enacted measures in France," he added.

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Source: AFP

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