The International Monetary Fund says most countries will need to raise taxes to pay off the trillions of dollars they spent fighting the global recession.
IMF chief economist Olivier Blanchard says in an article to be published today that governments acted properly in ramping up spending to stop the worst slump since World War II.
Soon, he says, nearly all countries will have to raise taxes to pay the recovery bill.
Canada’s Finance Minister Jim Flaherty has rejected the idea he will have to raise taxes to pay off about $47 billion in stimulus spending.
Blanchard, meanwhile, says with the recession virtually over, what is left are deep scars that will take years to heal.
He sees positive growth for most countries in the next few years, but says it will be sluggish.
“The recovery has started,” Blanchard says in the paper released by the Washington-based lender.
“The crisis has left deep scars, which will affect both supply and demand for many years to come.”
In many countries, the potential exists for economies never to return to where they stood before the recession hit, Blanchard states.
A rebalancing among nations is also needed, the IMF says, with countries like the United States increasing imports and economies like China increasing exports.
Having rescued economies from Pakistan to Iceland in the past year, the IMF is advising officials to keep economic stimulus in place no longer than needed to chart a path to sustainable growth.
Blanchard calls that process a “delicate rebalancing act,” in which capital flows to emerging markets “may not fully come back in the next few years.”
Most economies may expand for a few quarters but “growth will not be quite strong enough” to reduce unemployment, unlikely to crest until some time next year, he adds.
The IMF has said the world economy would expand 2.5 per cent in 2010, not 1.9 per cent as it predicted in April.
But this year’s contraction will be 1.4 per cent, worse than the 1.3 per cent drop the IMF saw in April.
Blanchard cautions that rising government debt levels mean fiscal stimulus programs cannot continue for “very long” unless private consumption and investment replace public support for growth.
“We may not go back to the old growth path,” he said in the paper. He adds that a sustained global recovery may hinge on the ability of Asia to boost domestic demand to levels that help U.S. exports.
“The United States was not only at the origin of the crisis. It is central to any world recovery.”
Inability or unwillingness by China, Japan and other Asian economic powers to reduce current-account surpluses could lead to a slower U.S. recovery and political pressure to pump in more fiscal stimulus and borrow more.
U.S. inability to trim debt, then, would become a concern.
Fiscal deficits could feed “worries about U.S. government bonds and the dollar … causing large capital flows from the United States,” Blanchard added.
“Dollar depreciation may take place, but in a disorderly fashion, leading to another episode of instability and high uncertainty” that could derail recovery.