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The former IMF minister and director argues that governments “should not withdraw budget support prematurely,” but warned of deficits and debt.
The weight of public debt and the budget deficit (as a function of GDP) will be much higher than what is currently forecast, the former Portuguese Finance Minister Vítor Gaspar warned this week at the European Central Bank Forum.
In his comment, the now director of the budget affairs department of the International Monetary Fund (IMF), made it very clear that the economic and budgetary situation of the vast majority of countries will worsen significantly before improving.
Gaspar pointed his finger at the second wave of covid-19. The dangers to the economy and jobs are real and growing, he said. And the uncertainty is huge, again.
The official did not refer to the fermentation of a recession in W (two very serious falls in GDP due to the two waves of the pandemic and the consequent confinements), but left clues in that regard. It seems to be happening, according to the battery of data and the analysis of the IMF economist.
In the latest IMF projections for the almost 200 economies that exist in the world, the recession is the big mark of 2020, but 2021 now seems more uncertain. It may be worse than you think.
Alternative scenarios
Gaspar referred to the latest and most recent projections for economic activity and public accounts, but said that we should begin to “consider alternative scenarios.”
There is such a base, central scenario, but “unfortunately, some risks have already materialized.” The worst case scenario is gradually taking shape.
The former PSD-CDS government minister, who applied the troika’s adjustment program between 2011 and 2014, recalled that “on the positive side, growth exceeded expectations in the third quarter of 2020.”
“Partial restrictions have been adopted in many places” and “responses from the public budget to support living conditions will lead to substantial increases in deficit and debt.” He concluded: “Economic activity and employment will also be negatively affected.”
Gaspar told the Forum’s virtual audience that “high levels of public debt are not the most immediate risk in the euro zone” and therefore advised policy makers not to “prematurely withdraw budget support.”
Gaspar once again defended public investment to help economies in this difficult stage. And he asked that the money available (European funds and ultra-low interest from the ECB) be used “productively” and that everything be done with “transparency and accountability.”
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