Undertaking a sizable fiscal adjustment is a lot like driving up a tall mountain: it’s hard work, it can take a long time, and you don’t want to run out of fuel partway up the incline. Countries are starting the climb, cutting back government deficits and debt levels, but according to our analysis often current plans aren’t enough to get countries where they need and want to go. The plans in place are large by historical standards, which brings with it difficult choices, and particular risks and uncertainties. Let me fill you in on what these are.
Fiscal policy this year in some leading advanced economies is shaping up to be quite different from what was expected just last November, according to the just-published Fiscal Monitor update. Some of this change is attributable to the somewhat better than projected fiscal results in 2010. Most of it, however, is due to additional stimulus measures introduced in recent months. Altogether, sovereign risks remain elevated and in some cases have increased since November 2010. No amount of deficit reduction this year, however, can be sufficient to restore countries’ fiscal accounts to robust good health. Putting the government accounts in order will require a multi-year effort. So, how are countries doing in setting out their longer-term plans? Here, we see somewhat of a mixed picture.