THE RISK of large government debts has been laid out in a new paper by the International Monetary Fund (IMF), which was published yesterday.
New research, approved by IMF chief economist Oliver Blanchard, suggests high debt levels are more dangerous for advanced economies than was commonly thought before the financial crisis.
Using Iceland and Ireland as examples, the paper says that rapid accumulation of debt during a crash means that seemingly safe levels can quickly become hazardous: “Even levels of debt well below what was considered prudent before the crisis may not be ‘safe’ in the face of large potential contingent liabilities.”
While the IMF stuck to its suggestion that frontloading (concentrating budget cuts early on) can be damaging, it also suggests that “excessive delay may also be very costly”.
The UK also gained credit for its use of medium-term budget plans. The paper finds that states without such estimates are more prone to error in their economic forecasts.