An unprecedented wave of electoral activity is forecasted for 2024, and the International Monetary Fund (IMF) has issued a stark warning about its potential impact on global economic stability. In its latest Fiscal Monitor report, the IMF has highlighted the challenges that the sheer number of elections – a record 88 nations going to the polls, representing more than half the world’s population – poses to fiscal discipline. As nations are inclined to increase spending and cut taxes to appease voters during election cycles, the IMF stresses the importance of re-establishing financial buffers that have been depleted.
The magnitude of the political events taking place has aptly led to the year being termed the ‘Great Election Year,’ with the United States gearing up for its presidential election in November, and India commencing its voting process later in the month. Nations like Taiwan, Portugal, Russia, and Turkey have already conducted their elections earlier in the year. Historically, it’s been observed that government deficits tend to overshoot their projections in election years by 0.4 percentage points of GDP, a phenomenon that could be exacerbated by the current high demands for social spending.
Despite a steady projection of global growth, with the IMF forecasting a 3.2% real GDP growth for both 2024 and 2025, policymakers must navigate through slowing growth prospects, elevated interest rates, and constrained fiscal spaces. The global outlook, although improved over the past six months, still presents concerns for countries grappling with significant debt and fiscal deficits amidst the less-than-ideal economic conditions.
In the wake of the COVID-19 pandemic, advanced economies other than the United States are witnessing government expenditure levels that are 3 percentage points higher than pre-crisis levels. For emerging market economies, excluding China, an increase of 2 percentage points has been noted. As a result, global public debt has ascended to 93% of GDP in 2023 – 9 percentage points larger than before the pandemic – with the rise majorly propelled by the United States and China, where debt grew by 2 and 6 percentage points, respectively.
The IMF calls for decisive measures aimed at phasing out crisis-era fiscal policies, such as energy subsidies, and advocates for the implementation of structural reforms to curtail escalating expenses while safeguarding the most vulnerable sections of society. With ageing populations straining resources in advanced economies, the reformation of healthcare and pension schemes is essential to combat spending pressures. Moreover, as suggested by the IMF, tweaking the corporate income tax system to address excessive profits could serve as a source of increased revenue.
Meanwhile, developing economies and emerging markets are encouraged to enhance their tax revenues through measures such as improving tax systems, broadening tax bases, and fortifying institutional capacities. The IMF estimates that these strategies could collectively generate additional revenue equivalent to as much as 9% of GDP.
Without a concrete approach to reduce deficits, the future trajectory of public debt looks grim, with projections showing a global debt level nearing 99% of GDP by 2029. China and the United States are expected to be significant contributors to this rise, potentially reaching new heights in public debt records.
The intersection of these unprecedented global elections with the intricate state of financial conditions calls for heightened vigilance and disciplined fiscal management. Policymakers will face the challenge of balancing electoral promises with the necessity of fiscal prudence to ensure the long-term stability and growth of the world economy. As countries across the globe prepare to cast their ballots, the risks to public finances loom large, putting the wisdom and restraint of governments to the test in what could be the most politically engaging, yet economically perilous year in recent history.
