Fiscal policy in the great election year

Fiscal policy is known to loosen during election years, with governments worldwide making big spending commitments on economic development, infrastructure, and social programs to win over voters. With more than half of the world's economies holding elections this year, concerns about government expenditure and high debt-to-GDP ratios have come to the forefront. Era Dabla-Norris, Deputy Director of the Fiscal Affairs Department at the IMF, joined CNBC Africa to shed light on the implications of the current economic backdrop. The overarching theme of the conversation revolved around the potential risks stemming from expanded fiscal policies in election years and the impact on public finances. Dabla-Norris highlighted the phenomenon known as the 'political budget cycle,' where governments ramp up spending and cut taxes in election years, typically resulting in deficits averaging 0.3 percentage points higher compared to non-election years. This trend poses risks to public finances, especially in the current environment of high global debt levels and growing pressures for increased spending to address issues like climate change. South Africa, which is gearing up for a crucial election, faces challenges with ongoing high fiscal deficits and rising debt levels. Dabla-Norris emphasized the need for fiscal consolidation to create space for essential expenditures and to reduce debt to sustainable levels. She suggested measures such as cutting transfers to state-owned enterprises and enhancing spending efficiency to curb debt escalation. Structural reforms aimed at boosting productivity, tackling crises in energy and logistics, and addressing broader economic issues could help improve growth prospects and public finances. Looking ahead, Dabla-Norris pointed out the concerning projection of global debt reaching 99% of GDP by 2029, with China and the US playing a significant role in driving this increase. While debt levels are expected to moderate in some countries over the medium term, primary deficits are projected to narrow slowly, indicating a persisting imbalance between spending and revenue. This protracted high debt scenario has broader economic implications for emerging markets, with the potential for sluggish growth and financial vulnerabilities. The conversation underscored the importance of prudent fiscal management and structural reforms to navigate the challenges posed by heightened debt levels and increased spending pressures. As nations prepare for elections amidst a delicate economic landscape, the IMF's warning against fiscal risks serves as a cautionary tale for policymakers worldwide.