Beijing: The global economic crisis has left “deep scars" in the fiscal balances of the world’s advanced economies, which should begin to rein in spending next year as the recovery continues, the No. 2 official at the International Monetary Fund (IMF) said on Sunday.

Grim picture: IMF’s John Lipsky has said a global rebalancing of savings patterns would be needed to sustain the recovery. Bloomberg

For the US, “a higher public savings rate will be required to ensure long-term fiscal sustainability," Lipsky said.

Lipsky said the average ratio of debt to gross domestic product in advanced economies was expected this year to reach the level that prevailed in 1950. Even assuming that fiscal stimulus programmes are withdrawn in the next few years, that ratio is projected to rise to 110% by the end of 2014, from 75% at the end of 2007.

Indeed, the ratio is expected to be close to or to exceed 100% for five of the Group of 7 countries—excluding Canada and Germany—by 2014.

“Addressing this fiscal challenge is a key near-term priority, as concerns about fiscal sustainability could undermine confidence in the economic recovery," Lipsky said. Maintaining public debt at postcrisis levels could reduce potential growth in advanced economies by as much as half a percentage point annually, compared with projections before the crisis, he said.

To reduce debt ratios to the pre-crisis average of 60% by 2030, he said, would require an 8 percentage points swing— from a structural deficit of about 4% of GDP in 2010 to a surplus of about 4% of GDP in 2020.

IMF estimates that the discretionary stimulus spending accounts for just 1.5% of GDP. Lipsky said advanced economies would have to take other steps, such as changes in pensions and healthcare programs, other cutbacks in spending and higher tax revenues.

While it makes sense for the world’s largest economies to continue stimulus spending through the end of this year, “fiscal consolidation should begin in 2011, if the recovery occurs at the projected pace," Lipsky said.

Lipsky also said that a “global rebalancing of savings patterns" would be needed to sustain the recovery.

The US and the EU have become increasingly concerned about China’s accumulation of an estimated $2.5 trillion in foreign reserves, the result of a large current account surplus with the rest of the world as well as actions to hold down the value of China’s currency.

Many economists say China will eventually need to develop its domestic markets and wean its economy away from a dependence on exports.

Lipsky said China was taking appropriate steps to shift public spending away from physical infrastructure and toward improvements in education, health and social security programs “that will increase productivity and also directly support consumption by lessening the perceived need for precautionary savings."

A sustained increase of 1% of GDP on health, education and pensions could result in a permanent increase in household consumption of more than 1% of GDP, Lipsky said, adding that China should consider increasing household income by shifting the tax burden away from earnings and toward property and capital gains.

Fiscal policy is expected to be a top item on the agenda when leaders of the Group of 20 nations gather for a summit meeting in Toronto in June.

Lipsky warned governments not to try to inflate their way out of their debts.

“A moderate increase in inflation would have only a limited impact on real debt burdens, while accelerating inflation would impose major economic costs and create significant risks to a sustained expansion," he said.

The US and other industrialized countries, as well as some developing countries, have been putting pressure on IMF to criticize China for its large-scale intervention in currency markets to hold down the value of the renminbi against the dollar. But Lipsky refrained from chastising China in his speech, which Chinese officials would have found particularly offensive if he had done so in Beijing.

IMF’s staff concluded in a report last summer that the renminbi was “substantially undervalued", and this was contributing to China’s large trade surpluses in recent years. But China has blocked the release of that report, a prerogative of the IMF’s member countries, although most allow the release of the IMF staff’s reports on their economies.

Commerce minister Chen Deming said at the same conference Sunday that China might run a trade deficit in March, after years of surpluses, said Xinhua, the official news agency.

A trade deficit for the current month would be a public relations bonanza for Chinese officials in pushing back against American pressures for revaluation of the renminbi. China typically announces its monthly trade figure between the 9th and 12th days of the next month. If it follows that schedule next month, the trade surplus will be released shortly before the 15 April deadline mandated by the US Congress to declare whether any foreign country, including China, manipulates the value of its currency.

Western economists have predicted that most, if not all, of China’s trade surplus would evaporate in March, but they have described this as a fluke of the calendar. Virtually all Chinese export factories closed for the last two weeks of February in observance of the Lunar New Year, which was unusually late this year, and many struggled to reopen at full capacity because many migrant workers were slow to return after the holidays.

The flow of goods to export ports slowed in March as a result, even as imports continued.

Chen also said China would not sit back if the US imposed sanctions after declaring China a currency manipulator, Xinhua reported.

The commerce ministry tends to represent the views of exporters. Like the commerce department in the US, the ministry does not have the authority to engage in international currency negotiations. But unlike commerce department officials in the US, who have a strict policy of not commenting on currency issues, commerce ministry officials in China have been outspoken to the domestic Chinese media in recent months in condemning any appreciation of the currency.

This has limited the room to maneuver for officials at the central bank and other agencies in charge of currency issues.