IMF official says China's fiscal policy plays positive role in fighting climate change

BEIJING -- China's climate policy in recent years has been very successful, attesting to the positive role of fiscal policy in the country's structural transformation, an International Monetary Fund senior official has said.

"If I were to give you my top measure or measures taken in China in the recent past, with the fiscal repercussions that I believe have been very successful, I would single out climate," Vitor Gaspar, director of the IMF's fiscal affairs department, told Xinhua in a virtual interview earlier this week, during the IMF and World Bank Spring Meetings.

Gaspar noted that in 2021, China introduced an emissions trading scheme that "rapidly became the largest carbon market in the world."

That's a very good example of using the market mechanism to serve climate change mitigation, Gaspar said. "That's something the IMF has been advocating for individual countries, and also for the world."

The IMF official said the measure is "a very important contribution of China to fighting climate change at the global level." He added that the IMF believes that a minimum carbon tax could be a good part of a global deal.

Another aspect that also reflects the role of fiscal policy in China, Gaspar said, is the increase of renewables in the production of energy.

According to the International Energy Agency, China is on track to reach in 2025 its goals for 2030 in terms of the share of renewables in the production of energy.

Noting that the increase in the share of China in world GDP reflects "quite an impressive growth performance" in the last 45 years or so, the IMF official said the main challenge for China right now is the transition in its growth model -- the rebalancing of growth from investment to consumption, from exports to domestic demand.

"As China's weight (in global GDP) increases, the need to rely on its own endogenous domestic dynamism increases," said Gaspar.

"Fiscal policy can help and should help this transition by, for example, offering more generous social safety nets that will provide incentives for Chinese households to reduce elevated precautionary savings," he said.

In its newly released Fiscal Monitor, the IMF said following 2020's historic surge in global public debt to nearly 100 percent of global GDP because of economic contraction and massive government support, fiscal deficits have since declined.

In the last two years, global debt posted the steepest decline in decades and accounted for 92 percent of GDP at the end of last year, which is still about 8 percentage points above pre-pandemic projections.

"Many of these countries are now revisiting their framework of rules, institutions, in order to go back to fiscal discipline. That is a very good sign of returning to normal," Gaspar told Xinhua.

The IMF official considers it a priority to reduce debt vulnerabilities and rebuild fiscal buffers over time, noting that about 60 percent of low-income countries are in debt distress or at high risk of debt distress, compared with roughly 25 percent a decade ago.

As low-income countries face particularly severe challenges, international cooperation is "crucial" to helping these countries resolve unsustainable debt burdens in an orderly and timely manner, Gaspar said.

Rising interest rates have pushed up debt servicing costs around the world, the latest Fiscal Monitor noted. In 2020, interest expenditures in the fiscal budget is about 2 percent of GDP, and that number is expected to reach 2.7 percent for the average of 2025-28.

Gaspar urged fiscal policymakers to adopt tighter fiscal policies to help central banks fight inflation and promote financial stability.

"The reason we emphasize fiscal tightening right now is because it would decrease the interest rate level that monetary policy would have to put in place to bring inflation back to target in a timely way," said Gaspar.

Meanwhile, the IMF argued that tighter fiscal policies require "better targeted safety nets to protect the most vulnerable households," including addressing food insecurity, while containing overall spending growth.

The reversal in the progress towards the global eradication of poverty is a problem highlighted by the Fiscal Monitor, which deems poverty the most salient of all sustainable development goals.

"One of the crucial fruits of the very fast growth of China in the last 45 years was the lifting of literally hundreds of millions of people out of poverty. And that's a very good example of how development helps eradicate poverty," said the IMF official.

Gaspar noted that the global progress towards the achievement of sustainable development goals had already slowed down before the pandemic, and the pandemic made prospects worse and made action to progress towards the sustainable development goals "even more urgent."

The reversal in the progress towards global poverty eradication partly results from insufficient financing capacity and fiscal capacity, Gaspar said, arguing for the urgency of improving the access to financial resources for low-income countries.

Additionally, the IMF official called on policymakers to reinforce fiscal capacity through building tax capacity in these countries, stressing the complementarity between efforts at the global and at the national level.