INTERNATIONAL Monetary Fund's (IMF's) latest World economic outlook (WEO) has voiced concern over slow pace of tax reforms in the United States and the risk of public debt overhang in Euro Area leading to enhanced taxation of corporates.

WEO has concluded that global economic prospects have improved again but the road to recovery in the advanced economies will remain bumpy. It has reckoned that world output is expected to grow 3¼ percent in 2013 and 4 percent in 2014. In advanced economies, activity is expected to gradually accelerate, starting in the second half of 2013. Private demand appears increasingly robust in the US but still very sluggish in the euro area. In emerging market and developing economies, activity has already picked up steam.

WEO, which was issued on 16 th April, observes: “In the United States, it is worrisome that after three years of deliberations, policymakers have not agreed on a credible plan for entitlement and tax reform and that improvement in near-term prospects seems to have come with a decreased sense of urgency for progress.”

Reviewing the fiscal reforms in the US, it says: “Despite the progress made so far through discretionary spending caps and modest tax increases, a comprehensive plan is needed that includes entitlement reform and additional revenue-raising measures to put public debt on a sustainable footing. Such a comprehensive plan should place fiscal consolidation on a gradual path in the short term, in light of the fragile recovery and the limited room for monetary policy.”

It has also noted that the passage of the American Taxpayer Relief Act resolved the immediate threat of a fiscal cliff, but offered no durable solution to looming fiscal issues, including the need to raise the debt ceiling and the deep automatic budget cuts under sequester.

As for Euro area risk, the report notes: “In the face of high taxes, tight lending conditions, and weak domestic demand, investment may fail to take off, growth may disappoint, fiscal revenues may fall short, and it may not be possible to ease off on consolidation as projected.”

Reviewing the impact of high debt on economic activity in Euro Area, the report notes: “As the risk of distortionary taxation on profit, capital income, and assets increases, high debt can generally discourage private saving and investment. This, again, adversely affects growth and worsens the debt overhang.”

As for The Effects of High Debt in Ireland and Greece, it opines: “Faced with a rapid increase in public debt, firms may expect higher future taxation, lower government expenditures, and other costs, including those related to possible sovereign default. In anticipation of such costs, their market valuation falls.”

Firms in the financial sector exhibit positive abnormal returns (although not significantly different from zero). For them, any expectation of future higher taxation appears to be offset by the immediate benefits of the bailout. Domestic firms and firms dependent on government demand, however, experience strongly negative abnormal returns. This suggests that the unexpected increase in public debt adversely affected the private sector in the short term through both the taxation and the demand channels.”

The report says that the critical fiscal policy requirements are persistent but gradual consolidation and, for the United States and Japan, the design and implementation of comprehensive medium-term deficit-reduction plans.

These requirements are urgent for Japan, given the significant risks related to the renewal of stimulus in an environment of very high public debt levels.

In the major advanced economies, inflation will ease from about 2 percent to 1¾ percent in the United States and from 2¼ percent to 1½ percent in the euro area. Inflation will rise above zero in Japan in 2013 and will temporarily jump in 2014 and 2015 in response to increases in the consumption tax.

In the Foreword to WEO, IMF's Economic Counsellor Olivier Blanchard says:

“Recent good news about the United States has come with renewed worries about the euro area. Given the strong interconnections between countries, an uneven recovery is also a dangerous one. Some tail risks have decreased, but it is not time for policymakers to relax.”

After reviewing WEO, IMF's executive directors cautioned that the bumpy recovery and the macroeconomic policy mix in advanced economies could complicate policymaking elsewhere.

The directors considered that the pursuit in all economies of policies that foster internal and external balance would help dispel concerns about competitive devaluations. In addition, concerted efforts continue to be required to

further reduce global imbalances-notably and where applicable, stronger domestic demand and exchange rate flexibility in surplus economies and increased public saving and structural reforms to boost competitiveness in deficit economies.