Front Matter

Front Matter

Author(s):
International Monetary Fund
Published Date:
September 2009
    Share
    • ShareShare
    Show Summary Details

    © 2009 International Monetary Fund

    Production: IMF Multimedia Services Division

    Figures: Theodore F. Peters, Jr.

    Typesetting: Alicia Etchebarne-Bourdin

    Cataloging-in-Publication Data

    Fiscal implications of the global economic and financial crisis/by a staff team from the Fiscal Affairs Dept.—Washington, D.C.: International Monetary Fund, 2009.

    p. cm.—Occasional paper (International Monetary Fund); no. 269.

    Includes bibliographical references.

    ISBN 9781589068506

    1. Global Financial Crisis, 2008–2009. 2. Fiscal policy. 3. Economic stabilization. 4. Finance, Public. 5. Debts, Public. I. International Monetary Fund. Fiscal Affairs Dept. II. Title. III. Series: Occasional Paper (International Monetary Fund); no. 269.

    HB3722.F573 2009

    Please send orders to:

    International Monetary Fund, Publication Services

    700 19th Street, N.W., Washington, D.C. 20431, U.S.A.

    Tel.: (202) 623-7430 Fax: (202) 623-7201

    E-mail: publications@imf.org

    Internet: www.imfbookstore.org

    Contents

    The following conventions are used in this publication:

    • In tables, a blank cell indicates “not applicable,” ellipsis points (…) indicate “not available,” and 0 or 0.0 indicates “zero” or “negligible.” Minor discrepancies between sums of constituent figures and totals are due to rounding.

    • An en dash (-) between years or months (for example, 2007-08 or January-June) indicates the years or months covered, including the beginning and ending years or months; a slash or virgule (/) between years or months (for example, 2007/08) indicates a fiscal or financial year, as does the abbreviation FY (for example, FY2008).

    • “Billion” means a thousand million; “trillion” means a thousand billion.

    • “Basis points” refer to hundredths of 1 percentage point (for example, 25 basis points are equivalent to ¼ of 1 percentage point).

    As used in this publication, the term “country” does not in all cases refer to a territorial entity that is a state as understood by international law and practice. As used here, the term also covers some territorial entities that are not states but for which statistical data are maintained on a separate and independent basis.

    Preface

    The global financial crisis is having major implications for the public finances of most countries. Direct fiscal support is being provided to the financial sector. Fiscal revenues are declining through the operation of automatic stabilizers and because of lower asset and commodity prices. Many countries are undertaking discretionary fiscal stimulus. The consequent fiscal deterioration is particularly strong for advanced countries, where the increase in both government debt and contingent liabilities is unprecedented in scale and pervasiveness since the end of the Second World War. Moreover, these developments are taking place in the context of severe long-run fiscal challenges, especially for countries facing rapid population aging.

    The fiscal balances of G-20 advanced countries are projected to weaken by 8 percentage points of GDP on average, and government debt is projected to rise by 20 percentage points of GDP in 2008–09, with most of the deterioration occurring in 2009. The fiscal balances of G-20 emerging market economies will deteriorate by 5 percentage points of GDP. For advanced economies, the increase in debt mostly reflects support to the financial sector, fiscal stimulus, and revenue losses caused by the crisis. For emerging economies, a relatively large component of the fiscal weakening reflects declining commodity and asset prices. Collapsing asset prices have also had adverse effects on funded components of pension systems, with potentially significant risks for public accounts over the next few years.

    While fiscal balances are expected to improve over the medium term, they will remain weaker than before the crisis. Public debt-to-GDP ratios will continue to increase over the medium term: in 2014 the G-20 advanced country average is projected to exceed the end-2007 average by 36 percentage points of GDP. On current policies, debt ratios will continue to grow over the longer term, reflecting demographic forces. Moreover, for both advanced and emerging economies, the crisis has increased short- and medium-term fiscal risks, with key downside risks arising from the need for possible further support to the financial sector, the intensity and the persistence of the output downturn, and the return from the management and sale of assets acquired during the financial support operations.

    This somber fiscal outlook raises issues of fiscal solvency, and could eventually trigger adverse market reactions. This must be avoided: market confidence in governments’ solvency is a key source of stability and a precondition for economic recovery. Therefore, there is an urgent need for governments to clarify their strategy to ensure that solvency is not at risk. In formulating such a strategy, four components are particularly important: (1) fiscal stimulus packages, where these are appropriate, should not have permanent effects on deficits; (2) medium-term frameworks, buttressed by clearly identified policies and supportive institutional arrangements, should provide a commitment to fiscal correction, once economic conditions improve; (3) structural reforms should be implemented to enhance growth; and (4) countries facing demographic pressures should firmly commit to clear strategies for health and pension reforms. While these prescriptions are not new, the weaker state of public finances has dramatically raised the cost of inaction.

    This Occasional Paper was prepared by a staff team from the Fiscal Affairs Department headed by Carlo Cottarelli and comprising S. M. Ali Abbas, Steven Barnett, Thomas Baunsgaard, Jacques Bouhga-Hagbe, Giovanni Callegari, Stephanie Eble, Julio Escolano, Annalisa Fedelino, Manal Fouad, Robert Gillingham, Mark Horton, Anna Ivanova, Jiri Jonas, Philippe D. Karam, Daehaeng Kim, Manmohan Kumar, Daniel Leigh, Adam Leive, Lusine Lusinyan, Edouard Martin, Paolo Mauro, Steven Symansky, Elsa Sze, Anita Tuladhar, and Daria Zakharova, assisted by Sukhmani Bedi, Maria Coelho, Maria David, and Annette Kyobe. Esha Ray of the External Relations Department coordinated production of the publication.

    An earlier version of the paper (“The State of Public Finances: Outlook and Medium-Term Policies After the 2008 Crisis”) was discussed by the IMF’s Executive Board at a seminar on February 20, 2009. The opinions expressed in the paper are those of the authors, however, and do not necessarily reflect the views of the national authorities, the IMF, or IMF Executive Directors.

    Abbreviations

    AMLF

    Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility

    APS

    Asset Protection Scheme

    CAP

    Capital Assistance Program

    CBO

    Congressional Budget Office

    CCA

    Contingent claims approach

    CDC

    Caisse des Dépôts et Consignations

    CDS

    Credit default swap

    CIT

    Corporate income tax

    CP

    Commercial paper

    CPFF

    Commercial Paper Funding Facility

    CPP

    Capital Purchase Program

    CPS

    Cost-pressure scenario

    EC

    European Commission

    ECB

    European Central Bank

    EDC

    Export Development Corporation

    EDF

    Expected default frequency

    EICDS

    Expected default frequency implied credit default swap

    ESA

    European System of Accounts

    ESF

    Exchange Stabilization Fund

    EU

    European Union

    FDIC

    Federal Deposit Insurance Corporation

    FHA

    Federal Housing Administration

    FSP

    Financial Stability Plan

    G-20

    Group of 20 countries

    GAO

    Government Accountability Office

    GDP

    Gross domestic product

    GFSM

    Government Finance Statistics Manual

    GSE

    Government-sponsored enterprise

    JDIC

    Japan Deposit Insurance Corporation

    LGD

    Loss given default

    LIBOR

    London interbank offered rate

    MBS

    Mortgage-backed securities

    MMIF

    Money Market Investor Funding Facility

    MYEFO

    Mid-Year Economic and Fiscal Outlook

    OECD

    Organization for Economic Cooperation and Development

    OMB

    Office of Management and Budget

    PBGC

    Pension Benefit Guaranty Corporation

    PDCF

    Primary Dealer Credit Facility

    PPIF

    Public-Private Investment Fund

    PIT

    Personal income tax

    PPF

    Pension Protection Fund

    PPP

    Purchasing power parity

    PPIP

    Public-Private Investment Program

    PRA

    Purchase and resale agreement

    RBS

    Royal Bank of Scotland

    RMBS

    Residential mortgage-backed securities

    SME

    Small and medium-sized enterprise

    SNDO

    Swedish National Debt Office

    TAF

    Term Auction Facility

    TALF

    Term Asset-Backed Securities Loan Facility

    TARP

    Troubled Asset Relief Program

    TLGP

    Temporary Liquidity Guarantee Program

    VAT

    Value-added tax

    WEO

    World Economic Outlook

      You are not logged in and do not have access to this content. Please login or, to subscribe to IMF eLibrary, please click here

      Other Resources Citing This Publication