Front Matter
  • 1 0000000404811396https://isni.org/isni/0000000404811396International Monetary Fund

Abstract

The pamphlet (which updates the 1995 Guidelines for Fiscal Adjustment) presents the IMF’s approach to fiscal adjustment, and focuses on the role that sound government finances play in promoting macroeconomic stability and growth. Structured around five practical questions—when to adjust, how to assess the fiscal position, what makes for successful adjustment, how to carry out adjustment, and which institutions can help—it covers topics such as tax policies, debt sustainability, fiscal responsibility laws, and transparency.

Pamphlet Series

No. 55

Fiscal Adjustment for Stability and Growth

James Daniel, Jeffrey Davis, Manal Fouad, and Caroline Van Rijckeghem

INTERNATIONAL MONETARY FUND

Washington, D.C.

2006

ISBN 9781589065130

ISSN 0538-8759

August 2006

Cataloging-in-Publication Data

Fiscal adjustment for stability and growth/James Daniel … [et al.]—Washington, D.C.: International Monetary Fund, 2006—(Pamphlet series; no. 55)

  • “Updates and replaces the original 1995 pamphlet, Guidelines for fiscal

  • adjustment”—Introduction.

  • Includes bibliographical references.

  • ISBN 1-58906-513-1

1. Fiscal policy. 2. Economic stabilization. I. Daniel, James, 1967–II. Series: Pamphlet series (International Monetary Fund) ; no. 55

The views expressed in this pamphlet, including any legal aspects, are those of the authors and should not be attributed to Executive Directors of the IMF or their national authorities.

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Contents

  • Preface

  • Introduction

    • I. When Is Fiscal Adjustment Needed?

      • Fiscal Adjustment for Growth and Poverty Reduction

      • Fiscal Adjustment to Reduce Vulnerability

      • Fiscal Adjustment for Short-Term Macroeconomic Stability

    • II. How Should the Fiscal Position Be Assessed?

      • Coverage of the Public Sector.

      • When to Record Government Transactions

      • Main Fiscal Indicators

    • III. What Makes Fiscal Adjustment Successful?

      • Timing and Speed of Adjustment

      • Size of Fiscal Adjustment

      • Quality and Durability of Adjustment

    • IV. How Should Fiscal Adjustment Be Carried Out?

      • Improving the Tax System and Mobilizing Revenue

      • Rationalizing Public Expenditure and Protecting the Poor

    • V. What Institutions Can Help Fiscal Adjustment?

      • Modernizing Revenue Administration

      • Effective Public Financial Management

      • Effective Intergovernmental Relationships

  • Bibliography

  • Boxes

      • 1. Expansionary Fiscal Contractions

      • 2. Key Differences between the 2001 and 1986 GFSMs

      • 3. Fiscal Policy and Nonrenewable Resources

      • 4. Civil Service Reform

      • 5. Fiscal Transparency

      • 6. Dangers of Tax Holidays

      • 7. Fundamental Public Expenditure Reform

      • 8. Key Issues in Pension Reform

      • 9. Features of a Dedicated Large Taxpayer Office.

      • 10. Tracking Poverty-Reducing Spending

      • 11. Rebuilding Fiscal Institutions in Post-Conflict Countries

Preface

This pamphlet is the product of a collaborative effort of the staff of the Fiscal Affairs Department (FAD). In particular, Peter Barrand, Matt Davies, Robert Gillingham, Michael Keen, Wojciech Maliszewski, Paulo Medas, and Theo Thomas provided valuable input. Advice and support from Teresa Ter-Minassian (Director of FAD) is gratefully acknowledged. The pamphlet also benefited from comments by staff of other departments within the IMF. Marina Primorac of the External Relations Department coordinated production of the publication.

Introduction

The IMF’s approach to fiscal adjustment focuses on the role that sound and sustainable government finances play in promoting macroeconomic stability and growth. Achieving and maintaining such a fiscal position often requires adjusting fiscal policy, as well as strengthening fiscal institutions. Fiscal adjustment may involve either tightening or loosening the fiscal stance, depending on each country’s circumstances.1

This paper updates and replaces the original 1995 pamphlet, Guidelines for Fiscal Adjustment. It reflects the significant changes in the world economy and in the way the IMF has approached fiscal adjustment since then. The key changes include globalization, which raises new challenges and opportunities for fiscal policy; the increasing importance of balance sheet variables, as highlighted by debt and capital account crises; the growing perception of institutions as key determinants of development success and macroeconomic stability; and the greater emphasis on helping low-income countries scale up productive expenditure and make good use of increased aid.

Fiscal policy and adjustment involve many fundamental and complex issues, about which much has been written and on which debate still flourishes. To be focused and more widely understood, this paper necessarily simplifies some of these issues. The paper also concentrates on broad topics and practical policy options, rather than on more technical or theoretical aspects, and is selective in the topics it addresses.2 And, while much of the analysis is relevant for advanced economies, its focus is on emerging market and low-income economies.

In keeping with this practical emphasis, the paper is organized around five questions:

  • When is fiscal adjustment needed?

  • How should the fiscal position be assessed?

  • What makes fiscal adjustment successful?

  • How should fiscal adjustment be carried out?

  • What institutions can help fiscal adjustment?

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