Abstract

This appendix (drawing from IMF, 2010a) discusses approaches to contain “excess cost growth”: the rise in public health spending over GDP in excess of what is due to population aging.

Appendices

APPENDIX 1 Tacklinǵ the Challenǵe of Health Care Reform in Advanced Economies

This appendix (drawing from IMF, 2010a) discusses approaches to contain “excess cost growth”: the rise in public health spending over GDP in excess of what is due to population aging.

The Potential Impact of Health Reforms in Advanced Economies

Econometric analysis suggests that several policy options are available to help contain the growth of public health spending. The analysis presented here uses recently compiled Organization for Economic Cooperation and Development (OECD) data (Joumard, Andre, and Nicq, 2010) on key characteristics of health care systems (such as the extent of private health care provision, degree of regulation, availability of patient choice, and stringency of budget constraints) to evaluate the relationship between indices of these characteristics and the growth of public health spending. The impact of particular reforms on the growth rate of public health expenditure is then simulated by looking at the impact of hypothetical changes to a country’s rating on these indices. Table A1.1 shows the estimated impact on excess cost growth (ECG) of a country’s moving up one unit in any given OECD index, keeping all other indices fixed. The results suggest that substantial reductions in ECG could be obtained through extending market mechanisms (—0.50), improving public sector management and coordination (—0.30), and strengthening budget caps (—0.24). This compares with the average ECG, based on IMF staff econometric work, of about 1.0, which is incorporated into the staff s baseline projections.

Table A1.1.

Relationship between Key Characteristics of Health Care Systems and Excess Cost Growth

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Sources: Joumard, Andre, and Nicq (2010); and IMF staff estimates.

Impact on excess cost growth of public health spending due to one-unit change in each OECD index. OECD indices have been mapped to reform categories, although some overlap remains. In simulating the potential impacts of further reforms, only reforms that the econometric analysis shows to be effective in reducing excess cost growth are included.

Health care reforms could help slow the growth of spending in this area over the next 20 years. Figure A1.1 shows the average impact of reforms on public health spending-to-GDP ratios in 2030, grouped in five categories: budget caps (including budget constraints and central government oversight), public management and coordination (including “gatekeeping” processes that require referrals for accessing specialized care and subnational government involvement), market mechanisms (including choice of insurers and providers, private provision, and the ability of insurers to compete), demand-side reforms (including expansion of private insurance and cost sharing), and supply controls (including regulation of the health care workforce). The figure shows the combined effect of raising countries to the OECD mean score on each of these indices, based on the impact of improvements reported in Table A1.1.22

Figure A1.1.
Figure A1.1.

Average Impact of Reform Components on Health Spending, 2030

(Decrease relative to the baseline; percent of GDP)

Sources: OECD Health Database; and IMF staff estimates.Note: Unweighted averages of the impact of reforms.

The results suggest that reforms of market mechanisms can be powerful, yielding a reduction in spending of about ½ percentage point of GDP. The exercise also underscores the importance of budget caps, which can reduce spending by ¼ percentage point of GDP. The simulated impacts of demand-side reforms and supply constraints are small, but not negligible. The variation in the impact on spending across categories, as shown in the figure, largely reflects differences in the size of the impact coefficients in Table A1.1, rather than substantial differences in the dispersion of index scores across categories.

It is important to note that the possible savings under reforms are subject to uncertainty. Simultaneous reforms across different aspects of the health system may be undesirable or counterproductive. Thus, the effect of the reforms across categories depicted in Figure A1.1 cannot necessarily be aggregated. Some reforms, however, could be complementary, implying that the savings under any particular reform may be understated.

The impact of the simulated reforms might still fall short of what would be needed in some countries to stabilize public health care spending-to-GDP ratios at current levels. Thus, additional efforts would be needed to achieve this target, or fiscal adjustment might need to rely more on cuts in other areas or additional revenue increases.

  • This is especially important in some advanced European economies with relatively high projected growth in public health spending, such as Austria, Portugal, Switzerland, and the United Kingdom.

  • In the United States, the challenge would be even larger. The illustrative savings from an assumed increase to the mean in the category of budget caps would yield savings of about 1 percentage point of GDP. Other options to reduce spending, beyond those captured in the econometric analysis, include the extension of health information technology, which would yield savings of ¼ percent of GDP.23 Curtailing the favorable tax treatment of health insurance contributions (which involve tax expenditures—see Appendix 5—amounting to about 2 percent of GDP) could potentially yield large savings, and recent proposals in this area would yield savings of an additional ½ percentage point of GDP on an annual basis.24 All told, these reforms, including those simulated in the econometric analysis, would reduce spending (including tax expenditures) by about 2 percentage points of GDP. Even with the reforms, however, health spending would still be rising by 3 percentage points of GDP.

Reform options and the appropriate mix of reforms will depend on country characteristics and the projected outlook for the growth of public health spending. The reform impacts simulated above focus on strengthening cost-containing characteristics of health systems on which countries score below the OECD mean. Of course, all of the identified reforms using this methodology may not necessarily apply to every country. Nevertheless, this approach provides a systematic way to identify potential reforms. Box A1.1 provides an assessment of options using this approach.

Health reform proposals raise two important questions. First, will cost-reducing reforms adversely affect health outcomes? Second, will reforms imply a fundamental change in the role of the state in the provision of health care services?

  • The relationship between cost containment and the provision of high-quality health services varies by reform (Brereton and Vasoodaven, 2010; Cutler, 2004; Or and Hakkinen, 2010). Most micro-level efficiency reforms, such as the introduction of competition, can improve the responsiveness of the health system to patients but also reduce the growth of spending. It is thus possible, with an appropriate mix of reforms, to control spending without adversely affecting outcomes.

  • Reforms have implications for the range of services or products financed by the public sector. As part of reforms to contain the growth of spending, countries may need to reduce the scope of the public benefits package. For predominately public sector systems, this could be achieved through greater reliance on cost sharing and private insurance. The expansion of the role of the private sector, however, needs to be accompanied by appropriate measures to ensure access, equity, and efficiency. Regulators also need to ensure adequate competition in the private insurance market.

Potential Reform Strategies to Contain the Growth of Public Health Spending

Countries relying on market mechanisms

  • In Canada, the Czech Republic, France, Germany, Japan, and the Slovak Republic, staying the course with marginal reforms would be enough to contain excess cost growth, although bolder reforms could still be needed to offset the effects of demographics on health spending.

  • In Australia, Austria, Belgium, and the Netherlands, possible strategies include tightening budget constraints, strengthening gatekeeping (such as by requiring referrals to access secondary care), and increasing cost-sharing.

  • Greece, Korea, Luxembourg, Switzerland, and the United States are projected to have relatively high spending growth, indicating the need for future reforms, especially for Greece and Luxembourg, which score low on efficiency measures.1 These countries tend to have less stringent budget constraints, minimal central oversight (Korea and Luxembourg), lax regulations of the workforce and equipment, and little gatekeeping. Future efforts to contain spending growth in these countries should address these weaknesses.

Countries that rely more heavily on public insurance and provision

  • Denmark and Ireland could focus on efficiency-enhancing reforms to reduce spending growth. Italy and Sweden, both of which score high in efficiency, could improve priority setting in the area of health (for example, by better monitoring public health objectives and the composition of the public health package).

  • In Norway and Spain, containing the growth of spending could require tightening macro controls (including central oversight), broadening private insurance for care beyond the basic health package (Norway), and improving priority setting (Spain).

  • Finland, Iceland, New Zealand, Portugal, and the United Kingdom have relatively high projected spending growth. Countries in this group could strengthen supply constraints on the workforce and equipment (for example, by rationing high-technology equipment). In addition, these countries could benefit from extending the role of private health insurance for over-the-basic care and increasing choice among providers (especially in Finland, New Zealand, and the United Kingdom).

Source: IMF (2010a).1 The assessment does not take into account reforms in Greece as part of its fiscal adjustment program initiated in 2010.

Appendix 2 Fiscal Transparency Under Pressure

As governments seek to cut their debts and deficits in coming years, they may be tempted to supplement genuine fiscal adjustment with accounting stratagems. This happened during earlier episodes of adjustment, and there is evidence of a resurgence of the problem.25 This appendix discusses some of these stratagems (drawing on examples mainly from Europe and the United States, where they have been documented most clearly) and suggests remedial actions.

Accounting Stratagems

In the short run, accounting stratagems typically increase reported revenue or decrease reported spending, but in return they decrease future revenue or increase future spending. Some stratagems are simple: with cash accounting and a lax definition of debt, governments can reduce deficits and leave reported debt unchanged, by deferring paydays and delaying payment of bills and tax refunds. Other stratagems, however, are more complex.

Most fiscal reporting standards do not recognize ordinary borrowing as revenue, but may treat similar, more complex transactions differently. For example:

  • In a typical currency swap, two parties agree to make a series of payments to each other in different currencies but with equal expected present values. No money changes hands up front, and no debt is created. But if swap payments are based on an exchange rate other than the market rate, the two series of payments may have different present values and a debt may be created—but one that may not have to be reported as such. Greece, for example, used such swaps in 2001—07 to reduce reported debt by 2¼ percent of GDP at the end of 2009—until Eurostat scrutinized Greece’s books.

  • The Portuguese government recently assumed the pension assets and liabilities of Portugal Telecom, in a transaction that reduced the country’s reported deficit for 2010 by 1½ percent of GDP. European reporting standards, set after a similar transaction by France in 1997, treat receipt of the assets as revenue without treating assumption of the obligations as spending. A comparable effect is achieved through the reversal of pension reforms, in which private second-pillar systems are returned to the public pay-as-you-go system (as in Argentina and Hungary): pension contributions provide an immediate boost to revenues, whereas the associated pension liability will translate into spending only in the future.

  • The sale and lease-back of government property can disguise borrowing. For example, in the United States, the state of Arizona, in the face of restrictive constitutional limits on debt, raised $1 billion in 2010 through contracts in which the state sold various buildings and simultaneously leased them back.

Other stratagems defer the reporting of spending:

  • In some public-private partnerships, the private sector invests in public buildings or infrastructure, and the government pays for services provided by the assets over the following decades. In the United Kingdom, obligations created by these arrangements amounted to some 2¼ percent of GDP in February 2010. In Portugal, such arrangements have created obligations worth about 3½ percent of GDP (not counting road contracts or contingent liabilities).26

  • Another example of deferred spending relates to civil servants’ pensions. Governments generally report the cash cost of paying pensions to retirees, but not the “employer contribution to pensions” element of their current employees’ compensation package, since this does not require a cash outlay. In 2010, the U.S. federal government reported cash spending of $123 billion on military and civil service pensions in its deficit, whereas its less-publicized estimate of “net operating cost” in the government’s financial statements counts the cost of the pensions at $312 billion.

Selling assets can reduce the deficit when the loss of the assets is not recognized:

  • Many governments have privatized public enterprises to meet deficit targets, exploiting accounting standards that treated privatization receipts as revenue, but did not recognize the loss of future revenue associated with the transaction. Under other standards, such as those now used to calculate the deficit under Europe’s excessive deficit procedure, the sale of shares of public enterprises does not reduce the deficit, but sales of nonfinancial assets, such as real estate, do. Of course, selling loss-making or barely profitable enterprises to owners that can improve their efficiency may improve the fiscal position of the government. But the reported fiscal improvement associated with selling profitable public enterprises can be much greater than the actual improvement.

  • In the 2000s, many European governments securitized future revenues to reduce their reported deficits, selling rights to receive future revenues. Belgium and Portugal securitized tax receivables. Greece securitized lottery proceeds, air traffic control fees, and EU grants. Italy reportedly raised €66 billion—€90 billion through securitizations.

Often governments reduce reported spending and debt by having it undertaken by entities excluded from fiscal accounts. In the United Kingdom, for example, when the privately owned rail network company failed, the government took over its liabilities, but designed the takeover in such a way as to ensure that the new company’s liabilities did not count as government debt. At present, some of governments’ biggest unrecognized debts relate to financial institutions. Eurostat concluded that Germany’s banking crisis resolution entity should be classified as part of general government. It ruled, however, that Ireland had designed its entity as a private organization for accounting purposes, even though 95 percent of the costs would be funded with government-guaranteed debt. The U.S. federal government does not recognize as its own the liabilities (or assets) of Fannie Mae and Freddie Mac (see April 2011 GFSR).

The Size of the Problem

The nature of accounting stratagems means that reliable data on them are scarce, but the problem has clearly been substantial in some countries. By one measure (Koen and van den Noord, 2005), their average impact was more than 2 percent of GDP a year in Greece in 1993—2003, and roughly two-thirds of 1 percent in Italy and Portugal.

Further evidence of the significance of accounting choices for the measurement of fiscal aggregates comes from governments that publish relatively good fiscal information. The case of the United States is particularly useful because the federal government’s fiscal decisions are influenced mostly by a mainly cash-based measure of the deficit, but the U.S. Treasury’s annual Financial Report of the U.S. Government also includes a less-publicized accrual measure (net operating cost) that provides a better measure of long-run fiscal effects. In 1995—2010, the U.S. budget deficit underestimated long-run costs, as measured by net operating cost, by an average of 2 percent of GDP a year, mainly because the cash cost of veterans’ compensation and civilian and military health and pension benefits was less than the accrued cost. Table A2.1 illustrates the difference between the two measures for 2008, 2009, and 2010.

Table A2.1.

Cash and Accrual Measures of the U.S. Federal Deficit

(Billions of U.S. dollars)

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Source: U.S. Department of Treasury, Financial Management Service (2009, 2010).
Improving the Quality of Fiscal Reporting

Preventing the loss of fiscal transparency caused by accounting stratagems is difficult, but ensuring that governments report a balance sheet and several measures of the deficit can help. A suite of measures drawn from the Government Finance Statistics Manual (GFSM 2001) should include four measures of fiscal performance (cash balance [the sum of operating and investing cash flows], net operating balance, net lending, and change in net worth) and four measures of the fiscal position (gross debt, net debt, net worth of the general government, and public sector gross debt). It is helpful if governments also follow financial-reporting standards such as International Public Sector Accounting Standards (IPSAS), the development of which has drawn on experience with the use of accounting stratagems in the private sector. As well as being useful in its own right, such reporting can provide reliable data for fiscal statistics.

Long-term fiscal projections and statements of fiscal risk are also useful. Standard statistics and financial reporting can be supplemented by long-term fiscal projections, which reveal the long-run effects of current decisions, even when those effects are not picked up in measures of the deficit or debt. Statements of fiscal risk can be used to highlight contingent liabilities, although how such statements might deal with implicit liabilities is an unresolved problem.

The incentive to move fiscal operations to entities outside the government’s accounts can be reduced by publishing statistics for the entire public sector, as well as financial reports prepared according to standards that require consolidation of entities controlled by government. Fiscal statistics in Europe and elsewhere focus on the general government, to the exclusion of public enterprises. There is good reason for using general government as the main unit of analysis, but an exclusive focus on the general government makes reporting too vulnerable to the shifting of spending and debts to other public entities. Reporting according to IPSAS is also helpful, because it requires governments to report as their own all activities of government-controlled entities, irrespective of legal status or function.

Lastly, more needs to be done to encourage compliance with standards. National audit institutions play a crucial role in ensuring the accuracy of financial reports by raising costs to government of publishing reports that do not comply with standards. Charters of budget honesty can help by requiring officials to certify the sincerity of budgets and financial reports. Independent statistical agencies and fiscal councils can help ensure that reporting is sheltered from political pressures. Media and nongovernmental organizations can help expose stratagems, and international financial institutions can provide independent surveillance: for example, with reports on compliance with fiscal standards, such as the IMF’s code of fiscal transparency.

Appendix 3 Assessinǵ Fiscal Sustainability Risks: Derivinǵ a Fiscal Sustainability Risk Map

Assessing a country’s susceptibility to fiscal sustainability risks requires tracking a number of internal and external factors. The methodology elaborated in this appendix presents a framework to assess fiscal risks in a forward-looking manner along multiple dimensions based both on high- and low-frequency data and information. The results are presented in a Fiscal Sustainability Risk Map (Figure A3.1) that includes six dimensions: The first three refer to expected fiscal developments under the baseline scenario: short- and medium-term fiscal fundamentals (core fiscal indicators), long-term fiscal challenges, and asset and liability management. The other three dimensions refer to shocks that may affect the baseline arising from unexpected macroeconomic developments, financial sector problems, and policy implementation shortfalls or errors.27

Figure A3.1
Figure A3.1

The Fiscal Sustainability Risk Map

Source: IMF staff estimates.Note: Greater distance from center indicates higher risk.
The Six Dimensions of the Map

The indicators used to capture the six dimensions of the Fiscal Sustainability Risk Map are summarized below.

  • Core fiscal indicators. They include the current year general government gross debt ratio (net debt for Australia, Canada, and Japan), the current year cyclically adjusted primary balance, and the projected growth-adjusted interest rate (five years ahead).

  • Long-term fiscal challenges. Measures used to capture long-term fiscal challenges are the projected increases in pension and health care spending through 2050 compared to current year, the current year fertility rate, and the 20-year-ahead old-age-dependency ratio.

  • Liability structure. This dimension includes gross financing needs, the share of short-term general government debt in total general government debt, the weighted average maturity of outstanding government debt, the ratio of short-term external debt to gross international reserves (for emerging economies only), the share of debt denominated in foreign currencies, and the share of general government debt held by nonresidents.

  • Macroeconomic uncertainty. Near-term uncertainty is captured by the dispersion of one-year-ahead real GDP forecasts across analysts based on Consensus Forecasts. Medium-term uncertainty is assessed by the dispersion over time in countries’ interest rate growth differential projections based on the semiannual WEO exercises.

  • Financial sector risks. The indicators draw on the Global Financial Stability Map of the GFSR. For advanced economies, the GFSR’s credit and market/liquidity risk index is used, complemented by a measure of contingent liabilities approximated by outstanding bonds of banks with government guarantees. For emerging economies, risks are captured by the GFSR’s emerging market risk index.28

  • Policy implementation risk. The risk measure is based on an assessment of the quality of countries’ fiscal plans, using five criteria, and supporting budgetary institutions (based on the November 2010 Fiscal Monitor and Bornhorst and others, 2010).29 Moreover, a measure of “government stability” enters, as captured by the corresponding component of the International Country Risk Guide risk indicator.

The indicators have been summarized using the following conventions. Indicators cover the G-20 advanced and emerging economies and some smaller advanced economies with large adjustment needs, with country group aggregations based on purchasing power parity GDP weights. Each dimension is an average (often weighted) of the subindicators and ranges from 0 to 10, with higher rankings signifying higher risks. A value of 5 should be interpreted as a broadly “neutral” outcome. In most cases, percentile rankings are used for each country compared to its historical values, with the historical average corresponding to the “neutral” level of 5. For the fiscal baseline variables, the normalization is not only over time but also compared to other countries; the related scores are combined with a fiscal stress index that assesses a country’s susceptibility to extreme tail events. The index maps fiscal indicators into a summary score that depends on endogenous thresholds derived by minimizing the errors made in using each indicator to predict fiscal stress episodes (Baldacci and others, 2011).

Informed judgment enters into the final calibration of a country’s position on the Fiscal Sustainability Risk Map. Staff judgment aims to account for the most recent information, which either may not yet be reflected in the data available or is difficult to capture quantitatively in the variables, and to reflect greater importance of certain risk factors at a given time.

Key Findings

Analysis of the indicators yields mixed results with regard to risks emanating from the baseline.30

  • Core fiscal indicators. Risks stemming from short- and medium-term fiscal trends, as reflected in the core fiscal indicators, remain broadly unchanged across advanced economies, but are somewhat lower across emerging market economies. For the advanced economies, a worsening in the general government gross debt ratios and in the interest rate—growth differential is offset by a small improvement in cyclically adjusted primary balances (in 2011 compared to 2010).

  • Long-term fiscal challenges. Risks from long-term fiscal challenges have remained broadly unchanged across both advanced and emerging market economies, reflecting limited reforms except most recently in France and Spain regarding pensions. All advanced economies continue to face significant risks due to spiraling health care costs.

  • Liability structure. Rollover risks linked to the liability structure are also little changed in advanced economies, but have declined in emerging economies. For advanced economies, the broadly unchanged risk reflects an increase in financing needs, including in the United States, which has been offset by an improved debt structure. For emerging economies, smaller gross financing needs are projected for 2011, and higher reserves have helped lower the risk profile further.

With regard to shocks around the baseline, developments have diverged across advanced and emerging economies.

  • Macroeconomic uncertainty. Near-term macroeconomic uncertainty has eased somewhat for advanced economies, but remains above its historical average. As activity has picked up in many advanced economies, the dispersion of real GDP forecasts for 2011 across analysts has narrowed markedly in recent months. This, however, does not yet reflect the amplified global downside risk stemming from higher-than-expected oil prices. In addition, there is somewhat greater volatility of medium-term projections regarding the interest rate growth differentials, reflecting increased uncertainty about the timing and strength of a potential shift from historically low interest rates. For emerging economies, macroeconomic uncertainty is still below that of advanced economies but has increased compared to six months ago. While the one-year-ahead real GDP growth dispersion indicator has fallen in recent months, overheating and inflationary pressures in some economies and rising food and commodity prices, as well as the uncertainties associated with the political turmoil in some countries in North Africa and the Middle East, have increased as risk factors.

  • Financial sector risk. This risk remains elevated in advanced economies, but has receded somewhat, reflecting favorable financial market performance. Contingent liabilities, when measured by bonds issued by banks with government guarantees, have remained broadly stable compared to November 2010 at around 6 percent of GDP, on average. In emerging economies, financial sector risk has stabilized at its historical average, while risk appetite has risen further.

  • Policy implementation risk. In contrast to financial sector risk, policy implementation risk has increased somewhat since November 2010 in advanced economies, reflecting a weakening of existing policy frameworks in some economies, and greater political uncertainty about government stability and the ability to implement fiscal plans. The increase in risk due to these developments has been partially offset by a strengthening of fiscal plans and institutions in some countries.

Several additional factors have a bearing on fiscal sustainability risk, and although they are not explicitly incorporated here, they are reflected in various parts of the risk map. For example, market sentiment or risk appetite affects governments’ ability to raise funding and the price at which they can do so. Until the earthquake and ensuing events in Japan, and the political turmoil in the Middle East, market sentiment had improved significantly in advanced economies and risk appetite for emerging market assets had increased. Over the past weeks, however, the sentiment has weakened somewhat, and the indicator for implied volatility of equity markets, which peaked temporarily in the autumn of 2010, has increased again. Market sentiment is in part reflected in the financial sector risk assessment. Nonfiscal imbalances, such as current account imbalances or large private sector balance sheet exposures, can also heighten fiscal risks and are reflected in macroeconomic uncertainty and financial sector risks (Cottarelli, 2011).

In sum, the indicator-based approach and the Fiscal Sustainability Risk Map signal that the fiscal sustainability risk is high in advanced economies, while it is generally lower for emerging economies, although new risk factors have emerged for the latter.

Appendix 4 What Failed and What Worked in Past Attempts at Fiscal Adjustment

A systematic and comprehensive analysis of past adjustment plans and their outcomes provides useful insights for fiscal consolidation going forward: although today’s circumstances may differ from those in the past, history offers lessons regarding pitfalls to avoid and successes to be replicated.31 This appendix summarizes the main findings of individual country case studies and a cross-country statistical analysis, and puts forward some implications for the design and implementation of current fiscal adjustment plans.

Analytical Framework

Previous empirical studies have typically identified fiscal adjustment episodes on the basis of ex post outcomes: that is, the largest observed improvements in government debt or fiscal balance.32 This appendix identifies fiscal adjustment plans on the basis of large envisaged reductions in debts and deficits. It thus goes beyond past successes, focusing also on attempts that eventually failed. The analysis tracks ex post outcomes compared with ex ante plans, looking at deviations from targets in revenues or expenditures and the factors underlying such deviations.

Case studies focus on each of the G-7 countries. Specific ex ante consolidation attempts in those countries have been selected based on the size of the planned adjustment, formal and public commitment to adjust, detailed formulation, and medium-term perspective. Table A4.1 summarizes the plans analyzed and their main features. The case studies are complemented by a cross-country statistical analysis drawing on the three-year Convergence or Stability and Growth Programs produced by European Union countries during 1991—2007 (covering 66 plans that envisaged a general government balance improvement of at least 1 percent of GDP cumulatively over the three-year period).

Table A4.1.

Main Features of Selected G-7 Fiscal Adjustment Plans

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Source: IMF staff compilations.
Key Findings

The analysis yields findings in three dimensions: rationale for and design of the envisaged fiscal adjustment, degree of implementation and underlying macroeconomic factors, and political and institutional determinants of the implementation record.

Rationale for and design of fiscal adjustment plans

Rationale. Adjustments in the 1970s and early 1980s focused on fiscal deficits to tackle macroeconomic imbalances, such as rising inflation and external current account deficits (e.g., France, Germany, and the United Kingdom). Since the mid-1980s, plans have usually been introduced in response to high or rising public debt. Refinancing concerns have not been a major factor in these countries, but in some cases (e.g., Canada in the 1990s, Italy in the runup to European Monetary Union, EMU) rising interest costs and spreads relative to neighboring countries were a motivating factor. In Europe, an enhanced focus on fiscal adjustment was driven by the Maastricht criteria, the Stability and Growth Pacts, and the excessive deficit procedure.

Envisaged composition of fiscal adjustment. Most plans focused on spending cuts, consistent with the relatively large initial size of government, particularly in Europe. Indeed, only 10 out of the 66 plans in the EU sample envisaged increases in the revenue-to-GDP ratio backed up by revenue measures. Furthermore, several plans called for a reduction in this ratio, requiring expenditure cuts larger than the targeted deficit reduction.

Macroeconomic assumptions. Macroeconomic assumptions were mostly in line with those of independent observers (such as Consensus Forecasts and the IMF’s World Economic Outlook). In other words, any surprises in economic growth (see below) and other macroeconomic variables were largely surprises for all observers.

Implementation record and underlying macroeconomic factors

Implementation record and degree of ambition. For the 66 plans in the EU sample, the average annual planned improvement in the structural fiscal balance was equivalent to 1.7 percent of GDP (cumulative over the three years), whereas the outturn was a 0.9 percent improvement. On a positive note, actual implementation was not weakened by greater ambition: higher planned adjustment was associated with higher actual adjustment by a factor of one (observations are scattered closely around the 45-degree line in Figure A4.1). This evidence suggests that it is “OK to plan big” because ambitious plans tend to produce more adjustment than do more modest ones.

Figure A4.1.
Figure A4.1.

European Union: Planned and Actual Adjustments, 1991-2007

(Percent of potential GDP)

Source: EU countries’ convergence plans and stability and growth plans; European Commission’s Annual Macroeconomic Database (AMECO); and IMF staff estimates.Note: Austria (AT), Belgium (BE), Cyprus (CY), Czech Republic (CZ), Finland (FI), France (FR), Germany (DE), Greece (EL), Hungary (HU), Italy (IT), Lithuania (LT), Luxembourg (LU), Malta (MT), Netherlands (NL), Portugal (PT), Slovak Republic (SK), Slovenia (SL), Sweden (SE), United Kingdom (UK). The two-digit numbers indicate the year when the plan was drawn up.

Revenue-expenditure mix in outcomes versus plans. In most of the case studies, expenditure cuts did not materialize to the extent initially envisaged; by contrast, revenues often turned out to be above expectations, because of favorable cyclical developments in macroeconomic or asset price conditions and/or the introduction of (temporary) revenue measures to offset difficulties in implementing expenditure cuts. The cross-country statistical evidence confirms these findings: while plans envisaged cuts in the ratio of structural primary spending to potential GDP of 1.8 percent on average, actual cuts amounted to 0.3 percent. In contrast, revenues overperformed, partially offsetting the expenditure overruns (Table A4.2).

Table A4.2.

Actual versus Planned Structural Fiscal Adjustment, G-7

(Percent of potential GDP)

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Sources: “Convergence” and “Stability and Growth” programs (plans); European Commission’s AMECO database (outturns).Note: ΔPLAN and ΔACTUAL refer to the planned and actual change in each item, in percent of potential GDP. Statistics reported are means, with the exception of those in the final column, which are medians.

Role of economic growth. Deviations of economic growth from initial expectations were a key factor underlying success or failure. Some adjustment plans (e.g., Germany in the 1970s, Japan) were derailed, almost immediately, by unexpected economic downturns. Lower growth had a direct negative impact on cyclical revenues (and, to a lesser extent, caused an increase in some expenditure items), thereby worsening the headline fiscal balance. In addition, it had an indirect impact by tilting the authorities’ perception of the relative merits of fiscal consolidation versus fiscal stimulus. Conversely, the success of some plans (e.g., in the United States in the 1990s) was facilitated by higher-than-expected growth and asset price developments. In the cross-country analysis, a 1 percentage point improvement in growth compared with expectations resulted, on average, in a ½ percent of GDP strengthening in the headline fiscal balance.

Structural reforms. The case studies reveal that fiscal adjustment plans were more likely to meet their objectives when they were grounded in structural reforms. This was evident in Germany in the 1980s and 2000s, with structural reforms to the social welfare system; in the United Kingdom with the “Lawson adjustment” of the 1980s, which curbed expenditures as part of Prime Minister Margaret Thatcher’s redefinition of the role of the state; and in Canada in the 1990s, in the context of a repositioning of the role of the state supported by a comprehensive expenditure review. In contrast, plans in the same countries that eschewed reforms failed to meet their targets.

Fiscal institutions and political factors

Features of fiscal institutions. Several aspects of fiscal institutions influenced the degree of implementation of fiscal adjustment plans:

  • Monitoring of fiscal outturns and policy response to data revisions. Shortcomings in these areas were important in Italy, where a significant portion of the deviations of outturns from plans reflected upward revisions to the initial deficit and subsequent medium-term plans did not compensate for such revisions. In the cross-country analysis, upward revisions of deficits generally resulted in larger deficits at the end of the period, whereas downward revisions in the deficit were less likely to result in changes to the end-period deficit targets or outcomes.

  • Binding medium-term limits. Although the presence of medium-term plans was one of the criteria for choosing the case studies reviewed, the extent to which the plans included binding limits on expenditures varied. As medium-term limits were made more legally binding, actual compliance with spending targets improved. This pattern was most noticeable in the United States (where constraints on discretionary expenditure allowed a more rapid improvement in the fiscal balance in the context of favorable growth and asset price developments), France, and the United Kingdom.

  • Contingency reserves. Some plans used contingency reserves to build in space to cope with potential adverse shocks, accelerate the adjustment, or create room for reducing the tax burden in the event that no adverse shocks materialized. Contingency reserves played a role in the extent to which fiscal adjustment targets were met in the United Kingdom and, to a lesser extent, Canada.

  • Coordination across levels of government. Although most adjustment plans were originally devised for the central government, several involved reductions in transfers to subnational governments or other public entities. The extent to which those entities undertook parallel fiscal consolidations was an important determinant of whether the general government balance improved (as in Canada) or challenges were encountered (France and the United Kingdom).

  • Fiscal rules. The cross-country statistical analysis finds the intensity of national fiscal rules to be positively associated with the extent to which targets were met.

Political factors and public support for fiscal adjustment. The cross-country evidence yields mixed messages on the role of political factors: lower fractionalization in the legislative body (parliament, congress) and perceptions of greater political stability are to some extent associated with better implementation of plans; on the other hand, implementation of ambitious plans is not associated with more frequent changes in government. What emerges more clearly from the case studies, however, is the importance of public support. For example, opinion polls ahead of the mid-1990s consolidation in Canada showed broad public support for debt reduction. The authorities took advantage of this to put in place a communication strategy to reinforce support for their adjustment plan. In Germany, a general shift in the economic policymaking paradigm in the 1980s (against active short-term demand management) and a reformist platform of the left-of-center party in the 2000s helped sustain fiscal adjustment.

Implications for Planned Adjustments

These findings have a number of implications for the design and implementation of fiscal adjustment plans in the years ahead.

Embedding plans in frameworks that are resilient to shocks. Current fiscal adjustment plans do not sufficiently detail the envisaged policy response to shocks. As seen above, shocks, especially to economic growth, often derail fiscal adjustment. Plans thus need to explicitly incorporate mechanisms to deal with such shocks, permitting some flexibility while credibly preserving the medium-term consolidation objectives. Examples of helpful mechanisms include:

  • Multiyear spending limits. To anchor the consolidation path, plans should include binding and well-defined ceilings for expenditures and their subcomponents, and would preferably be endorsed not just by the executive but also by the legislature. The ceilings could exclude items that are cyclical (e.g., unemployment benefits), nondiscretionary (e.g., interest payments), or fiscally neutral (e.g., EU-funded projects). Many of the current adjustment plans have been framed with multiyear frameworks, but only a few (e.g., Germany and the United Kingdom) include sufficiently detailed spending ceilings.

  • Cyclically adjusted targets would let the automatic stabilizers operate in response to cyclical fluctuations. To ensure credibility, the methods used to adjust the fiscal variables for the cycle should be subject to outside scrutiny. Thus far, only the plans for Germany and the United Kingdom include cyclically adjusted targets.

  • Realistic/prudent macroeconomic assumptions would reduce the risk of missing the fiscal targets. Using more conservative assumptions relative to independent observers could be justified in a context of high uncertainty, but should be relied on sparingly in order not to reduce credibility. In this respect, the November 2010 Fiscal Monitor notes that macroeconomic assumptions underlying some countries’ current adjustment plans are more optimistic than other publicly available forecasts.

Monitoring and accountability. Implementation of plans should be supported by reliable and timely information. Targets need to be based on sound information on the initial state of public finances. Any revisions to the initial position should lead to fine-tuning the adjustment path while keeping the medium-term targets unchanged, if possible. Fiscal councils and peer-monitoring processes can enhance accountability in implementing adjustment plans.33

Composition of fiscal adjustment. The revenue-expenditure mix of fiscal consolidation plans needs to reflect country-specific societal preferences and structural fiscal characteristics. As reported in the November 2010 Fiscal Monitor, expenditure measures significantly outnumber revenue measures in current consolidation plans. This is consistent with the large size of the state in many advanced economies. Nevertheless, in light of the magnitude of needed adjustments and the implementation record of past plans, where revenue increases partly compensated for expenditure overruns, it would seem desirable to redouble monitoring efforts and enhance institutional mechanisms to ensure that expenditure ceilings are adhered to. It would likewise be prudent to prepare additional high-quality measures and reforms on the revenue side, to be deployed in the event of expenditure overruns.

Structural reforms. Structural reforms are needed to underpin successful implementation of large fiscal adjustment plans. Several current plans include measures to reduce the size of the public administration and the social welfare system, but few envisage tackling the thorniest sources of spending pressures: those from pension and, especially, health entitlements. Current plans would benefit from a greater emphasis on reforms in these areas.

Building public support. Public support for fiscal adjustment, rather than a comfortable legislative majority, was a key determinant of successful fiscal adjustments. Thus, a priority going forward will be to build public support through communication campaigns. These would aim at educating the public about the scale of fiscal challenges, and explaining what can reasonably be achieved through reforms without overburdening taxpayers or unduly curtailing necessary public services.

Appendix 5 Containing Tax Expenditures

Rolling back tax expenditures can make a critical contribution to meeting the needs for fiscal consolidation in many countries while also improving the efficiency and fairness of their overall fiscal systems. This appendix reviews the pros and cons, calculation, and magnitude of tax expenditures—and their control and elimination.

What Are Tax Expenditures?

Tax expenditures are government revenues foregone as a result of preferential tax treatment of specific sectors, activities, regions, or agents. Common forms are exemptions (exclusions from the tax base), allowances (deductions from the base), credits (deductions from liability), rate reliefs (reduction of the tax rate), and deferrals (postponing payment).

Tax expenditures have been used by countries to achieve diverse public goals:

  • Increasing tax progressivity (such as reduced VAT rates for food and medicine)

  • Encouraging investment, research, and savings (e.g., accelerated depreciation, tax credits for research and development [R&D], reduced rates on certain financial instruments or savings accounts)

  • Stimulating the consumption of merit goods or items yielding social benefits beyond those enjoyed by the spender himself (e.g., deductions for education and charitable gifts, R&D tax credits)

  • Attracting investment, in particular, foreign direct investment, to certain sectors or regions (e.g., tax holidays for technology, mining, or tourism industries, free trade zones in poor and isolated regions).

Worthy as such objectives may be, tax expenditures have drawbacks that often make them inferior to spending measures (or doing nothing at all). Table A5.1 summarizes the main pros and cons, but a number of drawbacks stand out.

Table A5.1.

Comparison of Tax Expenditures and Direct Spending

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Source: Villela, Lemgruber, and Jorratt (2010).

First, tax expenditures are often poorly targeted, which may lead to ineffectiveness. For example, poorer households may spend a larger share of their income on food than richer households, but since they spend a smaller absolute amount, they tend to receive less of the benefit from a reduced VAT rate: the poor would be better served by eliminating the rate reduction and protecting them through targeted spending measures. Allowances or deductions under the personal income tax help only those who fall into the tax net, effectively excluding many poor households, while corporate tax breaks are little use to companies (such as start-ups) with no taxable income. There are many other examples. Tax expenditures may not be well targeted to the activities they are intended to promote: mortgage interest relief, for instance, has commonly been justified as encouraging home ownership, but the evidence for the United States is that the effect has rather been to encourage owner-occupiers to buy larger properties. Likewise, R&D tax credits may promote R&D with large private rather than social returns.

Second, tax expenditures add to the complexity of the tax code and can be open to abuse: regional tax holidays and free zones, for instance, provide opportunities to reduce tax by transfer pricing profits out of profitable domestic enterprises in the rest of the country.

Third and not least, tax expenditures are less transparent than traditional forms of expenditure. Indeed, the very lack of transparency of tax expenditures sometimes accounts for their popularity with policymakers. They may escape the scrutiny applied to regular budgetary outlays and typically do not require annual renewal through the budget process.

Moreover, tax expenditures avoid increasing the overall level of government spending, which can be attractive to politicians worried about hostile public reaction to “big government.”

This is not to say that tax expenditures are never worthwhile: a deduction for charitable gifts, for instance, may do a better job of allocating resources to activities that people want to support than would public spending, and in some cases, public spending may be more vulnerable to governance difficulties and abuse than are preferential tax arrangements. But both principle and experience suggest that tax expenditures should be regarded with skepticism.

How Big Are They?

Measuring tax expenditures is challenging. Key steps include

  • Specifying some reference or “benchmark” tax system against which deviations or preferential treatments can be identified.34

  • Estimating the fiscal costs, which can be interpreted and measured in different ways.35

  • Constructing aggregate measures. This is especially tricky: in general, the complexities and nonlinearities in most tax systems mean that the revenue gain from eliminating tax expenditures A or B together is not the same as the sum of that from eliminating each of A and B in isolation. Aggregated tax expenditure numbers (like those presented below) must be treated with care.

Different methodologies and judgments as to what is or not considered a tax concession mean that tax expenditure budgets vary in size across countries more dramatically than do the underlying policies. For example, Chile uses a broader notion than other Latin American countries, so its tax expenditures look correspondingly large. Some countries choose to report a very limited list of tax expenditures, and cross-country comparisons can therefore be misleading (i.e., higher values do not always represent a larger amount of actual tax expenditures, but may arise instead from better and more comprehensive reporting).

Reliable numbers are in fact hard to find. However, OECD and Latin American countries generally offer good practices in measuring and reporting tax expenditures. Figure A5.1 shows, for 26 countries, the order of magnitude of total tax expenditures—subject to the caveats above. They vary from less than 1 percent of GDP to above 8 percent.36 These numbers largely refer to the central government and could well be higher where subnational governments play a substantial role in revenue mobilization and are allowed to grant tax concessions (e.g., Brazil, the United States). The figures suggest that there is in many cases significant scope to raise additional revenue without increasing statutory tax rates. A particularly careful and powerful analysis of the scope for such reform was recently provided by the U.S. National Commission on Fiscal Responsibility and Reform (Box A5.1).

Figure A5.1.
Figure A5.1.

Tax Expenditures in 26 Countries

(Percent of GDP)

Sources: OECD (2010b); United States, National Commission on Fiscal Responsibility and Reform (2010); and websites of Latin American and Caribbean countries (Argentina, Brazil, Chile, Dominican Republic, Guatemala, Peru, and Uruguay).Note: All estimates are for 2010, except that for Guatemala, which is for 2009.

The U.S. National Commission Report

A 2010 report issued by the U.S. National Commission on Fiscal Responsibility and Reform is highly critical of U.S. tax expenditures (“backdoor spending hidden in the tax code”) with “corporations . . . able to minimize tax through various tax expenditures . . . as a result of successful lobbying.” It estimates tax expenditures in the United States to be $1.1 trillion a year: about 7.5 percent of GDP.

The commission’s recommendations are ambitious: instituting “zero-base budgeting” by eliminating all income tax expenditures and using the revenue to reduce rates and the deficit. Tax expenditures could then be added back only to support a small number of simpler and targeted provisions to promote work, home ownership, health care, charity, and savings.

If all tax expenditures were eliminated, the commission estimates, personal income tax rates could be reduced to as low as 8, 14, and 23 percent (from the 2011 progressive levels of 15, 28, 31, 36, and 39.6 percent), and the corporate income tax rate could be cut from 35 percent to 26 percent.

Can They Be Managed and Reduced?

The effective management of tax expenditures requires an adequate legal and institutional framework, supporting incentive mechanisms, and a systematic evaluation of costs and benefits.

Adequate legal and institutional framework

Managing tax expenditures is complex, given their multifunctional and intergovernmental nature. A clear legal framework is needed, as embodied in budgetary framework laws, fiscal responsibility laws, and/or tax codes. Tax expenditures should be granted only through tax or finance laws (not decrees, other infralegal instruments, or laws unrelated to taxation), and draft laws proposing new concessions should be accompanied by revenue loss estimates. It is good practice to estimate tax expenditures annually and to present a report alongside (or integrated with) the regular budgetary proposal to the legislature. Most OECD and Latin American countries do this, generally with detailed information by tax type. Some, like Brazil and Chile, perform additional analyses, including those regarding some regional and distributional impacts, respectively. Estimates are typically reported only for one year, but in some countries, such as Australia, Canada, the Netherlands, and the United States, the reports cover four or five years ahead.

Incentive mechanisms to control tax expenditures

Fiscal rules and other legal provisions can support the effective management of tax expenditures, limiting their increase—by sunset clauses, for instance, setting a deadline for the duration of tax expenditures or requiring evaluation after this period (e.g., those in Germany, Japan,37 Korea, and Peru). Specific rules to cap the amount of tax expenditures in relation to tax revenues are very rare.38 Nonbinding guidelines can also help control the expansion of tax expenditures, as with a 2006 Federal Cabinet guideline in Germany that new subsidies be given as grants, or “financial aids,” not as tax expenditures.

Systematic evaluation of costs and benefits

Tax expenditures should be evaluated according to clear criteria, assessing their impact on public finances, economic efficiency, equity, and administrative and compliance costs—and on their likely effectiveness in reaching their underlying objective. For example, Germany has started a formal revision of its tax expenditures, starting with the largest 20 (accounting for 92 percent of total tax expenditures). The evaluation framework includes identifying macroeconomic motivations or perceived market failures; assessing effectiveness and efficiency, including impact on behavior,39 and determining whether the tax expenditure is the best public policy instrument for pursuing the associated macro objective; and analyzing any side effects for the tax system.40 The Netherlands has had a similar commitment since 2004, with the objective of reviewing each tax expenditure every five years. Independent academic assessment also has an important role to play.

Ideally, a distinct administrative unit should be in charge of evaluation. The evaluation criteria should be clear and transparent, covering a number of factors: consistency with the macroeconomic framework; efficiency considerations; effectiveness in reaching intended goals, relative to alternatives; beneficiaries and impact on equity; and control of administrative and other costs (e.g., social, environmental, political).41

It Can Be Done

Reducing tax expenditures can mean taking on powerful interests. But it can be done. Some countries (the Slovak Republic, for instance) have done it by a wholesale reduction, so no one can complain of especially unfavorable treatment, perhaps sweetening the pill with some reduction of rates. In other cases they have been phased out, strategies for this including the conversion of deductions to credits calculated at the lowest marginal tax rate (or lower) and the fixing of caps in nominal terms: the United Kingdom has shown that, in this way, even mortgage interest relief can be removed.

Methodological and Statistical Appendix

This appendix comprises four sections: assumptions, data and conventions, economy groupings, and statistical tables. The assumptions underlying the estimates and projections for 2011—16 are summarized in the first section. The second section provides a general description of the data and of the conventions used for calculating economy group composites. The classification of countries in the various groups presented in the Fiscal Monitor is summarized in the third section. The last section comprises the statistical tables on key fiscal variables. Data in these tables have been compiled on the basis of information available through early April 2011.

Fiscal Policy Assumptions

The historical data and projections of key fiscal aggregates are in line with those of the April 2011 WEO, unless highlighted. For underlying assumptions other than on fiscal policy, see the April 2011 WEO.

The short-term fiscal policy assumptions used in the WEO are based on officially announced budgets, adjusted for differences between the national authorities and the IMF staff regarding macroeconomic assumptions and projected fiscal outturns. The medium-term fiscal projections incorporate policy measures that are judged likely to be implemented. In cases in which the IMF staff has insufficient information to assess the authorities’ budget intentions and prospects for policy implementation, an unchanged structural primary balance is assumed, unless indicated otherwise. The specific assumptions relating to selected economies follow.

Argentina. The 2011 projections are based on the 2010 outturn and IMF staff assumptions. For the outer years, the IMF staff assumes unchanged policies.

Australia. Fiscal projections are based on IMF staff projections and the 2010—11 Mid-Year Economic and Fiscal Outlook.

Austria. The historical figures and the projections for general government deficit and debt do not fully reflect the most recent revisions by Statistik Austria in the context of its fiscal notification to Eurostat.

Belgium. The data for 2010 are preliminary estimates by the National Bank of Belgium. IMF staff projections beyond 2011 are based on unchanged policies. The 2011 projections, however, include some of the planned measures for the 2011 federal budget still under preparation and the 2011 budgetary targets for the regions and communities, and the social security administration.

BraziL The 2011 projections are based on the Budget Law and recent policy announcements that reduce the overall expenditure envelope by about 1.2 percent of GDP. Medium-term projections are based on unchanged policies and assume the authorities will maintain their commitment to a primary surplus of about 3 percent of GDP.

Canada. Projections use the baseline forecasts in the latest Budget 2011—A Low-Tax Plan for Jobs and Growth. The IMF staff has made some adjustments to this forecast for differences in macroeconomic projections. The IMF staff forecast also incorporates the most recent data releases from Finance Canada and Statistics Canada, including federal, provincial, and territorial budgetary outturns through the end of 2010.

China. For 2010—11, the government is assumed to continue and complete the stimulus program it announced in late 2008, although the lack of details published on this package complicates IMF staff analysis. Specifically, the IMF staff assumes the stimulus was not withdrawn in 2010, and so there is no significant fiscal impulse. Stimulus is withdrawn in 2011, resulting in a negative fiscal impulse of about 1 percent of GDP (reflecting both higher revenue and lower spending).

Denmark. Projections for 2010—11 are aligned with the latest official budget estimates and the underlying economic projections, adjusted where appropriate for the IMF staff’s macroeconomic assumptions. For 2012—16, the projections incorporate key features of the medium-term fiscal plan as embodied in the authorities’ 2009 convergence program submitted to the European Union.

France. For 2010, the general government data reflect the provisional outturn based on data released by the authorities on March 31, 2011. These data differ from the April 2011 WEO, where this update is not yet reflected. Projections for 2011 and beyond reflect the authorities’ 2011—14 multiyear budget, adjusted for differences in assumptions on macro and financial variables, and revenue projections.

Germany. The estimates for 2010 are preliminary estimates from the Federal Statistical Office of Germany. The IMF staffs projections for 2011 and beyond reflect the authorities’ adopted core federal government budget plan adjusted for the differences in the IMF staff’s macroeconomic framework and staff assumptions on the fiscal developments in state and local governments, social insurance system, and special funds. The estimate of gross debt at end-2010 includes the transfer of liabilities of bad banks to the government balance sheet.

Greece. Macroeconomic and fiscal projections for 2010 and the medium term are consistent with the authorities’ program supported by an IMF Stand-By Arrangement. Fiscal projections assume a strong front-loaded fiscal adjustment in 2010, followed by further measures in 2011—13. Growth is expected to bottom out in late 2010 and gradually rebound thereafter, coming into positive territory in 2012. The data include fiscal data revisions for 2006—09. These revisions rectify a number of shortfalls in earlier statistics. First, government-controlled enterprises in which sales cover less than 50 percent of production costs have been reclassified as part of the general government sector, in line with Eurostat guidelines. A total of 17 entities are affected, including a large number of loss-making entities. The debt of these entities (7¼ percent of GDP) is now included in headline general government debt data, and their annual losses increase the annual deficit (to the extent their called guarantees were not reflected in previous deficit data). Second, the revisions reflect better information on arrears (including for tax refunds, lump sum payments to retiring civil service pensioners, and payments to health sector suppliers) and revised social security balances that reflect corrections for imputed interest payments, double-counting of revenues, and other inaccuracies. Finally, newly available information also helps explain the upward revision in debt data.

Hong Kong SAR. Projections are based on the authorities’ medium-term fiscal projections.

Hungary. Fiscal projections are based on IMF staff projections of the macroeconomic framework, the impact of existing legislated measures, and fiscal policy plans as announced by end-December 2010.

India. Historical data are based on budgetary execution data. Projections are based on available information about the authorities’ fiscal plans, with adjustments for the IMF staff’s assumptions. Subnational data are incorporated with a lag of up to two years; general government data are thus finalized long after central government data. The IMF presentation differs from Indian national accounts data, particularly regarding divestment and license auction proceeds, net versus gross recording of revenues in certain minor categories, and some public sector lending.

Indonesia. The 2010 deficit was lower than expected (0.6 percent of GDP), reflecting underspending, particularly for public investment. The 2011 deficit is estimated at 1.5 percent of GDP, lower than the budget estimate of 1.8 percent of GDP. While higher oil prices will have a negative budgetary impact in the absence of fuel subsidy reform, this effect is likely to be offset by underspending, in particular on public investment, given significant budgeted increases. Fiscal projections for 2012—16 are built around key policy reforms needed to support economic growth, namely, enhancing budget implementation to ensure fiscal policy effectiveness, reducing energy subsidies through gradual administrative price increases, and continuous revenue mobilization efforts to increase space for infrastructure development.

Ireland. The fiscal projections are based on the 2011 Budget and the medium-term adjustment envisaged in the December 2010 EU/IMF-supported program. This includes €15 billion in consolidation measures over 2011—14, with €6 billion in savings programmed for 2011. The projections are adjusted for differences in macroeconomic projections between the IMF staff and the Irish authorities. The new government that assumed office in early March 2011 has also committed to the 2011—12 fiscal program and to further consolidation in the medium term.

Italy. The fiscal projections incorporate the impact of the 2010 budget law and fiscal adjustment measures for 2010—13, as approved by the government in May 2010 and modified during parliamentary approval in June–July. The 2010 budget balance data reflect the outturn based on data released by the Italian National Institute of Statistics on April 4, 2011. These data differ by 0.1 percent of GDP from the April 2011 WEO, where this update is not yet reflected. The IMF staff projections are based on the authorities’ estimates of the policy scenario, including the above medium-term fiscal consolidation package and adjusted mainly for differences in the macroeconomic assumptions and for less optimistic assumptions concerning the impact of revenue administration measures (to combat tax evasion). After 2013, a constant structural primary balance (net of one-time items) is assumed.

Japan. The 2011 projections assume fiscal measures already announced by the government and reconstruction spending of around 1 percent of GDP. The medium-term projections typically assume that expenditure and revenue of the general government are adjusted in line with current underlying demographic and economic trends (excluding fiscal stimulus).

Korea. The fiscal projections assume that fiscal policies will be implemented in 2011 as announced by the government. The projection for for 2010 is mainly based on the outturn as of November 2010, assuming that the first 11 months had collected/used 92 percent of total revenue/expenditure. As a result, the fiscal impulse is projected to be –3 percent of GDP in 2010. Expenditure numbers for 2011 are broadly in line with the government’s budget. Revenue projections reflect the IMF staff s macroeconomic assumptions, adjusted for the tax measures included in the multiyear stimulus package introduced in 2009 and discretionary revenue-raising measures included in the 2010 budget. The medium-term projections assume that the government will continue with its consolidation plans and balance the budget (excluding social security funds) by 2013.

Mexico. Fiscal projections are based on the IMF staff’s macroeconomic projections; the modified balanced-budget rule under the Fiscal Responsibility Legislation, including the use of the exceptional clause; and the authorities’ projections for spending, including for pensions and health care, and for wage restraint. For 2010—11, projections take into account departure from the balanced budget target under the exception clause of the fiscal framework, which allows for a small deficit reflecting a cyclical deterioration in revenues.

Netherlands. Fiscal projections for 2010—15 are based on the Bureau for Economic Policy Analysis budget projections, after adjusting for differences in macroeconomic assumptions. For 2016, the projection assumes that fiscal consolidation continues at the same pace as for 2015.

New Zealand. Fiscal projections are based on the authorities’ 2010 budget and IMF staff estimates. The New Zealand fiscal accounts switched to generally accepted accounting principles beginning in fiscal year 2006/07, with no comparable historical data.

Portugal. 2010 data are preliminary. For 2011 and beyond, the IMF staff incorporates all approved fiscal measures (thus excluding the measures proposed in March 2011, but rejected by parliament). The fiscal numbers also incorporate the impact of the IMF staff’s macroeconomic projections.

Russian Federation. Projections for 2011—13 are based on the non-oil deficit in percent of GDP implied by the draft medium-term budget and on the IMF staff’s revenue projections. The IMF staff assumes an unchanged non-oil federal government balance in percent of GDP during 2013—16.

Saudi Arabia. The authorities adopt a conservative assumption for oil prices—the 2011 budget is based on a price of $54 a barrel—with the result that fiscal outcomes often differ significantly from the budget. IMF staff projections of oil revenues are based on WEO baseline oil prices discounted by 5 percent, reflecting the higher sulfur content in Saudi crude oil. Regarding non-oil revenues, customs receipts are assumed to grow in line with imports, investment income in line with the London interbank offered rate (LIBOR), and fees and charges as a function of non-oil GDP. On the expenditure side, wages are assumed to rise above the natural rate of increase, reflecting a salary increase of 15 percent distributed during 2008—10, and goods and services are projected to grow in line with inflation over the medium term. In 2010 and 2013, 13th-month pay is awarded based on the lunar calendar. Interest payments are projected to decline in line with the authorities’ policy of repaying public debt. Capital spending in 2010 is projected to be about 32 percent higher than in the budget and in line with the authorities’ announcement of $400 billion in spending over the medium term. The pace of spending is projected to slow over the medium term, leading to a tightening of the fiscal stance.

Singapore. For fiscal year 2011/12, projections are based on budget numbers. For the remainder of the projection period, the IMF staff assumes unchanged policies.

South Africa. Fiscal projections are based on the authorities’ 2011 budget and policy intentions stated in the Budget Review, published February 23, 2011.

Spain. The 2010 numbers are the authorities’ estimated outturns for the general government for the year. For 2011 and beyond, the projections are based on the 2011 budget and the authorities’ medium-term plan, adjusted for the IMF staff’s macroeconomic projections.

Sweden. Fiscal projections for 2010 are in line with the authorities’ projections. The impact of cyclical developments on the fiscal accounts is calculated using the OECD’s latest semielasticity estimates.

Switzerland. Projections for 2009—15 are based on IMF staff calculations, which incorporate measures to restore balance in the federal accounts and strengthen social security finances.

Turkey. Fiscal projections assume that the authorities adhere to their budget balance targets as set out in the 2011—13 Medium-Term Program. The cyclically adjusted balance refers to the general government and adjusts only for the standard output gap.

United Kingdom. Fiscal projections are based on the authorities’ 2011 budget announced in March 2011, and the Office for Budget Responsibility’s Economic and Fiscal Outlook published along with the budget. These projections incorporate the announced medium-term consolidation plans from 2011 onward. The projections are adjusted for differences in forecasts of macroeconomic and financial variables.

United States. Fiscal projections are based on the president’s draft FY2012 budget adjusted for the staff assessment of policies likely to be adopted by Congress. Compared with the president’s budget, the IMF staff assumes more front-loaded discretionary spending cuts, a further extension of emergency unemployment benefits, and a delayed action on the proposed revenue-raising measures. The IMF staff estimates of fiscal deficits also exclude certain measures yet to be specified by the authorities and are adjusted for a different accounting treatment of financial sector support. The resulting projections are adjusted to reflect the staff forecasts of key macroeconomic and financial variables and are converted to the general government basis.

Data and Conventions

Data and projections for key fiscal variables are based on the April 2011 WEO, unless indicated otherwise. Where the Fiscal Monitor includes additional fiscal data and projections not covered by the WEO, data sources are listed in the respective tables and figures. Unless otherwise indicated, all fiscal data refer to the general government where available and to calendar years, with the exceptions of Pakistan, Singapore, and Thailand, for which data refer to the fiscal year.

Composite data for country groups are weighted averages of individual country data, unless otherwise specified. Data are weighted by GDP valued at purchasing power parity (PPP) as a share of the group GDP in 2009. Fixed weights are assumed for all years, except in figures where annual weights are used.

For most countries, fiscal data follow the IMF’s Government Finance Statistics Manual 2001 (GFSM 2001). The concept of overall fiscal balance refers to net lending (+)/borrowing (—) of the general government. In some cases, however, the overall balance refers to total revenue and grants minus total expenditure and net lending.

Data on financial sector support measures are based on the IMF’s Fiscal Affairs and Monetary and Capital Markets Departments’ database on public interventions in the financial system, revised following a survey of the G-20 economies. Survey questionnaires were sent to all G-20 members in early December 2009 to review and update IMF staff estimates of financial sector support. This information was later completed using national sources and data provided by the authorities. For each type of support, data were compiled for the amounts actually utilized and recovered to date. The period covered is June 2007 to the latest available.

Statistical Tables 3 and 4 of this appendix present IMF staff estimates of the general government cyclically adjusted overall and primary balances. For some countries, the series reflect additional adjustments such as natural resource—related revenues or commodity-price developments (Chile, Peru), land revenue and investment income (Hong Kong SAR), tax policy changes and the effects of asset prices on revenues (Sweden), and extraordinary operations related to the banking sector (Switzerland). Data for Norway are for cyclically adjusted non-oil overall or primary balance.

Additional country information follows, including for cases in which reported fiscal aggregates in the Monitor differ from those reported in the WEO:

Argentina. Following the national definition, the general government balance, primary balance, cyclically adjusted primary balance, and expenditure include accrued interest payments.

Bulgaria. Historical ratios of fiscal variables to GDP have been revised compared to the November 2010 Fiscal Monitor, reflecting GDP revisions.

Colombia. Historical figures for the overall fiscal balance as reported in the Monitor and WEO differ from those published by the Ministry of Finance as they do not include the statistical discrepancy.

Finland. Data on revenue and expenditure of the general government have been revised compared to the November 2010 Fiscal Monitor because of different treatment of capital revenue and expenditure.

Greece. Fiscal data revisions for 2006—09 rectify a number of shortfalls in earlier statistics (for details see “Fiscal Policy Assumptions”).

Hungary. The cyclically adjusted overall and cyclically adjusted primary balances for 2011 exclude one-off revenues estimated at 10.8 percent of GDP (10.3 percent of potential GDP) as per asset transfer to the general government due to changes to the pension system.

Latvia. In accordance with WEO conventions, the fiscal deficit shown in the Monitor includes bank restructuring costs and thus is higher than the deficit in official statistics.

Pakistan. Data are on a fiscal year rather than calendar year basis.

Philippines. Fiscal data are for central government. Historical primary balance data have been revised compared to the November 2010 Fiscal Monitor, reflecting IMF staff revisions of interest income data for the national government

Singapore. Data are on a fiscal year rather than calendar year basis.

Switzerland. Swiss fiscal statistics have been revised, compared to the November 2010 Fiscal Monitor, with the adoption of the GFSM 2001, full introduction of accrual accounting at the federal level, and other accounting reforms within the cantons and communes. Data submissions at the cantonal and commune level are received with a long and variable lag and are subject to sizable revisions.

Thailand. Data are on a fiscal year rather than calendar year basis.

Turkey. Information on the general government balance, primary balance, and cyclically adjusted primary balance as reported in this Monitor and the WEO differ from those published in the authorities’ official statistics or country reports, which still include net lending. An additional difference from the authorities’ official statistics is the exclusion of privatization receipts in staff projections.

Economy Groupings

The following groupings of economies are used in the Fiscal Monitor.

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Table 1.

Statistical Table 1. General Government Balance

(Percent of GDP)

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Source: IMF staff estimates and projections. Projections are based on staff assessment of current policies (see section on Fiscal Policy Assumptions).
Table 2.

Statistical Table 2. General Government Primary Balance

(Percent of GDP)

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Source: IMF staff estimates and projections. Projections are based on staff assessment of current policies (see section on Fiscal Policy Assumptions).