A forward-looking perspective is always useful in policymaking, and it is especially useful for fiscal planners. The capital outlays of governments are large and discrete, and their benefits are realized only over time. Policy commitments that may cost little in the short term may become more costly over time as their full ramifications are felt. In addition, governments often borrow to finance today’s outlays, whether for current or for capital spending. Policymakers should always be mindful of the capacity of their government to service both its public debt and its policy commitments in the future. The consequences for a government that incurs excessive debt or accumulates exorbitant policy commitments, and therefore risks defaulting on that debt or reneging on those commitments, can be stark. Private credit rating agencies may downgrade its sovereign debt, thus raising the risk premium the country will have to pay on subsequent borrowing. This in turn may force abrupt cutbacks in politically popular government programs in order to reduce the fiscal deficit and restore fiscal credibility.
This chapter examines how long-term issues are presently brought to bear in the analysis, formulation, and implementation of aggregate fiscal policy and the budget. It starts by reviewing the various analytical approaches that governments and academics have used to appraise long-term fiscal viability. Specific attention is paid to the way in which developments that might affect the future fiscal position are integrated within the analysis and considered, if at all, in assessing the short- to medium-term fiscal stance. The discussion suggests that budget agencies, academics, and financial analysts have begun to pay at least some attention to the implications of the aging of the population that is projected to occur in many countries. But this focus has not been appreciably extended to include other potential developments over the long term that could also influence the viability of the fiscal regime.
The preceding chapters have made two principal arguments. First, in the decades to come, countries will confront structural change—in their demographics, in their economies, and elsewhere—that will pose serious fiscal challenges, particularly for governments that have already made significant social insurance commitments. Although these challenges are fraught with uncertainty, policymakers cannot be absolved from addressing the risks that they pose. Second, the ways in which governments, in their fiscal policy framework, presently take account of these long-run developments are inadequate. Weaknesses exist at all levels: in the analytical framework, in established budgetary procedures, in accounting methodologies, and in the specifics of fiscal policy both in the aggregate and at the program level. As a result, few governments are now well positioned to address these fiscal challenges.
One of the questions raised in Chapter 1 was the following: Given so much uncertainty about what might or might not happen several decades into the future, is it not fruitless for policymakers to worry about the long term in considering the stance of fiscal policy? This study argues against such fatalism. Uncertainty about the future is real and considerable. But four points appear reasonably clear.
International Monetary Fund. External Relations Dept.
In many countries, poverty and environmental problems are mutually reinforcing. The only way to break this vicious cycle is to promote sustainable economic growth, which is one of the IMF’s core objectives. To highlight possibilities for sustainable growth and environmentally friendly policies, the Statistics Department and the IMF Institute hosted a seminar on the environment and its implications for the IMF. The immediate motivation for the seminar was a new handbook on environmental accounting: Integrated Environmental and Economic Accounting 2003 (IEEA, 2003), now in its final draft version. Five international organizations—the United Nations (UN), the European Commission, the IMF, the Organization for Economic Cooperation and Development (OECD), and the World Bank—worked with the London Group on Environmental Accounting (mainly composed of national statisticians with an interest in environmental accounts) to draft and publish the handbook. Adriaan Bloem and Russel Freeman, both from the IMF’s Statistics Department, give an account of the seminar’s main findings.
In December 1997, 160 nations meeting in Kyoto, Japan agreed to cut back emissions of carbon dioxide and other greenhouse gases. While ratified by only a very small number of countries so far, the “Kyoto Protocol” calls for industrial countries to reduce their average emissions during 2008-12 to about 5 percent below 1990 levels. Some countries pledged to go further: the European Union set an 8 percent target, while the Unites States and Japan agreed to cut emissions by 7 and 6 percent, respectively. The Protocol allows some industrial countries to modestly increase their emissions in the near term, while special terms apply to members of the former Soviet Union. Since developing countries face potential technical and economic constraints, the Protocol does not oblige them to cut back their emissions.
Explores different ways of controlling pollution through -green-taxes or permits, and evaluates their advantages and disadvantages. While many countries use environmental taxes, interest in tradable permits is growing.