This report discusses fiscal policies to prepare for the next downturn and foster long-term inclusive growth by adapting to changing demographics, advancing technology, and deepening global integration. It also covers recent fiscal developments and the fiscal outlook in advanced economies, emerging markets, and low-income developing countries; recent trends in government debt and analysis of changes in fiscal balances, revenue, and spending; and potential fiscal risks. The report takes on in-depth look at how corruption impacts government policies and operations, the fiscal costs, and how fiscal institutions can help fight corruption.
With growth weakening in many parts of the world and downside risks on the rise, fiscal consolidation remains challenging. However, considerable progress has been made in strengthening fiscal accounts following their sharp deterioration in 2008-09. This issue of the Fiscal Monitor takes stock of this progress, focusing on its size, composition, and implications for employment and social equity. The issue finds that most countries--and especially advanced economies--have made significant headway in rolling back fiscal deficits, but that efforts at controlling debt stocks are taking longer to yield results. The mix of revenue and expenditure policies employed by countries with sizable fiscal consolidation needs has differed, with advanced economies in general relying more on spending retrenchment than emerging markets and low-income countries. Both spending and revenue measures have important implications for employment and social equity, the issue finds, and these implications need to be taken into account if the large consolidation efforts underway are to be sustainable.
Weakening growth and policy uncertainties cast a shadow over the fiscal outlook, even as budget deficits narrow and recent announcements by monetary authorities provide some respite on the financial front. Countries with stronger fiscal positions and lower public debt, including several emerging market economies, can afford to pause fiscal consolidation efforts, but in others adjustment must proceed at a pace that reflects medium-term adjustment needs, the state of the economy, and financing constraints. Where financing permits, flexibility should be allowed for automatic stabilizers to play in response to moderate growth shortfalls. Should growth fall well short of current expectations, countries with space should smooth their adjustment paths over 2013 and beyond. The United States and Japan must promptly define and enact clear and credible plans to return to fiscal sustainability over the medium term and buttress investor confidence.
Consolidation efforts are yielding fruit, at least for deficits. In 2013, cyclically adjusted deficits are expected to fall below their precrisis levels in about half of the countries included in the Fiscal Monitor database.2 The evolution of debt ratios is more varied: they have declined in most emerging market economies, but not in most of the advanced economies, reflecting in many cases higher interest rate–growth differentials in the latter group. Consolidation packages have typically attempted to focus on measures that are supportive of potential growth, but countries with large adjustment requirements have had to use a broader brush, in many cases cutting public investment and raising income taxes. Institutional reforms have also been introduced to strengthen governance and credibility, including—but not only—in the euro area.
Notwithstanding the progress mentioned in the preceding section, large financing requirements remain a source of near-term fiscal vulnerability in several advanced economies, while prospective increases in age-related spending loom large over the long-term horizon for many of them. Moreover, fiscal risks around the baseline projections are on the rise across country groups, given the uncertain growth outlook and large contingent liabilities, particularly from the financial sector.19 If history is a lesson, the path to restoring fiscal sustainability will be long and arduous for most advanced economies. Maintaining adjustment efforts over the long term will require packages that mesh flexibility and credibility (through the use of structural or cyclically adjusted targets), limit adverse social effects, and boost employment and labor supply through appropriate tax and other spending policies, backed by strong fiscal institutions.
The Great Recession of 2007–09 led to an unprecedented increase in public debt and raised serious, ongoing concerns about fiscal sustainability.33 Against this backdrop, many governments have been making substantial fiscal adjustments to reduce their ratios of debt to GDP. It is generally recognized that consolidation is bad for growth in the short run. But do different forms of fiscal consolidation affect income inequality as opposed to income levels?34 Surprisingly, there has been little systematic analysis of this question.35
This appendix comprises six sections. “What’s New” presents a brief description of the methodological changes to the database and statistical tables since the April 2012 issue of the Fiscal Monitor. “Data and Conventions” provides a general description of the data and of the conventions used for calculating economy group composites. “Fiscal Policy Assumptions” summarizes the country-specific assumptions underlying the estimates and projections for 2012–17. Details on the coverage and accounting practices underlying each country’s Fiscal Monitor data are provided in “Definition and Coverage of Fiscal Data.” The classification of countries in the various groups presented in the Fiscal Monitor is summarized in “Economy Groupings.” “Statistical Tables” on key fiscal variables complete the appendix. Data in these tables have been compiled on the basis of information available through October 2012.