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.
With increasing fiscal challenges in the aftermath of the global financial crisis, multilateral surveillance of fiscal developments, a key part of the IMF's surveillance responsibilities, has gained further importance. In response, the Fiscal Monitor was launched in 2009 to survey and analyze the latest public finance developments, update fiscal implications of the crisis and medium-term fiscal projections, and assess policies to put public finances on a sustainable footing. The Fiscal Monitor is prepared twice a year by the IMF's Fiscal Affairs Department. The Monitor's projections are based on the same database used for the October 2010 World Economic Outlook (WEO) and Global Financial Stability Report.
With increasing fiscal challenges in the aftermath of the global financial crisis, multilateral surveillance of fiscal developments, a key part of the IMF's surveillance responsibilities, has gained further importance. In response, the Fiscal Monitor was launched in 2009 to survey and analyze the latest public finance developments, update fiscal implications of the crisis and medium-term fiscal projections, and assess policies to put public finances on a sustainable footing. Previous issues of the Monitor were published in the IMF's Staff Position Notes series, but starting with this issue, the Monitor will be a part of the IMF's World Economic and Financial Surveys series, to complement the overviews presented in the World Economic Outlook (WEO) and the Global Financial Stability Report (GFSR). The Fiscal Monitor is prepared twice a year by the IMF's Fiscal Affairs Department. The Monitor's projections are based on the same database used for the April 2010 WEO and GFSR. The fiscal projections for individual countries have been prepared by IMF desk economists, and, in line with the WEO guidelines, assume that announced policies will be implemented.
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