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The new government has taken important steps to support job creation and address the cost of aging-notably through wage moderation, pension reform, and a tax shift. But growth prospects remain mediocre, public debt very high, and the labor market severely fragmented. Downside risks loom large, including from the slowdown in emerging markets, financial volatility, and geopolitical stress.
Following successful reforms during the government's initial year in office, the year 2016 proved to be more difficult. The terror attacks in Paris and Brussels had a significant, albeit temporary, effect on the economy. The fiscal strategy veered off track, with a sizeable overshoot of the deficit target. Growth prospects for 2017 and beyond are modest, as in other euro area countries. The Belgian labor market remains severely fragmented.
2017 Article IV Consultation, First Review Under the Extended Arrangement Under the Extended Fund Facility, Requests for Extension of the Arrangement, Rephasing of Purchases, and Waiver of Nonobservance of Performance Criterion-Press Release; Staff Report; and Statement by the Executive Director for Bosnia and Herzegovina
Abstract
Inflation has fallen, financing conditions have improved, and risks of major disruptions in the global economy have so far been averted. However, the distribution of debts, deficits, and public finance risks and vulnerabilities has changed little. While monetary policy remained restrictive in more than 85 percent of the world’s economies in 2023, only half of them tightened fiscal policy, down from about 70 percent in 2022 (Figure 1.1, panel 1). Revenue windfalls from inflation surprises dwindled (Figure 1.1, panel 2),1 and spending remained high as a result of legacies of fiscal measures to address the pandemic crisis and the introduction of new fiscal support measures in many economies. As a consequence, momentum toward fiscal policy normalization that would bring fiscal balances back to prepandemic levels faltered. Decisive fiscal consolidation efforts are needed to safeguard sustainable public finances and rebuild fiscal buffers in a context of elevated public debt, slowing medium-term growth prospects, and still-high interest rates. Fiscal adjustment will also support the “last mile” of disinflation, especially in overheated economies.
Abstract
Chapter 1 argues that fiscal policy should remain nimble and strengthen its medium-term frameworks, as countries face highly uncertain and differentiated prospects. Vaccination has saved lives and is helping fuel a nascent recovery, but risks are elevated amidst new virus variants, high debt, and poverty. In advanced economies, the shift in fiscal support toward medium-term packages to “build back better” will have overall positive effects globally. Emerging markets and low-income developing countries face a more challenging outlook, with permanent economic scarring and revenue losses. They need international support to increase vaccine availability and financing to achieve the Sustainable Development Goals. Many countries find themselves in a situation where fiscal support is still invaluable to protect lives and livelihoods. At the same time, governments are also facing questions on their elevated debt and gross financing needs. Chapter 2 provides countries with guidance on how they can both avoid withdrawing fiscal support too early, and yet signal to the public that their debt levels are sustainable in the long run. To commit to future deficit reduction, governments have several instruments, including undertaking structural fiscal reforms (such as pension reform or subsidies reform), pre-legislating changes to taxes or spending, committing to fiscal rules that lead to deficit reduction in the future. Countries that follow debt rules, for instance, manage to reduce debt faster that other countries, although fiscal rules should also provide enough flexibility to spend in times of need. Overall, governments that commit to sound public finances and that achieve high levels of fiscal transparency reap meaningful benefits: their budgets are more credible, their announcements are better perceived by the media, and they pay lower interest rates on their debt.
Abstract
Global productivity growth and innovation have weakened over the past two decades (Figure 2.1, panel 1), and medium-term growth expectations have dimmed (Goldin and others 2024; see also the April 2024 World Economic Outlook). Innovation— defined as the invention and introduction of new or improved products and processes—is the ultimate driver of long-term productivity growth and better living standards because it expands the frontier of what is possible for society. Yet despite rapid advancements in digital technologies, innovation has become costlier to produce (Bloom and others 2020), unbalanced across sectors (Acemoglu, Autor, and Patterson 2023), and increasingly driven by applied rather than fundamental research that generates wide-ranging knowledge spillovers (Akcigit, Hanley, and Serrano-Velarde 2021). Moreover, the diffusion of innovation across countries and firms has slowed (Andrews, Criscuolo, and Gal 2016; Dabla-Norris and others 2023). While the contribution of emerging market and developing economies to innovation has grown, large cross-country technology gaps remain (Figure 2.1, panel 2).
Abstract
Chapter 1 argues that fiscal policy should remain nimble and strengthen its medium-term frameworks, as countries face highly uncertain and differentiated prospects. Vaccination has saved lives and is helping fuel a nascent recovery, but risks are elevated amidst new virus variants, high debt, and poverty. In advanced economies, the shift in fiscal support toward medium-term packages to “build back better” will have overall positive effects globally. Emerging markets and low-income developing countries face a more challenging outlook, with permanent economic scarring and revenue losses. They need international support to increase vaccine availability and financing to achieve the Sustainable Development Goals. Many countries find themselves in a situation where fiscal support is still invaluable to protect lives and livelihoods. At the same time, governments are also facing questions on their elevated debt and gross financing needs. Chapter 2 provides countries with guidance on how they can both avoid withdrawing fiscal support too early, and yet signal to the public that their debt levels are sustainable in the long run. To commit to future deficit reduction, governments have several instruments, including undertaking structural fiscal reforms (such as pension reform or subsidies reform), pre-legislating changes to taxes or spending, committing to fiscal rules that lead to deficit reduction in the future. Countries that follow debt rules, for instance, manage to reduce debt faster that other countries, although fiscal rules should also provide enough flexibility to spend in times of need. Overall, governments that commit to sound public finances and that achieve high levels of fiscal transparency reap meaningful benefits: their budgets are more credible, their announcements are better perceived by the media, and they pay lower interest rates on their debt.
2018 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for Cyprus
(As of September 30, 2019)