Title Page
World Economic and Financial Surveys
Fiscal Monitor
April 2015
Now Is the Time Fiscal Policies for Sustainable Growth
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©2015 International Monetary Fund
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Cataloging-in-Publication Data
Fiscal monitor—Washington, D.C. : International Monetary Fund, 2009– v. ; cm.—(World economic and financial surveys, 0258-7440)
Twice a year.
Some issues have also thematic titles.
1. Finance, Public—Periodicals. 2. Finance, Public—Forecasting—Periodicals. 3. Fiscal policy—Periodicals. 4. Fiscal policy—Forecasting—Periodicals. 5. Financial crises—Periodicals. 6. Global Financial Crisis, 2008–2009—Periodicals. I. International Monetary Fund. II. Series: World economic and financial surveys.
HJ101.F57
Disclaimer: The Fiscal Monitor (FM) is a survey by the IMF staff published twice a year, in the spring and fall. The report analyzes the latest public finance developments, updates medium-term fiscal projections, and assesses policies to put public finances on a sustainable footing. The report was prepared by IMF staff and has benefited from comments and suggestions from Executive Directors following their discussion of the report on April 3, 2015. The views expressed in this publication are those of the IMF staff and do not necessarily represent the views of the IMF’s Executive Directors or their national authorities.
Recommended citation: International Monetary Fund, Fiscal Monitor—Now Is the Time: Fiscal Policies for Sustainable Growth (Washington, April 2015).
ISBN: 978-1-49839-638-7 (paper)
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Contents
Assumptions and Conventions
Further Information and Data
Preface
Executive Summary
Chapter 1. Recent Fiscal Developments and Outlook
The Fiscal Impact of Lower Oil Prices
Advanced Economies: Low Growth and Low Inflation Complicate Debt Reduction
Emerging Market and Middle-Income Economies: Financial Volatility and Lower Export Prices Stretch Already Thin Fiscal Buffers
Low-Income Developing Countries: Resisting Headwinds from Lower Growth and Lower Commodity Prices
Fiscal Risks
A Supportive Role for Fiscal Policy
Box 1.1. Past, Present, and Future Patterns in Revenues
Box 1.2. Reforming Energy Subsidies
Box 1.3. The Pressure of Age-Related Spending on Public Debt in Advanced Economies
References
Chapter 2. Can Fiscal Policy Stabilize Output?
How Fiscal Policy Influences Economic Activity
What Shapes Fiscal Stabilization?
Potential Payoffs from Fiscal Stabilization
Conclusion
Annex 2.1 Empirical Methodology
Box 2.1. Fiscal Stabilization under Alternative Estimates of the Output Gap
Box 2.2. Boosting the Effectiveness of Automatic Stabilizers
References
Country Abbreviations
Glossary
Methodological and Statistical Appendix
Data and Conventions
Fiscal Policy Assumptions
Definition and Coverage of Fiscal Data
Table A. Advanced Economies: Definition and Coverage of Fiscal Monitor Data
Table B. Emerging Market and Middle-Income Economies: Definition and Coverage of Fiscal Monitor Data
Table C. Low-Income Developing Countries: Definition and Coverage of Fiscal Monitor Data
List of Tables
Advanced Economies (A1–A8)
Emerging Market and Middle-Income Economies (A9–A16)
Low-Income Developing Countries (A17–A22)
Structural Fiscal Indicators (A23–A25)
Financial Sector Support (A26)
Fiscal Monitor, Selected Topics
IMF Executive Board Discussion Summary
Figures
Figure 1.1. Fiscal Impact of Lower Oil Prices
Figure 1.2. Fiscal Trends in Advanced Economies
Figure 1.3. Fiscal Trends in Emerging Market and Middle-Income Economies
Figure 1.4. Fiscal Trends in Low-Income Developing Countries
Figure 1.1.1. Advanced Economies: Total Revenue and Corporate Income Tax
Figure 1.1.2. OECD Countries: Corporate Income Tax versus Gross Operating Surplus
Figure 1.1.3. Emerging Market and Developing Economies: Total Revenue
Figure 1.2.1. Six Elements of Successful Energy Reforms
Figure 1.3.1. Age-Related Spending Increases and Gross Debt
Figure 2.1. Distribution of Fiscal Stabilization Coefficients
Figure 2.2. Selected Fiscal Stabilization Coefficients
Figure 2.3. Advanced Economies: Government Size and Automatic Stabilizers
Figure 2.4. Selected Countries: Fiscal Stabilization and Automatic Stabilizers
Figure 2.5. Fiscal Stabilization and Automatic Stabilizers: Cross-Country Correlations
Figure 2.6. Advanced Economies: Determinants of Fiscal Stabilization
Figure 2.7. Advanced Economies: Fiscal Stabilization Coefficients and General Government Expenditure over Time
Figure 2.8. Fiscal Stabilization over the Cycle
Figure 2.9. Advanced Economies: Fiscal Stabilization and Demand Shocks
Figure 2.10. Asymmetric Stabilization: Unpleasant Public Debt Arithmetic
Figure 2.11. Fiscal Stabilization and Output Volatility: Cross-Country Correlations, 1980–2013
Figure 2.12. Impact of Fiscal Stabilization and Government Size on Output Volatility
Figure 2.13. Emerging Market and Developing Economies: Government Size and Output Volatility
Figure 2.14. Advanced Economies: Factors that Boost the Effectiveness of Automatic Stabilizers
Figure 2.15. Budget Balance Rules: Contingent on the Economic Cycle?
Figure 2.16. Fiscal Stabilization and Medium-Term Growth
Annex Figure 2.1.1. Impact of the Output Gap on the Fiscal Balance
Figure 2.1.1. Impact of the Output Gap on the Overall Fiscal Balance
Tables
Table 1.1a. Fiscal Balances, 2008–16: Overall Balance
Table 1.1b. Fiscal Balances, 2008–16: Cyclically Adjusted Balance
Table 1.2. General Government Debt, 2008–16
Table 1.3. Selected Advanced Economies: Gross Financing Need, 2015–17
Table 1.4. Selected Emerging Market and Middle-Income Economies: Gross Financing Need, 2015–16
Annex Table 2.1.1a. Advanced Economies: Country-Specific Estimations
Annex Table 2.1.1b. Emerging Market and Developing Economies: Country-Specific Estimations
Annex Table 2.1.2. Advanced Economies: Time-Varying Coefficients of Fiscal Stabilization, Selected Years
Annex Table 2.1.3. Determinants of Fiscal Stabilization
Annex Table 2.1.4. Fiscal Stabilization, Government Size, and Output Volatility
Annex Table 2.1.5. Advanced Economies: Factors Driving the Effectiveness of Automatic Stabilizers
Annex Table 2.1.6. Fiscal Stabilization and Medium-Term Growth
Table A. Advanced Economies: Definition and Coverage of Fiscal Monitor Data
Table B. Emerging Market and Middle-Income Economies: Definition and Coverage of Fiscal Monitor Data
Table C. Low-Income Developing Countries: Definition and Coverage of Fiscal Monitor Data
Table A1. Advanced Economies: General Government Overall Balance, 2006–20
Table A2. Advanced Economies: General Government Primary Balance, 2006–20
Table A3. Advanced Economies: General Government Cyclically Adjusted Balance, 2006–20
Table A4. Advanced Economies: General Government Cyclically Adjusted Primary Balance, 2006–20
Table A5. Advanced Economies: General Government Revenue, 2006–20
Table A6. Advanced Economies: General Government Expenditure, 2006–20
Table A7. Advanced Economies: General Government Gross Debt, 2006–20
Table A8. Advanced Economies: General Government Net Debt, 2006–20
Table A9. Emerging Market and Middle-Income Economies: General Government Overall Balance, 2006–20
Table A10. Emerging Market and Middle-Income Economies: General Government Primary Balance, 2006–20
Table A11. Emerging Market and Middle-Income Economies: General Government Cyclically Adjusted Balance, 2006–20
Table A12. Emerging Market and Middle-Income Economies: General Government Cyclically Adjusted Primary Balance, 2006–20
Table A13. Emerging Market and Middle-Income Economies: General Government Revenue, 2006–20
Table A14. Emerging Market and Middle-Income Economies: General Government Expenditure, 2006–20
Table A15. Emerging Market and Middle-Income Economies: General Government Gross Debt, 2006–20
Table A16. Emerging Market and Middle-Income Economies: General Government Net Debt, 2006–20
Table A17. Low-Income Developing Countries: General Government Overall Balance, 2006–20
Table A18. Low-Income Developing Countries: General Government Primary Balance, 2006–20
Table A19. Low-Income Developing Countries: General Government Revenue, 2006–20
Table A20. Low-Income Developing Countries: General Government Expenditure, 2006–20
Table A21. Low-Income Developing Countries: General Government Gross Debt, 2006–20
Table A22. Low-Income Developing Countries: General Government Net Debt, 2006–20
Table A23. Advanced Economies: Structural Fiscal Indicators
Table A24. Emerging Market and Middle-Income Economies: Structural Fiscal Indicators
Table A25. Low-Income Developing Countries: Structural Fiscal Indicators
Table A26. Selected Advanced Economies: Financial Sector Support
Assumptions and Conventions
The following symbols have been used throughout this publication:
. . . to indicate that data are not available
—to indicate that the figure is zero or less than half the final digit shown, or that the item does not exist
– between years or months (for example, 2008–09 or January–June) to indicate the years or months covered, including the beginning and ending years or months
/ between years (for example, 2008/09) to indicate a fiscal or financial year
“Billion” means a thousand million; “trillion” means a thousand billion.
“Basis points” refer to hundredths of 1 percentage point (for example, 25 basis points are equivalent to ¼ of 1 percentage point).
“n.a.” means “not applicable.”
Minor discrepancies between sums of constituent figures and totals are due to rounding.
As used in this publication, the term “country” does not in all cases refer to a territorial entity that is a state as understood by international law and practice. As used here, the term also covers some territorial entities that are not states but for which statistical data are maintained on a separate and independent basis.
Further Information and Data
This version of the Fiscal Monitor is available in full through the IMF eLibrary (www.elibrary.imf.org) and the IMF website (www.imf.org).
The data and analysis appearing in the Fiscal Monitor are compiled by the IMF staff at the time of publication. Every effort is made to ensure, but not guarantee, their timeliness, accuracy, and completeness. When errors are discovered, there is a concerted effort to correct them as appropriate and feasible. Corrections and revisions made after publication are incorporated into the electronic editions available from the IMF eLibrary (www.elibrary.imf.org) and on the IMF website (www.imf.org). All substantive changes are listed in detail in the online tables of contents.
For details on the terms and conditions for usage of the contents of this publication, please refer to the IMF Copyright and Usage website, www.imf.org/external/terms.htm.
Preface
The projections included in this issue of the Fiscal Monitor are based on the same database used for the April 2015 World Economic Outlook and Global Financial Stability Report (and are referred to as “IMF staff projections”). Fiscal projections refer to the general government unless otherwise indicated. Short-term projections are based on officially announced budgets, adjusted for differences between the national authorities and the IMF staff regarding macroeconomic assumptions. The medium-term fiscal projections incorporate policy measures that are judged by the IMF staff as likely to be implemented. For countries supported by an IMF arrangement, the medium-term projections are those under the arrangement. In cases in which the IMF staff has insufficient information to assess the authorities’ budget intentions and prospects for policy implementation, an unchanged cyclically adjusted primary balance is assumed, unless indicated otherwise. Details on the composition of the groups, as well as country-specific assumptions, can be found in the Methodological and Statistical Appendix.
The Fiscal Monitor is prepared by the IMF Fiscal Affairs Department under the supervision of Vitor Gaspar, Director of the Department, Martine Guerguil, Deputy Director, and Benedict Clements, Division Chief. The main authors of this issue are Marta Ruiz-Arranz (team leader), Elva Bova, Paolo Dudine, Marina Marinkov and Natalija Novta for Chapter 1; and Xavier Debrun (team leader), Kamil Dybczak, Davide Furceri, João Tovar Jalles, Ivo Razafimahefa, and Sampawende J.-A. Tapsoba for Chapter 2, which also benefited from comments from Antonio Fatás and Justin Wolfers. Outstanding research assistance was provided by Ethan Alt, Nathalie Carcenac, and Tafadzwa Mahlanganise. Nadia Malikyar and Jeffrey Pichocki provided excellent administrative and editorial support. From the IMF Communications Department, Gemma Diaz and Linda Kean edited the issue, and Gemma Diaz managed its production.
Inputs, comments, and suggestions were received from other departments in the IMF, including area departments—namely, the African Department, Asia and Pacific Department, European Department, Middle East and Central Asia Department, and Western Hemisphere Department—as well as the Institute for Capacity Development; Monetary and Capital Markets Department; Research Department; Statistics Department; and Strategy, Policy, and Review Department. Both projections and policy considerations are those of the IMF staff and should not be attributed to Executive Directors or to their national authorities.
Executive Summary
Recent Fiscal Developments and Outlook
A moderate and uneven recovery is taking place in advanced economies, supported by lower oil prices, continued accommodative monetary policy, and slower fiscal adjustment. However, high public and private debt levels continue to pose headwinds to growth and debt sustainability in some advanced economies. In addition, inflation is below target by a large margin in many countries, making the task of reducing high public debt levels more difficult. Growth in emerging economies is softening and financial and exchange rate volatility has increased public financing costs for some of them. Meanwhile, lower oil and commodity revenues have created challenges for exporting countries.
In this challenging environment, fiscal policy continues to play an essential role—alongside accommodative monetary policy and structural reforms—in building confidence and, where appropriate, sustaining aggregate demand. With narrow margins for policy maneuvering, three courses of action for sound fiscal policy stand out:
Use fiscal policy flexibly to support growth, while mitigating risks and ensuring medium-term debt sustainability. The degree and type of flexibility will depend on individual countries’ fiscal positions, macroeconomic conditions, and relevant fiscal risks. Countries with fiscal space can use it to support growth, particularly where risks of low growth and low inflation have materialized. For example, higher public investment in infrastructure could raise aggregate demand in the short term and increase potential output in the medium term. Countries that are more constrained should pursue more growth-friendly fiscal rebalancing and structural reforms to boost potential growth. Meanwhile, in countries where mounting fiscal risks may lead to market pressure, rebuilding fiscal buffers should be a priority. In oil- and commodity-exporting countries, the government’s financial assets, if sufficient, can be used to adjust gradually to the shock from lower oil prices. Nonetheless, spending cuts may be unavoidable in some financially constrained oil exporters. In economies with oil subsidies, the windfall gains from lower prices should be used to increase spending that can boost growth and, where macroeconomic vulnerabilities are high, to rebuild fiscal buffers.
Seize the opportunity created by falling oil prices. Energy tax reform can help reduce negative externalities caused by energy consumption and provide breathing room for rebalancing the tax burden—for example, by lowering taxes on labor to boost employment.
In developing economies, further reform of energy subsidies could provide space for productive spending on education, health, and infrastructure, as well as for programs to benefit the poor.
Strengthen institutional frameworks for managing fiscal policy. Fiscal frameworks anchor fiscal policy and guide it toward its medium-term objectives. These frameworks help enhance the play of automatic stabilizers over the course of the business cycle and thus reduce output volatility and raise medium-term growth. Well-grounded fiscal frameworks are particularly necessary in countries with high levels of public debt and a looming increase in the burden of age-related spending.
Can Fiscal Policy Stabilize Output?
In an environment of tepid growth and persistent downside risks, finding ways to enhance fiscal policy’s ability to smooth the effect of shocks to economic activity is high on the policy agenda. As is clear from the evidence gathered in this Fiscal Monitor, fiscal policy has often served this purpose over the last 30 years. Since the mid-1990s, some advanced economies have also increasingly turned to fiscal policy to help stabilize economic conditions. Many emerging market and developing economies, however, seemed less inclined to use this approach, given their less potent fiscal instruments and the prominence of policy objectives other than output stability, such as building economic and social infrastructure geared toward economic development, and addressing social needs.
Fiscal policy can seek to stabilize output in two ways. One way is through so-called automatic stabilizers (tax payments that move in sync with income and spending and social transfers, such as unemployment benefits, that automatically boost aggregate demand during downturns and moderate it during upswings). Another way is through deliberate fiscal policy measures adopted in response to specific shocks. Automatic stabilizers are timely, but often have adverse side effects for efficiency (such as high marginal tax rates or overly generous transfers that undermine incentives to find work or create jobs).
Automatic stabilizers have played an important role in fiscal stabilization, often accounting for more than half the stabilizing response of fiscal policy in advanced economies. However, they have generally not been allowed to play fully in good times, because spending a portion of revenue windfalls is tempting. The resulting asymmetry in the policy response to output shocks prevents the restoration of fiscal buffers when growth is strong and can contribute to significant accumulation of public debt over time.
If the past is any indication of the future, making fiscal policy more responsive to output shocks could substantially reduce macroeconomic volatility. The dividends of greater fiscal stabilization are especially large in advanced economies, where it could lower output volatility by up to 20 percent. Reduced volatility and uncertainty could in turn foster medium-term growth. An average increase—by one standard deviation in the sample—in the responsiveness of fiscal policy to output could boost annual growth by about 0.3 percentage point in advanced economies. Dividends appear much smaller in emerging market and developing economies, where fiscal stabilization is less effective and is dominated by developmental priorities.
In sum, stability and growth could both benefit when procyclical fiscal measures are avoided. Well-designed fiscal rules and medium-term frameworks can help by allowing automatic stabilizers to play in good as well as in bad times. Countries seeking to augment automatic stabilizers should pursue measures that do not entail large efficiency costs (for example, making tax exemptions such as the investment tax credit or the mortgage interest deduction less procyclical). The decision and implementation lags associated with discretionary stabilization could be eased, for instance, by moving quickly to identify easy-to-implement capital and maintenance spending.