- International Monetary Fund
- Published Date:
- September 2009
© 2009 International Monetary Fund
Production: IMF Multimedia Services Division
Figures: Theodore F. Peters, Jr.
Typesetting: Alicia Etchebarne-Bourdin
Fiscal implications of the global economic and financial crisis/by a staff team from the Fiscal Affairs Dept.—Washington, D.C.: International Monetary Fund, 2009.
p. cm.—Occasional paper (International Monetary Fund); no. 269.
Includes bibliographical references.
1. Global Financial Crisis, 2008–2009. 2. Fiscal policy. 3. Economic stabilization. 4. Finance, Public. 5. Debts, Public. I. International Monetary Fund. Fiscal Affairs Dept. II. Title. III. Series: Occasional Paper (International Monetary Fund); no. 269.
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- I Overview
- II Fiscal Implications of the Crisis: Direct Costs
- III Fiscal Implications of the Crisis: The Cost of the Recession
- IV Fiscal Implications of the Crisis: Effects Through the Funded Component of the Pension System
- V The Outlook for Public Finances in Light of the Crisis
- VI The Risk for Fiscal Solvency and the Appropriate Policy Response
- I. Reporting the Fiscal Impact of Financial Sector Support
- II. Financial Sector Support Measures
- III. Outlook for Recovery Rates
- IV. Measuring Government Contingent Liabilities to the Banking Sector
- V. Estimation of Nondiscretionary Impacts
- VI. Fiscal Stimulus Packages in the G-20 Countries
- VII. Effect of Larger Debts on Interest Rates
- VIII. Japan: High Public Debt and Low Interest Rates
- 3.1. Composition of Discretionary Fiscal Measures in G-20 Countries, 2008–10
- 4.1. Pension Fund Assets in OECD Countries
- 4.2. Pension Plan Assets by Economy, End-2007
- 5.1. G-20 Countries: Outlook for Public Finances
- 5.2. Impact of the Crisis on Public Finances: Contributing Factors
- 5.3. G-20 Advanced Countries: Evolution of Government Debt
- 5.4. Lower Growth Scenario
- 5.5. Prolonged Slowdown Scenario
- 5.6. Government Debt in Case of Prolonged Slowdown, Higher Interest Rate, and Contingent Liability Shock
- 6.1. Long-Term Government Bond Yields and Spreads
- 6.2. Selected Countries: Public Debt-to-GDP Ratio
- 6.3. Population Aging in Emerging Market Countries, 2005 and 2050
- 6.4. Advanced G-20 Countries: Government Debt
- 6.5. EU-5 Countries: Outlook for Fiscal Balance Versus 2006 Stability Program
- A3.1. Recovery Rates: Selected Banking Crises
- A3.2. Gross and Net Fiscal Cost of Banking Crises
- A8.1. Japan: Debt and Interest Rates
- 2.1. Headline Support for Financial and Other Sectors and Upfront Financing Need
- 3.1. G-20 Countries: Contribution of Automatic Stabilizers
- 3.2. Loss of Fiscal Revenue Due to Commodity Price Movements
- 3.3. G-20 Countries: Other Nondiscretionary Factors
- 3.4. G-20 Countries: Estimated Cost of Discretionary Measures
- 3.5. G-20 Stimulus Measures, 2008–10 10
- 5.1. G-20 Countries: Change in Fiscal Balances and Government Debt
- 5.2. Public Finances
- 6.1. Historical Episodes of Major Accumulations and Decumulations of Government Debt
- 6.2. Debt and Primary Balance
- 6.3. Fiscal Costs of Aging
- 6.4. Emerging Economies: Selected Debt Reduction Episodes
- 6.5. Net Present Value of Impact on Fiscal Deficit of Crisis and Aging Related Spending
- A1.1. Statistical Treatment of Government Intervention (Under GFSM 1986)
- A1.2. Statistical Treatment of Government Intervention (Under GFSM 2001)
- A2.1. Upfront Gross Fiscal Cost and Estimated Recovery Rate
- A2.2. Hypothetical Net Cost from Financial Sector Support Measures: Illustrative Scenarios
- A2.3. Financial Sector Support Operations in Selected Countries
- A3.1. Estimation Results
- A3.2. In-Sample Recovery Rate Predictions
- A4.1. Banking Sector: Expected Cost of Financial Guarantees Based on CCA Calculations
- A4.2. Banking Sector: Expected Cost of Financial Guarantees Based on CCA Calculations Annual Cost over Five Years
- A4.3. Banking Sector: Expected Costs of Financial Guarantees Based on Three Alternative Credit Spread Measures and Total Banking Liabilities
- A5.1. Estimated Impact of Automatic Stabilizers on G-20 Fiscal Balances
- A5.2. Responsiveness of Cyclically Adjusted Revenue to Asset Price Changes
- A6.1. Summary of the Fiscal Stimulus Packages in the G-20 Countries
- A7.1. Studies on the Effects of Debt and Deficits on Interest Rates
The following conventions are used in this publication:
- In tables, a blank cell indicates “not applicable,” ellipsis points (…) indicate “not available,” and 0 or 0.0 indicates “zero” or “negligible.” Minor discrepancies between sums of constituent figures and totals are due to rounding.
- An en dash (-) between years or months (for example, 2007-08 or January-June) indicates the years or months covered, including the beginning and ending years or months; a slash or virgule (/) between years or months (for example, 2007/08) indicates a fiscal or financial year, as does the abbreviation FY (for example, FY2008).
- “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).
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.
The global financial crisis is having major implications for the public finances of most countries. Direct fiscal support is being provided to the financial sector. Fiscal revenues are declining through the operation of automatic stabilizers and because of lower asset and commodity prices. Many countries are undertaking discretionary fiscal stimulus. The consequent fiscal deterioration is particularly strong for advanced countries, where the increase in both government debt and contingent liabilities is unprecedented in scale and pervasiveness since the end of the Second World War. Moreover, these developments are taking place in the context of severe long-run fiscal challenges, especially for countries facing rapid population aging.
The fiscal balances of G-20 advanced countries are projected to weaken by 8 percentage points of GDP on average, and government debt is projected to rise by 20 percentage points of GDP in 2008–09, with most of the deterioration occurring in 2009. The fiscal balances of G-20 emerging market economies will deteriorate by 5 percentage points of GDP. For advanced economies, the increase in debt mostly reflects support to the financial sector, fiscal stimulus, and revenue losses caused by the crisis. For emerging economies, a relatively large component of the fiscal weakening reflects declining commodity and asset prices. Collapsing asset prices have also had adverse effects on funded components of pension systems, with potentially significant risks for public accounts over the next few years.
While fiscal balances are expected to improve over the medium term, they will remain weaker than before the crisis. Public debt-to-GDP ratios will continue to increase over the medium term: in 2014 the G-20 advanced country average is projected to exceed the end-2007 average by 36 percentage points of GDP. On current policies, debt ratios will continue to grow over the longer term, reflecting demographic forces. Moreover, for both advanced and emerging economies, the crisis has increased short- and medium-term fiscal risks, with key downside risks arising from the need for possible further support to the financial sector, the intensity and the persistence of the output downturn, and the return from the management and sale of assets acquired during the financial support operations.
This somber fiscal outlook raises issues of fiscal solvency, and could eventually trigger adverse market reactions. This must be avoided: market confidence in governments’ solvency is a key source of stability and a precondition for economic recovery. Therefore, there is an urgent need for governments to clarify their strategy to ensure that solvency is not at risk. In formulating such a strategy, four components are particularly important: (1) fiscal stimulus packages, where these are appropriate, should not have permanent effects on deficits; (2) medium-term frameworks, buttressed by clearly identified policies and supportive institutional arrangements, should provide a commitment to fiscal correction, once economic conditions improve; (3) structural reforms should be implemented to enhance growth; and (4) countries facing demographic pressures should firmly commit to clear strategies for health and pension reforms. While these prescriptions are not new, the weaker state of public finances has dramatically raised the cost of inaction.
This Occasional Paper was prepared by a staff team from the Fiscal Affairs Department headed by Carlo Cottarelli and comprising S. M. Ali Abbas, Steven Barnett, Thomas Baunsgaard, Jacques Bouhga-Hagbe, Giovanni Callegari, Stephanie Eble, Julio Escolano, Annalisa Fedelino, Manal Fouad, Robert Gillingham, Mark Horton, Anna Ivanova, Jiri Jonas, Philippe D. Karam, Daehaeng Kim, Manmohan Kumar, Daniel Leigh, Adam Leive, Lusine Lusinyan, Edouard Martin, Paolo Mauro, Steven Symansky, Elsa Sze, Anita Tuladhar, and Daria Zakharova, assisted by Sukhmani Bedi, Maria Coelho, Maria David, and Annette Kyobe. Esha Ray of the External Relations Department coordinated production of the publication.
An earlier version of the paper (“The State of Public Finances: Outlook and Medium-Term Policies After the 2008 Crisis”) was discussed by the IMF’s Executive Board at a seminar on February 20, 2009. The opinions expressed in the paper are those of the authors, however, and do not necessarily reflect the views of the national authorities, the IMF, or IMF Executive Directors.
Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility
Asset Protection Scheme
Capital Assistance Program
Congressional Budget Office
Contingent claims approach
Caisse des Dépôts et Consignations
Credit default swap
Corporate income tax
Commercial Paper Funding Facility
Capital Purchase Program
European Central Bank
Export Development Corporation
Expected default frequency
Expected default frequency implied credit default swap
European System of Accounts
Exchange Stabilization Fund
Federal Deposit Insurance Corporation
Federal Housing Administration
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Group of 20 countries
Government Accountability Office
Gross domestic product
Government Finance Statistics Manual
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Loss given default
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Money Market Investor Funding Facility
Mid-Year Economic and Fiscal Outlook
Organization for Economic Cooperation and Development
Office of Management and Budget
Pension Benefit Guaranty Corporation
Primary Dealer Credit Facility
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Personal income tax
Pension Protection Fund
Purchasing power parity
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Small and medium-sized enterprise
Swedish National Debt Office
Term Auction Facility
Term Asset-Backed Securities Loan Facility
Troubled Asset Relief Program
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World Economic Outlook