CHAPTER 1 Fiscal Developments and Near-Term Outlook
- Philip Gerson, and Manmohan Kumar
- Published Date:
- November 2010
At a Glance
This chapter discusses fiscal developments in 2010, and the fiscal adjustment expected in 2011. It shows that while the overall fiscal deficit for the world is projected to decline somewhat this year, this owes much to improved economic conditions. Fiscal adjustment, particularly in advanced economies, will gather pace next year, which is appropriate given the need to strike a balance between improving fiscal fundamentals and avoiding an abrupt withdrawal of support to economic recovery. There are considerable differences in the pace of adjustment across advanced economies, which are explained primarily by the initial level of deficit and market pressures. The chapter finds that public debt ratios in advanced economies will increase further this year and are projected to be about 29 percentage points of GDP higher by end-2011 than before the crisis, while in emerging economies they will start declining. In advanced economies net purchases of government securities by central banks have generally declined with respect to 2009, and the recovery of direct support to the financial sector is proceeding gradually.
Fiscal Developments in 2010: The Beginning of the Fiscal Exit
Fiscal deficits have started declining somewhat in 2010, especially in emerging and low-income economies, where economic activity is picking up more rapidly. The overall fiscal deficit for the world is projected to decrease from 6¾ percent of GDP in 2009 to 6 percent in 2010, in line with projections in the May Fiscal Monitor (Table 1.1; Figure 1.1). Among the countries covered in the Monitor, the share of those with a declining deficit reaches 60 percent (three times more than in 2009). This percentage rises to nearly 70 percent among emerging markets. The narrowing of deficits is stronger in Latin America and in some Asian countries, reflecting faster economic recovery and policy tightening. Among the advanced economies, more diverse economic and financial conditions have translated into greater fiscal heterogeneity, with deficits declining in only about half of them.
In advanced economies on average, fiscal policy remains supportive of economic activity, although fiscal exit has picked up speed in some European countries.
(Percent of GDP)1
|2010 May Fiscal|
|Advanced G-20 Economies||-1.7||-4.3||-9.5||-8.7||-7.4||-0.1||0.2||-0.3|
|Emerging G-20 Economies||0.3||-0.3||-4.7||-4.0||-3.2||0.1||-0.3||-0.2|
|Cyclically Adjusted Balance2|
|Advanced G-20 Economies||-1.7||-3.5||-5.8||-6.4||-5.5||0.3||0.6||0.4|
|Emerging G-20 Economies||-0.5||-1.8||-4.3||-3.9||-3.1||0.0||-0.4||-0.3|
|United States3||-2.7||-5.9||-10.4||-10.7||-9.5||-0.4||-0.1||-1.4|Figure 1.1Fiscal Balances, 2005-11
Source: October2010 WEO and IMF staffcalculations.
1 Cyclically adjusted data are not available for several countries.
While the average deficit of these economies is projected to decline from 9 percent of GDP in 2009 to 8¼ percent of GDP in 2010, this is due to lower financial sector support in the United States, net of which the deficit is projected to be unchanged, on average. Deficits are expected to increase in many major economies (France, Germany), primarily reflecting fiscal stimulus measures provided this year (Box 1.1). In some of these economies, revenue performance is turning out to be weaker and deficits somewhat larger than projected in the May Monitor. Ireland has the highest deficit of this group—and the largest upward revision—owing to larger banking sector bailout costs than expected in May.1
However, fiscal exit has been initiated in countries where economic activity is picking up (Korea), or that have been subject to market pressure (Greece, Portugal). In the latter group, fiscal tightening is indeed stronger than anticipated in May, primarily reflecting additional expenditure cuts. The deficit is also declining in Japan owing to a smaller fiscal stimulus than in 2009 and a relatively strong recovery. In the United Kingdom, additional multiyear tightening measures adopted in June, including further expenditure cuts for 2010, should ensure the deficit remains broadly stable this year.
Changes in cyclically adjusted balances (CAB) broadly mirror these developments, but a sizable upward revision in the potential output series for the United States implies a lower cyclically adjusted deficit than estimated earlier, with implications for future fiscal projections and risks (Chapter 4).2
Box 1.1.The G-20 Economies: Crisis-Related Discretionary Fiscal Stimulus1
(Percent of GDP)
|Developments Relative to the|
|2009||2010||2011||May 2010 Fiscal Monitor|
|Argentina||4.7||1.4||…||2009 estimate is 3.2 percentage points (pps) higher, due to higher (mostly capital) spending; 2010 estimate is 1.4 pps higher and includes mostly soft credit lines to promote investment, together with some revenue-enhancing measures.|
|Australia||2.7||1.7||1.3||The 2009 and 2010 estimates are 0.1 pps lower due to minor slippages in some investment categories within the stimulus package.|
|Brazil||0.7||0.6||0.0||No change in stimulus from earlier estimates.|
|Canada||1.8||1.7||0.0||No change in stimulus from earlier estimates.|
|China||3.1||2.7||…||No change in stimulus from earlier estimates.|
|France||1.2||1.1||0.6||2009 estimate is 0.2 pps higher, due to a greater use of tax benefits and revision of GDP estimates; 2010 estimate is higher by 0.6 pps due to new measures in the additional 2010 budget (abolition of local business tax, and new public investment program).|
|Germany||1.7||2.2||1.7||2009 and 2010 stimulus estimates are 0.2 pps and 0.1 pps higher, reflecting additional cost of stimulus measures and a revised profile for investment in 2009-10.|
|India||0.5||0.3||0.0||2009 stimulus estimate is lower by 0.1 pps due to upward revision of GDP; the 2010 estimate is 0.1 pps lower, as the 2010/11 budget reversed half the reduction in indirect taxes taken as part of the stimulus and due to upward revision of GDP forecast.|
|Indonesia||1.4||0.0||0.2||2009 stimulus estimate is 0.1 pps higher than previously announced; 2010 estimate is 0.6 pps lower since recent budget execution data point to under-spending of budgeted fiscal stimulus and a neutral fiscal stance.|
|Italy||0.0||0.0||0.0||2010 stimulus estimate is lower by 0.1 pps due to upward revision of GDP forecast.|
|Japan||2.8||2.2||1.0||No change in stimulus from earlier estimates.|
|Korea||3.6||1.1||0.0||No change in stimulus from earlier estimates.|
|Mexico||1.5||1.0||0.0||No change in stimulus from earlier estimates.|
|Russia||4.5||5.3||4.7||2010 stimulus higher by 2.4 pps reflecting the reclassifications of transfers to the pension fund (3.2 percent of GDP) as “anti-crisis” measures; and higher spending in the supplementary June budget.|
|Saudi Arabia||5.4||4.2||1.6||2009 and 2010 estimates are higher by 2.1 pps and 0.7 pps, respectively, as capital spending was larger than budgeted.|
|South Africa||3.0||2.1||0.0||No change in stimulus from earlier estimates.|
|Turkey||1.2||0.5||0.0||No change in stimulus from earlier estimates.|
|United Kingdom||1.6||0.0||0.0||Downward revision of 0.2 pps for 2010 mainly reflects spending cuts in the new June 2010 budget.|
|United States||1.8||2.9||1.7||2009 and 2010 estimates of stimulus are based on the FY2011 Mid-Session Review and are unchanged from the May Fiscal Monitor. The 2010 and 2011 estimates are subject to a downside risk since some measures are still pending in Congress.|
In emerging economies, the economic recovery—and, to a lesser extent, tightening measures and lower interest payments—are leading to a widespread decline in the fiscal deficit, albeit a still relatively contained one.
Latin America. The reduction in fiscal deficits is largest and most widespread in Latin America. A withdrawal of discretionary fiscal stimulus is under way in some countries in light of either a sharp rebound of economic activity and rising export commodity prices (Brazil) or sustainability concerns (Mexico). Alongside these developments, interest payments for several countries in the region are expected to be significantly smaller than earlier anticipated, reflecting low interest rates in some cases and a decline in debt ratios.
Emerging Asia. Fiscal deficits are declining in emerging Asia as several economies recover more strongly and countries start tightening fiscal policy (India, Malaysia, Thailand). However, China’s fiscal deficit is projected to narrow only marginally as large fiscal stimulus measures continue.
Emerging Europe. Fiscal developments are more diverse in emerging Europe. The overall decline in the deficit is largely driven by the strengthening of the fiscal position of the Russian Federation, even though the improvement is smaller than projected because of lower oil prices and additional stimulus measures. Several emerging economies in Europe facing market concerns about sustainability have started to tighten fiscal policy (Latvia, Lithuania, Romania, Ukraine). But in some countries, deficits continue to widen in 2010 as revenue collection remains weak (Bulgaria) or sticky spending raises expenditure ratios in light of sharp output shocks (Estonia, Latvia).
Emerging economies as a group. The improvement in the fiscal balances for emerging economies is still driven mostly by the economic recovery, as the cyclically adjusted balance (CAB) has improved only marginally (¼ percentage point of GDP) compared to 2009.
In low-income countries (LICs), deficits are also expected to decline, reflecting higher tax revenues and grants, although with considerable variation across countries. After rapidly expanding in 2009—when fiscal policy played a countercyclical role in contrast with earlier downturns—the average fiscal deficit is expected to decline from 4½ percent of GDP in 2009 to 3½ percent of GDP this year:
Sub-Saharan Africa. The overall balance is expected to improve in 2010 by ¾ percentage point in sub-Saharan Africa. The tightening partly reflects expenditure measures, including the reversal of stimulus measures in countries that implemented these in 2009. Most countries are expected to have moderate fiscal tightening, with larger adjustments expected in Liberia, Madagascar, and Malawi.
Emerging Asia. The fiscal tightening is stronger in Asian LICs, with the overall balance expected to rise by 1¾ percentage points. This reflects in particular fiscal efforts in Cambodia, Mongolia, and Vietnam.
Other LICs. For the remaining LICs in Europe, Latin America and the Caribbean, and the Middle East, the overall balance is projected to improve by about 1 percentage point. Some countries, though, are implementing much larger adjustments (e.g., Armenia, Grenada, Nicaragua).
Among oil producers, fiscal balances have also strengthened, given higher oil prices in 2010 and fiscal tightening measures in some countries (the Russian Federation, Saudi Arabia). The overall deficit for this group of economies is projected to decline by 1½ percentage points in 2010. This improvement, however, is half that envisaged in May, reflecting weaker than expected oil prices and additional fiscal stimulus in the Russian Federation and Saudi Arabia.
Outlook for 2011: Broader Fiscal Adjustment
With the projected firming of the recovery, fiscal exit will start in earnest in 2011 for most countries, but at significantly different speeds.
Advanced countries as a group. Consolidation efforts will be a key driver of the expected decline in the overall deficit of advanced countries by 1¼ percent of GDP (with the percentage of these countries showing a declining deficit rising to 90 percent). The corresponding improvement in the CAB by about 1 percentage point (Table 1.1; Figure 1.1) almost entirely reflects the unwinding of discretionary fiscal stimulus introduced in 2009-10 (Box 1.1). Overall, the size of the adjustment (Figure 1.2) strikes an appropriate balance between the need to put public finances back on a sustainable path and supporting the economic recovery (see Box 1.2; Blanchard and Cottarelli, 2010; and IMF, 2010a).
Figure 1.2.Selected Advanced Economies: Change in Fiscal Balances
Sources: October 2010 WEO; and IMF staff estimates.
Note: Excluding financial sector support, the overall deficit in the United States is estimated to increase in 2010 by ½ percentage point of GDP and decline by 1½ percentage point of GDP in 2011.
Box 1.2.To Tighten or Not to Tighten: This Is the Question
The debate on what fiscal policy should do in advanced countries in 2011 has been heated in recent months. Surely—argues one side—it is folly to tighten fiscal policy at a time when unemployment is at a record high. Surely—argues the other—it is reckless not to tighten fiscal policy when public debt is at a record high. Both sides have compelling arguments, and a policy that blends these policy prescriptions—a down payment on consolidation now, with continued gradual tightening over the medium term—is needed.
An abrupt, front-loaded tightening is risky and should be avoided, except when market conditions make it inevitable. As discussed in Chapter 3 of the WEO, fiscal tightening is likely to reduce GDP growth (the multiplier is small—0.5 to 1—but is not zero), compared to a situation in which fiscal policy is not tightened and financing continues to remain easy for the government. Thus, given the relatively slow pace of economic recovery, stepping on the brakes with excessive enthusiasm would not be appropriate unless there is acute market pressure.
So why not delay fiscal adjustment altogether? There are two reasons (see also discussion in Chapter 4). First, markets could lose confidence in the willingness of governments to pay back their debt. Markets may now be too pessimistic about some countries (Chapter 2), but that does not mean that risks can be ignored. The easy financing conditions that most advanced economies continue to enjoy—which reflect a range of factors noted in Chapter 2—may suggest that the risk of a loss of market confidence is remote for now. But markets typically react late and abruptly (spreads on Greek debt were as low as 100 basis points just one year ago). Second, high deficits raise public debt and there is evidence that high debt harms growth: a 10 percentage point increase in debt lowers annual potential output growth by some 0.15 point in advanced countries (Kumar and Woo, 2010), not a trivial amount for countries where potential growth is already fairly low.
The ideal course of action would be to avoid any tightening now, while also credibly committing to future tightening. This is why this Monitor discusses in depth the adequacy of medium-term adjustment plans (Chapter 3). Unfortunately some up-front tightening is likely to be needed to ensure that future plans are credible. Some may argue that an immediate reduction in the deficit can be avoided if reforms to address long-term spending pressures (from pensions and health care) are implemented. But these reforms are already long overdue: they are needed simply to avoid a further increase in public debt, not to reduce it. Be this as it may, progress remains inadequate on these long-term reforms.
How much adjustment is “just right” in this Goldilocks world? The WEO shows that a reduction in the advanced economies’ cyclically adjusted deficit by about 1 percentage point in 2011 would be consistent with a continuation of the world recovery at a time when private sector demand is stirring. Country conditions of course differ, and some countries are planning to do more, while others are planning to do less. This is appropriate in light of different fiscal, cyclical, and market conditions. At the same time, if economic activity threatens to fall short of WEO projections, maintaining adequate flexibility will be necessary. In that case, countries with fiscal space should let the automatic stabilizers operate fully and slow the pace of structural adjustment.
Differences across advanced countries. The extent of the fiscal tightening varies significantly across advanced countries. The three largest advanced economies envisage a relatively back-loaded or evenly spread adjustment: in CAB terms, the expected retrenchment in Germany, Japan, and the United States3 amounts to ½, ½, and 1 percentage point of GDP, respectively (Figure 1.3), against larger average adjustments over the medium term (Chapter 3). In some advanced economies where the cyclically adjusted deficits were high, governments opted for accelerating the pace of adjustment in comparison to earlier announcements. France’s deficit is now projected to decline by 2 percentage points in 2011, ¾ percentage point more in cyclically adjusted terms than expected earlier, mostly because of new revenue measures. In the United Kingdom, the deficit is also projected to decline by 2 percentage points next year, 1¼ percentage points more than expected in May, as the recent budget included additional tightening measures (an increase in the VAT rate, capital spending cuts, and a nominal public sector wage freeze). In Portugal and Spain, additional adjustment for 2011 was announced in the wake of market pressures in May with a view to reducing deficits by a further 2 and 2¼ percentage points of GDP, respectively.
For emerging economies, the improvement in the fiscal accounts will be driven by discretionary actions—contrary to 2010. Their overall deficit is projected to decline by 1 percent of GDP from its 2010 level, largely reflecting an improvement of the CAB by ¾ percent of GDP, with the bulk of it accounted for by the unwinding of the fiscal stimulus. However, there is considerable variation among emerging economies, pointing to contrasting fiscal policy responses. Fast-growing economies with excessive external surpluses and low debt appear likely to appropriately delay fiscal tightening. In others where debt is relatively high and external positions are broadly in line with medium-term fundamentals, fiscal tightening is expected to start in the near term (Chapter 3).
Figure 1.3.Selected Advanced Economies: Change in the Cyclically Adjusted Balance, 2009-11
Sources: October 2010 WEO and IMF staff estimates.
Elsewhere, the strengthening in fiscal balances is also varied, primarily reflecting the uneven recovery and the associated revenue performance. In low-income countries, the fiscal adjustment in 2011 is expected to be more modest than in 2010, with a decline in the overall deficit of ¼ percent of GDP. The improvement primarily reflects a cyclical uptick in revenue collections. The outlook for commodity exporting LICs indicates that the fiscal adjustment will be slightly larger (about ½ percent of GDP). Oil producers are also expected to reduce their overall deficit in 2011 (by 1 percent of GDP) because of a rebound in growth, as well as the unwinding of the stimulus in Saudi Arabia and, to a lesser degree, in the Russian Federation.
The Pace of Fiscal Consolidation: What Explains the Differences Across Advanced Economies?
The considerable variation in the pace of adjustment across advanced economies mostly reflects differences in initial fiscal conditions, and market pressures. These factors explain more than two-thirds of the cross-country dispersion in the magnitude of fiscal consolidation envisaged in 2010—11:4
The initial state of public finances in the immediate aftermath of the crisis is a key determinant of the pace of consolidation. In particular, high deficit-to-GDP ratios in 2009 are associated with larger adjustment during 2010—11 (Figure1.4). High public debt—either before the beginning of the crisis (2007) or in 2009—tends to lead to stronger adjustment, but the effect is less clear. Finally, the deterioration in public finances during 2008—09 is not found to affect the size of the retrenchment, suggesting that the fiscal effort is commensurate with the medium-term adjustment need, rather than simply a reversal to the pre-crisis fiscal position.
Market pressure seems to have a significant influence on the pace of fiscal adjustment over and above the impact of fiscal fundamentals, which are already reflected in the yields themselves. Specifically, countries facing higher borrowing costs in the immediate aftermath of the crisis generally tend to undertake larger adjustments in the near term (Figure 1.5).
Evidence that the conditions of the real economy play a role in shaping fiscal adjustment is mixed. Among conventional business cycle indicators, only the unemployment rate is found to be associated with the size of the expected fiscal adjustment: economies where the labor market was hit harder tended to have less contractionary policies in the near term, possibly reflecting efforts to limit additional short-term costs that may arise from frontloaded fiscal retrenchment. But the effect is not as clear as for the fiscal and financial market variables.
Figure 1.4.Adjustment and Initial Fiscal Deficits
Sources: October 2010 WEO; and IMF staff estimates.
Note: The panels depict conditional correlations (statistically significant at the 5 percent level) emerging from the multivariate regression described in footnote 4. The conditioning variables are as described in that footnote.
Figure 1.5.Adjustment and Bond Yields
Sources: October 2010 WEO; and IMF staff estimates.
Note: The panels depict conditional correlations (statistically significant at the 5 percent level) emerging from the multivariate regression described in footnote 4. The conditioning variables are as described in that footnote.
Public Debt Still Rising, with Some Central Bank Support5
Fiscal deficits still exceed what would be necessary to stabilize the public debt ratio. In advanced economies, public debt by end-2011 is projected to be 29 percentage points of GDP higher than before the crisis, on average, with four-fifths of the increase having already occurred (Figure 1.6). Divergences within these economies are significant, though (Figure 1.7). In some economies (Canada, Iceland, Israel, Korea, Sweden, Switzerland), the planned fiscal tightening is sufficient to achieve a decline in debt ratios by 2011. Others will experience further sharp increases between 2009 and 2011, with the highest (between 15 and 42 percentage points) projected for Ireland, Greece, Japan, Spain, and the United States. However, for those countries that have frontloaded their fiscal consolidation in light of market pressure or political choice, the debt outlook has improved. Compared to the May Monitor, the projected 2011 public debt ratios have been revised down for Greece (by 5¾ percentage points of GDP), Spain (5¼ percentage points), Portugal (4¾ percentage points), and the United Kingdom (3 percentage points). In contrast, Ireland’s 2011 debt ratio is now expected to be 21 percentage points higher than projected in May, reflecting additional banking sector support. Overall, the distribution of debt ratios among advanced economies has shifted dramatically since 2007, with 40 percent of countries now projected to have debt ratios above 80 percent of GDP by end-2011, compared to 17 percent pre-crisis (Figure 1.8).6
Figure 1.6.General Government Gross Debt Ratios
Source: IMF staff estimates based on October 2010 WEO projections.
Figure 1.7Selected Advanced Economies: Changes in Public Debt, 2008-11
Source: October 2010 WEO.
Figure 1.8Government Debt Distribution, 2007-11
Source: October 2010 WEO and IMF staff estimates.
In contrast, in emerging economies, lower deficits and stronger growth are expected to reduce the average debt ratio slightly to 37¼ percent in 2011. There are, however, marked differences across economies, with the largest declines expected in the faster growing Asian and Latin American regions. In contrast, in emerging Europe, with the exception of Turkey, debt ratios are expected to increase—significantly, in some cases (Latvia, Lithuania). Because the impact of the crisis on emerging economies was generally small, the distribution of debt ratios has shifted less than for advanced economies (Figure 1.8): by end-2011, around half the emerging economies are projected to have debt ratios above 40 percent of GDP, compared to about 35 percent in 2007. Even this shift, however, mostly reflects emerging Europe, highlighting the regional concentration of fiscal vulnerabilities. This said, the resumption of the decline in the debt ratios of emerging markets is still premised on a negative interest rate-growth differential in many countries (Appendix 1). The average primary balance is still negative (-17frac14; percent of GDP) for this country group through 2011, although this is not unusually low by historical standards.
In LICs, debt ratios are expected to remain stable through 2010—11. The average debt-to-GDP ratio is expected to reach 437¾ percent in 2011 (Figure 1.6).7 However, the combination of higher growth and an associated moderate fiscal improvement is expected to lead to a gradual decline in debt ratios over the medium term.
The evolution of net debt in advanced and emerging economies is generally similar to that of gross debt. Net public debt is around 25 percentage points of GDP lower than gross debt on average for advanced economies, and 10 percentage points lower for emerging markets (Statistical Table 8). Over 2008—10, asset acquisitions led to net debt accumulation being around 2 percentage points lower than gross debt in advanced economies. In emerging markets, capital losses and asset liquidations meant that net debt increased by 2 percentage points more than gross debt, on average.
In advanced economies, net purchases of government securities by central banks have declined with respect to 2009, although they were sizable in the euro area in the second quarter of this year. During 2009, about one-fifth of the U.S. deficit was financed by the Federal Reserve, while some 85 percent of the U.K. deficit was financed by the Bank of England (Table 1.2). During 2010, purchases by these two central banks were mostly limited to rolling over government debt holdings, although the Federal Reserve recently resumed net purchases in modest amounts, using the principal repayment of Government Sponsored Enterprise (GSE) debt and mortgage-backed securities (MBS) that it had acquired to stabilize the mortgage market. The European Central Bank started its purchases of euro area bonds in May 2010, and they now amount to about €61½ billion (¾ percent of GDP), with most of the intervention taking place in the second quarter of 2010.
|Central Bank Holdings, end of period||Central Bank Purchases|
|(Percent of GDP)||(Percent of new net issuance)|
|U.S. Federal Reserve|
|Agency Debt and MBS 2||0.1||7.2||8.3||8.6||8.4||…||…||…||…|
|European Central Bank|
|Securities Market Program 3||0.0||0.0||0.0||0.6||0.7||0.0||0.0||16.0||1.2|
|Bank of England|
|Gilt Purchase under||0.0||13.0||13.7||13.7||13.7||86.5||13.3||0.0||0.0|
|Asset Purchase Facility|
Financial Sector Support and Recovery to Date
With the ongoing economic recovery, there has been in general limited new direct financial sector support, with the striking exception of Ireland.8 While most direct support measures pledged previously remain in place, their utilization in the three largest economies most affected by the financial crisis has increased only modestly since end-2009 and remains lower than generally expected at the peak of the crisis (Table 1.3). Even the small increase reflects mostly the additional purchase of GSE preferred shares (about US$60 billion) in the United States. The utilization of pledged capital injections and asset purchases are broadly unchanged in Germany and the United Kingdom. There has been a sharp increase in public outlays for the banking sector in Ireland, however, related predominantly to the support to Anglo-Irish Bank. The uptake of guarantees continues to be markedly lower than the protection offered. Several liquidity support and guarantee programs expired in 2010, with only part of the available funding being utilized and without any guarantees being called.9
The recovery of direct support to the financial sector is proceeding gradually. By end-June 2010, recovery of outlays stood at 1½ percent of GDP, ¼ percentage point higher than at end-2009. As a result, the recovery rate of the utilized support increased from 21 percent to 25 percent. The bulk of the additional recovery has occurred through the repurchase of shares, sales of warrants, and dividend receipts in the United States. The current pace for recovery of outlays appears somewhat faster than has been the case historically, when the bulk of the recovery has typically occurred over a period of five to seven years post-crisis.
The net direct cost of financial sector support remains below historical norms, but contingent liabilities remain high. Although more outlays have been recovered since end-2009, the additional utilization of the pledged measures raised the average net fiscal cost marginally (by US$13 billion, or less than ¼ percent of GDP) among the three largest economies that have provided the bulk of the support (Table 1.3), bringing the average cost to 4.1 percent of GDP.10 Prospects for further recovery in the medium term appear to be good. A mark-to-market valuation of some assets acquired by the government during the crisis, although still volatile, suggests that large losses are unlikely. There could even be net gains to the government when divesting the assets.11 Nonetheless, although banking sector risks in Europe are generally considered to have declined since 2009, contingent liabilities arising from banking system losses are estimated to remain high in several European economies, ranging from under 1 percent of sovereign assets for Portugal and Spain up to 30 percent for Ireland (about 22 percent of GDP; see October 2010 GFSR). Moreover, the above cost estimates refer only to the cost of direct support to the financial sector. The broader cost of the crisis, including the fiscal impact of induced recession, has been much higher, as reflected in the surge in public debt in the advanced economies.
|Direct Support||Recovery||Net Direct|
|Average (end-June 2010)||7.9||5.4||1.4||4.1|
|In billions of U.S. dollars||1,549||1,074||265||809|
|Average (end-Dec 2009)||7.9||5.1||1.1||4.0|
|In billions of U.S. dollars||1,544||1,006||210||796|
The figures for the United States reported in the tables of this Monitor are consistent with those in the October 2010 World Economic Outlook. However, preliminary federal government data released since the publication of the WEO suggest the 2010 general government deficit may be smaller. The figures in this Monitor for Ireland incorporate the outlays on bank recapitalization announced in late September classified by the Irish authorities as expenditure amounting to about €30 billion (20 percent of GDP).
The U.S. potential GDP level has been revised upward, which has made the output gap more negative. As a result, the cyclically adjusted deficit has been revised by 1¼ percent of GDP in 2010 for the United States and by ½ percent of GDP for the advanced country average.
Should the 2010 outturn prove stronger than projected in the Monitor, the associated tightening implied in the 2011 projection would be smaller. This projection does not include the effect of the new stimulus package announced by the U.S. administration in mid-September. If all components of such a package were approved and implemented without delay, there would be almost no change in the fiscal deficit of the United States in 2011, with respect to the previous year. A sizable component of this package is the provision allowing an early depreciation of capital, which would have a negative impact on the fiscal accounts in 2011 but a positive impact in later years. The projection also assumes that the cuts in personal income tax rates introduced by the Bush administration are allowed to expire for taxpayers earning more than US$250,000. The decline in the CAB is about half what had been projected in the May Monitor because of the postponement to 2011 of some stimulus spending initially projected for 2010.
This section is based on two cross-country regressions for 25 advanced economies for 2010 and 2011, respectively. The dependent variable is the change in the cyclically adjusted primary balance (CAPB) between 2009 and 2010, and between 2009 and 2011; the explanatory variables are the initial fiscal positions (public debt and CAPB in 2009, and the change in the CAPB between 2007 and 2009), government bond yields in 2009, and the cyclical position (measured by the unemployment rate in 2009 and the change in the unemployment rate over 2007—09).
The term public debt is used in this Monitor for simplicity, as indicating gross general government debt (see Glossary).
FAD staff has compiled a new Historical Public Debt Database (HPDD) covering nearly the entire Fund membership and a long time period (from 1880 for most G-7 countries and a few other advanced and emerging economies). The HPDD is available at http://www.imf.com and is linked to the WEO to provide for regular updates. An IMF Working Paper (Abbas et al., 2010) provides further information on the HPDD, including sources, definitions, and institutional coverage.
However, note that around two-thirds of the debt of LICs is concessional.
Direct support includes capital injections and purchase of assets.
These include various crisis-related credit facilities in the United States (such as Term Auction Facility and Term Securities Lending Facility), as well as in Canada (Canadian Secured Credit Facility), and guarantee facilities in the United Kingdom (notably the Credit Guarantee scheme).
The net fiscal cost is defined as total outlays net of recovery by end-June 2010. As further recovery will be possible by divesting assets that the government still holds, the net fiscal cost is an upper bound of the expected net loss (or negative worth) of financial sector support, which is included as transfer spending in the budget of some countries.
For example, in the United Kingdom, £70 billion worth of common stocks were purchased for recapitalizing banks, less than £3 billion of which has been sold. The market value of the common stocks still held by the government was around £58 billion at end-2009, and improved further to £70 billion as of end-April, 2010. However, the cost recovery will also depend crucially on the timing of unwinding, and the scale of unwinding will affect the market values of assets.