Front Matter

Front Matter

Philip Gerson, and Manmohan Kumar
Published Date:
November 2010
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    ©2010 International Monetary Fund

    Production: IMF Multimedia Services Division

    Typesetting: Alicia Etchebarne-Bourdin

    Cataloging-in-Publication Data

    Fiscal monitor—Washington, DC: International Monetary Fund, 2009—

    • v. ; cm.—(World economic and financial surveys, 0258-7440)

    • Irregular

    • Some issues have also thematic titles.

    • EAN ISBN 978-1-61635-047-5

    1. Financial crises—Periodicals. 2. Global Financial Crisis, 2008—2009—Periodicals. 3. Finance, Public—Periodicals. 4. Fiscal policy—Periodicals. 5. Finance, Public—Forecasting—Periodicals. 6. Fiscal policy—Forecasting—Periodicals. I. International Monetary Fund. II. Series: World economic and financial surveys.


    Disclaimer: This publication should not be reported as representing the views or policies of the International Monetary Fund. The views expressed in this work are those of the authors and do not necessarily represent those of the IMF, its Executive Board, or its management.

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    We dedicate this issue of the Fiscal Monitor to the memory of Richard Goode (1916-2010), the first Director of IMF’s Fiscal Affairs Department



    This edition of the Fiscal Monitor continues to survey and analyze the latest public finance developments, updates reporting on fiscal implications of the crisis and medium-term fiscal projections, and assesses policies to put public finances on a stronger footing. Beginning with this issue, the Monitor will be available in print, as well as online.

    The projections included in this Monitor are based on the same database used for the October 2010 World Economic Outlook (WEO) and Global Financial Stability Report (GFSR) (and are referred to as “IMF staff projections”). The fiscal projections refer to the general government unless otherwise indicated. Short-term fiscal 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 where 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.

    The Fiscal Monitor is prepared by the IMF Fiscal Affairs Department under the supervision of Carlo Cottarelli, Director of the Department, and Philip Gerson, Senior Advisor. This issue is coordinated by Manmohan S. Kumar, Assistant Director and Chief, Fiscal Policy and Surveillance Division. Other principal contributors include Emre Alper, Olivier Basdevant, Carlos Caceres, Giovanni Callegari, Xavier Debrun, Lorenzo Forni, Marc Gerard, Raquel Gomez Sirera, Jack Grigg, Julia Guerreiro, Jiri Jonas, Philippe Karam, Daehaeng Kim, Thornton Matheson, Ruud De Mooij, Andrea Schaechter, Anna Shabunina, and Jaejoon Woo. In addition, contributions were provided by Javier Arze del Granado, Emanuele Baldacci, Thomas Baunsgaard, Fabian Bornhorst, Nina Budina, Benedict Clements, Asmaa El Ganainy, Borja Gracia, Bertrand Gruss, Mark Horton, Richard Hughes, Alvar Kangur, Kenichiro Kashiwase, Javier Kapsoli, Mick Keen, Andrea Lemgruber, Junhyung Park, Victoria Perry, Iva Petrova, and Mauricio Soto. Maria Delariarte and Nadia Malikyar provided excellent administrative and editorial assistance. From the IMF External Relations Department, Nancy Morrison edited the volume, and Sean Culhane and Joanne Blake managed its production.

    The analysis has benefited from comments and suggestions by staff from other IMF departments. Both projections and policy considerations are those of the IMF staff and should not be attributed to Executive Directors or to their national authorities.

    This version of the Fiscal Monitor is available in full on the IMF’s website,

    Further inquiries may be sent to the Fiscal Policy and Surveillance Division, Fiscal Affairs Department.

    International Monetary Fund

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    Washington, D.C. 20431, U.S.A.

    Fax: (202) 623-6343

    Main Themes

    Fiscal policy is beginning a gradual shift from supporting demand to reducing deficits, but at different speeds depending on country circumstances. Deficits are falling this year in most emerging market and low-income countries, mostly because of improved cyclical conditions. Deficits are also falling in several advanced economies, in some cases because market pressures have dictated an early fiscal exit. Tightening will become broader and driven by discretionary measures in both advanced and emerging economies in 2011. However, public debt ratios are still rising rapidly in advanced economies, andfiscal risks remain elevated. Further clarity on exit plans and reforms to address long-term fiscal costs would help.

    Chapter 1 reviews fiscal developments and trends in 2010—11. The global fiscal deficit is projected to fall from 6¾ percent of GDP in 2009 to 6 percent this year, in line with earlier projections in the Fiscal Monitor. Deficit declines are widely spread—some 60 percent of countries covered by the Monitor are projected to post smaller deficits in 2010 than last year. However, the declines owe much to improved economic conditions. The cyclically adjusted balance—which discounts changes resulting from economic growth—is expected to worsen this year. In 2011, 90 percent of the countries are projected to record smaller deficits, and the cyclically adjusted balance is expected to improve by 1 percentage point of GDP in advanced economies (and close to this in emerging economies). This pace of adjustment is broadly appropriate, as it strikes a balance between addressing market concerns about fiscal fundamentals and avoiding an abrupt withdrawal of support to the nascent recovery. However, if growth threatens to slow appreciably more than expected in the baseline projections in the IMF World Economic Outlook,

    advanced economies with fiscal room should let the fiscal stabilizers operate and slow the pace of adjustment. The pace of adjustment varies significantly across countries, with country differences in advanced economies explained primarily by the initial level of the deficit and market pressure.

    Chapter 2 looks at borrowing requirements and sovereign debt market conditions. While a sharp deterioration in market sentiment compelled some advanced economies to tighten fiscal policy this year, other economies considered safe havens continue to benefit from very low interest rates. The onset of the crisis was marked by an increase in home bias and a decrease in maturities in sovereign bond markets. With the stabilization of market conditions, the shortening of the maturity structure has now started reversing. Net purchases of government securities by central banks have been much more limited relative to 2009, although they were sizable in the euro area during the second quarter of this year.

    Chapter 3 discusses the medium-term fiscal adjustment plans put forward to restore or maintain market confidence going forward. A review of fiscal plans for a group of 25 countries (including all of the G-20) finds that 90 percent of them have announced that they will gradually reduce their medium-term deficits, with plans typically through 2013. The overall pace of underlying adjustment envisaged is broadly appropriate. The vast majority of adjustment plans are intended to be expenditure-based, which is also appropriate in light of the high spending level in many of them. However, plans fall short of what is required in various respects. First, in many cases detailed adjustment measures have not been identified. Second, while some plans include measures addressing short-term pressures from health care, none include the comprehensive reforms that are needed to contain medium-and long-term spending pressures in this area. As the net present value of increases in health and pension spending is expected to vastly outweigh the budgetary costs of the crisis, this is an important failing. Third, while most countries have introduced measures to mitigate the impact of the financial crisis on vulnerable groups, very few are planning fundamental reforms of their social welfare systems, such as improved targeting of benefits. Finally, few countries have explicitly committed to a long-run target for their public debt ratio, or—where such a target predated the crisis—have indicated clearly when they intend to achieve it, thus leaving the ultimate fiscal strategy goal uncertain.

    Chapter 4, based on the earlier discussion, focuses on the likelihood of two possible (unpleasant) outcomes: that, over the short to medium term, sovereign rollover problems arise at a regional or global level; and that, over the longer run, debt ratios stabilize, but at elevated levels. Overall, the risk that these events materialize remains high by historical standards for advanced economies—especially those that are already under market pressure. They are lower but nontrivial for emerging markets. Risks arising from macroeconomic uncertainty are generally higher than six months ago, amid concerns that the global recovery may be losing steam, while those related to the quality of plans have broadly eased, as countries have announced or even begun implementing at least some aspects of their fiscal exit strategies. Global market sentiment has improved toward emerging markets but worsened toward those advanced economies that were already under pressure in May 2010.

    Chapter 5 concludes with an assessment of four topical fiscal policy questions:

    • Pension reforms. Various reforms have been proposed to address long-term pension spending: what is their impact on economic growth? Significantly, the analysis finds that a two-year increase in the retirement age—the increase that would be needed to offset projected spending increases over the next two decades—would increase GDP by 1 percentage point in the short to medium run, on average, and by 4½ percentage points over the long run.

    • Financial sector taxation. How can the tax system be used to reduce systemic financial sector risk? The Monitor summarizes the proposals put forward in a recent IMF report in this area, notably the “Financial Stability Contribution,” proposed by the IMF to internalize systemic risk and raise revenues to offset future financial support needs.

    • Carbon pricing. What are the fiscal implications of regimes to address the environmental impact of carbon-based fuels? Efficient carbon-pricing schemes could raise ¾ percent of GDP in advanced economies and 1½ percent of GDP in emerging economies within the next ten years, while targeted transfers could offset any impact on the poor.

    • The VAT. How can revenues from value-added taxes (VATs) be increased to support consolidation? Advanced economies should concentrate on eliminating preferential rates. Emerging economies should concentrate on improving compliance.

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