- International Monetary Fund. Fiscal Affairs Dept.
- Published Date:
- April 2011
Change in the cyclical balance.
The spread on a credit default swap refers to the annual amount (in basis points of the notional amount) that the protection buyer must pay the seller over the length of the contract to protect the underlying asset against a credit event.
Cyclical component of the overall fiscal balance, computed as the difference between cyclical revenues and cyclical expenditure. The latter is typically computed using country-specific elasticities of aggregate revenue and expenditure series with respect to the output gap. Where these are unavailable, standard elasticities (0,1) are assumed for expenditure and revenue, respectively.
Overall balance minus cyclical balance.
Revenue and expenditure adjusted for the effect of the economic cycle (i.e., net of cyclical revenue and expenditure).
Cyclically adjusted balance excluding net interest payments
Elasticity of expenditure with respect to the output gap.
Discretionary fiscal policy actions adopted in response to the financial crisis.
The general government sector consists of all government units and all nonmarket, nonprofit institutions that are controlled and mainly financed by government units comprising the central, state, and local governments. The general government sector does not include public corporations or quasi-corporations.
All liabilities that require future payment of interest and/or principal by the debtor to the creditor. This includes debt liabilities in the form of Special Drawing Rights (SDRs), currency and deposits, debt securities, loans, insurance, pensions and standardized guarantee schemes, and other accounts payable. The term “public debt” is used in this Monitor, for simplicity, as synonymous with gross debt of the general government, unless otherwise specified. (Strictly speaking, the term “public debt” refers to the debt of the public sector as a whole, which includes financial and nonfinancial public enterprises and the central bank.)
Overall new borrowing requirement plus debt maturing during the year.
Gross debt minus financial assets, including those held by the broader public sector: for example, social security funds held by the relevant component of the public sector, in some cases.
Deviation of actual from potential GDP, in percent of potential GDP.
Net lending/borrowing, defined as the difference between revenue and total expenditure, using the 2001 edition of the IMF’s Government Finance Statistics Manual (GFSM 2001). Does not include policy lending. For some countries, the overall balance continues to be based on GFSM 1986, in which it is defined as total revenue and grants minus total expenditure and net lending.
Transactions in financial assets that are deemed to be for public policy purposes but are not part of the overall balance.
Overall balance excluding net interest payment (interest expenditure minus interest revenue).
See gross debt.
The public sector consists of the general government sector plus government-controlled entities, known as public corporations, whose primary activities are commercial.
Relative asset swap spreads measure the difference between benchmark government bond yields and the interest rate on the fixed-rate arm of an interest rate swap in the same currency and of the same maturity (usually 10 years) as the bond.
Elasticity of revenue with respect to the output gap.
Cyclically adjusted balance, corrected for one-off and other factors, such as asset and commodity prices and output compositions effects.
Government revenues that are foregone as a result of preferential tax treatments to specific sectors, activities, regions, or economic agents.
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All averages in this Fiscal Monitor are weighted by GDP in purchasing power parity terms, unless noted otherwise.
In 2010, government support to the financial sector (recorded as part of the deficit in the United States) was approximately ¼ percent of GDP, 2¼ percent of GDP lower than in 2009. The share of the United States in total GDP for the advanced economies is almost 40 percent.
More generally, the U.S. fiscal stance remains highly uncertain given the ongoing discussions in Congress about this year’s federal spending levels.
The primary balance also improved by about 1 percentage point of GDP between 2009 and 2010. In view of data limitations and uncertainties regarding changes in potential growth in low-income economies, fiscal variables for this group are not adjusted for the cycle.
The projection for the United States is broadly consistent with U.S. Congressional Budget Office (CBO) projections incorporating the effects of the recent health care reform. The CBO projects increases in federally mandated spending (primarily Medicare and Medicaid) of 3½ percentage points of GDP in 2011–30. If other spending remains constant as a share of total public health spending, this implies increased spending of 5¼ percentage points of GDP. The projection for Europe exceeds the baseline projection of a ¾ percentage point of GDP increase over the next 20 years in the European Commission’s (EC) Aging Report (European Commission, 2009). The EC projection assumes that technology will not increase costs, leading to excess cost growth (ECG) of just 0.2 percent. This would represent a sharp break from past trends. For a fuller discussion of ECG and health care costs, see Appendix 4.
In the United States, a sweeping reform expanding coverage is expected to reduce the budget deficit primarily because of higher payroll and excise taxes on health. The expected expenditure savings, however, are small and highly uncertain. In Europe, fiscal adjustment plans affecting general government employment and compensation could have an effect on health spending in the near term, but their long-term impact is uncertain. Reforms have also addressed spending on pharmaceuticals, which constitutes about 15 percent of public health spending. Recent reforms in advanced European economies (Germany, the United Kingdom), including those being undertaken in Greece as part of its fiscal adjustment program, have not been incorporated into the projections.
This trend may continue: the latest presentation of the Treasury Borrowing Advisory Committee suggests issuing bonds with maturities of up to 40–50 years which would be of interest to asset managers such as pension funds concerned with matching assets and liabilities. See United States, Department of Treasury (2011).
Breakeven inflation rates over the 10-year horizon are around 2½ percent. Also, the U.S. Treasury yield curve has steepened since end-October 2010, which signals not only economic expansion, but also the possibility of inflation down the road—both pointing to rises in policy rates.
It is difficult to make a precise quantification of the effect of QE2 but it is likely to be small and may primarily have occurred at the time of announcement (April 2011 GFSR).
It is too early to assess the market impact of the Bank of Japan’s decision to double the size of its Asset Purchase Program to ¥10 trillion following the March earthquake and ensuing events.
Iara and Wolff (2010) suggest that yield spreads against Germany of countries with relatively weak fiscal rules could be up to 100 bps lower if they upgrade their numerical fiscal rules.
For emerging markets, Jaramillo and Tejada (2011) find that reducing debt-to-GDP ratios lowers spreads significantly, especially for countries with lower sovereign credit ratings.
Fiscal forecasts for both advanced and emerging economies are highly sensitive to growth assumptions. As a first approximation, each 1 percentage point increase in output growth would improve the annual fiscal balance by 0.4 percent of GDP in advanced economies and 0.3 percent of GDP in emerging economies.
Leaving aside the uncertainty about short-term output growth, a significant source of uncertainty relates to whether potential output will recover its precrisis trend levels. For a discussion of the implications of this uncertainty for the fiscal accounts, see the May 2010 Fiscal Monitor, p. 20.
For these calculations, gross financing needs are calculated assuming that the average maturity profile of each country remains the same as in 2010. The estimation also takes into account the impact on interest income.
See, for instance, Baldacci and Kumar (2010).
The countries included in the sample are Argentina, Chile, Colombia, Indonesia, Mexico, Nigeria, Peru, the Russian Federation, and Saudi Arabia. The calculation assumes no supply response to the change in global prices and is therefore intended only as a “ready reckoner” of the impact of a price fall.
For a detailed discussion of remaining financial sector vulnerabilities, see the April 2011 GFSR.
The results of the indicators analysis reflect a worsening in the debt indicator, a small improvement in the cyclically adjusted primary balance indicator, and some worsening in the interest rate—growth differential.
See the May 2011 Regional Economic Outlook: Europe (IMF, 2011c) and Allard and Everaert (2010) for a review of structural reform needs in Europe.
As noted in the November 2010 Fiscal Monitor, most countries that have announced medium-term deficit reduction plans in response to the most recent financial crisis are also relying on expenditure measures.
For the United States, which was not included in the OECD study of health institutions, the simulations show only the impact of an increase in the indices for strengthening of budget caps and supply controls. For this exercise, the value of the budget caps and supply controls indices for the United States is set equal to the average for the bottom 50 percent of the distribution on each of these indices.
See Hillestad and others (2005) and U.S. Congressional Budget Office (2008).
See U.S. Senate Joint Committee on Taxation (2008). A recent proposal to replace the employer-sponsored health insurance tax exclusion in the United States with a credit indexed to the consumer price index would save, it is estimated, a little over 5 percent of GDP cumulatively over the next 10 years (Committee for a Responsible Federal Budget, 2010).
See, for example, Easterly (1999) and Koen and van den Noord (2005). Further references for the stratagems discussed here, including more recent ones, can be found in Irwin (2011) and, for the European examples, in the government finance statistics area of Eurostat’s website (http://epp.eurostat.ec.europa.eu/portal/page/portal/government finance statistics/introduction).
The macroeconomic relevance of a public-private partnership program does not imply that it is solely motivated by an intent to defer spending, and countries such as Portugal and the United Kingdom assess the value for money offered by public-private partnerships and also disclose information on their future fiscal implications.
See Dattels and others. (2010) for a detailed discussion on the GFSR’s Global Financial Stability Map.
The criteria include whether medium-term fiscal goals have been specified, the level of commitment and specificity of policy measures in the fiscal plans, the composition of adjustment, and the degree to which measures to protect the most vulnerable are envisaged.
While changes in the aggregate baseline indicators of less than 0.2 are considered in the text as “broadly stable,” Figure A3.1 indicates the exact numerical changes over time.
This appendix summarizes work undertaken by IMF staff and coauthors in Mauro (2011).
For example, in the European Union, the recently introduced European semester (a six-month period every year during which member states’ policies will be reviewed to detect any inconsistencies and emerging imbalances) is expected to reinforce coordination while major budgetary decisions are still under preparation.
Alternatives are the conceptual approach (benchmark is some theoretically preferred tax structure), the legal approach (benchmark is the actual tax legislation framework that applies for activities not benefiting from preferential treatment), and the analogous subsidy approach (identifies as tax expenditures only those tax concessions analogous to a direct spending measure).
There are three main methods: foregone revenue (revenue loss assuming that the concession does not change taxpayers’ behavior), earned revenue (taking into account behavioral changes), and equivalent direct expenditure (the transfer that would leave taxpayers with an income similar to that which they obtain from the tax expenditure). Almost all countries use the foregone revenue method for its greater ease; only Sweden and the United States have tried equivalent direct expenditure as an additional method.
To give just one example of the difficulty in comparing numbers, the VAT estimates for Portugal (which appears to have the lowest levels of tax expenditures in this set) include “exemptions” but not “reduced rates” (typically the largest VAT expenditure), whereas the estimates for other countries generally include both.
OECD (2010b) mentions that sunset clauses have functioned effectively in Japan, because they force tax officials and other related parties to review the contents of Special Tax Measures regularly.
Korea seems to be the only OECD country that narrowly caps tax expenditures, through the adoption, in 2007, of a provision stating that the ratio of tax expenditures to the sum of tax expenditures and tax revenues should grow by at most 0.5 percent of its average over the previous three years (OECD, 2010b).
For instance, a tax deduction for some item of spending increases aggregate private spending on it by more than the revenue foregone only if the elasticity of private spending with respect to unity minus the relevant marginal tax rate exceeds unity. More generally, Saez (2004) provides a framework for evaluating tax expenditures under the personal income tax aimed to encouraging spending on particular items.
See OECD (2010b) for additional details.
Administrative and compliance costs have not received much attention in evaluating tax expenditures. However, important costs arise from reporting and managing tax expenditures, such as the need for additional tax auditors to control tax concessions, the development of specific information systems, new tax forms or additional data requests from taxpayers, and specific intragovernmental procedures (e.g., between the tax administration and line ministries, or free zone regulators and customs authorities).