Transcript of a Press Briefing on the Fiscal Monitor Report

April 9, 2014

Washington, D.C.
Wednesday, April 09, 2014

Sanjeev Gupta
Acting Director, Fiscal Affairs Department
Martine Guerguil
Deputy Director, Fiscal Affairs Department
Julio Escolano
Division Chief, Fiscal Affairs Department
Wafa Amr
Senior Communications Officer, Communications Department

Webcast of the press briefing Webcast

MS. AMR: Good morning, everybody. Thank you for joining us. I would like to welcome you to the Press Conference on the Fiscal Monitor. I would like to remind journalists online to send their questions. Mr. Sanjeev Gupta, Acting Director of the Fiscal Affairs Department, will make a short presentation. We also have with us Martine Guerguil, Deputy Director, and Julio Escolano, Division Chief. After the presentation, we will open the floor for questions.

MR. GUPTA: Thank you, Wafa, and thank you to all for coming to this Press Conference. Since the publication of the previous Fiscal Monitor, fiscal risks are abating somewhat, but remain elevated in advanced economies. In emerging economies and low-income countries, fiscal vulnerabilities are rising, although from moderate levels. Let me elaborate briefly on these trends. I will start with advanced economies, and here I will make two points. First, the average fiscal deficit in advanced economies has nearly halved since the crisis peaked and now stands at 3.5 percent of GDP. Fiscal consolidation will continue in 2014 but at a more gradual pace, with a lesser drag on growth. The exception to this picture is Japan, where fiscal consolidation is starting this year, notably with the first stage of [collection?] tax increase that took place last week. However, despite advanced countries’ progress in narrowing in fiscal deficits, the average debt-to-GDP ratio remains stubbornly high and will exceed a hundred percent of GDP even by 2019, as you can see in this accompanying slide.

The second point I want to make on advanced economies is that the composition of fiscal consolidation is shifting from revenue to expenditure measures by end-2013. Close to half of the consolidation has come from the revenue side, quite more than originally intended, but the share is expected to decline in the coming years as spending cuts take hold. The blue part of the bar reflects the revenue measures. There is, however, heterogeneity across countries, with the U.S. relying on revenue measures more than the euro area, where the scope to raise additional taxes is very limited, as was discussed in the previous issue of the Fiscal Monitor.

Passing now to emerging market economies, these countries have overall stronger fiscal positions. They initially weathered the crisis well, in large part by running down the fiscal buffers. While there is significant heterogeneity among emerging economies, deficits and debt ratios remain significantly above pre-crisis levels.

The environment faced by emerging economies has turned more challenging. In some economies, financial vulnerabilities and changes in market sentiment will likely compound fiscal challenges. For example, those economies with higher nonresident holdings may see sharper increases in interest rates as liquidity conditions in advanced countries tighten. On average, nonresident holdings amount to about one third of emerging market debt, and local currency debt has more than doubled in several emerging market economies since 2009. While this is a welcome development for domestic market deepening and overall financial development, it does come with some risks.

Let me now turn to low-income economies. Fiscal space has also declined in those economies, as revenue mobilization has lagged fast-spending growth. As a result, the average fiscal deficit remains almost 3 percentage points of GDP above pre-crisis levels. As a result, in about half of the low-income country sample, debt ratios are projected to keep increasing through 2019 and the increase in debt is expected to be sizable in some of the so-called “ frontier markets,” such as Honduras, Senegal and Zambia.

Debt buildup has had adverse consequences for LICs in the past because it was not used for growth-enhancing investments, so it seems warranted to wonder whether the story will be different this time. In other words, has the new borrowing been used to increase productive spending? The evidence here is mixed. In many countries, large increases in debt have not been associated with higher capital spending, for example, in Honduras, Sudan and Zambia. This raises concerns about the quality of spending in some low-income countries and point to the need to strengthen institutional capacity to raise the efficiency of spending.

So, what is our policy advice against this backdrop? Our policy advice for advanced countries has not changed. Fiscal consolidation must continue at a steady and gradual pace to lower debt ratios to prudent levels. The design and implementation of well-articulated, credible, medium-term consolidation plans can help in this regard, but these plans are still lacking in some countries, most notably in the United States and Japan.

Those emerging market economies with large debt and deficits and most vulnerable to market volatility should start to rein in deficits now. In other emerging market economies, fiscal reforms are still needed, even with less urgency. In low-income countries, stepped-up revenue mobilization and higher expenditure efficiency are needed to restore fiscal buffers and to create room for much-needed public services.

Let me now turn to the second chapter of the Fiscal Monitor which is focused on public expenditure reform, a topic which we believe is both timely and politically challenging. Expenditure reforms have a key role to play in country strategies to strengthen their fiscal positions. In advanced economies, expenditure reforms can support fiscal consolidation efforts, as there is now greater reliance on expenditure measures in advanced economies. In emerging economies and low-income countries, expenditure reforms can help respond to growing demands for better delivery of public services.

The challenge for policymakers around the globe is to ensure the sustainability of expenditure programs, maximize the efficiency of public spending, and foster equitable access to public services. Reaching these goals is not easy, but will require mobilizing political and social support. I do not think I have the time to walk through all the details of the analysis in the chapter, but let me pick up a few important conclusions.

First, any spending reform must ensure the sustainability of major budget items, particularly the government wage bill and social benefits. In advanced economies, these two items together account for 30 percent of GDP and about 80 percent of non-interest government spending. In emerging markets and low-income countries, these two items constitute 60 percent of total spending.

Second, expenditure reforms should seek to achieve efficiency gains while preserving equity. These reforms should be designed and sequenced taking into account country-specific circumstances. The reforms could be achieved through better targeting of social programs and promoting greater competition in the healthcare and education sectors.

My final slide is focused on capital spending. What it shows is that there is a secular decline in public capital stock in relation to GDP in advanced and emerging market economies. In order to arrest this decline, either more productive public investment or higher involvement of the private sector would be needed. Thank you very much.

MS. AMR: We will open the floor for questions now. We will take a couple of questions before we give them a chance to answer. Please identify yourself and the organization you work for.

QUESTIONER: Many central banks around the world are targeting/battling inflation that is below the target. U.S. inflation is below 2 percent and the U.S. has already normalized monetary policy. Do you think the time is right? With inflation below 2 percent, what do you think is an appropriate stimulative package for the U.S. at this moment and its implication for emerging markets?

QUESTIONER: How about the fiscal situation in Saudi Arabia, especially after they voted for some reforms?

QUESTIONER: I was wondering if you can throw some light on—you already talked about expenditure reforms. In particular, we have seen expenditure controls through cutting down public sector development programs and slower disbursements through income support programs. What do you think is the right direction?

MR. GUPTA: - I will take up this question on the U.S. and the general question on expenditure reforms. Then my colleague will talk about Saudi Arabia. In the case of the U.S., as you know, the budget deficit has been reduced quite substantially in the last few years. The major issue for them is really to put their medium-term debt trajectory on a downward path by dealing with age-related spending, so they need to focus more on implementing these reforms so that the debt is on a more sustainable path over the medium term. As I said earlier in my remarks, we do not have a credible medium-term consolidation plan for both the U.S. and Japan.

On the general sort of issue of cutting expenditure programs, one of the things that we discussed in our Fiscal Monitor is that countries should avoid across-the-board cuts in spending, and they should look at efficiency and equity when sort of restructuring their expenditure programs, whether it is employment, government employment, whether it is social transfers, because in all those programs one has to find ways to improve the spending quality and that is possible in those countries. So, what we have to avoid is that in reforming these programs there are no across-the-board cuts which may penalize both efficiency and equity.

MS. GUERGUIL: Saudi Arabia has the specificity of higher oil dependency, which is a quite exceptional case in the world. Now, the authorities have, at the fiscal level, very carefully managed this and built sufficient buffers so as to be able to smooth spending when oil prices go down and accumulate buffers when oil prices go up.

They also face specific challenges: on the one side, ensuring the diversification of the economy in addition to oil. This has, as in many cases, in many countries that are less dependent on oil, have already proven a challenge, and the other aspect, as in many other countries, is to build the infrastructure, not only the physical but also the electronic infrastructure.

Our advice to the authorities in the context of the Article IV consultation with Saudi Arabia has been to consider the usefulness of building multi-year budget frameworks that allow them to define medium-term goals, particularly with respect to these two challenges I mentioned, say, in public investment and the development of the non-oil sector and, in this respect, think of introducing a concept of a structural deficit that does not take into account possible fluctuations in the oil market, to think over the medium term for the development of the economy.

QUESTIONER: I wanted to ask about pension reform. Could you explain why you think it is acceptable to increase retirement ages when blue collar workers are the least able to cope with higher retirement ages? Could you also comment on the U.K. government’s decision to ring-fence health and education spending and cut other departments? Do you think that is a good way to go about dealing with public spending?

QUESTIONER: You mentioned in the report the fiscal risks associated with elections in Brazil this year. I would like you to elaborate a little bit more of what would be the concerns. The second question would be what kind of fiscal reforms do you recommend or are most needed in Brazil right now.

MR. GUPTA: - Thank you for these questions. These are all very relevant questions. The reason why we recommend raising the retirement age is because, if you look at the life expectancy going forward, that is rising quite a bit. What it means is that people are going to live longer and the pension system will have to provide pensions to people who may not have contributed enough to be able to recover these amounts.

However, I also understand your concern, which is that some of the low-income workers may not live that long. So, what we are suggesting, if you look at the Fiscal Monitor, is that for those people, there would have to be some other social assistance provisions, whether it is done in the context of disability payments, whether it is in the context of increasing the years that they contribute, and that is taken into account in determining the pension payments.

But the fact remains that when you compare the life expectancy now against the statutory pension age in most countries, the life expectancy is much higher and that could be a major fiscal challenge for many of the countries unless something is done about it. The choices the countries face is either to raise the retirement age or to raise payroll taxes, which again is not going to be very beneficial to the economies, or cut the benefits. These are the tradeoffs. We feel that against all these tradeoffs, perhaps raising the retirement age is a better option.

The second issue that you raised was on why do we need to ring-fence health and education spending. During an adjustment process or fiscal consolidation, you want to make sure that access of the population to critical social services is maintained. So, I think it is a good idea to protect that spending. In fact, if you look at Fund-supported programs, this is one of the key elements of those programs. We have told countries that they ought to protect or increase such spending during the period when fiscal consolidation is taking place.

MR. ESCOLANO: Brazil is indeed facing elections soon. However, you know that recently it has been announced that the outcome for the primary surplus in Brazil has been 1.9 for 2013. The government has announced the target for 2014 as also 1.9. So, at this point, the government has expressed intentions to maintain fiscal discipline through to 2014. We think that this is important, something that we have supported, and we think is appropriate to do so in this coming year.

The Fiscal Responsibility Law, which underpins the fiscal policy framework in Brazil, has so far provided good guidance and we have encouraged the government to maintain this fiscal framework and stick to it this year and the following.

Over the medium term, however, we think that Brazil should set itself a bit more ambitious targets, including going back to the 3 percent primary surplus that they had before. Another challenge is to address specific challenges that exist in the fiscal framework in Brazil, such as, for example, the discipline of sub-national governments, which so far is an important point of pressure on public finances; curtail policy lending, which is also an important point of pressure in the budget; and not to rely on exceptional items of financing. Those are tasks that over the medium term should be tackled.

QUESTIONER: I would like you to talk a little bit about Europe, what recommendations do you have. Could you tell me what are the differences, if there are any, between countries in the Eurozone and countries that are in the EU that have not yet adopted the euro like Hungary, Poland.

QUESTIONER: I have a question about Italy, what is your assessment of Italy’s government efforts to reduce debt and balance the structural budget by 2016, and what are your recommendations looking forward.

MR. GUPTA: Yes. Let me start with Italy and then I will go on to the other one. Our view is that Italy should continue to make progress toward its target of achieving a zero structural budget balance in due course under the new fiscal rule that they have, and they should lock in the gains that they have achieved through fiscal consolidation in the past few years. However, they should rebalance their budget through implementing structural measures on the spending side, which is being done in the context of the Spending Review, and then implement some reforms on the tax side to lower the cost of employment. So, in this context, we welcome the new program that was announced yesterday, the three-year program, which is moving in this direction.

On the issue of the Eurozone and non-Eurozone, I think my answer would be that we have to look specifically at the countries that we are talking about other than generalize across all groups of countries.

MS. AMR: - We have one question online: What is your assessment of the financial situation in the Caribbean in light of the current global financial status? If possible, make specific references to St. Kitts and Nevis, one of the region’s smallest states.

MR. ESCOLANO: As you know, there was some market turmoil in terms of financing of emerging economies in February and before that, in May last year. We have indicated in the Fiscal Monitor that many countries have seen their conditions tighten in terms of financing, both economy and the government. We have in this Fiscal Monitor advanced the view that countries that have seen these concerns or discussed concerns for future tightening of financing conditions should start reducing the deficit now. Others with less, let us say, immediate refinancing risks can leave that for the medium term, but still plans for the start of a policy in that direction should start now, too.

The Caribbean perhaps is one of the areas that has suffered a tightening of financing conditions not only now but for some time now. We reiterate this advice for the Caribbean countries that are at risk in terms of facing financing conditions that are tougher at this point.

MS. AMR: Thank you all for coming and thank you, Sanjeev, Martine, and Julio.


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