Transcript of a Conference Call on the November 2009 Cross-Country Fiscal Monitor

November 3, 2009

With Carlo Cottarelli, Fiscal Affairs Department Director, and
the authors of the Monitor: Phil Gerson, Paolo Mauro, Mohan Kumar, and Mark Horton.
Tuesday, November 3, 2009
Washington, D.C.

MS. NARDIN: Good morning, and thank you for joining us. This is the Conference Call on the publication of the November 2009 Cross-Country Fiscal Monitor. Carlo Cottarelli, Director of our Fiscal Affairs Department, will offer introductory, and we will then take your questions.

MR. COTTARELLI: Thank you very much, Simonetta, and thank you to all of you for participating in this conference call. This issue of the Fiscal Monitor updates our projections of fiscal developments since the July issue. The outlook is fairly similar to what we presented in July. Fiscal policy will continue to provide substantial support to aggregate demand and economic activity this year and is projected to remain supportive of economic activity in advanced countries in 2010. This support remains extremely important because the recovery of the global economy is still fragile. That's the first point. Second, this recovery itself is the result—at least in part—of supportive monetary and fiscal policies that have been implemented and it would therefore be premature to withdraw this fiscal support. At the same time, the Monitor underscores that it is important that governments design and communicate credible exit strategies to ensure that this rise in public debt does not prompt concerns about fiscal policy, because these concerns may result in higher interest rates and therefore slow down the economic recovery.

In addition to updating the fiscal outlook, this issue of the Monitor looks more closely at some important issues for future development in public finances in the world. First of all, we look more closely at the factors behind increased deficits that have occurred in the last 2 years and we find that in addition to the effects of the crisis, there has been an underlying deterioration in the fiscal accounts of some important countries. This is important to keep this in mind, this underlying deterioration, because while the effects of the crisis in a way will be short-lived (a large component of the fiscal stimulus introduced was temporary), the underlying deterioration has more long-term implications and reflects for example, on increasing spending in some countries like the United States and Japan.

The second point that we focus on is the effects that over the medium-term rising public debt could have on interest rates. This is based on new econometric evidence and we find sizable effects of public debt. For example, we find that the increase in the public debt ratio that is projected in the baseline to 2014—an increase of about 40 percentage points in the debt-to-GDP ratio over 2007—could increase interest rates by about 2 percentage points, a pretty sizable effect. This is obviously is over the medium-term.

The third point that we focus on is the size of the fiscal adjustment that will be needed across countries, advanced countries in particular, to bring down the public debt ratio below 60 percent, which is more or less where the median debt-to-GDP ratio was before the crisis. We find that if the target is to lower the public debt ratio below 60 percent by 2030, the primary structural balance of advanced countries would have to improve by about 8 percentage points of GDP within the next 10 years, and then be kept at a higher level for another 10 years. This is a fairly sizable adjustment. This is the average across advanced countries. Obviously the country-specific figures would depend on the country's circumstances. Country figures are included in the Monitor.

Finally, we look at the fiscal measures that will be needed to improve the primary balance by as I said 8 percentage points of GDP in structural terms, and we find that what is needed is a comprehensive set of actions and, given the size of the adjustment, the measure would have to be very comprehensive and could include, first of all, a nonrenewal of the stimulus measures when the time comes, i.e. when the economy has sufficiently recovered. Second, a freeze in real per capita spending excluding pension and health. Reforms in the pension and health areas are also needed to keep the growth of spending for pension and health at most in line with the growth rate of GDP. But you may also need tax increases which in the average of advanced countries we quantify about 3 percentage points of GDP. As I said, all this is for the average of advanced countries and a specific mix of measures of course will depend on country circumstances.

QUESTION: You said that a tightening is expected to begin next year in emerging markets, and you actually mentioned Brazil. But next year is an election year in Brazil. Is it realistic to expect such fiscal tightening in an election year? And you also mentioned that debt ratios will remain above 60 percent of GDP in Brazil. Is that a source of concern?

MR. COTTARELLI: These projections are in line with projections underlying the World Economic Outlook. It is assumed that emerging market countries will start tightening fiscal policies in 2010. This is based on policy announcements and the policies in place, which means that if support of policies were introduced in 2009, they will expire in 2010. This is reflected in the projections. The Monitor underscored that these are the assumptions, but of course there is a lot of uncertainty regarding whether policies will be implemented in 2010. That is one of the reasons why we say the outlook of emerging market countries seems to be better, but this assumes again that there is some tightening in 2010. That's the first point. Second, the outlook also assumes that growth will actually be as strong as projected in 2010 and the following years for emerging market countries. Because of this uncertainty, we also provide in the Monitor an analysis. There is a fan chart that explains what are the possible developments in terms of uncertainty in emerging market countries. One thing that we would like to add is that this assumed tightening of fiscal policy in 2010 in emerging market countries also reflects the expectation that economic growth will be stronger, therefore that these countries will be in a position to tighten fiscal policies in 2010.

QUESTION: The second question, the debt level remaining above 60 percent of GDP, is that a source of concern?

MR. COTTARELLI: I don't see this as a source of immediate concern. The debt level in many countries has increased in the short-run as the result of the crisis. As we underscore in the Monitor and as we underscored in the past, over the medium term, emerging market countries should try to continue to reduce their debt ratio as it happened before the crisis.

QUESTION: I have a question about Spain. You mention in the report that this is one of the countries that will have to adjust more. In the table on page 24 you say that the country needs 10.7 change in the primary balance which is a very large number. And at some point in the report you also mention that there may be a structural deterioration in its fiscal accounts, and I wonder if you could explain that and what's going on there.

MR. COTTARELLI: What we see for Spain is that there is a large primary deficit in 2010. This is the result of the recession, but as you can see, there is also an underlying structural deficit of 5.8 percent. It's clear that a country running a structural deficit of this sort will have to adjust. Part of this adjustment however will stem from the ending of the fiscal stimulus, which was large. This, in a way, will facilitate the adjustment because the fiscal stimulus in Spain, as well as in other countries, was, to a large extent, of temporary nature. Still, yes, there will have to be a fairly large adjustment in Spain.

One thing that I should add is that Spain like most of the advanced countries will need to make a particularly strong effort as a result also of pressures from the population aging.

QUESTION: Is that when you were talking about the structural deficit? Is that what you're referring to, to the aging of the population?

MR. COTTARELLI: No, the structural deficit is the deficit netted out for the immediate effect of the recession. When there is a recession you have a temporary loss of revenues and the revenues are expected to recover. So that this figure in 2010 does not reflect the future aging of the population, but the future fiscal developments of course over the next 20 years will have to reflect the aging of the population. The main figure is that over the next 20 years of unchanged policies the spending for health and pension in advanced countries will increase by about 3 to 4 percentage points of GDP in the absence of reforms and this will have to be offset through reforms if public debt has to be brought down.

QUESTION: This adjustment might wind up, if I understand you right, boosting interest rates by 2 percentage points higher than they otherwise would be. What's the prospect of that in terms of long-term global growth? Will that undermine the recovery or diminish the recovery? What's your view?

MR. COTTARELLI: The baseline scenario that is underlying the World Economic Outlook published at the beginning of this month is that there is an increase in the debt-to-GDP ratio of advanced countries by about 40 percentage points. The average gross debt-to-GDP ratio of advanced countries of the general government will be about 120 percent. What we say is that, in the absence of adjustments, this is likely to increase interest rates by perhaps 200 basis points, 2 percentage points. You're asking whether this is going to have effects on growth. In my view, yes, over the medium term. Of course, this is likely to cause crowding out of economic activity, of private sector activity. That is why we believe that it is important that fiscal adjustment takes place over the medium term. Again I want to emphasize that this is not the moment to tighten fiscal policy, but it is the time to think how to adjust fiscal policy in the future if we want to avoid an increase in interest rates and therefore crowding out effects which would lower potential growth over the medium term.

QUESTION: You also had a table there of countries that did make very substantial changes and improvements to their primary deficits and I was just glancing at them. Most of them seem to be in countries that were coming out of crisis. The U.S. was in there but not in a crisis situation, that was kind of the 1990s surprising emergence of surpluses. What's your view as to these adjustments? Are they overwhelmingly made in response to crisis, and is what have we have gone through sufficient do you think to produce that sort of a response?

MR. PAOLO MAURO: I can answer the actual question relatively easily. You made the good point that, yes, some of these adjustments were undertaken after recession, but not all of them. In fact, many of these episodes were adjustments in response to high debt. I can go through some of them if you take the cases of Italy , Ireland, or Belgium, they were undertaken just because of a perception that the debts were too high and adjustment was needed. Others like Sweden for example were indeed as you say initiated in a time of crisis, but it's pretty mixed. –We have actually adjusted the numbers for the cycle. It's a difficult game, so we probably haven't adjusted it perfectly, but I think that there was an attempt to take into account the fact that some of these adjustments were initiated at the time of crisis.

QUESTION: Just a definitional question. A primary balance versus a headline primary balance, what is the difference?

MR. COTTARELLI: We have the primary balance which is the balance minus interest payments. Then we have the primary balance adjusted, and that's what we call the headline balance. Then we have the primary balance adjusted for the cycle, the fact that there are temporary factors related to the economic cycle that affect revenues mostly, but also some forms of spending, and that's what we call the cyclically adjusted balance. We sometimes also refer to the structural primary balance which is the cyclically adjusted balance netted out of any other temporary effects.

QUESTION: So the headline primary balance is just the basic balance minus the interest rate?


QUESTION: Mr. Cottarelli, do you feel that the policies in place, or that the fiscal plans of the G-20 so far in your mind will help bring down these debt levels any quicker than you're projecting?

MR. COTTARELLI: I think that the G-20 in their communiqué at the end of the summit in Pittsburgh clearly indicated that there was a need to clarify, identify, and make public the fiscal strategies that are needed over the medium term. It's clear that this has not been yet done by many countries, but it seems to me that there is a clear recognition that this is needed. We have seen some steps taken by some countries in this direction. For example, Germany has introduced a constitutional amendment to essentially have a balanced budget, it's not exactly balanced but it's close to balanced, not to take effect immediately, but in a few years. However, it's clear that this a step toward clarification of the fiscal strategy has not yet taken place. But as I said, there is the acknowledgement by the G-20 countries that this is needed.

MS. WROUGHTON: If I may have a follow-up. You said that it's too soon to tighten fiscal policy now, but that you do expect it to begin next year?

MR. COTTARELLI: I didn't say that I expect it to begin next year. The WEO projection for advanced countries do not imply any withdrawal of fiscal stimulus in 2010. There is some withdrawal in emerging market countries expected in the baseline WEO projections projected in the baseline. But that also reflects the assumption that growth will resume at a stronger pace in emerging market countries in 2010.

QUESTION: I have a question regarding this notion that you developed on pages 7 and 8 about some of the stimulus, the fiscal one as well as on financial spending still being in the pipeline and only part of being used. How do you use that with respect to the deficit? Is that a good thing or is that a problem and is that a further risk on finances?

MR. COTTARELLI: As expected, it takes time for the fiscal stimulus to be implemented once it is decided. The projections assume that the full amount of the fiscal stimulus will be implemented this year. We think that this remains a problem as we continue to believe that the fiscal stimulus that has already been decided should continue to be implemented in 2010. As I said, initially at the beginning of the year we were a bit concerned about the pace of implementation. I think that the pace of implementation has picked up but we are still not sure whether the whole amount will be actually implemented as scheduled.

For the financial sector what we say is that the implementation is less than expected but because things in the financial sector are improving, so that is the kind of development that is positive. There is less need of support in the financial sector because things are improving, again not in all countries in the same way, but we have seen that there has been less need to spend public money by the financial sector that had been initially been envisaged, again with differences across countries.

QUESTION: And on the fiscal side on the stimulus measures, would you be worried that if it's not implemented even though there could be less of a weight on public finance then it could lead also to slower growth?

MR. COTTARELLI: Yes. As I said, we think that the fiscal stimulus that has been decided should be implemented. At this point a sizable amount of what was decided was actually already implemented so, yes, we think they should continue to be implemented. Fiscal policy needs to remain supportive of the economic activity, yes.

MS. NARDIN: This concludes the Conference Call on the November 2009 Fiscal Monitor. Today's conference will be available for replay after 11:30 a.m. Eastern Time today until November 4 at midnight. You may access the AT&T Executive Playback Service at any time by dialing 1-(800) 475-6701 and entering the access code of 121999. International participants may dial 1-(320) 365-3844.


Public Affairs    Media Relations
E-mail: E-mail:
Fax: 202-623-6220 Phone: 202-623-7100