Latest Fiscal Monitor
The May 2010 issue of the Fiscal Monitor was the first to be published as part of the World Economic and Financial Surveys. One of its key messages is that fiscal risks have risen, especially in advanced economies, as a result of three factors: underlying trends have further deteriorated since the November 2009 Monitor; financial markets have increased their focus on fiscal weaknesses; and progress in defining fiscal exit strategies has been slow. The Monitor argues that fiscal strategies should aim at gradually reducing public debt ratios, rather than just stabilizing them at their elevated post-crisis levels. Without progress in addressing fiscal sustainability concerns, high levels of public indebtedness could weigh down long-term economic growth.
The first IMF Fiscal Forum, an international event organized by the Fiscal Affairs Department, took place from April 22–23 at IMF headquarters in Washington, D.C. It was opened by the IMF Managing Director, Mr. Dominique Strauss-Kahn, and attended by senior finance officials from advanced, emerging, and low-income economies, representing 22 countries or about 75 percent of the world’s public debt. Issues discussed included the speed and timing of the fiscal adjustment, the measures required to implement it, and the institutional fiscal reforms needed to sustain the adjustment over time. From now on, the Fiscal Forum will be an annual event and take place around the Spring Meetings of the IMF/World Bank.
The Ten Commandments
In a blog that has received world-wide attention (see also the “Fiscal Affairs Department in the News” column in this Newsletter), IMF Research Department Director and Economic Counselor Olivier Blanchard and Fiscal Affairs Department Director Carlo Cottarelli offer advice to advanced economies on how to design fiscal strategies that are consistent with the continuation of the current economic recovery and with long-term growth prospects. To achieve this dual goal, Blanchard and Cottarelli’s “Ten Commandments” include clarity of intent, an appropriate calibration of fiscal targets, and adequate structural reforms.
Policy Paper: “From Stimulus to Consolidation—Revenue and Expenditure Policies in Advanced and Emerging Economies”
Tools for consolidating fiscal accounts in advanced and emerging economies are explored in more depth in a recent policy paper by the Fiscal Affairs Department entitled “From Stimulus to Consolidation—Revenue and Expenditure Policies in Advanced and Emerging Economies.” On the spending side, the focus is on pension and health care reform, public wages, untargeted social spending and subsidies, and military spending. On the revenue side, particular attention is given to measures that could raise revenues by reducing existing distortions in the tax system.
18 Sub-Saharan African Countries Represented at Petroleum Tax Conference
A conference on “Petroleum Taxation in Sub-Saharan Africa: Principles, Problems and Practice” was organized by the Fiscal Affairs Department from June 28 to July 1, 2010 in Kampala, Uganda with support from the Norwegian Oil for Development Program. Staff of ministries of finance and revenue authorities from 18 countries in sub-Saharan Africa attended the conference, which also served as the African launch of a recent book, “The Taxation of Petroleum and Minerals: Principles, Problems and Practice.” Issues discussed included: (1) the growing complexity of petroleum fiscal regimes in sub-Saharan Africa; (2) the growth of cross-border issues, related to pipeline transportation and petroleum fields extending across borders; and (3) widespread duty and tax exemptions under petroleum agreements that cut across the objectives of Africa’s regional trade agreements. Government participants decided to establish a regional Extractive Industries Fiscal Forum to continue the exchanges begun at this conference.
International Award to Fiscal Affairs Department Staff
Michael Keen, Assistant Director in the Fiscal Affairs Department, has received this year's Musgrave Prize. This is awarded annually by the International Institute of Public Finance and CESifo in recognition of distinguished contributions to the field of public finance. Accepting this honor in Munich on July 7, Keen delivered a lecture on "Taxing and Regulating Banks," based on a paper on the same subject.
New Working Papers
FAD In The News
The Fiscal Monitor: The latest issue of the Fiscal Monitor (see article in this Newsletter) was featured in various international media analyzing current economic events. The Financial Times, in an article entitled “Now Is The Time To Ask: ‘What Crisis?’” analyzes fiscal developments in the United Kingdom and refers to the Monitor as an “impartial audit.” The Wall Street Journal analyzes the debt projections in the Fiscal Monitor and draws particular attention to the staff analysis that higher debt can undermine economic growth in a number of ways, notably through higher interest rates, mortgage rates, and corporate borrowing costs. The New York Times emphasizes an important conclusion of the Monitor, namely that the surging public debt in advanced countries is driven mostly by huge declines in taxes as a result of lower economic activity in the last few years.
The Ten Commandments:
In an article on the G-20 meeting that took place in Canada in late June, the Washington Post refers to the admonitions offered by Blanchard and Cottarelli on resolving the dilemma between short-term adjustment and long-term growth (see article in this Newsletter).
The Debt Brake:
In an event organized by the Embassy of Switzerland and the Urban-Brookings Tax Policy Center to commemorate the 250th birthday of Albert Gallatin—fourth and longest-serving Secretary of the U.S. Treasury and one of the most prominent Swiss-Americans in history — Fiscal Affairs Department Director Carlo Cottarelli participated in a roundtable discussion on the challenges faced by many countries due to rising public debts and the Swiss experience with rules-based fiscal policy. The event, which took place on June 11, 2010 in the U.S. Congress and included several prominent international experts, focused on Switzerland's experience with its fiscal rule (the so-called “Debt Brake”).
National Commission on Fiscal Responsibility and Reform:
In May, Fiscal Affairs Department Director Carlo Cottarelli was invited to testify before the U.S. National Commission on Fiscal Responsibility and Reform, a bipartisan commission set up by President Obama to address the fiscal challenges of the United States. In his presentation, Cottarelli discussed the challenges faced by advanced countries in consolidating their fiscal accounts in the years ahead.
In a July 13 interview with Bloomberg Fiscal Affairs Department Director Carlo Cottarelli indicated that advanced economies need to spell out more clearly how they will meet deficit-reduction targets after 2011. “The first year is relatively easy because most of the adjustment that we have is simply the fiscal stimulus coming to an end,” Cottarelli said. He urged governments to instill confidence that “adjustment will continue in the following years.”
In a working paper entitled “Automatic Stabilizers and the Size of Government: Correcting a Common Misunderstanding,” Carlo Cottarelli and Annalisa Fedelino argue that the ratio of government spending to GDP—often used in the literature on the stabilizing effects of fiscal policy—is not the right proxy for the size of the automatic stabilizers. A more appropriate measure is the revenue to GDP ratio.
In “Public Debt and Growth” M.S. Kumar and J. Woo explore the impact of high public debt on potential economic growth. The empirical results suggest an inverse relationship between initial debt and subsequent growth, controlling for other determinants of growth: on average, a 10 percentage point increase in the initial debt-to-GDP ratio is associated with a slowdown in annual real per capita GDP growth of around 0.2 percentage points per year, with the impact being somewhat smaller in advanced economies. There is some evidence of nonlinearity with higher levels of initial debt having a proportionately larger negative effect on subsequent growth.
Two other recent working papers by Fiscal Affairs Department staff analyzed the effects of fiscal policy on, first, macroeconomic activity: “Public Investment as a Fiscal Stimulus: Evidence from Japan’s Regional Spending During the 1990s,” by Markus Bruckner and Anita Tuladhar; and, second, on the external current account :“Fiscal Policy and the Current Account,” by A. Abbas, J. Bouhga-Hagbe, A. Fatas, P. Mauro, and R. Velloso.
One working paper focused on health policy issues: “Subnational Health Spending and Soft Budget Constraints in OECD Countries,” by E. Crivelli, A. Leive, and T. Stratmann; another on tax issues: “Tax Revenue Downturns: Anatomy and Links to Imports,” by Kun Li and P. Lopez Murphy; and a third addressed a recurring theme in public financial management: “Treasury Single Account: Concept, Design, and Implementation Issues,” by S. Pattanayak and I. Fainboim.
New Technical Notes and Manuals
New additions to the series of Technical Notes and Manuals prepared by the staff of the Fiscal Affairs Department include:
Technical Assistance Activities
Between April and June 2010 FAD provided technical assistance to 50 countries on a broad range of fiscal issues. FAD technical assistance typically comprises missions led by IMF staff with the participation of international experts in specialized fields. Examples of recent FAD activities include: four missions to Greece, including one on revenue administration, two on public financial management, and one on expenditure rationalization, in support of the country’s fiscal consolidation program; one mission to China on VAT reform; three missions to Mongolia on decentralization and intergovernmental relations, the fiscal regime of mining, and strengthening large taxpayer administration; one mission to Pakistan on its financial accounting and budgeting system; and two missions to Togo on the petroleum product pricing mechanism and the modernization of revenue administration.