Transcript of a Conference Call with IMF Senior staffs on the Launch of The State of Public Finances: A Cross-Country Fiscal MonitorWashington, D.C.
Thursday, July 30, 2009
OFFICIAL 1: I wanted to start by just giving a very short introduction of what the Monitor is and then also a brief summary of what’s in this particular issue of the document. I know that you have copies of it. There’s an executive summary, so I don’t need to go into great detail.
This issue of the Monitor is the first of a series of regular updates on global fiscal developments that we’ll be producing. The expectation is that the main issues of the Monitor will come out semi-annually, shortly after the appearances of the spring and the fall World Economic Outlooks (WEOs). Updates could also be produced quarterly in between those main issues should circumstances warrant. The idea is to try to respond to the great demand that’s out there for information about fiscal developments, especially in the current environment.
The current issue of the Monitor focuses on the policy response to the global crisis. And, to summarize the main messages of it, first, clearly—and this will come as a surprise to no one—the crisis is having a major impact on fiscal positions around the world, reflecting both the impact of automatic stabilizers, that is, the automatic falls in revenue and increases in expenditure that come about with a big drop in output and, secondly, discretionary policy actions, actions that governments have taken deliberately to respond to the crisis.
The impact has been somewhat larger in advanced G-20 than in the emerging market G-20, which essentially reflects larger automatic stabilizers in those countries because of their typically bigger public sectors.
In terms of discretionary measures, implementation is proceeding much more rapidly on the revenue side than on the spending side, and the delays on the spending side, for the most part, reflect just normal budget safeguards that are in place that have to be addressed. It’s clear, though, that it’s difficult to make judgments in this area because not all countries are providing comprehensive data on implementation, and that’s an area where hopefully in the future we’ll be able to make better assessments.
Governments have also been providing substantial support to specific sectors of the economy, particularly financial sectors. But what we’ve found is that the actual level of support that’s been disbursed has been much lower than the original ceilings on these programs, and that primarily reflects the fact that the out-turn in the financial sector has turned out to be much less drastic than the worst case scenarios that were being envisioned at the time that these programs were being announced.
Fiscal balances are expected to strengthen over the medium term with the recovery of economic activity, but public debt in advanced economies in particular will continue to rise over the medium term. And, for these countries, one of the things that we document in the paper is that substantial adjustment is going to be required over the medium term. That’s especially the case for those countries that face pre-existing pressures that come from population aging.
Early commitment by these countries to strategies to reduce the debt over the medium term is going to be key, and, in particular, it’s critical to making sure that the impact of stimulus spending now is as large as possible. The risk is that if the public starts to worry about medium-term sustainability and inevitable rises in interest rates, that that will undercut the effectiveness of the stimulus. So it’s critical that countries now begin to develop and enunciate medium-term and longer plans for dealing with the rise in debt, even though I want to emphasize that at this stage, with the economic outcome subject to considerable uncertainty, it would be premature to start implementing fiscal contractions. But the key at this point is to develop a strategy that gives confidence to the public, that over the medium term the potential build-up in debt will be addressed.
QUESTIONER: Hi. There have been a couple of, or around the G-20 meetings, there were often updates, and so it’s a little hard to keep track as to what’s new in terms of what the IMF is doing or the information it’s collecting and what isn’t. And so, I wanted to know from your perspective if you think that there is new information as opposed to kind of an update.
For instance, I look back at the WEO, and you talked there about the advanced countries, the debt level rising roughly as high as you talk about the debt level rising in this report. But then on Page 30, there’s this chart which, if I understand it correctly, is basically saying—and correct me if I’m wrong—is basically saying from 2014 to 2029 that the countries here, enumerated here, would have to reduce their fiscal deficit by whatever the percentage is. The U.S. is 4.3 percent, I think, 4.3 percent a year from 2014 to 2029 further than or deeper than expected to get to a debt level of 60 percent of GDP.
So the two questions are: What’s really new and, secondly, am I understanding that last chart correctly?
OFFICIAL 2: Maybe I can just address your technical question first. That’s easier.
Let’s pick the example of the United States just to make this as clear as possible. You’re looking at Appendix Table 5 on Page 30, and what one sees in that table is that the current WEO projection for the debt to GDP ratio for the United States is 112 percent in 2014. That’s very high compared to historical standardS. And then, we have a projection for the primary balance for 2014 of 0.3 percent of GDP.
The number that you see on the right-hand side in the outermost column, the 4.3, is the primary balance that the United States would need to maintain between 2015 and 2029, so, for 15 years, it would hypothetically have to maintain a primary surplus every year of 4.3 percent of GDP, in order to reduce the debt to GDP ratio to 60 percent after 15 years, namely in 2029.
So, technically, what you could look at is under current projections we are expecting a 0.3 percent primary surplus in 2014. The adjustment would have to be by 4 percentage points of GDP to go from 0.3 to 4.3, but not every year. That would just have to be kind of a level adjustment maintained in the medium term.
Of course, this is a very large adjustment, and these are illustrative calculations, but the sense we want to give is that there’s a lot of work to do in many of the largest advanced economies. I hope that answers the technical question. On what is new here, perhaps another colleague can come in and give that answer.
OFFICIAL 1: Well, I was just going to stress very quickly, there is, as always, a mix of some stuff that’s new and some stuff that’s updated in this document.
In terms of things that are new, a few things that occur to me are, first of all, the information on the financial sector on actual use of these resources versus commitment amounts is new to this document. There’s information in here as well about non-G-20 countries which obviously didn’t appear in the G-20 note. In addition, there’s material on expenses related to population aging in Box 2 which is also new. So those are a few things that occur to me.
OFFICIAL 3: I think you’ve captured a lot of what is new. I guess the key thing is that the Monitor reflects also the July, 2009 WEO update which came out about three weeks ago, and then the figures in the Monitor reflect the most recent estimates by Fund desks. So, in the WEO update, for instance, there was a summary treatment of where things stand and the risks at this stage, where the Monitor gives more cross-country information based on the same set of projections.
OFFICIAL 4: And, just to add, of course, some of the analysis is updated with regard to market perceptions of risks.
In the analysis we now have on financial sector support utilization rates, as we are getting more information, it is becoming clearer that compared to the programs which were announced and the amounts which were pledged, the uptake has been significantly smaller. And that, of course, has implications for the analysis regarding debt profile and fiscal deficits.
QUESTIONER: Can I ask a follow-up on that? So, on the use of resources versus the commitments, the level is quite small, the percentage is quite small, which was quite interesting.
So, when you make your debt projections, are you assuming that it will stay at that level or that it will go to a much higher percentage? And so, the question is, if it were to go to a much higher percentage, would the debt level therefore be even higher than you’re projecting at the moment?
OFFICIAL 2: Well, my sense is that the projections—I’m opening the black box of who does the projections in the IMF—but the projections are done by the individual country desks, and therefore we are not sort of ideally placed to tell you exactly what they’re assuming for the use of these facilities.
My sense is that they’re being fairly conservative in assuming how much will be used. Of course, to the extent that there’s further intervention in support of the financial system, then that would have to be reflected in larger numbers for the debt to GDP ratio.
QUESTIONER: Yes, two quick questions. One is the debt to GDP ratio of 60 percent, is that what you would consider kind of a sustainable debt level? Is that why you’re picking that one?
The second question is as far as the market conditions, how concerned are you about the recent uptick that you mention in the report and what kind of message is that sending as far as the need to come up with a strategy for fiscal sustainability?
OFFICIAL 2: On why we picked 60 percent, of course, there’s no magic number, and that’s sort of just an illustrative number. What you will note also is that when we did the exercise for the emerging markets, in that case, we picked a 40 percent ratio of debt to GDP, because many analysts think that the sustainable number is higher for advanced economies than for emerging markets. Again, these are not targets. These are not ideal numbers. There’s no rule that says that it’s only sustainable if it’s above or below 60. But we wanted to be as concrete as possible, and these are sort of in the ballpark of what is being discussed in the profession as being a normal number that we have seen in past history.
Of course, historically, we’ve seen debt to GDP ratios that were much higher, where there was no big default or big inflation. And, conversely, we’ve seen instances in which defaults occurred even at lower debt to GDP ratios.
So there’s no magic number, but we wanted to be concrete and give you an illustration of what would be required in terms of fiscal adjustment if you wanted to return to a ratio that we had previous to the crisis. So that’s the spirit of the exercise. It’s not difficult to redo the exercise with a different objective. But, again, the message here is that the degree of fiscal adjustment going forward is really going to be major, and that is what we would like to emphasize.
For some other countries—for example, for the cases of countries where the debt to GDP ratio was a little bit lower to start from—in those instances, we’ve targeted just stabilizing the debt to GDP ratio, which is another natural objective that one could consider. But we’re trying to be as open-minded as possible while giving you some quantitative estimates.
OFFICIAL 4: Just to add, we’ve done a number of scenarios and simulations. And, if one thinks in terms of what would it require in terms of adjustment to go back to the debt to GDP ratios prevailing before the crisis—so, say at the end of 2007—the adjustment and degree of adjustment required is similarly, for a large number of countries, quite substantial.
Now there’s a question on the market conditions, that there’s been an uptick in bond yields and how do we view that. As we indicate in our assessment, this really reflects primarily normalization or the beginnings of normalization of conditions—that sentiment, it has moved back to more normal levels of risk aversion, more normal levels of market appetite for risk as the rate of decline in activity appears to be decelerating. Green shoots appear to be certainly there, and financial sector conditions have begun to stabilize. There is some sort of pickup in inflationary expectations. But given the large and widening output gaps, the increase in bond yields for advanced countries essentially reflects a normalization of conditions.
Having said that, given the very large increases in deficits and debts, we do have a concern that the market perceptions of fiscal sustainability, fiscal solvency could begin to change.
And, given that, it’s critical, as the Monitor argues, to take measures to anchor medium-term expectations—so, in other words, have a strategy. It’s not that we are suggesting that consolidation has to begin now, but there has to be a strategy, there have to be measures which can be implemented and which are credible, which will reassure markets with regard to medium-term sustainability. If that were not done, there is a serious risk that you could see a substantial increase in risk premia and a sustained rise in bond yields.
QUESTIONER: Sustained rise in, sorry, bond yields?
OFFICIAL 4: In bond yields, yes.
QUESTIONER: In the executive summary, you say that fiscal policy should continue to support economic activity until economic recovery has taken hold, and then, in parentheses, “and, indeed, additional discretionary stimulus may be needed in 2010”.
I don’t see that. Maybe I missed it. I don’t see any further explanation or explication of that in the text. So do you think additional discretionary stimulus will be needed in 2010? We’re not all that far away from 2010 at this point.
OFFICIAL 1: It’s phrased the way it’s phrased in the introduction deliberately: Additional stimulus may be needed.
There’s a great deal of uncertainty about the outlook. The sense that we get right now is that governments are focusing on implementing discretionary measures that are already in the pipeline and pausing to reassess where they are before deciding whether further stimulus measures will be needed in 2010. That’s an issue that’s going to come increasingly to the fore as we get farther along in the 2010 budget cycle.
Right now, the assessment that we have is that the discretionary part—and Table 1 in the text lays this out—that discretionary measures are larger in 2009 than they are in 2010. Partly that just reflects the fact that budgets for 2010 have not been finalized yet, and there could be additional stimulus that’s called for.
Finally, it’s going to come down to country-specific circumstances. There may be some countries that have fiscal space for additional stimulus and some countries that don’t. There may be some countries where cyclical conditions are improving at a more rapid pace than others, and there may be less need for discretionary stimulus.
And so, it’s hard at this stage to give a blanket answer to the question “will more stimulus be needed in 2010?”. But I think it would be a mistake at this stage to say, categorically, in no country will additional stimulus be needed in 2010. We’re just going to have to see as we go forward.