IMF Survey : Fiscal Policy Looks Forward
April 19, 2013
- Medium-term, credible fiscal adjustment plans needed
- Well-balanced fiscal policy can help reduce inequality
- Quality of fiscal adjustment just as important as quantity
The evolving role of fiscal policy in the midst of sluggish economic growth topped the agenda at the 2013 Fiscal Forum. In today’s context of a three-speed global recovery, fiscal policy choices are harder than ever.
2013 Spring Meetings
“The fundamental question that policymakers face today is how to reduce deficits and debt levels in a way that ensures stability and equity but is sufficiently supportive of economic growth and employment—how do innovative and activist ideas about fiscal policy fit with traditional strategies of fiscal consolidation?” said IMF First Deputy Managing Director David Lipton, who spoke at the fourth annual Fiscal Forum.
The Fiscal Forum, held annually to coincide with the IMF’s Spring Meetings, brings together policymakers, technical experts, and academics from across the world to hear and exchange views on fiscal policy. The financial, economic, and debt crises across the world in recent years have changed the way policymakers look at the role of fiscal policy.
As many countries continue with efforts to trim deficits, there was acknowledgment among Forum participants that public support for the difficult choices on spending cuts is growing fatigued. While no quick fixes to fiscal consolidation exist, ensuring a balanced and equitable fiscal adjustment is generally seen as the best means for gaining public support.
Inequality and inclusive growth
A portion of the discussion at the Forum focused on the need to achieve fiscal adjustment while at the same time ensuring adequate social protection, as well as ways to help address the growing inequality seen now in many parts of the world. There is some evidence to suggest that countries that fail to become more equitable in terms of the distribution of their living standards may fail to get on a sustained growth path. “Unequal access, for example to credit markets, prevents profitable projects from being undertaken and this generates inequality and inefficiencies—reducing an economy’s efficiency and slowing down growth,” said Francois Bourguignon, professor of economics at the Paris School of Economics.
This has implications for the choices that policymakers are faced with when designing fiscal policy, and current budgetary practices might have to be rethought in order to accommodate new approaches to budgeting. Rethinking the budgetary process could mean transforming it into something more than an exercise in deciding “who gets what’’ and make it about intended results of the expenditures, so government ministries would clearly and more precisely define their desired outcomes and this becomes a more prominent component of the budgetary decision-making process.
In order for policymakers to design fiscal policy that sets an appropriate course, there is a need to measure the effectiveness of “inequality-correcting” policies, something that has yet to be undertaken. Such an exercise would look at the effect that policies have both on growth and efficiency, as well as their distributive impact, by measuring the volume of new “opportunities” created and their likely return.
Credible and well-anchored
At the afternoon roundtable discussion led by CNBC’s Maria Bartiromo a wide range of views surfaced on fiscal policy’s evolving role in the economy. Panel members representing views from academia, labor, government, and the private sector agreed that credible medium-term fiscal adjustment plans, which had the necessary public support, were vital to countries given the current economic picture. “There has to be a medium-term fiscal consolidation that is properly anchored, that is irreversible, and that indicates to economic actors what is going to happen going forward,” said IMF Managing Director Christine Lagarde.
Credible medium-term plans entail prioritizing, presenting, and managing revenue and expenditure with a multiyear perspective. Once governments put such plans into place, they can demonstrate the impact of current and proposed policies over the course of several years, as well as signal future budget priorities. “At the moment our biggest problem is uncertainty. The market needs some guidance on where the world is going. Policy needs commitment devices to give some guidance to the market on where things will go,” said UBS Chairman Axel Weber.
Augustin Carstens, Governor of Mexico’s central bank called for more attention to be paid to the quality of spending. “We can get a far bigger bang for our buck if we have a much better assessment of spending and if we direct spending in a more effective way in terms of building capabilities—and eventually have a much bigger impact on growth, distribution, and employment,” he said.
Where are the jobs?
The panel also agreed on the need to be mindful of job creation. In formulating fiscal policy, governments direct spending and taxes to achieve desired levels of domestic output and employment. According to the International Labor Organization, around 197 million people worldwide are now unemployed, many of them young people.
“Do we have fiscal space to invest in jobs? Yes we do. We’ve got to be talking about jobs. Sit at the table and say, ‘where is the space to invest in jobs?’” said International Trade Union Confederation General Secretary Sharan Burrow.
The IMF’s latest Fiscal Monitor, a semi-annual report on the state of government deficits and debt, found fiscal accounts in almost all advanced economies continue to improve. At the same time, fiscal room for maneuver is limited, because the crisis has taken its toll on public sector deficits and debt. In many advanced economies, public debt has reached levels unprecedented during peace time, while building demographic pressures raises questions about the affordability of current health care and pension systems.
The report also noted two important milestones: First, reflecting declines in almost all countries, this year the average fiscal deficit—the imbalance between revenues and spending—will be about half of what it was in 2009 at the peak of the crisis. Second, after rising since 2007 the average debt-to-GDP ratio of advanced economies has begun to decline slightly; although, it is still considered very high at about 110 percent of GDP.