## fmc1 - Introduction

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### Overview and framing
- Assesses fiscal policy through Musgrave’s (1959) three functions: stabilization, allocation, and redistribution.
- Notes most governments operate with limited fiscal buffers and must be selective in budgetary choices.
- Recent debate highlights a greater role for fiscal policy along three dimensions: stabilization, allocation, and redistribution.

### Stabilization: countercyclical role of fiscal policy
- Pre-crisis view: discretionary fiscal policy generally not seen as effective for macro stabilization; monetary policy preferred.
- Reluctance reflected four considerations:
  - the relatively long time it takes for fiscal measures to be implemented and have an impact;
  - the difficulty of reversing a fiscal stimulus;
  - governments’ tendency to spend revenue windfalls in good times, leaving insufficient buffers for bad times;
  - the belief that markets may reward fiscal discipline and that, in some cases, fiscal consolidation could be expansionary.
- Crisis-period evidence:
  - Fiscal policy returned as a countercyclical tool during the global financial crisis when recession was deep and prolonged and monetary policy alone could not restore full employment.
  - Discretionary fiscal policy can have a strong effect on output (high fiscal multipliers) when monetary policy is constrained, the financial sector is weak, and there is significant and protracted slack in the economy.
- Normal circumstances: prefer combination of monetary policy with free operation of automatic stabilizers.
- Automatic stabilizers vs discretionary policy: automatic stabilizers (tax revenues fall and unemployment payments rise as output falls); discretionary policy involves active tax and expenditure changes.

### Allocation: fiscal policy and long-term growth
- Fiscal measures can have permanent effects on level and growth rate of GDP per capita.
- Recent research and micro data have improved understanding of tax and expenditure effects on productivity and investment.
- Concerns about “secular stagnation” support raising public investment; public investment remains at a historical low in advanced economies.
- Fiscal policy can indirectly support long-term growth by facilitating structural reforms; fiscal support can amplify reform benefits when the economy is weak.

### Redistribution: inclusiveness and equity
- Rising income inequalities over three decades have increased attention to distributional effects of tax and spending policies.
- Advances in measurement and household/administrative data improve calibration of tax, transfer, and social insurance measures.
- Debate persists over efficiency costs of progressive taxation; some research supports redistributive benefits exceeding costs, while others contest this.
- Recent research suggests equity-enhancing fiscal measures may be consistent with sustainable economic growth.
- Implication: in certain cases, scope exists to improve income distribution without undermining incentives to work and invest.

### Recent fiscal developments and outlook (overview)
- Chapter examines fiscal developments across advanced economies, emerging markets and middle-income economies, and low-income developing countries; provides fiscal outlook and main risks (Tables 1.1a, 1.1b, and 1.2 referenced).
- Since the early 2000s, potential growth has decelerated dramatically.
- Benefits of growth have been shared less evenly over the last three decades.

### Advanced economies: 2016 developments and medium-term outlook
- Aggregate: advanced economies eased their fiscal stance by one-fifth of 1 percent of GDP in 2016, breaking a five-year trend of consolidation.
- Main contributors to the change: Italy, Spain, and the United States; smaller contributions from Canada and Germany.
- Debt dynamics:
  - Debt-to-GDP ratio of advanced economies increased by about 2 percentage points in 2016, reaching 107.6 percent of GDP, and is expected to remain elevated and relatively flat in the medium term.
  - Japan’s path of debt ratios was reduced by more than 10 percent of GDP starting in 2015 owing to a comprehensive revision of national accounts.
- Factors accounting for fiscal loosening in 2016:
  - Support for recovery amid heightened uncertainty (short-term growth and employment priorities).
  - Japan’s supplementary budget in response to weaker domestic and external environment.
  - Over 20 years, fiscal policy has become gradually more countercyclical in advanced economies (rise in fiscal stabilization coefficient).

### Cyclically Adjusted Primary Balance (definition and interpretation)
- Defined as the cyclically adjusted balance plus net interest payable/paid (interest expense minus interest revenue) following the World Economic Outlook convention.
- Positive coefficient interpretation: nominal fiscal balance increases when output rises and decreases when output falls—countercyclical response.
- For comparability: U.S. expenditure and fiscal balances adjusted to exclude imputed interest on unfunded pension liabilities and imputed compensation of employees under 2008 SNA; Japan’s figures reflect a December 2016 comprehensive revision including the switch from 1993 SNA to 2008 SNA.

### General Government Debt and Deficit: key historical values and projections
- Emerging market and middle-income economies:
  - Headline fiscal deficits increased from an average of 0.9 percent of GDP in 2012 to 4.8 percent in 2016.
  - Average debt ratio rose by about 10 percentage points between 2012 and 2016, reaching 47.4 percent of GDP in 2016.
- China:
  - On-budget deficit: 2.8 percent of GDP in 2015 to 3.7 percent of GDP in 2016.
  - “Augmented” deficit: 9.5 percent of GDP in 2015 to 10.3 percent of GDP in 2016.
- Baseline projections for emerging market and middle-income economies:
  - Overall deficit projected to decline to 4.4 percent of GDP in 2017 and to 3.1 percent of GDP by 2022.
  - Average debt ratio projected to increase from 48.6 percent of GDP in 2017 to 52.4 percent of GDP in 2022.
- Selected country policies and assumptions:
  - United States scenario assumes a fiscal impulse of about 1 percent of GDP spread over 2018−19 based on lower personal and corporate income taxes.
  - Japan: planned VAT hike pushed from April 2017 to October 2019.
  - United Kingdom: planned increase in cyclically adjusted primary balance about 2⁄3 percentage point of GDP per year until fiscal year 2019/20.
  - Saudi Arabia: fiscal deficit expected to decline by 7 percent of GDP in 2017 largely because of higher oil revenues and a decline in arrears payments.
  - Russia: medium-term federal budget for 2017−19 based on $40 a barrel oil price and envisages an annual fiscal adjustment of 1 percentage point of GDP.

### Fiscal trends and policy stances in advanced economies (country examples)
- 2017 aggregate stance expected broadly neutral, with heterogeneity:
  - Canada and the euro area expected to continue relaxing fiscal positions in 2017.
  - Korea and the United Kingdom plan to tighten in 2017.
- Country measures:
  - Canada: stimulus package equivalent to 1¼ percent of GDP spread over fiscal years 2016/17 and 2017/18; more than 40 percent allocated to infrastructure; new infrastructure bank to leverage private capital.
  - Germany (2017): increased primary spending 0.5 percent of GDP for higher pension outlays and refugee-related spending; priorities include personal income tax relief, higher infrastructure spending, more funding for R&D.
  - Italy (2017): plans corporate tax cut and new spending (higher pensions, wage bill, public investment).
  - Japan (2016/17): fiscal stimulus raising spending in 2017 including cash transfers to low-income individuals, wage increases for caregivers, and infrastructure investment; authorities committed to a 2020/21 primary surplus goal without specified new measures.
  - United States (policy uncertainty): consideration of business and personal income tax cuts, corporate tax reform, health care overhaul, increased defense spending offset by large domestic program cuts.

### Emerging market and middle-income economies: drivers and outlook
- Main drivers of deteriorating balances (2012–16): slower growth, lower commodity prices, political/geopolitical factors, and stimulatory fiscal measures in China.
- Country snapshots (2016):
  - Brazil: overall deficit declined by more than 1 percentage point to 9 percent of GDP in 2016; primary fiscal deficit continued to increase.
  - India: returned to fiscal consolidation in fiscal year 2016/17 aided by near-elimination of fuel subsidies and better targeting of social benefits.
  - Turkey: overall deficit widened to 2.3 percent of GDP in 2016 from 1.2 percent in 2015 reflecting higher minimum wages, security spending, and temporary tax relief.
- Oil exporters:
  - Rebound in oil prices and consolidation measures stabilized average fiscal deficit at about 6 percent of GDP in 2016.
  - Gulf countries announced objectives including introducing a VAT by 2018 and other fiscal adjustment measures.
  - Russia introduced a mechanism in February to save excess oil revenues into the reserve fund.

### Projections, risks, and policy implications (emerging markets)
- Projected gradual tightening of fiscal positions in 2017 and beyond, subject to policy uncertainties.
- Debt ratios expected to continue rising because deficits remain above debt-stabilizing levels in a majority of countries.
- Policy implications:
  - Use temporary stimulus in countries with slack while protecting medium-term fiscal sustainability.
  - Advance public investment and institutional reforms to support medium-term growth.
  - For oil exporters: combine consolidation with diversification and revenue-reform measures (for example, VAT introduction).

### Fiscal developments in selected emerging economies (country specifics)
- Mexico: on-budget deficit expected to remain close to 2016 level; measures to make income tax more equitable, realign revenue/spending across government levels, improve local government debt management.
- India: headline deficit projected to decline modestly in fiscal year 2017/18; budget envisages growth-friendly adjustment protecting infrastructure investment, more progressive income taxes for individuals, lower taxes on SMEs; GST rollout expected to enhance internal efficiency and create a common national market; anchor fiscal adjustment to debt-to-GDP ratio of 60 percent by fiscal year 2022/23.
- Brazil: expected to exit recession in 2017 and pursue reforms; constitutional amendment limits federal non-interest spending in real terms for the next two decades with scheduled revision after nine years; social security reform submitted to Congress in 2017; headline deficit projected to stabilize in 2017; public debt ratio expected to continue rising for several years despite spending freeze.

### Low-Income Developing Countries: recent trends and 2017 outlook
- Average fiscal deficit reached 4.4 percent of GDP in 2016 (third consecutive increase).
- Average debt-to-GDP ratio reached 40.4 percent in 2016, a rise of 4.3 percentage points from 2015.
- Drivers:
  - Commodity exporters: deficits driven by declining commodity revenues, falling demand, and oil supply disruptions (example: Nigeria—decline in oil production due to infrastructure sabotage; deficit 4.4 percent of GDP in 2016).
  - Other low-income countries: public investment increases (Kyrgyz Republic, Zimbabwe), larger current spending (Cambodia, Ethiopia), revenue drops (Uzbekistan, Zimbabwe), rising interest expenses (Uganda).
- Borrowing costs and interest payments:
  - Average interest payments in frontier markets have increased markedly as a share of revenue—doubling since 2011.
  - Higher interest bill due to higher coupon rates on new debt and greater reliance on nonconcessional external financing.
- 2017 projections and sensitivities:
  - Under current projections, fiscal deficits forecast to stabilize in percent of GDP in 2017.
  - Commodity exporters’ fiscal positions expected to improve, contingent on commodity prices and production; Nigeria an exception where deficits may widen due to planned capital projects.
  - Other low-income countries: fiscal positions projected to deteriorate slightly (example: Bangladesh—deficit increase from delay in VAT rollout and higher wage bill/transfers).
  - Average debt ratio projected to rise by about 1.6 percentage points in 2017, about one-third of the 2016 increase.
  - Nigeria: increasing fiscal deficit and clearance of arrears expected to push up debt-to-GDP ratio by 4.7 percentage points in 2017.

### Risks to the fiscal outlook (channels and scenarios)
- Fiscal risks remain elevated and on the downside; two main sources of divergence:
  - Uncertainties about fiscal policies (scope and design).
  - Governments’ balance sheets vulnerable to a wide range of risks.
- Risk channels:
  - Fiscal policy uncertainty: policy uncertainty reached a decade high; main source is lack of specificity about future U.S. policies; upcoming elections in the euro area, Brexit transition, leadership changes in China add uncertainty; geopolitical tensions and migration/refugee flows could shift fiscal policies substantially.
  - Weak growth and retreat from cross-border integration: inward-looking policies could limit trade, financial flows, and migration with negative effects on growth and public debt dynamics.
  - Tighter financial conditions and stronger U.S. dollar: faster rate increases and dollar appreciation could raise borrowing costs and depreciate emerging market and developing economy currencies; almost half of public debt in these economies is issued in foreign currency on average.
  - Lower energy prices: OPEC production cuts may not materialize or be offset, keeping oil prices lower; oil exporters could see worsening fiscal positions (one-third of fiscal revenues on average rely directly on oil production).
  - Contingent liabilities: banking distress, corporate defaults, sovereign guarantees, losses at state-owned firms, and PPP failures could trigger material fiscal costs.

### Managing fiscal risks: recommended four-step strategy
- 1) Identify and analyze risks:
  - Identify main fiscal risk sources and use tools including simulations to assess plausible shocks’ impacts.
- 2) Select tailored mitigating measures:
  - Examples: limits on fiscal exposure, regulations to reduce risky behavior, risk-transfer mechanisms, active debt maturity management.
- 3) Create sufficient buffer funds:
  - Establish budgetary buffers to absorb unmitigated risks.
- 4) Account for residual risks in long-term fiscal targets:
  - Incorporate large or uncertain risks into long-term targets and ensure safety margins relative to debt ceilings.
- Empirical note: longer debt maturity reduces recurring financing needs and rollover risk, lowering default probability and borrowing costs and allowing safer borrowing.

### The evolving role of fiscal policy: three-pronged approach and constraints
- Fiscal policy is a powerful tool to stabilize the economy and promote inclusive growth when combined with monetary policy and structural reforms.
- Constraints on fiscal leeway: high debt, demographic challenges, and elevated fiscal risks—necessitate selectivity and sound public financial management.
- Policy guidance:
  - Define sound fiscal objectives across stabilization, allocation, and redistribution, recognizing interlinkages and trade-offs.
  - Be selective in reforms; some growth-enhancing structural reforms may impose temporary drags on activity and require careful sequencing.

### Preserved numeric and quoted facts (selected)
- Advanced economies eased fiscal stance by one-fifth of 1 percent of GDP in 2016.
- Advanced-economy debt-to-GDP: increased by about 2 percentage points in 2016, reaching 107.6 percent of GDP.
- Emerging markets and middle-income economies: headline fiscal deficits rose from 0.9 percent of GDP in 2012 to 4.8 percent in 2016.
- Emerging market average debt ratio: reached 47.4 percent of GDP in 2016.
- China on-budget deficit: 2.8 percent of GDP in 2015 and 3.7 percent of GDP in 2016; augmented deficit: 9.5 percent of GDP in 2015 and 10.3 percent of GDP in 2016.
- Baseline projections: overall deficit for emerging markets projected to decline to 4.4 percent of GDP in 2017 and to 3.1 percent of GDP by 2022; average debt ratio projected to increase from 48.6 percent of GDP in 2017 to 52.4 percent of GDP in 2022.
- Country-specific measures and magnitudes cited: Canada stimulus = 1¼ percent of GDP; Germany increased primary spending = 0.5 percent of GDP; United States assumed fiscal impulse ≈ 1 percent of GDP spread over 2018−19.
- Low-income group averages: fiscal deficit = 4.4 percent of GDP in 2016; debt-to-GDP = 40.4 percent in 2016 (rise of 4.3 percentage points).
- Average debt ratio projected to rise by about 1.6 percentage points in 2017 for low-income developing countries.
- Numeric policy threshold: “Almost half of low-income developing countries have a tax ratio below 15 percent of GDP.”
- Quoted numeric policy fact: “In advanced economies, the incomes of the top 1 percent have grown three times faster than those of the rest of the population over the last three decades.”
- Fiscal-space illustrative fact: “A permanent decline of 1 percentage point in the differential could allow advanced economies to borrow safely an additional 25 percent of GDP, on average.”
- Implicit debt decline: “the stock of implicit debt in advanced economies has shrunk by 25 percent of GDP in the past six years.”
- Discounting assumption for NPV pension obligations: “a discount rate of 1 percent a year in excess of GDP growth.”
- Selected country-level fiscal-space indicators for 2016 (examples preserved exactly as in source):
  - Saudi Arabia: Public Debt, 2016: 12.4 (percent of GDP); Public Debt Change, 2016–22: 14.1 (percent of GDP); Projected Interest Rate–Growth Differential, 2017–22, 3: 0.3 (percent); Share of Foreign Currency Public Debt, 2017: 38.6 (percent of total); Primary Gap in 2017, 5: 10.6 (percent of GDP); Health and Pension Spending Change, 2022–50, 7: 7.7 (percent of GDP).
  - South Africa: Public Debt, 2016: 50.5 (percent of GDP); Gross Financing Needs, 2017: 11.9 (percent of GDP); 10-Year Sovereign Yield Spreads (Against U.S.), 2: 6.5 (percent); Projected Interest Rate–Growth Differential, 2017–22, 3: 0.1 (percent).
  - Ukraine: Public Debt, 2016: 81.2 (percent of GDP); Public Debt Change, 2016–22: –21.1 (percent of GDP); Projected Interest Rate–Growth Differential, 2017–22, 3: –5.2 (percent); Share of Foreign Currency Public Debt, 2017: 70.9 (percent of total); Primary Gap in 2017, 5: –7.4 (percent of GDP).
  - Group median summary: Public Debt, 2016: 44.2 (percent of GDP); Gross Financing Needs, 2017: 9.0 (percent of GDP); Projected Interest Rate–Growth Differential, 2017–22, 3: –2.9 (percent); Share of Foreign Currency Public Debt, 2017: 35.1 (percent of total); Primary Gap in 2017, 5: 0.1 (percent of GDP); Health and Pension Spending Change, 2022–50, 7: 3.9 (percent of GDP).

_International Monetary Fund | April 2017_

### Introduction

### fmc1 - Introduction

### Overview and framing
- The chapter assesses the role of fiscal policy using Musgrave’s (1959) three functions of public finances: stabilization, allocation, and redistribution.
- It acknowledges that most governments operate with limited fiscal buffers and must be selective in budgetary choices; the three functions are presented as a road map for policymakers.
- The recent debate suggests a greater role for fiscal policy along three main dimensions: stabilization, allocation, and redistribution.

### Stabilization: countercyclical role of fiscal policy
- Prior to the global financial crisis, discretionary fiscal policy was generally not seen as an effective tool for macroeconomic stabilization (Taylor 2000; Blanchard, Dell’Ariccia, and Mauro 2010; IMF 2013).
- Monetary policy was the preferred instrument for mitigating business cycle fluctuations.
- Reluctance to use discretionary fiscal policy reflected four considerations:
  - the relatively long time it takes for fiscal measures to be implemented and have an impact;
  - the difficulty of reversing a fiscal stimulus;
  - governments’ tendency to spend revenue windfalls in good times, leaving insufficient buffers for bad times;
  - the belief that markets may reward fiscal discipline and that, in some cases, fiscal consolidation could be expansionary.
- During the global financial crisis, fiscal policy returned as a countercyclical tool because the recession was deep and prolonged and monetary policy alone could not restore full employment.
- Academic research cited shows discretionary fiscal policy can have a strong effect on output (high fiscal multipliers) when:
  - monetary policy is constrained;
  - the financial sector is weak;
  - there is significant and protracted slack in the economy (Christiano, Eichenbaum, and Rebelo 2011; Woodford 2011; Auerbach and Gorodnichenko 2012; Jordà and Taylor 2016).
- Under normal circumstances, the preferred approach remains a combination of monetary policy with free operation of automatic stabilizers (DeLong and Summers 2012).
- Automatic stabilization vs discretionary policy: automatic stabilizers vary with economic activity (tax revenues fall and unemployment payments rise as output falls); discretionary policy involves active changes in expenditure and tax policies in response to the business cycle.

### Allocation: fiscal policy and long-term growth
- Fiscal policy can affect trend growth, not just fluctuations (Tanzi and Zee 1997); fiscal measures can have permanent effects on the level and growth rate of GDP per capita.
- The tool kit of growth-friendly fiscal measures was relatively limited and lacked granularity in the 2000s; empirical evidence on the growth impact of public investment and education was mixed (Warner 2014).
- With slowing productivity and potential growth (noted since the early 2000s), governments have explored new levers to boost employment, accelerate capital accumulation, and lift productivity.
- Progress has been made in understanding how tax and expenditure measures can be used as structural instruments to improve medium- to long-term growth; research shows these reforms have a larger growth dividend than previously thought (OECD 2010; Barbiero and Cournède 2013; IMF 2015a).
- Use of micro data has improved estimation of tax effects on firms’ productivity and investment (Egger and others 2009; Gemmell and others 2016).
- Concerns about “secular stagnation” strengthen the case for raising public investment, which remains at a historical low in advanced economies (October 2014 World Economic Outlook, Chapter 3; Summers 2014, 2016).
- Fiscal policy can indirectly support long-term growth by facilitating implementation of structural reforms; fiscal support can amplify reform benefits when the economy is weak (October 2014 Fiscal Monitor, Chapter 2; April 2016 World Economic Outlook, Chapter 3).

### Redistribution: inclusiveness and equity
- Equity issues have become more visible after three decades of rising income inequalities in many countries.
- Advances in measurement of income and wealth concentration (Atkinson, Piketty, and Saez 2011; Mankiw 2013) have reinforced attention to distributional effects of tax and spending policies.
- Research has improved calibration of tax, transfer, and social insurance measures using household survey and administrative data (Brewer, Saez, and Shephard 2010; Chetty and Finkelstein 2013; Lustig, Pessino, and Scott 2014).
- Debate continues on the efficiency cost of progressive taxation:
  - some argue redistributive benefits of higher marginal income tax rates exceed their costs (Diamond and Saez 2011; Piketty, Saez, and Stantcheva 2014);
  - this remains contested (Mankiw, Weinzierl, and Yagan 2009).
- Recent research suggests equity-enhancing fiscal measures may be consistent with sustainable economic growth (Ostry, Berg, and Tsangarides 2014).
- One implication: in certain cases, there may be scope to improve income distribution without undermining incentives to work and invest (IMF 2014a; Fabrizio and others 2017).

### Recent fiscal developments and outlook (overview)
- The chapter examines recent fiscal developments across three country groups: advanced economies, emerging markets and middle-income economies, and low-income developing countries; it provides an overview of the fiscal outlook and main risks to projections (Tables 1.1a, 1.1b, and 1.2).
- Since the early 2000s, potential growth has decelerated dramatically (Figure 1.2).
- The benefits of growth have been shared less evenly over the last three decades (Figure 1.3).

### Advanced economies: turning to fiscal relaxation in 2016
- Advanced economies eased their fiscal stance by one-fifth of 1 percent of GDP in 2016, breaking a five-year trend of gradual fiscal consolidation (Figure 1.4, panels 1 and 2).
- The main countries contributing to the change in the aggregate stance were Italy, Spain, and the United States, and to a smaller extent Canada and Germany.
- The debt-to-GDP ratio of advanced economies increased by about 2 percentage points in 2016, reaching 107.6 percent of GDP, and is expected to remain elevated and relatively flat in the medium term (in contrast to the April 2016 Fiscal Monitor’s projection of a moderate and steady decline).
- Starting from 2015, the path of debt ratios in Japan has been reduced by more than 10 percent of GDP owing to a comprehensive revision of national accounts, which pushed up the level of nominal GDP.
- Three broad factors accounting for fiscal loosening in 2016:
  - Support for the recovery amid heightened uncertainty over economic prospects; short-term growth and employment were key in Italy, Spain, and the United States.
  - In Japan, authorities adopted a supplementary budget in response to a weaker domestic and external economic environment at the beginning of 2016.
  - Over a longer perspective, fiscal policy has become gradually more countercyclical in advanced economies over the past 20 years, reflected in a rise in the fiscal stabilization coefficient.

*International Monetary Fund | April 2017*

### Chapter 2 of the April 2015 Fiscal Monitor, which provides further

### Chapter 2 of the April 2015 Fiscal Monitor, which provides further details on the calculation

### Cyclically Adjusted Primary Balance (definition and interpretation)
- The cyclically adjusted primary balance is defined as the cyclically adjusted balance plus net interest payable/paid (interest expense minus interest revenue) following the World Economic Outlook convention.
- A positive coefficient means that the nominal fiscal balance increases when output rises and decreases when output falls; hence, fiscal policy generates additional demand when output is weak and subtracts from demand when the economy is booming, corresponding to a countercyclical fiscal response.
- For cross-country comparability, expenditure and fiscal balances of the United States are adjusted to exclude the imputed interest on unfunded pension liabilities and the imputed compensation of employees counted as expenditures under the 2008 System of National Accounts (2008 SNA).
- Japan’s figures reflect a comprehensive revision by the national authorities, released in December 2016, including the switch from the 1993 System of National Accounts to the 2008 System of National Accounts.

### General Government Debt and Deficit: key historical values and projections
- Emerging market and middle-income economies: headline fiscal deficits increased from an average of 0.9 percent of GDP in 2012 to 4.8 percent in 2016.
- For the emerging market and middle-income group, the average debt ratio rose by about 10 percentage points between 2012 and 2016, reaching 47.4 percent of GDP in 2016.
- China:
  - On-budget deficit moved from 2.8 percent of GDP in 2015 to 3.7 percent of GDP in 2016.
  - The “augmented” deficit (including off-budget activity through local government financing vehicles) increased from 9.5 percent of GDP in 2015 to 10.3 percent of GDP in 2016.
- Baseline projections for emerging market and middle-income economies:
  - Overall deficit projected to decline to 4.4 percent of GDP in 2017 and to 3.1 percent of GDP by 2022.
  - Average debt ratio projected to increase from 48.6 percent of GDP in 2017 to 52.4 percent of GDP in 2022.
- United States: the scenario presented assumes a fiscal impulse of about 1 percent of GDP spread over 2018−19, based on lower personal and corporate income taxes.
- Japan: authorities have pushed back the planned VAT hike from April 2017 to October 2019.
- United Kingdom: planned increase in the cyclically adjusted primary balance is now about 2⁄3 percentage point of GDP per year until fiscal year 2019/20.
- Saudi Arabia: the fiscal deficit is expected to decline by 7 percent of GDP in 2017 largely because of higher oil revenues and a decline in arrears payments.
- Russia: the medium-term federal budget proposal for 2017−19 is based on a conservative oil price assumption of $40 a barrel and envisages an annual fiscal adjustment of 1 percentage point of GDP.

### Fiscal trends and policy stances in advanced economies
- After years of consolidation, advanced economies relaxed their fiscal stance in 2016.
- In 2017 the aggregate fiscal stance in advanced economies is expected to be broadly neutral, but with substantial differences across countries:
  - Canada and the euro area are expected to continue relaxing fiscal positions in 2017.
  - Korea and the United Kingdom plan to tighten in 2017.
- Examples of country-specific measures and drivers:
  - Canada: a stimulus package equivalent to 1¼ percent of GDP spread over fiscal years 2016/17 and 2017/18, with more than 40 percent allocated to infrastructure projects and plans to establish a new infrastructure bank to leverage private sector capital.
  - Germany (2017): increased primary spending corresponding to 0.5 percent of GDP directed toward higher pension outlays and refugee-related spending; federal priorities include personal income tax relief, higher infrastructure spending, and more funding for R&D.
  - Italy (2017): intends to enact a corporate tax cut and new spending initiatives (higher pensions, wage bill, and public investment).
  - Japan (2016/17): announced a fiscal stimulus package raising spending in 2017 including cash transfers to low-income individuals, wage increases for caregivers, and infrastructure investment; authorities remain committed to a 2020/21 primary surplus goal though no new measures have been specified to meet this target.
  - United States (policy uncertainty): consideration of business and personal income tax cuts, comprehensive corporate tax reform, health care overhaul, and more defense and homeland security spending offset by large cuts in domestic programs and foreign aid.

### Emerging market and middle-income economies: drivers, heterogeneity, and outlook
- Main drivers of deteriorating fiscal balances between 2012 and 2016:
  - Slower growth and lower commodity prices.
  - Political and geopolitical factors.
  - In China, stimulatory fiscal measures to support the economy.
- Country-specific developments in 2016:
  - Brazil: overall deficit declined by more than 1 percentage point to 9 percent of GDP in 2016, though the primary fiscal deficit continued to increase.
  - India: returned to fiscal consolidation in fiscal year 2016/17, aided by near-elimination of fuel subsidies and enhanced targeting of social benefits.
  - Turkey: fiscal stance loosened with the overall deficit widening to 2.3 percent of GDP in 2016 from 1.2 percent in 2015, reflecting higher minimum wages, security spending, and temporary tax relief.
- Oil exporters:
  - The rebound in oil prices and consolidation measures helped stabilize the average fiscal deficit at about 6 percent of GDP in 2016.
  - Gulf countries (Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates) have announced objectives including introducing a VAT system by 2018 and a range of fiscal adjustment measures.
  - Russia introduced a mechanism in February to save excess oil revenues into the reserve fund rather than spend them, to lessen oil-price-driven volatility.

### Projections, risks, and policy implications
- For 2017 and beyond, gradual tightening of fiscal positions in emerging market and middle-income economies is expected, subject to policy uncertainties.
- Debt ratios in the emerging market and middle-income group are projected to continue rising gradually because deficits are expected to remain above debt-stabilizing levels in a majority of countries.
- Countries with greater economic slack are expected to conduct more supportive fiscal policies in 2017.
- Policy implications highlighted:
  - Use temporary stimulus in countries with slack while protecting medium-term fiscal sustainability.
  - Advance public investment and institutional reforms where appropriate to support medium-term growth.
  - For oil exporters, combine consolidation with diversification and revenue-reform measures (for example, VAT introduction) to restore fiscal discipline.

*Source: IMF staff estimates and projections, as presented in the supplied chapter text.*

### CHAPTER 1 A gReATeR ROLe FOR FISCAL POLICY

### CHAPTER 1 A gReATeR ROLe FOR FISCAL POLICY

### Fiscal developments in selected emerging economies
- Mexico: on-budget deficit expected to remain close to its 2016 level as non-oil tax revenue is expected to increase modestly, accompanied by more tax breaks and reductions in administrative fees paid by businesses. Measures underway to make the income tax system more equitable, realign revenue and spending responsibilities across government levels, and improve local government debt management.
- India: headline deficit projected to decline modestly in fiscal year 2017/18, with continued delay in reaching the medium-term deficit target. Budget envisages growth-friendly fiscal adjustment underpinned by expenditure cuts that protect infrastructure investment, more progressive income taxes for individuals, and lower taxes on small and medium-sized enterprises. Nationwide goods and services tax rollout expected to enhance internal efficiency and create a common national market. Progress toward anchoring fiscal adjustment by means of a debt-to-GDP ratio of 60 percent to be achieved by fiscal year 2022/23.
- Brazil: expected to exit a two-year recession in 2017 and continue reforms to rebuild credibility and fiscal sustainability. Constitutional amendment adopted end-2016 establishes a ceiling for federal non-interest spending in real terms for the next two decades (with scheduled revision after nine years). Social security reform submitted to Congress and planned for adoption later in 2017. Headline deficit projected to stabilize in 2017. Over the medium term, spending freeze in real terms will help reduce the deficit at a relatively fast pace, although the public debt ratio should continue to rise for several years.

### Low-Income Developing Countries: recent trends and 2017 outlook
- Average fiscal deficit in low-income developing countries increased for the third consecutive year, reaching 4.4 percent of GDP in 2016.
- Average debt-to-GDP ratio for the group reached 40.4 percent in 2016, a rise of 4.3 percentage points from a year ago.
- Drivers across subgroups:
  - Commodity exporters: deficits driven mostly by declining commodity revenues due to lower commodity prices, falling demand from major export markets, and oil supply disruptions. Example: Nigeria—decline in oil production due to infrastructure sabotage compounded lower oil prices; efforts to boost non-oil revenue offset by recession, bringing the deficit to 4.4 percent of GDP in 2016. Many commodity exporters relied on borrowing to cushion collapsing revenues.
  - Other low-income countries: country-specific factors—public investment ratios increased significantly in the Kyrgyz Republic and Zimbabwe; larger current spending raised deficits in Cambodia (public sector pay hikes) and Ethiopia (drought-related social expenses); revenue drops in Uzbekistan (tax cuts) and Zimbabwe (recession); interest expenses rose in many countries (Uganda experienced notable increase partly from domestic borrowing at elevated rates).
- Borrowing costs and interest payments:
  - Average interest payments in frontier markets have increased markedly as a share of revenue—doubling since 2011.
  - Higher interest bill explained by both higher coupon rates on new debt and greater reliance on nonconcessional external financing.
- 2017 projections and sensitivities:
  - Under current projections, fiscal deficits are forecast to stabilize in percent of GDP in 2017, halting the trend of the past few years.
  - Fiscal position of commodity exporters expected to improve (fragile and contingent on commodity prices and production picking up and export markets improving), with the notable exception of Nigeria where deficits should continue widening because of planned increases in capital projects.
  - In other low-income developing countries, fiscal positions projected to deteriorate slightly (example: Bangladesh—deficit increase reflects delay in VAT rollout and higher wage bill and transfers).
  - Average debt ratio projected to rise by about 1.6 percentage points in 2017, about one-third of the 2016 increase.
  - Nigeria: increasing fiscal deficit and clearance of arrears expected to push up the debt-to-GDP ratio by 4.7 percentage points in 2017.

### Risks to the fiscal outlook
- Fiscal risks remain elevated and on the downside, though some upside risks have increased recently.
- Two main sources of divergence from baseline projections:
  - Uncertainties about fiscal policies (scope and design) have risen.
  - Governments’ balance sheets remain vulnerable to a wide range of risks.
- Global nonfinancial sector debt at an all-time high, two-thirds private sector liabilities (October 2016 Fiscal Monitor). This raises risk of disruptive private sector deleveraging and potential migration of private liabilities to government balance sheets.
- Specific risk channels and scenarios:
  - Fiscal policy uncertainty: policy uncertainty (Baker, Bloom, and Davis 2016) has reached a decade high. Main current source is lack of specificity about future U.S. policies, including size and composition of expected fiscal stimulus. Upcoming elections in the euro area, Brexit transition arrangements, and leadership changes in China add uncertainty. Geopolitical tensions and migration/refugee flows could shift fiscal policies substantially.
  - Weak economic growth and retreat from cross-border integration: downside risks to global growth predominate. Inward-looking policies could limit international trade, financial flows, and migration with potentially large negative effects on global growth, adversely affecting public debt dynamics—especially where inflation is low and below target. Other growth risks: weak demand–low inflation–low potential output feedback loops; insufficient progress in Europe on crisis legacies and productivity-enhancing reforms; disruptive private sector deleveraging in emerging markets; sharper slowdown in China; delays in policy adjustment and diversification in commodity exporters.
  - Tighter financial conditions and stronger U.S. dollar: faster interest rate increases and U.S. dollar appreciation could raise borrowing costs and depreciate emerging market and developing economy currencies, exacerbating public debt vulnerabilities. In these economies, almost half of public debt is issued in foreign currency, on average.
  - Lower energy prices: OPEC and other producers’ agreement to cut oil production in 2017 may not materialize or could prompt increased production elsewhere (e.g., the United States), keeping oil prices lower than expected; oil exporters could see worsening fiscal positions (one-third of fiscal revenues, on average, rely directly on oil production), while oil importers would benefit.
  - Contingent liabilities: risks discussed could trigger materialization of contingent liabilities with severe public finance costs—banking sector distress in Europe, corporate defaults in emerging markets where nonfinancial corporate debt is at a historical high, calls on sovereign guarantees, losses at state-owned energy companies in commodity exporters, and obligations from failed public-private partnerships in low-income countries.

### Managing fiscal risks: recommended four-step strategy
- 1) Identify and analyze risks:
  - Identify main sources of fiscal risks and develop tools for fiscal risk analysis, including simulations to assess impact of plausible shocks on public finances.
- 2) Select tailored mitigating measures:
  - Examples: limits on fiscal exposure, regulations to reduce risky behavior, mechanisms to transfer risks to third parties, active debt maturity management.
- 3) Create sufficient buffer funds:
  - Establish budgetary buffers to absorb risks that are not mitigated.
- 4) Account for residual risks in long-term fiscal targets:
  - For risks too large, costly, or imprecisely known, incorporate them in setting long-term fiscal targets and ensure sufficient safety margins relative to debt ceilings.
- Empirical note: longer debt maturity reduces recurring financing needs and rollover risk, lowering default probability and borrowing costs; this can allow governments to borrow more safely and enjoy greater fiscal space.

### The evolving role of fiscal policy
- Fiscal policy is viewed as a powerful tool to stabilize the economy and promote inclusive growth, particularly when combined with monetary policy and structural reforms (the “three-pronged approach”).
- Constraints on fiscal leeway: high debt, long-term demographic challenges, and elevated fiscal risks place a premium on selectivity and sound public financial management.
- Policy guidance:
  - Define sound fiscal policy objectives across three categories—economic stabilization, allocation, and redistribution—while recognizing their interlinkages and trade-offs.
  - Be selective in reforms: some fiscal structural reforms may boost medium-term growth but impose temporary drags on activity; consider these trade-offs in policy design and sequencing.

*International Monetary Fund | April 2017*

### Chapter 3) or that some growth-enhancing policies can

### Chapter 3) or that some growth-enhancing policies can

### Fiscal Policy Should Be Countercyclical
- Emerging new view: fiscal policy should react more actively to cyclical conditions in times of deep and prolonged recessions and when monetary policy is constrained.14
- Normal times: rely on automatic stabilizers to smooth economic fluctuations, provided that fiscal space is available.
- Discretionary fiscal actions: should be used only in special circumstances; fiscal policy should respond symmetrically to the business cycle (expand in bad times and tighten in good times).
- Fiscal Risk Management Strategy (Figure 1.8):
  - Step 1: Identify risks, their magnitude, and their likelihood
  - Step 2: Reduce the probability of risks occurring and government exposure
  - Step 3: Create buffers in the budget to absorb the remaining risks
  - Step 4: Set safe fiscal targets
- Case 1 — Countercyclical fiscal policy in downturns:
  - Applies where demand is lacking and fiscal space is available; particularly relevant when nominal interest rates are close to the effective lower bound and inflation expectations are low.
  - Passive response based solely on automatic stabilizers may be insufficient.
  - Discretionary fiscal expansion, combined with structural reforms and monetary accommodation, can break debt-deflation traps by raising nominal GDP.
  - Country examples: Canada and Japan need continued supportive fiscal policies; Korea should remain open to stimulus if the output gap widens; euro area aggregate position argues for a slightly more expansionary stance in 2017 but individual countries face limited fiscal space and Stability and Growth Pact constraints.
  - Centralized fiscal capacity proposal: create or extend centralized schemes to provide fiscal support across the euro area.
- Three amplifying factors for countercyclical support (Gaspar, Obstfeld, and Sahay 2016):
  - Monetary accommodation: fiscal stimulus more effective when monetary policy keeps interest rates low, even with modest and temporary inflation overshooting.
  - Credible medium-term fiscal framework: fiscal expansions must be anchored in a sustainable public debt path to avoid crowding out current spending via expected future tax increases or higher risk premiums.
  - International coordination: coordinated fiscal actions produce large fiscal spillovers, especially among countries with strong trade and financial links; gains are particularly large under very low interest rates and wide output gaps.
- Case 2 — Countercyclical fiscal policy in upturns:
  - For economies with limited/no slack and signs of inflationary pressures, withdraw fiscal support to rebuild fiscal space and prevent macroeconomic and fiscal imbalances.
  - United States: economy close to full employment; fiscal stance should remain neutral this year, with consolidation afterward to put debt on a downward path; reorient current fiscal envelope toward infrastructure to boost medium-term growth.
  - China: augmented deficit should decline to stabilize augmented debt and support rebalancing.
  - Russia and Vietnam: initiate medium-term fiscal consolidation as output approaches or is at potential.
- Case 3 — Procyclical fiscal policy in downturns:
  - Some countries must conduct procyclical policies because they lack fiscal buffers, have high debt, or face market-financing pressures.
  - Commodity exporters: experienced an average decline in commodity prices of almost 50 percent from the 2011 peak; main priority is consolidation to put debt on a sustainable path.
  - Nigeria: up-front fiscal adjustment centered on mobilizing non-oil revenues is critical.
  - Mexico: despite near-term slack, maintain commitment to ongoing fiscal consolidation to preserve investor confidence.
  - Mitigation of procyclicality: calibrate pace and composition to reduce short-term drag on activity; phase in adjustments where possible; avoid indiscriminate tax increases or spending cuts—consider growth impact.
  - Country examples: United Kingdom—slower pace of consolidation in Autumn Statement 2016 appropriate given subdued growth and uncertainty; Italy—evenly phased adjustment with improved progrowth composition supports recovery; Spain—preannounced gradual increase in preferential VAT rates toward the standard rate could bring consumption forward and support growth.
- Pillars referenced in Figure 1.9: Pillar 1 Countercyclical; Pillar 2 Growth friendly; Pillar 3 Inclusive; STRONGER FISCAL POLICY; Capacity to Generate Resources

### Fiscal Policy Should Be Growth Friendly
- Motivation:
  - Deceleration of potential output in a majority of countries (April 2015 World Economic Outlook, Chapter 3).
  - Debt sustainability: public debt reduction more successful in high-growth environments (Abbas and others 2013).
- Definition and channels:
  - “Growth-friendly fiscal policies” affect medium- to long-term growth (the trend), in contrast to countercyclical policies that smooth fluctuations around trend.
  - Direct channel: structural tax or expenditure policies that boost employment, accumulation of physical and human capital, and productivity.
  - Indirect channel: fiscal policies that enhance effectiveness and implementation of structural reforms in labor and product markets.
- Tax policy:
  - Scope exists in almost all countries to achieve a more growth-friendly tax system by cutting distortionary taxes and inefficient tax expenditures, better targeting tax incentives, and lowering burdensome tax administration practices.
  - Evidence: IMF (2015a) finds that reducing tax rates on either labor or capital income by 5 percentage points in a revenue-neutral manner could add about ¼ percentage point to long-term economic growth in advanced economies.
  - No one-size-fits-all: reforms should be tailored to country-specific growth bottlenecks.
  - Country examples:
    - United States: corporate tax reform needed to revitalize business dynamism and investment; some options could entail negative international spillovers.
    - France and Italy: scope for further reducing labor tax wedges to improve incentives to work (Figure 1.10).
    - Germany and Japan: eliminate tax-induced work disincentives for secondary earners and spousal income tax deductions to boost female labor force participation.
- Expenditure policy:
  - Orient resources toward more productive spending supporting physical and human capital, labor force, and productivity.
  - Public investment case: strong almost everywhere due to low long-term borrowing costs and substantial infrastructure deficiencies (October 2014 World Economic Outlook, Chapter 3; Figure 1.11).
  - Advanced economies (Germany, United Kingdom, United States): bring forward planned investments in the current environment of low potential growth and funding costs.
  - Emerging markets and developing economies: address infrastructure bottlenecks; countries with limited fiscal space (e.g., Brazil) should incentivize private participation and improve public investment management.
  - Labor supply measures: active labor market policies and targeted spending for women and migrant workers (child care) in advanced economies with rising dependency ratios (Germany, Italy, Japan); improved access to health and education in emerging markets and developing economies via well-designed social transfers and better-targeted spending.
  - India: reduce gender inequality in education and health; additional spending on gender-targeted skills training.
  - Productivity measures: subsidies for research and development can foster innovation (October 2016 Fiscal Monitor, Chapter 2); Australia reviewing R&D subsidies to ensure cost effectiveness and simplicity.
  - Well-targeted transfers and subsidies: support bank balance sheet repair and incentivize private debt restructuring (October 2016 Fiscal Monitor).
- Fiscal support accompanying structural reforms:
  - Temporary fiscal stimulus can enhance growth effects of certain reforms by mitigating short-term macroeconomic and distributional costs (April 2016 World Economic Outlook, Chapter 3; Banerji and others 2017).
  - Fiscal relaxation to accompany reforms depends on the reform, country fiscal position, and financial market reaction.
  - Countries with fiscal space and good reform track records may use temporary fiscal support for labor market reforms (employment protection or unemployment benefits) during slack to front-load macroeconomic benefits (Box 1.2).
  - Japan: fiscal support could ensure labor supply-boosting reforms do not create deflationary pressures.
  - Germany: looser fiscal position could finance policies that lift potential growth—tax and expenditure reforms to increase incentives for female labor force participation, integrate low-skilled migrants, and boost labor supply of low-income earners.
- Budget-neutral and constrained-space options:
  - Not all growth-friendly policies entail short- or medium-term budgetary costs; pursue growth-friendly reforms everywhere.
  - In limited fiscal space, compensate growth-friendly measures in a budget-neutral way or within consolidation paths.
  - India: reorient public expenditure away from untargeted subsidies (food and fertilizers) toward capital and social spending to achieve growth-friendly consolidation.
  - Spain: broaden VAT base and increase excise duties and environmental levies; use additional revenues to fund active labor market programs and public R&D to bolster labor supply and productivity.

### Fiscal Policy Should Promote Inclusion
- Global trends:
  - Global Gini index: worldwide dispersion of individual incomes has declined since the late 1980s.
  - Poverty reduction: number of people living in poverty diminished by more than 1 billion; share in world population decreased from 50 percent to about 10 percent since the early 1980s (Figure 1.12).
  - Poverty limit used in Figure 1.12: $1.90 per day in 2011 dollars at purchasing-power parity (PovcalNet).
- Within-country inequality and labor market risks:
  - Income inequalities have increased within most advanced economies and largest emerging market economies (China and India).
  - Advanced economies: incomes of the top 1 percent have grown at annual rates almost three times higher than those of the rest of the population over the past three decades (Figure 1.13).
  - After narrowing at the onset of the global financial crisis, income distributions have widened again over the past five years (OECD 2016a).
  - Economic uncertainty: increased for many groups amid a downward trend in labor income shares (April 2017 World Economic Outlook, Chapter 3).
  - Unemployment durations: evidence from the International Labour Organization (2014) points to longer average durations of unemployment in the past decade in advanced economies.
  - Nonstandard work arrangements: prevalence of self-employment, temporary contracts, or no contracts is high in many countries.
  - Social protection coverage: large and growing share of labor force has limited unemployment protection coverage due to restrictive qualifying conditions; share is higher in emerging market and developing economies with large informal sectors (ILO 2015).
- Inequality, uncertainty, and growth:
  - Excessively high and increasing levels of inequality and uncertainty appear detrimental to welfare and growth, supported by research (Berg and Ostry 2011; Ostry, Berg, and Tsangarides).

*International Monetary Fund | April 2017*

### CHAPTER 1 A gReATeR ROLe FOR FISCAL POLICY

### CHAPTER 1 A gReATeR ROLe FOR FISCAL POLICY

### Inclusive fiscal policy: objectives and channels
- Fiscal policy can promote inclusive growth by: (1) affecting income inequality through improved use of taxes and transfers; and (2) promoting “equality of opportunity” via investment in human capital and protection against risk.
- Channels through which inequality and weak inclusion harm growth include lower human capital investment, poorer health outcomes for cash-constrained households, excessive household saving that lowers short-term demand, reduced willingness of firms to hire and invest, and long-term effects of unemployment on labor market attachment, skills, and productivity.

### Redistribution: transfers and tax design
- Improved design of transfers:
  - Broader use of in-work tax credits in advanced economies can support low-income families while encouraging work (example: United States—extension of the Earned Income Tax Credit combined with a raise in the minimum wage).
  - Conditional cash transfer programs could be expanded in emerging market and developing economies (examples listed: Indonesia, Jamaica, Pakistan) to support incomes of the poor and incentivize human capital development.
- More progressive tax systems:
  - Reduce regressive tax exemptions (examples: mortgage interest payment exemptions in the United States and to a lesser extent Sweden).
  - Increase use and improve design of property and wealth taxes in countries such as Ireland, Italy, and the Netherlands; recurrent value-based property taxes are described as efficient and progressive.
  - In emerging market and developing economies, expand coverage of the personal income tax by reducing exemptions and formalizing firms and individuals (example: China—reduce the level of the basic personal income tax exemption to bring more middle-income earners into tax liability).

### Equality of opportunity: education, health, and insurance
- Public education and training:
  - Governments should help workers acquire and maintain skills amid shifting labor demand due to global integration and technological change.
  - Examples: United Kingdom—expand vocational training and apprenticeship programs; Canada—more vocational and specialized skills training; in emerging market and developing economies, focus on improving access of low-income groups to primary and secondary education, especially for girls and rural areas.
- Public health care:
  - Better access to basic health services supports schooling outcomes and sustained labor market participation (example: United States—further subsidies to health care for the poor; Nigeria—ensure efficient delivery and broader coverage for the poor; Thailand—coordinate fragmented health insurance schemes for more equal coverage).
- Employment and social insurance:
  - Prevent labor market detachment after shocks through reforms to insurance and active labor market policies (examples: United States—reform disability insurance to create incentives for part-time work; France—enhance active labor market policies including job-search support; Japan—clarify legal framework and subsidize conversion of nonregular workers to “intermediate” contracts; China—reform household residency system to improve equity of social security).

### Financing inclusive and growth-friendly policies: fiscal space and constraints
- Some inclusive and growth-friendly policies require additional resources; these should be mobilized in ways least harmful for growth.
- For countries with fiscal room:
  - Additional borrowing is an option, but debt should be used where return on debt-financed projects outweighs costs and risks.
  - A new IMF approach to measuring “fiscal space” is referenced (Annex 1.1).
  - Factors increasing fiscal space in advanced economies:
    - A persistently lower interest rate minus GDP growth differential may allow more borrowing; a permanent decline of 1 percentage point in the differential could allow advanced economies to borrow safely an additional 25 percent of GDP, on average.
    - Declines in “implicit” debt obligations: on average, the stock of implicit debt in advanced economies has shrunk by 25 percent of GDP in the past six years (Figure 1.15).
  - Caveats: age-related spending remains high in many countries; reforms can be reversed; a reduction in implicit obligations does not translate one-to-one into an ability to borrow an additional dollar.
- Role of fiscal institutions:
  - Sound fiscal institutions and credible commitment mechanisms (medium-term budget frameworks, well-designed fiscal rules) can lower interest risk premia and create budgetary room.
  - Well-designed, well-calibrated, and regularly reviewed fiscal rules are necessary; poorly designed rules can unduly constrain policy or raise sustainability risks.
  - Example of tapping otherwise inaccessible resources: proposals for a central fiscal capacity in the euro area that would borrow at favorable rates and on-lend to member states, requiring safeguards to preserve fiscal discipline.

### Revenue mobilization and spending efficiency
- When no fiscal space exists, room must be created within the budget via higher revenue or lower spending; policies can be implemented in a budget-neutral manner but may be politically difficult.
- Revenue-side measures:
  - Priority: identify revenue-enhancing measures that are least distortionary to work, saving, and investment.
  - Broaden the tax base by eliminating exemptions and preferential rates; raise indirect and property taxes which are found to be less detrimental to growth.
  - Country examples and suggestions:
    - United States: introduce a federal-level VAT (noted implementation difficulty due to coordination with state sales taxes).
    - Italy: rationalize large tax expenditures, broaden the tax base, and create a modern real estate tax.
    - United Kingdom: scale back distortionary tax expenditures (example: nonstandard zero VAT rates).
    - Japan: raise the consumption tax in a preannounced and gradual manner to generate stable revenue in an aging society.
    - Gulf countries: continue work on introducing a VAT.
    - China: raise taxes on fossil fuel and pollution (carbon or coal tax) to generate revenue and improve energy efficiency.
    - India: raise taxes on petroleum products while oil prices remain low.
  - Initial tax burden matters: almost half of low-income developing countries have a tax ratio below 15 percent of GDP, indicating scope to mobilize more revenue.
  - Improve revenue administration and compliance, which is important in low-income developing countries and advanced economies where compliance deteriorated during the financial crisis.
  - Numeric point: tax ratio threshold highlighted explicitly as 15 percent of GDP.
- Spending-side measures:
  - Achieve savings by improving targeting and efficiency through comprehensive expenditure reviews; many categories of spending can achieve desired outcomes at lower cost (Figure 1.17).
  - Eliminate generalized subsidies that disproportionately benefit higher-income groups in favor of targeted measures (example: India—overhaul food and fertilizer subsidies through better targeting and efficiency).
  - Implement automatic pricing mechanisms to remove recurrent subsidies (example: Nigeria—automatic fuel-price-setting mechanism).
  - Expand means testing to target social transfers more effectively (example: France—expand means testing for family and housing allowances).
  - Reduce government wage bills while preserving service quality (example: France—reduce public employment at local level and limit wage drift; Argentina—structural reduction in public employment facilitated by payroll management, identification of ghost workers, and attrition-based systems).
  - Pension and health reforms can markedly improve fiscal outlook in many advanced and emerging market economies (example: Brazil—pension and other benefits represent nearly half of federal noninterest spending; fiscal strategy depends on social security reform).

### Key numeric facts and figures preserved verbatim
- Advanced-economy top-income dynamics: “In advanced economies, the incomes of the top 1 percent have grown three times faster than those of the rest of the population over the last three decades.”
- Fiscal space and debt:
  - “A permanent decline of 1 percentage point in the differential could allow advanced economies to borrow safely an additional 25 percent of GDP, on average.”
  - “the stock of implicit debt in advanced economies has shrunk by 25 percent of GDP in the past six years.”
  - Net present value calculations for future pension obligations use “a discount rate of 1 percent a year in excess of GDP growth.”
- Tax revenue context:
  - “Almost half of low-income developing countries have a tax ratio below 15 percent of GDP.”

*Source: CHAPTER 1 A gReATeR ROLe FOR FISCAL POLICY, International Monetary Fund | April 2017*

### CHAPTER 1 A gReATeR ROLe FOR FISCAL POLICY

### CHAPTER 1 A gReATeR ROLe FOR FISCAL POLICY

### Design of a Destination-Based Cash Flow Tax (DBCFT)
- Definition and core features:
  - “Cash flow”: allows immediate full deduction for capital expenses (in lieu of depreciation allowances), but does not allow deduction of net interest expense; this makes it a “rent tax” that taxes only profits above the minimum required by the investor.
  - “Destination-based”: border-adjusts the tax by exempting exports and taxing imports—or equivalently, not taxing imports at the border but denying companies a deduction for them when calculating tax liability.
- Economic properties:
  - As a rent tax, the DBCFT would not affect marginal investment decisions.
  - Cash flow treatment removes the tax bias toward debt finance and reduces the incentive to use related-party loans to avoid tax.
  - Border adjustment shifts the tax base to the location of final consumption (destination), which is less mobile than investment, thereby eliminating the tax advantage of locating production or profits in low-tax jurisdictions and reducing base erosion and profit-shifting (BEPS) activities.
- Empirical and institutional context:
  - No country has yet introduced a DBCFT; many have moved toward heavier reliance on VAT and reductions in labor taxes and CIT rates.
  - The account draws on Auerbach and others (2017) and references to proposals in U.S. (June 2016 Republican tax reform “Blueprint”), UK (Mirrlees Review), and earlier U.S. proposals.

### DBCFT in a Global Setting — Adoption Scenarios and Spillovers
- If all countries adopt DBCFT:
  - Collective efficiency gains are expected because opportunities for profit shifting are reduced; intra-group transfers lose tax advantage as exports are exempted and imports are not deductible.
- If only a subset of countries adopt DBCFT:
  - Adverse spillovers likely for nonadopters: loss of real investment and increased incentives for outward profit shifting.
  - Potential reactions by nonadopters include measures to protect tax bases or pressure to adopt DBCFT-like regimes.
  - Legal, practical, and political challenges would arise—key concerns include WTO consistency and compatibility with double tax treaties.
- Distributional externalities:
  - Windfall gains to foreigners with income or assets in the currency of the adopter and potential international impacts via debts and contracts specified in the appreciating currency.

### Implementation Considerations and Limitations
- Design and operational challenges:
  - Refunds for perpetual tax losses of exporters would be required for the tax to operate as a rent tax; instituting refunds could be politically difficult and carries fraud risk.
  - Efficiency properties require uniform tax treatment of all sectors and transactions, which may be hard to sustain given lobbying pressures.
  - Key design issues remain unresolved (notably, the treatment of financial transactions) and transition issues (treatment of “old” investments) need careful attention.
- Uncertainties:
  - Effects on exchange rates and prices are highly uncertain, warranting caution in evaluating impacts on adopters and nonadopters.
- Distributional impacts within an adopter:
  - As a tax on rents, the DBCFT in itself has the potential to be mildly progressive.
  - Exact distributional outcome depends on whether adjustment occurs through domestic prices, the exchange rate, or both:
    - If adjustment comes mainly through prices: burden falls on those spending domestically from nonwage income—largely the relatively wealthy and those on unindexed nominal incomes.
    - If adjustment comes predominantly through the nominal exchange rate: the tax would burden those spending domestically from incomes denominated in foreign currency (such as foreign corporate earnings).
  - Final distribution also depends on accompanying changes to personal taxes.

### Box 1.2 — Budgetary Costs and Gains of Structural Reforms (Labor and Product Market Reforms)
- Data and methods:
  - Analysis based on a new database identifying major policy changes in five reform areas for 26 advanced economies over four decades (Banerji and others 2017).
  - Reform areas: product market deregulation; relaxation of employment protection legislation for regular workers; reductions in unemployment benefits; higher spending on active labor market policies; cuts in labor tax wedges.
  - Empirical analysis traces average evolution of output, fiscal balance, and public-debt-to-GDP ratios via estimated “impulse responses”; supplemented by numerical simulations inspired by DeLong and Summers (2012) but assuming a zero fiscal multiplier over the medium term.
- Three main results:
  - Most labor and product market reforms strengthen public finances in the medium term.
    - Short-term impacts vary by reform type: some have direct budgetary costs (e.g., labor tax cuts, higher active labor market spending) or savings (e.g., reduced duration of unemployment benefits); others act indirectly through gradual output effects (e.g., product market or job protection reforms).
    - Indirect fiscal gains from higher output can partly or fully offset direct up-front costs.
    - Empirical result: labor tax wedge cuts have, on average, not been associated with an increase in the public-debt-to-GDP ratio over the medium term; fiscal gains from higher output and offsetting measures (tax increases or spending cuts) play roles.
    - Simulations show that if direct costs are financed through higher borrowing (rather than offset), medium-term fiscal benefits may not materialize.
  - The effect of certain structural reforms depends on business cycle conditions at implementation:
    - Example: employment protection legislation reforms reduce public-debt-to-GDP in the medium term when carried out during expansions, but not if implemented during periods of major slack.
    - To a lesser extent, the same applies to unemployment benefit reforms.
  - Combining structural reforms with fiscal stimulus can yield net medium-term budgetary gains:
    - Temporary, well-designed fiscal stimulus can front-load macroeconomic benefits of reforms that are less effective during slack by supporting the economy and enhancing reform dividends, raising tax revenues.
    - Example: with relaxed employment protection, fiscal stimulus can encourage firms to hire new workers rather than dismissing existing ones during a downturn; stimulus costs may be fully offset by subsequent gains.
    - Country-specific circumstances (government funding costs, stimulus magnitude and quality, credibility and strength of reform implementation) affect achievable gains.
- Numerical example and figure references:
  - Figure 1.2.1: effect of a 1 percentage point cut in the labor tax wedge on the public-debt-to-GDP ratio (empirical analysis; t = 0 is year of reform shock).
  - Figure 1.2.2: net medium-term fiscal benefit of job protection reforms under weak economic conditions—shows net fiscal gains when fiscal support accompanies reform (numerical simulations); error bars indicate minimum and maximum values in OECD member countries.

### Box 1.3 — Making Growth More Inclusive in China
- Poverty and growth achievements:
  - Over the past 35 years, the number of people living in poverty (on less than $1.90 a day in real purchasing-power parity terms) has declined by 850 million since the early 1980s.
  - Average per capita income has increased almost tenfold over the period.
- Inequality and wealth concentration:
  - China’s Gini coefficient has increased and ranks high among the world’s largest economies (Cevik and Correa-Caro 2015).
  - Wealth concentration estimate: top 1 percent of the wealthiest families possess about one-third of the country’s total wealth, compared to 18 percent on average for OECD countries.
- Fiscal policy and redistribution:
  - Fiscal policy contributes relatively little to narrowing rising inequalities, reflected in small differences between Gini coefficients before and after taxes and transfers.
  - Explanations include a relatively low overall tax burden, greater reliance on indirect taxes, regressive design of direct taxation (notably social security contributions), and local governments’ limited, inefficient, and uncertain revenue sources.
- Policy options to make fiscal policy more redistributive and support household consumption:
  - Making direct taxation more progressive:
    - Individual income tax provides little redistributive effect despite a nominally progressive schedule; recent estimates indicate close to 80 percent of urban workers are not liable to pay this tax (Lam and Wingender 2015).
    - Lowering the currently high level of the basic personal allowance and redesigning tax brackets could ensure more middle- and high-income taxpayers contribute.
  - Introducing a property tax:
    - Recurrent property taxes based on market values are largely absent in China and are broadly viewed as progressive because high-income households tend to have higher property wealth.
  - Reforming the household registration (hukou) system:
    - Relaxing residency constraints and allowing more urban migrants to contribute to and benefit from the social safety net would reduce disparities and strengthen fiscal redistribution.
- Figure reference:
  - Figure 1.3.1: Redistributive effect of fiscal policy in selected advanced and emerging market economies, 2009 (Gini coefficient): shows relatively small redistributive effect for China.

### Interest–Growth Rate Differentials and Debt Sustainability
- Context and premise:
  - Global decline in interest rates over past three decades has reduced sovereign borrowing costs in many countries; some argue governments can sustain higher public debt as lower interest rates reduce debt service costs.
  - The key metric for debt sustainability is the differential between the effective interest rate on government debt and nominal growth rates (interest–growth rate differential).
- Historical pattern:
  - Figure 1.4.1 shows interest–growth rate differentials for a sample of advanced economies since 1990; there has been a marked downward trend as interest rates have fallen more than growth rates.
  - Recent declines reflect continuation of a longer trend rather than a new phenomenon.
- Possible drivers of the decline:
  - Structural factors likely: slow adjustment of nominal growth expectations to lower historical rates, reduction in supply of safe assets, decreasing global risk appetite, demographic changes increasing demand for savings instruments.
- Implications for the future:
  - Given structural nature of drivers, the trend is unlikely to reverse in the near term; future interest–growth rate differentials are likely to be lower than their average in the past decade.
- Analytical experiments:
  - Two experiments assess impact of transitory and permanent declines in the interest–growth differential on sustainable debt levels.
  - Framework extends Ghosh and others (2013) to produce a debt limit (maximum debt level before default) for each country; the differential follows a persistent stochastic process.
  - Model calibration covers seven countries: Canada, France, Germany, Japan, the Netherlands, the United Kingdom, and the United States.
- Note:
  - Ongoing structural changes in emerging market economies make similar trend identification harder there.

*International Monetary Fund | April 2017*

### Box 1.4. Can Countries Sustain Higher Levels of Public Debt?

### Box 1.4. Can Countries Sustain Higher Levels of Public Debt?

### Experiments on the interest–growth rate differential
- Transitory decline experiment:
  - Uses data since the early 1990s and treats the observed recent decline as a draw from the estimated distribution of the interest–growth rate differential.
  - Compares model-generated debt limit in 2012 to that consistent with the World Economic Outlook forecast for 2022 (to allow for the dissipation of expected monetary policy changes).
  - Between 2012 and 2022 the interest–growth rate differential is forecast to fall by an average of 1.6 percentage points for the countries in the sample.
  - Result: this fall could increase debt limits by about 2 percent of GDP, on average.
- Permanent decline experiment:
  - Implements a permanent decline by shifting the distribution of the differential to the left by 1 percentage point.
  - Result: a permanent decline of 1 percentage point increases the maximum sustainable debt level by an average of 25 percent of GDP in the sample.
  - Cross-country range: from a low of 10 percent of GDP to a high of 40 percent of GDP.
  - Note: it is difficult in practice to assess whether the decline is transitory or permanent; even if only a portion is permanent, the impact on debt limits is likely to be large.

### Intuition, assumptions, and robustness
- Intuition:
  - Public debt issued today is rolled over and repaid over long periods; sustainability of debt is driven principally by future interest–growth rate differentials, which depend on the shape of the distribution.
  - Sensitivity to permanent (structural) changes is much larger than to transitory changes because of the long horizon over which debt is serviced.
- Model simplifying assumptions:
  - Debt is short term.
  - Growth is exogenous.
  - Shocks to the surpluses are uncorrelated with growth.
- Robustness:
  - Results are robust to various estimation periods of the process for the interest–growth rate differential.
  - Results are of similar magnitude to those found in other studies (for example, OECD 2016b as cited in the source).

### Fiscal rules and sovereign borrowing costs (associated Box 1.5 content)
- Empirical background:
  - Literature (mostly Europe and United States) is cautiously optimistic about fiscal rules lowering sovereign borrowing costs, but concerns exist about spurious correlation (rules as signals of preexisting fiscal prudence).
- Econometric approach:
  - Uses Jordà’s (2005) methodology to estimate the response of 10-year sovereign bond yields over the medium term following introduction of a fiscal rule.
  - Sample: 33 advanced economies between 1980 and 2016.
  - Regression structure: Y_{i,t+k} − Y_{i,t} = α_{i}^{k} + Σ_{j=1}^{l} γ_{j}^{k} ∆Y_{i,t−j} + β_{k} rule_{i,t} + X_{i,t}′ δ_{k} + ε_{i,t}^{k}, for k = 1 to 4 years, where rule_{i,t} is a dummy for the rule implementation date and X includes controls (real GDP growth, inflation rate, lagged level of debt).
  - Estimation uses Arellano and Bond (1991) difference generalized method of moments to partly address endogeneity.
- Key empirical findings:
  - Plain estimation: yields decline by about 2 percentage points, on average, in the four years following a rule’s introduction.
  - Conditional on fiscal track record:
    - In countries that are fiscally less prudent, there is no evidence that rules lower borrowing costs.
    - In better-performing countries, rules are associated with lower borrowing costs (see Figure 1.5.1 in source).
  - Historical context for fiscally less prudent sample: interest rates have historically been relatively high (up to 22 percent over the period, with a mean of 7 percent).
- Role of rule design:
  - In fiscally less prudent countries, reestimating the model with interactions between the rule dummy and binary indicators of specific design features shows:
    - Rules can lower financing costs if accompanied by independent monitoring mechanisms.
    - This result is consistent with evidence on the role of fiscal councils and their synergies with fiscal rules (IMF 2013 as cited in source).
    - Flexibility features (such as escape clauses) are not found to affect the ability to lower the risk premium.
    - Results on enforcement procedures (sanctions and correction mechanisms) are not conclusive.

*International Monetary Fund | April 2017*

### CHAPTER 1 A gReATeR ROLe FOR FISCAL POLICY

### CHAPTER 1 A gReATeR ROLe FOR FISCAL POLICY

### Selected Potential Indicators of Fiscal Space — Key Statistics (Emerging Market and Developing Economies)
- Saudi Arabia
  - Public Debt, 2016: 12.4 (percent of GDP)
  - Public Debt Change, 2016–22: 14.1 (percent of GDP)
  - Gross Financing Needs, 2017: . . . (percent of GDP)
  - 10-Year Sovereign Yield Spreads (Against U.S.), 2: . . . (percent)
  - Projected Interest Rate–Growth Differential, 2017–22, 3: 0.3 (percent)
  - Share of Foreign Currency Public Debt, 2017: 38.6 (percent of total)
  - Nonresident Holding of General Government Debt, 2016, 4: . . . (percent)
  - Share of Short-Term External Debt, 2017: 27.5 (percent)
  - Primary Gap in 2017, 5: 10.6 (percent of GDP)
  - Primary Gap in 2022, 6: 2.5 (percent of GDP)
  - Health and Pension Spending Change, 2022–50, 7: 7.7 (percent of GDP)

- South Africa
  - Public Debt, 2016: 50.5 (percent of GDP)
  - Public Debt Change, 2016–22: 3.2 (percent of GDP)
  - Gross Financing Needs, 2017: 11.9 (percent of GDP)
  - 10-Year Sovereign Yield Spreads (Against U.S.), 2: 6.5 (percent)
  - Projected Interest Rate–Growth Differential, 2017–22, 3: 0.1 (percent)
  - Share of Foreign Currency Public Debt, 2017: 10.4 (percent of total)
  - Nonresident Holding of General Government Debt, 2016, 4: 32.1 (percent)
  - Share of Short-Term External Debt, 2017: 27.4 (percent)
  - Primary Gap in 2017, 5: 0.1 (percent of GDP)
  - Primary Gap in 2022, 6: –1.4 (percent of GDP)
  - Health and Pension Spending Change, 2022–50, 7: 4.0 (percent of GDP)

- Sri Lanka
  - Public Debt, 2016: 77.3 (percent of GDP)
  - Public Debt Change, 2016–22: –11.0 (percent of GDP)
  - Gross Financing Needs, 2017: 17.0 (percent of GDP)
  - 10-Year Sovereign Yield Spreads (Against U.S.), 2: . . . (percent)
  - Projected Interest Rate–Growth Differential, 2017–22, 3: –2.4 (percent)
  - Share of Foreign Currency Public Debt, 2017: . . . (percent of total)
  - Nonresident Holding of General Government Debt, 2016, 4: 39.8 (percent)
  - Share of Short-Term External Debt, 2017: 16.8 (percent)
  - Primary Gap in 2017, 5: –1.8 (percent of GDP)
  - Primary Gap in 2022, 6: –3.2 (percent of GDP)
  - Health and Pension Spending Change, 2022–50, 7: 2.5 (percent of GDP)

- Thailand
  - Public Debt, 2016: 42.2 (percent of GDP)
  - Public Debt Change, 2016–22: –0.4 (percent of GDP)
  - Gross Financing Needs, 2017: 7.3 (percent of GDP)
  - 10-Year Sovereign Yield Spreads (Against U.S.), 2: 0.3 (percent)
  - Projected Interest Rate–Growth Differential, 2017–22, 3: –1.5 (percent)
  - Share of Foreign Currency Public Debt, 2017: 5.1 (percent of total)
  - Nonresident Holding of General Government Debt, 2016, 4: 12.3 (percent)
  - Share of Short-Term External Debt, 2017: 40.3 (percent)
  - Primary Gap in 2017, 5: 0.0 (percent of GDP)
  - Primary Gap in 2022, 6: 0.1 (percent of GDP)
  - Health and Pension Spending Change, 2022–50, 7: 7.1 (percent of GDP)

- Turkey
  - Public Debt, 2016: 29.1 (percent of GDP)
  - Public Debt Change, 2016–22: –0.1 (percent of GDP)
  - Gross Financing Needs, 2017: 8.1 (percent of GDP)
  - 10-Year Sovereign Yield Spreads (Against U.S.), 2: 3.1 (percent)
  - Projected Interest Rate–Growth Differential, 2017–22, 3: –1.5 (percent)
  - Share of Foreign Currency Public Debt, 2017: 36.4 (percent of total)
  - Nonresident Holding of General Government Debt, 2016, 4: 35.3 (percent)
  - Share of Short-Term External Debt, 2017: 24.0 (percent)
  - Primary Gap in 2017, 5: 0.1 (percent of GDP)
  - Primary Gap in 2022, 6: –0.5 (percent of GDP)
  - Health and Pension Spending Change, 2022–50, 7: 3.9 (percent of GDP)

- Ukraine
  - Public Debt, 2016: 81.2 (percent of GDP)
  - Public Debt Change, 2016–22: –21.1 (percent of GDP)
  - Gross Financing Needs, 2017: 7.2 (percent of GDP)
  - 10-Year Sovereign Yield Spreads (Against U.S.), 2: 5.5 (percent)
  - Projected Interest Rate–Growth Differential, 2017–22, 3: –5.2 (percent)
  - Share of Foreign Currency Public Debt, 2017: 70.9 (percent of total)
  - Nonresident Holding of General Government Debt, 2016, 4: 48.3 (percent)
  - Share of Short-Term External Debt, 2017: 13.9 (percent)
  - Primary Gap in 2017, 5: –7.4 (percent of GDP)
  - Primary Gap in 2022, 6: –4.1 (percent of GDP)
  - Health and Pension Spending Change, 2022–50, 7: 7.0 (percent of GDP)

- United Arab Emirates
  - Public Debt, 2016: 19.3 (percent of GDP)
  - Public Debt Change, 2016–22: –1.2 (percent of GDP)
  - Gross Financing Needs, 2017: . . . (percent of GDP)
  - 10-Year Sovereign Yield Spreads (Against U.S.), 2: . . . (percent)
  - Projected Interest Rate–Growth Differential, 2017–22, 3: –4.6 (percent)
  - Share of Foreign Currency Public Debt, 2017: . . . (percent of total)
  - Nonresident Holding of General Government Debt, 2016, 4: . . . (percent)
  - Share of Short-Term External Debt, 2017: 20.0 (percent)
  - Primary Gap in 2017, 5: 0.9 (percent of GDP)
  - Primary Gap in 2022, 6: –1.2 (percent of GDP)
  - Health and Pension Spending Change, 2022–50, 7: 4.4 (percent of GDP)

- Uruguay
  - Public Debt, 2016: 60.9 (percent of GDP)
  - Public Debt Change, 2016–22: 3.1 (percent of GDP)
  - Gross Financing Needs, 2017: 12.3 (percent of GDP)
  - 10-Year Sovereign Yield Spreads (Against U.S.), 2: . . . (percent)
  - Projected Interest Rate–Growth Differential, 2017–22, 3: –3.7 (percent)
  - Share of Foreign Currency Public Debt, 2017: 50.9 (percent of total)
  - Nonresident Holding of General Government Debt, 2016, 4: 43.7 (percent)
  - Share of Short-Term External Debt, 2017: 11.0 (percent)
  - Primary Gap in 2017, 5: –1.4 (percent of GDP)
  - Primary Gap in 2022, 6: –3.0 (percent of GDP)
  - Health and Pension Spending Change, 2022–50, 7: 5.6 (percent of GDP)

- Venezuela
  - Public Debt, 2016: 28.2 (percent of GDP)
  - Public Debt Change, 2016–22: –10.4 (percent of GDP)
  - Gross Financing Needs, 2017: . . . (percent of GDP)
  - 10-Year Sovereign Yield Spreads (Against U.S.), 2: . . . (percent)
  - Projected Interest Rate–Growth Differential, 2017–22, 3: –95.2 (percent)
  - Share of Foreign Currency Public Debt, 2017: 3.2 (percent of total)
  - Nonresident Holding of General Government Debt, 2016, 4: . . . (percent)
  - Share of Short-Term External Debt, 2017: . . . (percent)
  - Primary Gap in 2017, 5: –10.9 (percent of GDP)
  - Primary Gap in 2022, 6: 0.0 (percent of GDP)
  - Health and Pension Spending Change, 2022–50, 7: 5.6 (percent of GDP)

- Vietnam
  - Public Debt, 2016: 62.4 (percent of GDP)
  - Public Debt Change, 2016–22: 4.8 (percent of GDP)
  - Gross Financing Needs, 2017: . . . (percent of GDP)
  - 10-Year Sovereign Yield Spreads (Against U.S.), 2: . . . (percent)
  - Projected Interest Rate–Growth Differential, 2017–22, 3: –6.1 (percent)
  - Share of Foreign Currency Public Debt, 2017: 47.0 (percent of total)
  - Nonresident Holding of General Government Debt, 2016, 4: . . . (percent)
  - Share of Short-Term External Debt, 2017: 12.3 (percent)
  - Primary Gap in 2017, 5: –0.2 (percent of GDP)
  - Primary Gap in 2022, 6: . . . (percent of GDP)
  - Health and Pension Spending Change, 2022–50, 7: . . . (percent of GDP)

### Group Median Summary
- Public Debt, 2016: 44.2 (percent of GDP)
- Public Debt Change, 2016–22: –0.3 (percent of GDP)
- Gross Financing Needs, 2017: 9.0 (percent of GDP)
- 10-Year Sovereign Yield Spreads (Against U.S.), 2: 3.1 (percent)
- Projected Interest Rate–Growth Differential, 2017–22, 3: –2.9 (percent)
- Share of Foreign Currency Public Debt, 2017: 35.1 (percent of total)
- Nonresident Holding of General Government Debt, 2016, 4: 35.4 (percent)
- Share of Short-Term External Debt, 2017: 15.7 (percent)
- Primary Gap in 2017, 5: 0.1 (percent of GDP)
- Primary Gap in 2022, 6: –1.1 (percent of GDP)
- Health and Pension Spending Change, 2022–50, 7: 3.9 (percent of GDP)

### Methodological Notes and Definitions (as provided)
- Gross financing need is defined as the projected overall deficit and maturing government debt in 2017; for more details on the assumptions, see note 1 in Table A23. Data are from Bloomberg L.P. and IMF staff projections.
- Data are as of March 31, 2017.
- Interest rate refers to the interest payments divided by outstanding debt at the end of previous year in nominal terms. Growth rate refers to the nominal GDP growth rate.
- Nonresident holdings of general government debt data are for the fourth quarter of 2016 or latest available from the Joint External Debt Hub (JEDH), Quarterly External Debt Statistics, which include marketable and nonmarketable debt. For some countries, tradable instruments in the JEDH are reported at market value. External debt in U.S. dollars is converted to local currency, then taken as a percentage of 2015 gross general government debt.
- Primary gap in 2017 refers to the change in primary balance in 2017 (relative to the forecast in the World Economic Outlook) to stabilize the debt-to-GDP ratio at the 2016 level.
- Primary gap in 2022 refers to the change in primary balance in 2022 (relative to the forecast in the World Economic Outlook) to stabilize the debt-to-GDP ratio at the 2021 level.
- Projections rely on authorities’ estimates when these are available. For the European Union countries, pension projections are based on The 2015 Ageing Report of the European Commission. When authorities’ estimates are not available, IMF staff projections use the methodology described in Clements, Eich, and Gupta 2014. Staff projections for health care spending are driven by demographic and other factors. The difference between the growth of health care spending and real GDP growth that is not explained by demographics (“excess cost growth”) is assumed at the advanced economy historical average by 2050 (0.8 percent).
- The IMF staff projects an increase in pension spending in Brazil to 5.9 percent of GDP by 2030. See IMF 2016e.

*International Monetary Fund | April 2017*

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_Source: https://www.imf.org/-/media/files/publications/fiscal-monitor/2017/april/pdf/fmc1.pdf_