## fmexs

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### A Greater Role for Fiscal Policy (Chapter 1)
- The global economy is undergoing major transformations, including a productivity slowdown, technological change, and global economic integration, creating new demands for public policies to facilitate these transformations and cushion the effect on those negatively affected.
- Fiscal policy has a greater role to play in fostering sustainable and inclusive growth, while high uncertainty and stretched government balance sheets require better understanding and management of risks.
- Fiscal policy faces the task of achieving more and better in a more constrained environment.

### Shifts in Fiscal Positions and Elevated Risks
- 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.
- Their aggregate fiscal stance is expected to remain broadly neutral in 2017 as well as in the following years.
- Public debt in advanced economies should stabilize in the medium term, averaging more than 100 percent of GDP, rather than decline as previously expected.
- In emerging market and developing economies, the deterioration in fiscal positions seems to have come to an end, although the expected improvement depends crucially on developments in commodity markets.
- Oil exporters are implementing large consolidation plans; their fiscal deficits are expected to fall by about $150 billion between 2016 and 2018 (with the improvement next year coming mainly from the non-oil balance).
- In oil importers, the fiscal deficit should remain broadly stable as a share of GDP in 2017, followed by a gradual consolidation over the medium term.
- Sources of policy uncertainty include:
  - Lack of specificity about the size and composition of the expected fiscal stimulus in the United States.
  - A number of elections in Europe.
  - The upcoming party congress in China.
- In emerging market and developing economies, risks include a more rapid increase in interest rates, a significant appreciation of the U.S. dollar, and lower commodity prices, which could exacerbate debt vulnerabilities and trigger materialization of contingent liabilities, particularly implicit government guarantees on corporate borrowing.

### Setting the Course for Fiscal Policy
- Fiscal policy has been reassessed over the past decade and is seen as a powerful tool for promoting inclusive growth and stabilizing the economy, particularly during deep recessions and when monetary policy is less effective.
- High debt levels, long-term demographic challenges, and elevated fiscal risks require fiscal policies to be anchored within a credible medium-term framework that ensures debt sustainability, manages risks, and encourages buffer building during upturns.
- Three main objectives should guide fiscal policy, with trade-offs and limited budgetary room constraining simultaneous pursuit:

  1. Fiscal policy should be countercyclical.
     - A countercyclical fiscal response should rely mostly on automatic stabilizers and be symmetric.
     - In countries with protracted lack of demand and constrained monetary policy (for example, Japan), discretionary fiscal support combined with structural reforms and continued monetary accommodation can raise nominal GDP and break debt-deflation traps.
     - In the euro area, the aggregate cyclical position argues for a slightly more expansionary aggregate fiscal stance in 2017.
     - Economies with limited slack and signs of inflationary pressures should, in general, withdraw fiscal support to rebuild buffers.
     - In the United States, with the economy close to full employment, fiscal consolidation could start next year to put debt firmly on a downward path.
     - In China, given robust employment and expected pickup in inflation, the “augmented” fiscal deficit should decline in the medium term to support economic rebalancing, with fiscal resources reallocated from off-budget public investment toward on-budget spending for social assistance, education, and health.
     - Some countries must pursue fiscal consolidation regardless of cyclical conditions to ensure fiscal sustainability in the face of large shocks (for example, in commodity exporters) or to restore market confidence.

  2. Fiscal policy should be growth friendly.
     - Tax and expenditure measures can support the three engines of long-term growth: the stock of physical capital, the labor force, and productivity.
     - The case for increasing public investment remains strong in many countries given low borrowing costs and infrastructure deficiencies, but requires careful project selection, management, and evaluation to ensure investment efficiency.
     - More growth-friendly business tax systems that focus on taxing rents and reducing burdensome tax administration practices can promote private investment (example: in the United States, reforming corporate taxation could help revitalize business dynamism and investment).
     - Countries should create better environments for job creation:
       - In advanced economies: reduce labor taxation where it is high, make more intensive use of active labor market policies, and adopt targeted spending measures for vulnerable groups.
       - In emerging markets and developing economies: improve access to health care and education.
     - Almost all countries need to boost female labor force participation.
     - To foster productivity, policies can include tax measures that reduce misallocation of resources across firms (see summary of Chapter 2).

  3. Fiscal policy should promote inclusion.
     - Global integration and technological change have lifted one billion people out of poverty since the 1980s, but gains have not always been widely shared within countries.
     - In advanced economies, incomes of the top 1 percent have grown almost three times faster than those of the rest of the population over the past 30 years.
     - Fiscal policy can ensure the poor and middle class share in growth via transfer and tax instruments that promote inclusiveness while maintaining incentives to invest and work.
     - Conditional cash transfer programs could be expanded in a number of emerging markets and developing economies.
     - Inclusive fiscal policies should improve access to quality education, training, health services, and social insurance.

### Achieving Sustainable and Inclusive Growth While Coping with High Debt
- Where fiscal buffers exist, financing additional policies through borrowing is an option, but debt should be used wisely: the return on debt-financed projects should outweigh the cost and risks of higher leverage.
- The IMF has developed a new framework combining indicators and tools to assess “fiscal space” more systematically and consistently across countries.
- The persistent decline in interest rates may have relaxed government budget constraints in advanced economies; if the differential between interest rates and GDP growth were to remain durably lower than in past decades, countries could sustain higher levels of public debt.
- For countries without fiscal space, room must be created within budgets by raising revenue or saving on expenditures to implement policies in a budget-neutral way.
  - Revenue-side options include identifying the least distortionary measures: broadening the tax base by eliminating tax exemptions and preferential tax rates, and raising indirect taxes and property taxes.
    - Example: In China, significantly raising taxes on fossil fuel would raise revenue while curtailing emissions and improving energy efficiency.
  - Spending-side measures include better targeting of expenditure and increasing efficiency, preferably via comprehensive expenditure reviews, and eliminating generalized subsidies that disproportionately benefit higher-income groups in favor of targeted measures to those in need.
- Reallocating taxes and expenditures within a given budget envelope may be politically difficult.

### Upgrading the Tax System to Boost Productivity (Chapter 2)
- Raising total factor productivity is a top challenge for policymakers; growth-friendly fiscal policies, including tax system upgrades, are important because they can reduce distortions that prevent resources from going where they are most productive.
- Key findings:
  - Countries can reap substantial productivity gains by reducing resource misallocation across firms.
    - Resource misallocation arises from government policies or poorly functioning markets that allow less efficient businesses to gain market share at the expense of more efficient businesses.
    - Estimates show eliminating distortions that cause resource misallocation could generate sizable productivity gains and lift annual real GDP growth rates by roughly 1 percentage point for about 20 years.
  - Upgrading tax design can ensure firms’ decisions are made for business and not tax reasons.
    - Important productivity gains can be achieved by reducing tax discrimination by asset type, by sources of financing, or by firm characteristics such as formality and size.
  - Minimizing differentiated tax treatments across capital asset types and financing helps tilt firms’ decisions toward more productive investments rather than more tax-favored ones.
    - Tax treatments that favor debt over equity create resource misallocation by imposing a higher marginal tax on research and development investment, which depends more on equity.
    - Disparity in taxes across capital asset types also affects firms’ investment decisions.
    - These distortions can be eliminated by shifting to a cash flow tax or by adopting an allowance for corporate equity system, which allows a tax deduction for the normal rate of return on equity.
  - Governments should encourage growth of productive firms by leveling the playing field.
    - Informal firms evade taxes and can remain in business despite low productivity; stronger tax administration can reduce the unfair cost advantage these firms enjoy.
    - Encourage growth and productivity among small firms by reducing tax compliance costs and by targeting tax relief to new firms rather than small firms to avoid disincentives to growth that result in the “small business trap.”
- Conclusion: How governments tax matters for productivity. Improving tax policy design helps remove distortions holding more productive firms back, generating a positive impact on aggregate productivity and growth.

*International Monetary Fund | April 2017*

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