## CHAPTER 1 FISCAL pOLICY FOR A CHANgINg gLObAL ECONOMY ## Source details **Canonical URL:** [CHAPTER 1 FISCAL pOLICY FOR A CHANgINg gLObAL ECONOMY](https://www.imf.org/-/media/files/publications/fiscal-monitor/2019/april/english/ch1.pdf) ## Other formats - [Markdown version](/-/media/files/publications/fiscal-monitor/2019/april/english/ch1.pdf.md) - [Structured JSON version](/-/media/files/publications/fiscal-monitor/2019/april/english/ch1.pdf.json) --- ### Recent fiscal policies and debt dynamics - Over the past decade fiscal policies prioritized economic stabilization; less attention was given to reforms to foster long-term inclusive growth. - Major fiscal expansions after the 2007–08 global financial crisis helped address demand-side weaknesses and, in some cases, supported financial systems. - Emerging market and developing economies returned to expansionary fiscal policies during 2012–15, notably in commodity exporters responding to persistently lower commodity prices. - Subsequent fiscal adjustment has, in most countries, remained incomplete: - Advanced economies, on average, have reverted to a neutral fiscal stance rather than gradually restoring depleted fiscal buffers. - In emerging market and developing economies deficits have remained high or risen further. - Public debt ratios are significantly higher than before the global financial crisis in all country groups. - Interest-burden dynamics: - Emerging market and developing economies face notably higher interest burdens. - Low interest rates have reduced the interest bill in advanced economies. - Risks: - High debts and deficits increase vulnerability to interest rate and other fiscal risks and may drag on long-term growth. - Market confidence can be lost abruptly, causing sharp increases in borrowing costs. - Lowering public debt ratios would create room for countercyclical policy in the next recession. ### Global risks and macroeconomic context - Current downside global risks include: - Further escalation in trade tensions. - A sharper slowdown in China. - Deterioration in risk sentiment amplified by high public and private debt, totaling $184 trillion, or 225 percent of global GDP at the end of 2017. - Financial market volatility. - Political developments (including uncertainty about Brexit). - Fiscal expansions are usually less effective when economic slack is limited and monetary policy is normalizing. - Backloading adjustment can be warranted if a significant worsening in the outlook makes recession likely, but any delay should be anchored in a clear and credible medium-term adjustment plan to ensure debt sustainability. ### Demographic shifts and fiscal implications - Age-related government expenditures: - Currently account for 17 percent of GDP in advanced economies and 7 percent of GDP in emerging market economies. - Projected to rise to 23 percent and 14 percent of GDP, respectively, by 2050. - Consequences: - Declines in working-age populations will reduce payroll tax revenues and social security contributions. - Further parametric pension and healthcare reforms are necessary in many countries. - Migration, combined with rapid labor market integration of migrants, can help ease fiscal pressures in aging economies. - Low-income developing countries (example sub-Saharan Africa): - Population projected to increase by 70 percent over the next 30 years, accounting for more than half of anticipated global population growth. - Will require creating 20 million jobs a year in the region over the next two decades. - Urban populations projected to double in many African and Asian countries by 2050. - Delivering core infrastructure and services SDGs will require additional spending in 2030 of $2.6 trillion (2.5 percent of 2030 world GDP) in emerging market and developing economies. ### Technological advances and labor market effects - Automation, digitalization, and the digital economy have changed employment modalities: - Rise in part-time, short-term, on-demand, and self-employment jobs. - Automation has replaced routine or repetitive positions. - Effects on labor and income: - Technological progress has contributed to the decline in labor income shares and has favored high-skilled over low-skilled workforces. - These changes increase income uncertainty and create a need for continuous skills upgrading. - Policy implication: - Social spending reforms are needed to support labor mobility, facilitate skill upgrades, and promote a more equitable distribution of income. ### Global integration, tax avoidance, and distributional challenges - International economic integration: - Supported a large reduction in worldwide poverty in recent decades. - Accompanied by growing income and wealth inequality within many countries, particularly advanced economies. - Enabled private capital to move easily across borders, improving allocation but also facilitating tax avoidance. - Evidence on tax avoidance and profit shifting: - Nearly 40 percent of all foreign direct investment positions globally ($12 trillion) pass through empty corporate shells in low-tax jurisdictions with no real activity. - Close to 40 percent of multinational profits are estimated to be shifted to low-tax jurisdictions each year globally. - Policy implication: - Tax and spending policies need reform to better distribute the benefits of global integration and ensure capital movements are driven by economic efficiency rather than tax avoidance. ### Policy priorities: adapting fiscal policy to global trends - Pivot to structural, growth-friendly, and inclusive fiscal reforms should include: 1. Expenditure reprioritization and cost savings: cut wasteful spending such as energy subsidies; curb corruption. 2. Reforms to achieve efficiency gains in public spending and service delivery. 3. Revenue generation, particularly in emerging market and developing economies where tax intake remains relatively low. - Design and implementation considerations: - Many countries will need to finance reforms through savings or budget-neutral policy shifts because of elevated debt levels. - Reforms can be politically challenging and must protect vulnerable populations. - Exploit synergies across reforms (education and training reforms can lengthen productive work lives, support labor mobility, boost growth, and ease pension pressures). - Budget-neutral tax reforms enhancing tax efficiency and recomposing toward infrastructure investment can yield significant growth dividends. - Making tax systems more progressive would help distribute the benefits of technology and trade more evenly. - Role of international cooperation: - Multilateral approaches critical for corporate taxation, climate change, and corruption. - Multilateral cooperation can more effectively tax rents of multinational firms, including highly digitalized firms. - A multilateral framework preferred to mitigate and manage climate change, including via carbon taxes. - Coordinated international support and cooperation important to address cross-border fiscal challenges. ### Fiscal developments and outlook — global aggregates - World overall general government balance (Percent of GDP) series (2012–2024): –3.7 –2.8 –2.8 –3.2 –3.4 –2.9 –2.8 –3.3 –3.1 –3.1 –3.1 –3.0 –2.9. - Memo: World Output (percent change) series: 3.5 3.5 3.6 3.4 3.4 3.8 3.6 3.3 3.6 3.6 3.6 3.6 3.7. ### Advanced economies — fiscal easing, debt, and financing needs - Aggregate fiscal stance for advanced economies eased slightly in 2018. - The average structural primary deficit edged up to 1⅓ percent of GDP in 2018 from 1 percent a year earlier. - Major 2018 drivers: - United States: higher discretionary spending and the reduction in effective tax rates under the 2017 Tax Cuts and Jobs Act (TCJA). - Korea: fiscal tightening by 3/4 percentage point of GDP due to higher marginal top rates. - Netherlands: easing by close to 1 percentage point of GDP reflecting public investment increases. - Advanced-economy debt and spending trends: - General government debt eased from a recent peak of almost 107 percent of GDP in 2016 to 103½ percent of GDP in 2018. - Total government expenditures have declined by almost 5 percentage points of GDP since reaching a peak in 2009 but remain higher than precrisis levels. - Total revenues remained broadly unchanged as a share of GDP. - 2019 expected fiscal stance (selected AEs, percent of GDP): - Germany: projected stimulus ⅔ percentage point of GDP in 2019. - Netherlands: ½ percentage point of GDP stimulus. - Italy: loosen by ⅓ percentage point of GDP. - Korea: ease by ⅔ percentage point of GDP in 2019. - United States: structural primary deficit projected to widen by ⅓ percentage point of GDP in 2019. - Australia: fiscal stance to ease by ¼ percentage point of GDP in 2019. - Medium-term projections (2019–24): - Structural primary balance projected to improve by more than 1 percentage point of GDP in Australia and the United States, and more than ½ percentage point of GDP in Japan between 2019 and 2024. - Fiscal stance projected to further ease in Italy and in Korea over the medium term. - Debt projections and risks: - General government gross debt in advanced economies projected to remain broadly unchanged over the medium term, at more than 103 percent of GDP. - The United States expected to exceed 110 percent of GDP by 2024, as headline fiscal deficits remain above 4 percent of GDP until 2024. - In several advanced economies, the debt-to-GDP ratio is projected to increase further after 2024, reflecting rising age-related expenditures (Italy, Japan). - Countries facing rising interest payments and large annual financing requirements include Canada, Italy, Spain, and the United States, and also Belgium, France, Japan, and Portugal, with annual financing requirements ranging from 10 to 40 percent of GDP over the next three years. - Selected financing needs for advanced economies (Percent of GDP highlights): - United States: - 2019: Maturing Debt 20.5; Budget Deficit 4.6; Total Financing Need 25.1. - 2020: Maturing Debt 20.5; Budget Deficit 4.4; Total Financing Need 24.9. - 2021: Maturing Debt 17.6; Budget Deficit 4.4; Total Financing Need 21.9. - Italy: - 2019: Maturing Debt 21.0; Budget Deficit 2.7; Total Financing Need 23.7. - 2020: Maturing Debt 20.6; Budget Deficit 3.4; Total Financing Need 24.0. - 2021: Maturing Debt 21.2; Budget Deficit 3.5; Total Financing Need 24.7. - Japan: - 2019: Maturing Debt 36.7; Budget Deficit 2.8; Total Financing Need 39.5. - 2020: Maturing Debt 36.3; Budget Deficit 2.1; Total Financing Need 38.5. - 2021: Maturing Debt 31.2; Budget Deficit 1.9; Total Financing Need 33.0. - Average (selected AEs): - 2019: Maturing Debt 16.5; Budget Deficit 2.6; Total Financing Need 19.1. - 2020: Maturing Debt 16.5; Budget Deficit 2.4; Total Financing Need 19.0. - 2021: Maturing Debt 14.3; Budget Deficit 2.4; Total Financing Need 16.7. ### Emerging market and middle-income economies (EMMIEs) — mixed outcomes - Overall fiscal deficits in 2018 declined for a second year in a row, driven primarily by fiscal adjustment in oil exporters. - Group averages: - Average overall deficit fell from 4⅓ percent of GDP in 2017 to 4 percent of GDP in 2018. - Selected country developments (overall balances, percent of GDP): - Saudi Arabia: overall deficit declined by half to 4½ percent of GDP in 2018. - Russia: overall budget turned from a deficit of 1½ percent of GDP to a surplus of 23/4 percent of GDP. - Mexico: overall deficit increased in 2018 but remained ½ percentage point of GDP below its 2016 level. - China and Turkey: headline fiscal balances widened by around 1 percentage point of GDP in 2018. - Pakistan: overall deficit was 2½ percentage points of GDP looser than budgeted in 2018. - Argentina and Egypt: overall deficits declined by 1½ and 1 percentage point of GDP, respectively. - Brazil: overall deficit declined by 1 percentage point of GDP; primary deficit remained broadly unchanged at 13/4 percent of GDP. - India: general government deficit declined by ⅓ percentage point of GDP in fiscal year 2018/19. - Debt developments: - General government debt-to-GDP ratio for the group rose by 2⅓ percentage points in 2018 to almost 51 percent of GDP on average. - More than half of those countries saw debt rising in 2018, and almost a fifth had debt ratios exceeding 70 percent of GDP. - Fiscal outlook and medium-term strategy: - Overall deficit expected to increase in 2019 before gradually declining over the medium term, but debt expected to continue trending up. - 2019 deficit increase largely driven by: - Projected stimulus in China (about 1¼ percentage point of GDP). - Deteriorating fiscal positions among oil exporters—particularly Russia and Saudi Arabia. - Medium-term adjustment expected to rely on spending restraint (over 1 percentage point of GDP by 2024) without mobilizing higher revenues. - Overall investment spending expected to edge up steadily (cumulatively by ½ percentage point of GDP by 2024), albeit decline in oil exporters. - Total revenues as a share of GDP expected to further decline over the medium term; for oil exporters this reflects expected moderation of oil prices. - Projected fiscal improvements will not be sufficient to stabilize debt over the medium term, particularly in non–oil-exporting countries (Brazil, China). - Gross financing needs (selected EMMIEs, percent of GDP, 2019): - Argentina: 12.7 | 2.7 | 15.3 (Maturing Debt | Budget Deficit | Total Financing Need) - Brazil: 7.7 | 7.3 | 15.0 - Egypt: 28.0 | 8.6 | 36.6 - India: 3.8 | 6.9 | 10.7 - Pakistan: 35.1 | 7.2 | 42.3 - Average (selected economies): 2019 — 6.1 | 3.8 | 9.9; 2020 — 6.5 | 3.6 | 10.2. ### Low-Income Developing Countries (LIDCs) — expansion and vulnerabilities - 2018 developments: - Average overall fiscal deficit tightened slightly in 2018 to 4 percent of GDP. - Weighted-average expenditures increased by 1/3 percentage point of GDP in LIDCs, including 3/4 percentage point of GDP in commodity exporters. - Between 2012 and 2018, expenditure composition shifted away from public investments toward servicing existing debt. - Debt service pressure: - Proportion of tax revenue spent on servicing debt increased by 7 percentage points between 2012 and 2018 to 19½ percent. - Interest expenditures increased particularly sharply in Bangladesh, Kenya, Nigeria, and Zambia. - In Ghana, interest expenditures consume about 40 percent of domestic tax revenue. - Public debt and risk of distress: - Public debt rose further in 2018 and reached 45 percent of GDP. - General government debt increased by more than 2 percentage points of GDP in Bangladesh, Ethiopia, Ghana, Kenya, and Nigeria, and by close to 10 percentage points of GDP in Zambia. - Share of LIDCs in debt distress or at high risk of debt distress increased by almost a half from 2012 to 43 percent in 2018. - 2019 projections and tensions: - Average headline fiscal deficit projected to remain broadly unchanged in 2019 among both commodity and non–commodity exporters. - Some non–commodity exporters expected to widen deficits due to higher spending on social programs or capital investments, offset by fiscal adjustment in others. - General government debt expected to trend down after 2019 if deficits decline as projected, largely through expenditure control. - Tension exists between expenditure-based debt stabilization and large spending gaps to meet the SDGs. - Continued reliance on non-concessional financing in many countries could add to debt vulnerability if proceeds are not properly managed. ### Risks to the fiscal outlook - Many risks from the April 2018 Fiscal Monitor have materialized: rising tariffs and trade policy uncertainty; reduced social and political cohesion delaying fiscal adjustment in several advanced economies; higher borrowing costs and US dollar appreciation worsening debt dynamics in vulnerable emerging market and frontier market economies with high external and foreign currency debt; and oil price volatility increasing revenue and energy-bill uncertainty. - Economic policy uncertainty and financial market volatility are at their highest levels in two years. - Key sources of downside risk: - Weaker nominal growth from trade escalation, China slowdown, or a disorderly Brexit. - Tighter financial conditions that could expose high-debt emerging market and frontier economies to debt service, refinancing, and exchange rate risks. - Commodity price volatility—lower oil prices would worsen fiscal positions in oil exporters and improve them in oil importers. - Contingent liabilities from stressed public and private corporations and state-owned energy companies. ### Setting the right course for fiscal policy — guidance by country group - General guidance: - Tailor size, pace, and composition of adjustment to country circumstances (unemployment, excess capacity, market access). - Prioritize growth-enhancing expenditures where growth is slowing toward a lower potential rate. - If a major cyclical downturn occurs, fiscal stimulus can complement monetary easing where there is policy space. - For low-income developing countries, boost revenue to stabilize high public debt and fund development objectives. - Advanced economies: - Fiscal restraint appropriate for most high-debt countries to provide room for countercyclical policies and address aging-related expenditure pressures. - Rebuild buffers gradually to keep interest bills in check. - Specific recommendations: - High-debt economies should pursue gradual fiscal adjustment: Canada, France, Japan, Spain, United Kingdom, United States. Adjustment especially relevant if spreads remain high and financing needs are large (Italy). - Japan: maintain a neutral fiscal stance during 2019–20; starting in 2021, an annual consolidation of ½ percentage point of GDP in the structural primary balance could stabilize public debt below the current level of 235 percent of GDP by 2030. - Where fiscal space exists, boost aggregate demand if slack remains (examples: Korea—allow automatic stabilizers in 2019 and frontload planned spending; Australia—use discretionary infrastructure spending if the 2018 slowdown worsens). - Economies operating above potential with low debt can pursue fiscal reforms to raise potential GDP (Germany, Netherlands). - Emerging market and middle-income economies: - Debt vulnerabilities, volatile oil prices, and risk of tighter financial conditions call for fiscal restraint, though limited support may be warranted where demand is weak and there is fiscal space. - Specific recommendations: - Non-oil exporters with no fiscal space (Argentina, Brazil) should continue consolidating to put debt on a firm downward trend. - Faster consolidation affordable in India; necessary in South Africa to stabilize debt at a lower level than currently projected. Protect well-designed social transfers and productive infrastructure investment. - Where some fiscal space exists and slowdown risk is present (China, Turkey): - China: adopt a targeted high-quality stimulus (about 1¼ percentage point of GDP in 2019), continue deleveraging, and present a credible medium-term consolidation plan. - Turkey: allow automatic stabilizers and improve fiscal transparency. - Oil exporters: - Continue planned consolidation, balance growth, equity, and sustainability. - Mexico and Russia could aim for faster consolidation to address demographic pressures. - Kuwait and United Arab Emirates can adjust gradually and save revenue windfalls. - Gulf exporters and Indonesia need to develop non-oil private sector, mobilize revenue, reduce large public-sector wage bills, and eliminate energy subsidies. - Low-income developing countries: - Focus on long-term growth and development: boost revenues, improve spending quality, and better manage debt burdens. - Specific recommendations: - Kenya: adjustment of 3 percentage points of GDP over the next two fiscal years, including revenue measures, recommended to keep public debt on a downward trajectory. - Vietnam: more ambitious revenue-based consolidation than currently planned required to ensure long-term debt sustainability. - Noncommodity exporters with low to moderate debt (Bangladesh): keep spending growth in line with revenue increases and pursue revenue/expenditure reforms supporting development. - Myanmar and Tanzania: low risk of debt distress allows for a fiscal deficit of 4 percent over the medium term to support social and infrastructure objectives. - Commodity exporters with high debt vulnerabilities (Ghana): run a positive primary budget balance and build domestic tax base. - Nigeria: fiscal consolidation based on non-oil revenue mobilization necessary over the medium term. - Côte d’Ivoire: streamline substantial tax exemptions and contain fiscal risks from public enterprises and public-private partnerships. - Preparing for a major slowdown: - Countries have less fiscal space than during the global financial crisis. - Fiscal stimulus can be potent when slack is prolonged and monetary policy near the effective lower bound, but feasible primarily where public debt vulnerabilities are limited. - Policymakers should plan fiscal actions in advance to offset implementation lags; at a minimum, allow automatic stabilizers to work without discretionary offsets for countries with fiscal space. - Where output falls substantially below potential, fiscal adjustment can be back-loaded or fiscal stimulus pursued with monetary easing; quality of revenue and expenditure measures matters for stimulus effectiveness. - In a severe euro-area downside, monetary policy could be complemented by fiscal easing in countries with appropriate space and financing conditions; a synchronized, differentiated fiscal response can strengthen area-wide impact. ### Adapting to global trends — expenditure reprioritization and efficiency - Reprioritize expenditures in economies with debt vulnerabilities: - Cut wasteful spending (for example, untargeted energy subsidies). - Contain rigid recurrent spending (for example, wage bills). - Channel resources to investment and social spending to build infrastructure and skills. - Improve public financial management to increase spending efficiency. - Mobilize revenues in emerging market and low-income developing economies via tax policy and administration reforms. - Tax policy reforms in advanced economies should foster efficiency and a more equitable distribution of disposable income. - International cooperation on corporate taxation, climate change, corruption, and achieving the 2030 SDGs can amplify reform gains. - Public capital, investment, and infrastructure financing: - Gross public investment insufficient to expand public capital stock over past decade. - Delivering SDG-related infrastructure will require additional spending in 2030 of 4 and 9 percent of GDP in emerging market economies and low-income developing countries, respectively. - Sub-Saharan Africa digital investment needs estimated at $4 billion to $7 billion a year (0.2 to 0.4 percent of the region’s GDP). - Public-private partnerships can help but require strong governance: - Develop and implement clear rules for PPP use. - Identify, quantify, and disclose risks and expected costs. - Reform budget and government accounting frameworks to capture all fiscal costs comprehensively. - Improve investment quality: - An estimated 30 percent, on average, of investment is lost due to inefficiencies, with larger losses in emerging market and developing economies. - Reforms needed in project appraisal, allocation, and implementation to improve outcomes (examples: Nigeria, Vietnam, India, Indonesia). - Human capital and social services: - Projected additional spending needs by 2030 in emerging market and developing economies: - Education: 8 percent of GDP - Healthcare: 12 percent of GDP - Efficiency potential: - Bottom-quartile countries could raise healthy life expectancy by up to five years by addressing inefficiencies in public health spending. - Country program examples for education and training and social protection are cited (Singapore, Netherlands, France, Chile, South Africa, Colombia, Bangladesh, Indonesia, Uganda, Nordic countries, Korea). ### Reducing wasteful spending, pensions, healthcare, and PFM reforms - Cut untargeted energy subsidies in many countries (listed examples include Finland, Italy, Latvia, Norway, Egypt, Kuwait, Saudi Arabia, Angola, Ethiopia, Nigeria). - Public sector payroll management: better medium-term wage forecasting and position-based employment systems can generate savings; limit public sector job creation where appropriate. - Pension and healthcare reform priorities (selected recommendations): - United States: raise the income ceiling for payroll taxes and index benefits to chained inflation. - Spain: consider comprehensive measures to safeguard financial viability after recent relaxation of pension indexation. - Italy: consider offsetting implications from early retirement rule easements. - Brazil: increase the retirement age, delink the minimum pension from the minimum wage, and moderate pension generosity. - Japan and the United States: adopt efficiency-improving technology and pursue greater cost sharing with beneficiaries to contain healthcare costs. - Public Financial Management (PFM) reforms: - Better management of public sector balance sheets, especially nonfinancial public corporations and government financial assets, could yield up to 3 percent of GDP a year in additional revenue. - Use of internet, big data, and increased connectivity can improve service delivery and governance (examples: India’s Direct Benefit Transfer; Slovenia’s online citizen reporting). ### Revenue mobilization and fuel subsidy reform - Tax revenue medians (2017, percent of GDP): - LIDC median: 15 - EMMIE median: 18 - AE median: 26 - Scope for increased tax revenue in emerging market and developing economies by broadening tax bases and improving efficiency (potential gains in sub-Saharan Africa of 3 to 5 percent of GDP on average through reforms). - Medium-term revenue strategies recommended (examples of engagement: Papua New Guinea, Egypt, Lao P.D.R., Uganda, Indonesia, Senegal, Thailand). - Fuel and energy subsidy reform: - Global fuel subsidies in 2017 estimated at $5.2 trillion, or 6.5 percent of global GDP. - Raising fuel prices to efficient levels through taxes would generate additional revenue of $3.2 trillion (4 percent of global GDP) over the long run. - Compensation mechanisms and transparent communication recommended to protect vulnerable households. ### International cooperation priorities - Multilateral action important for: - Taxation of multinational and highly digitalized companies: uncoordinated ad hoc measures risk distortions; multilateral cooperation preferred. - Climate change: carbon taxation or similar pricing is the most efficient mitigation tool; a carbon price floor among large emitters could promote coordination. - International financial support for low-income developing countries: annual spending gap to attain meaningful progress on SDG-related infrastructure in low-income developing countries amounts to $358 billion, even after assuming an increase in their tax-to-GDP ratio of 5 percentage points over the next decade. ### Fiscal implications of potential stress in global financial markets (modeling results) - Modeling framework: - Extended Global Vector Autoregression (GVAR) covering 33 country-specific models; sample period 1981:Q2–2018:Q2. - Variables included real GDP, inflation, real exchange rate, short- and long-term interest rates, government debt-to-GDP ratio, primary fiscal balance, price of oil, and an index of financial stress in advanced economies. - Shadow interest rates used for periods with policy rates at effective lower bounds. - Fiscal impacts of a one standard deviation positive shock to the advanced-economies financial stress index (FSI): - Average increase in public debt-to-GDP ratios across country groups ranges between ½ and 1¼ percentage point of GDP after one year, with large cross-country variation. - Real GDP growth slows worldwide by ¼–½ percentage point on average. - Inflation-adjusted long-term interest rate rises by 10 basis points on average (and higher in emerging market economies). - Primary fiscal balances worsen by 0.1–0.2 percentage point of GDP on average. - Impact larger for countries with high debt ratios, shorter residual debt maturities, higher shares of foreign-currency-denominated debt, and greater nonresident holdings. - FSI shock calibration: - A one standard deviation positive shock to FSI in advanced economies is ⅔ of the shock that occurred during the European sovereign debt crisis and 1/10 of the global financial crisis shock. ### Box: China — fiscal policy to support activity and rebalancing - Guiding principles for China’s fiscal response: - On-budget measures to ensure transparency. - Facilitate macroeconomic rebalancing. - Target measures to maximize multiplier effects and reduce poverty and inequality. - Revenue-side measures: - Recently announced personal income tax cuts support consumption temporarily but have reduced progressivity. - Future tax cuts should be accompanied by medium-term reforms to broaden the overall tax base, improve progressivity (including alleviating regressive social security), and introduce a recurrent property tax. - Expenditure-side measures: - Reprioritize spending toward education, healthcare, and social security. - Improve social safety net by increasing rural pension benefits and widening unemployment insurance coverage (currently 40 percent of urban workers). - Targeted measures to cushion slower growth and reduce poverty and inequality. - Large-scale infrastructure investment: - Considered less desirable given past stimulus vulnerabilities. - Past investment-led stimulus (2009–12) amounted to some 10 percent of GDP and contributed to a decline of net financial worth from 23 percent of GDP in 2009 to 11 percent of GDP in 2017. - Shortfall of returns on infrastructure relative to cost of liabilities estimated at 1½–2 percentage points during 2013–15. - Implication: a large-scale public investment stimulus now would add to vulnerabilities. - SOE deleveraging and structural reforms: - SOEs highly leveraged and account for large share of corporate credit; deleveraging could improve medium-term growth and strengthen the general government balance sheet. - Historical precedent (1999–2003) of public corporation restructuring improved net financial worth significantly. - Additional reforms needed: intergovernmental relations, fiscal data, and parametric social security reforms. ### International tax system under stress and reform directions - Problems identified: - Pervasive profit-shifting by multinationals to low-tax jurisdictions. - Tax norms centered on physical presence are challenged by digitalization and hard-to-value intangibles. - Tax competition and complexity burden developing countries disproportionately. - Alternative reform directions under consideration (OECD Inclusive Framework work toward 2020): - Minimum effective taxation (outbound or inbound variants). - Destination-based systems (e.g., destination-based cash flow tax; allowance for corporate equity). - Unitary taxation with formula apportionment. - Residual profit allocation schemes (split routine and residual returns). - Trade-offs: - No single reform scores best on all criteria; assessment depends on design details and country priorities. - Cooperative multilateral approach required to put international corporate tax on a sound basis. *International Monetary Fund | April 2019 — Chapter 1 (content unit: ch1)* ### Introduction ### Introduction ### Recent Fiscal Policies and Debt Dynamics - Over the past decade, fiscal policies prioritized economic stabilization; less attention was given to reforms to foster long-term inclusive growth. - Major fiscal expansions after the 2007–08 global financial crisis helped address demand-side weaknesses and, in some cases, supported financial systems. - Emerging market and developing economies returned to expansionary fiscal policies during 2012–15, notably in commodity exporters responding to persistently lower commodity prices. - Subsequent fiscal adjustment has, in most countries, remained incomplete: - Advanced economies, on average, have reverted to a neutral fiscal stance rather than gradually restoring depleted fiscal buffers. - In emerging market and developing economies deficits have remained high or risen further. - Public debt ratios are significantly higher than before the global financial crisis in all country groups. - Interest burden dynamics: - Emerging market and developing economies face notably higher interest burdens. - Low interest rates have reduced the interest bill in advanced economies. - Risks noted: - High debts and deficits increase vulnerability to interest rate and other fiscal risks and may drag on long-term growth. - Market confidence can be lost abruptly, causing sharp increases in borrowing costs. - Lowering public debt ratios would create room for countercyclical policy in the next recession. ### Global Risks and Macroeconomic Context - Current downside global risks include: - Further escalation in trade tensions. - A sharper slowdown in China. - Deterioration in risk sentiment amplified by high public and private debt, totaling $184 trillion, or 225 percent of global GDP at the end of 2017. - Financial market volatility. - Political developments (including uncertainty about Brexit). - Fiscal expansions are usually less effective when economic slack is limited and monetary policy is normalizing, because fiscal stimulus effects on inflation can be offset by central banks. - Global policy uncertainty dampens business and consumer responses to fiscal stimulus. - Backloading adjustment can be warranted if a significant worsening in the outlook makes recession likely, but any delay should be anchored in a clear and credible medium-term adjustment plan to ensure debt sustainability. ### Demographic Shifts - Aging populations will strain public finances in many advanced and some emerging market economies: - Age-related government expenditures on public pensions and healthcare currently account for 17 percent of GDP in advanced economies and 7 percent of GDP in emerging market economies. - These are projected to rise to 23 percent and 14 percent of GDP, respectively, by 2050. - These spending profiles add considerably to government obligations when presented in net present value terms. - Consequences of aging: - Declines in working-age populations will reduce payroll tax revenues and social security contributions. - Further parametric pension and healthcare reforms are necessary in many countries. - Migration, combined with rapid labor market integration of migrants, can help ease fiscal pressures in aging economies. - Rapid population growth and urbanization in low-income developing countries (for example, sub-Saharan Africa) create large development spending needs: - The population of sub-Saharan Africa is projected to increase by 70 percent over the next 30 years, accounting for more than half of anticipated global population growth. - This will require creating 20 million jobs a year in the region over the next two decades. - Urban populations are projected to double in many African and Asian countries by 2050. - Delivering core infrastructure and services SDGs will require additional spending in 2030 of $2.6 trillion (2.5 percent of 2030 world GDP) in emerging market and developing economies. ### Technological Advances - Automation, digitalization, and the digital economy have changed employment modalities: - Rise in part-time, short-term, on-demand, and self-employment jobs. - Automation has replaced routine or repetitive positions. - Effects on labor and income: - Technological progress has contributed to the decline in labor income shares and has favored high-skilled over low-skilled workforces. - These changes increase income uncertainty and create a need for continuous skills upgrading. - Policy implication: - Social spending reforms are needed to support labor mobility, facilitate skill upgrades, and promote a more equitable distribution of income. ### Global Integration - International economic integration has: - Supported a large reduction in worldwide poverty in recent decades. - Been accompanied by growing income and wealth inequality within many countries, particularly advanced economies. - Enabled private capital to move easily across borders, improving allocation but also facilitating tax avoidance. - Evidence on tax avoidance and profit shifting: - Nearly 40 percent of all foreign direct investment positions globally ($12 trillion) pass through empty corporate shells in low-tax jurisdictions with no real activity. - Close to 40 percent of multinational profits are estimated to be shifted to low-tax jurisdictions each year globally. - Policy implication: - Tax and spending policies need reform to better distribute the benefits of global integration and ensure capital movements are driven by economic efficiency rather than tax avoidance. ### Policy Priorities: Adapting Fiscal Policy to Global Trends - The pivot to structural, growth-friendly, and inclusive fiscal reforms should include: 1. Expenditure reprioritization and cost savings: - Cut wasteful spending such as energy subsidies. - Curb corruption. 2. Reforms to achieve efficiency gains in public spending and service delivery. 3. Revenue generation, particularly in emerging market and developing economies where tax intake remains relatively low. - Design and implementation considerations: - Many countries will need to finance reforms through savings or budget-neutral policy shifts because of elevated debt levels. - Reforms can be politically challenging and involve difficult tradeoffs; they must be accompanied by efforts to protect vulnerable populations. - Synergies across reforms should be exploited (for example, education and training reforms can lengthen productive work lives, support labor mobility, boost growth, and ease pension pressures). - Budget-neutral tax reforms that enhance tax efficiency and recompose toward infrastructure investment can yield significant growth dividends. - Making tax systems more progressive would help distribute the benefits of technology and trade more evenly. - Role of international cooperation: - Multilateral approaches are critical for issues with transnational implications, including corporate taxation, climate change, and corruption. - Multilateral cooperation can provide a more effective way to tax rents of multinational firms, including highly digitalized firms, and mitigate negative consequences of international corporate tax competition. - A multilateral framework is the preferred approach for national fiscal policies to mitigate and manage climate change, including via carbon taxes. - Coordinated international support and cooperation are important to address cross-border fiscal challenges. *International Monetary Fund | April 2019 — Chapter 1, "Introduction"* ### 1. By Country, 1995 versus 20142. By Skill Level, 1995–2009 ### ch1 - 1. By Country, 1995 versus 20142. By Skill Level, 1995–2009 ### Labor income shares and distributional trend - "The income share of labor has declined globally, in particular for low- and middle-skilled labor." - Figure referenced: "Figure 1.6. Evolution of Labor Income Shares since 1995 (Percent of GDP)." (graphic data not reproduced here; statement preserved verbatim) ### Recent fiscal developments and outlook — broad takeaway - "A key take-away is that little fiscal room exists in many countries to respond if risks discussed in the subsequent section materialize." - "Given the limited progress with rebuilding buffers, the final section reemphasizes the need for fiscal restraint tailored to country-specific circumstances." - Emphasis on designing fiscal policies responsive to "evolving demographics, advancing technology, and deepening economic integration to foster inclusive growth." ### Global fiscal balances (high-level) - World overall general government balance (Table 1.1, Percent of GDP): –3.7 –2.8 –2.8 –3.2 –3.4 –2.9 –2.8 –3.3 –3.1 –3.1 –3.1 –3.0 –2.9 (2012–2024 series as listed). - Memo: "World Output (percent change)" series: 3.5 3.5 3.6 3.4 3.4 3.8 3.6 3.3 3.6 3.6 3.6 3.6 3.7. ### Advanced economies — fiscal easing and debt dynamics - Aggregate fiscal stance for advanced economies "eased slightly in 2018," with "The average structural primary deficit edged up to 1⅓ percent of GDP in 2018 from 1 percent a year earlier." - Major drivers in 2018: - United States: strong procyclical policy from "higher discretionary spending and the reduction in effective tax rates under the 2017 Tax Cuts and Jobs Act (TCJA)." - Korea: fiscal tightening by "3/4 percentage point of GDP" due to higher marginal top rates. - Netherlands: easing "by close to 1 percentage point of GDP" reflecting public investment increases. - Advanced-economy debt and spending trends: - "General government debt eased from a recent peak of almost 107 percent of GDP in 2016 to 103½ percent of GDP in 2018." - "Total government expenditures have declined by almost 5 percentage points of GDP since reaching a peak in 2009 but remain higher than precrisis levels." - "Total revenues, on the other hand, remained broadly unchanged as a share of GDP." - 2019 expected fiscal stance in selected AEs (percent of GDP): - Germany: projected stimulus "⅔ percentage point of GDP in 2019." - Netherlands: "½ percentage point of GDP" stimulus. - Italy: loosen by "⅓ percentage point of GDP." - Korea: ease by "⅔ percentage point of GDP" in 2019. - United States: structural primary deficit projected to widen by "⅓ percentage point of GDP in 2019." - Australia: fiscal stance to ease by "¼ percentage point of GDP" in 2019. - Medium-term projections (2019–24): - Structural primary balance projected improvement "by more than 1 percentage point of GDP in Australia and the United States, and more than ½ percentage point of GDP in Japan" between 2019 and 2024. - Conversely, "fiscal stance is projected to further ease in Italy" and "in Korea" over the medium term. - Debt projections and risks: - "General government gross debt in advanced economies is projected to remain broadly unchanged over the medium term, at more than 103 percent of GDP." - "The United States is expected to exceed 110 percent of GDP by 2024, as headline fiscal deficits remain above 4 percent of GDP until 2024." - "In several advanced economies, the debt-to-GDP ratio is projected to increase further after 2024, reflecting rising age-related expenditures (Italy, Japan)." - Countries facing rising interest payments and large annual financing requirements include "Canada, Italy, Spain, and the United States" and also "Belgium, France, Japan, and Portugal," with annual financing requirements "ranging from 10 to 40 percent of GDP over the next three years." ### Selected financing needs for advanced economies (Table 1.3 highlights) - United States (Percent of GDP): - 2019: Maturing Debt 20.5; Budget Deficit 4.6; Total Financing Need 25.1. - 2020: Maturing Debt 20.5; Budget Deficit 4.4; Total Financing Need 24.9. - 2021: Maturing Debt 17.6; Budget Deficit 4.4; Total Financing Need 21.9. - Italy (Percent of GDP): - 2019: Maturing Debt 21.0; Budget Deficit 2.7; Total Financing Need 23.7. - 2020: Maturing Debt 20.6; Budget Deficit 3.4; Total Financing Need 24.0. - 2021: Maturing Debt 21.2; Budget Deficit 3.5; Total Financing Need 24.7. - Japan (Percent of GDP): - 2019: Maturing Debt 36.7; Budget Deficit 2.8; Total Financing Need 39.5. - 2020: Maturing Debt 36.3; Budget Deficit 2.1; Total Financing Need 38.5. - 2021: Maturing Debt 31.2; Budget Deficit 1.9; Total Financing Need 33.0. - Average (selected AEs, Percent of GDP): - 2019: Maturing Debt 16.5; Budget Deficit 2.6; Total Financing Need 19.1. - 2020: Maturing Debt 16.5; Budget Deficit 2.4; Total Financing Need 19.0. - 2021: Maturing Debt 14.3; Budget Deficit 2.4; Total Financing Need 16.7. ### Emerging market and middle-income economies — mixed outcomes, consolidation on hold - "Overall fiscal deficits in 2018 declined in emerging market and middle-income economies for a second year in a row, driven primarily by fiscal adjustment in oil exporters." - Group averages (percent of GDP): - Average overall deficit fell from "4⅓ percent of GDP in 2017 to 4 percent of GDP in 2018." - Selected country developments: - Saudi Arabia: overall deficit "declined by half to 4½ percent of GDP" in 2018. - Russia: overall budget "turned from a deficit of 1½ percent of GDP to a surplus of 23/4 percent of GDP." - Mexico: overall deficit "increased in 2018" but remained "½ percentage point of GDP below its 2016 level." - China and Turkey: headline fiscal balances "widened by around 1 percentage point of GDP in 2018." - Pakistan: overall deficit "was 2½ percentage points of GDP looser than budgeted." - Argentina and Egypt: overall deficits "declined by 1½ and 1 percentage point of GDP, respectively." - Brazil: overall deficit "declined by 1 percentage point of GDP," primary deficit "remained broadly unchanged at 13/4 percent of GDP." - India: general government deficit "declined by ⅓ percentage point of GDP in fiscal year 2018/19." - Debt developments: - "The general government debt-to-GDP ratio for the group rose by 2⅓ percentage points in 2018 to almost 51 percent of GDP on average." - "More than half of those countries saw debt rising in 2018, and almost a fifth had debt ratios exceeding 70 percent of GDP." ### Low-income developing countries and other notes - Low-income developing countries: Table 1.1 shows group balances (Percent of GDP) series: –2.0 –3.5 –3.3 –3.9 –3.9 –4.2 –4.0 –4.0 –3.8 –3.6 –3.5 –3.4 –3.4 (2012–2024). - Country example (Nigeria): Table 1.1 series (Percent of GDP): 0.2 –2.3 –2.1 –3.5 –4.0 –5.4 –4.5 –5.1 –4.6 –4.5 –4.5 –4.5 –4.4. ### Policy implications emphasized in the chapter - Need for "fiscal restraint tailored to country-specific circumstances" given limited buffers. - Greater attention to "designing and implementing fiscal policies that are responsive to evolving demographics, advancing technology, and deepening economic integration to foster inclusive growth." - Recognition that "little fiscal room exists in many countries to respond" to downside risks, implying prioritization of debt sustainability, targeted investment, and revenue-strengthening where feasible. *Source: IMF staff estimates and projections as presented in ch1 - 1. By Country, 1995 versus 20142. By Skill Level, 1995–2009 (PDF chapter text supplied).* ### CHAPTER 1 FISCAL pOLICY FOR A CHANgINg gLObAL ECONOMY ### CHAPTER 1 FISCAL pOLICY FOR A CHANgINg gLObAL ECONOMY ### Global financial conditions and emerging market vulnerabilities - Global financial conditions tightened in 2018, causing: - Risk premiums (spreads over 10-year US Treasury yields) to rise by 40 percent on average in selected economies since the beginning of 2018. - Sovereign 10-year US dollar bond yields to increase in several large emerging markets (Indonesia, Mexico, Turkey). - Exchange rate and interest rate shocks that boosted debt ratios in several countries with debt vulnerabilities (Argentina, Angola, Turkey, Brazil, South Africa, Indonesia, Mexico). - Domestic tightening also occurred in economies less reliant on external financing or that issue debt mainly in local currency (Brazil, India, South Africa). - Rising interest burdens exceeded 20 percent of total revenue in 2018 in Egypt, Pakistan, and Sri Lanka. - Emerging market economies became vulnerable to rollover risks if they face large financing needs (see Table 1.4). - Figure indicators in the source: - Figure 1.14: Drivers of change in general government debt, 2017–18 (exchange rate and interest rate shocks notable). - Figure 1.15: Sovereign 10-year US dollar bond yields, 2018–19 (percent). - Figure 1.16: Sovereign spreads over 10-year US Treasury bond yields, 2018–19 (Index = 100 for January 1, 2018; actual sovereign spreads as of March 29, 2019 noted). ### Recent fiscal trends in emerging market and middle-income economies (EMMIEs) - Revenues and spending patterns: - Tax-to-GDP ratios remained flat on average through 2018. - Spending rigidities on wage bills and transfers continued to crowd out public investment. - Nontax revenues increased in non-oil exporters since 2012 (largely from social security administration gains in China). - Nontax revenues declined among oil exporters during 2012–15 (lower dividends from state-owned oil companies). - Expenditures as a share of GDP declined in oil exporters (current and capital cuts), but rose across most categories for non-oil exporters, except investment spending which remained low. - Specific changes: - Spending on social benefits and interest increased substantially since 2012 (Figure 1.19). - Total expenditure increased following the global financial crisis, but investment continued to fall (Figure 1.18). - General government revenue remained broadly flat since 2010, with a drop in nontax revenue for oil exporters (Figure 1.17). ### Fiscal outlook for emerging market and middle-income economies - Short- and medium-term trajectory: - The overall deficit is expected to increase in 2019 before gradually declining over the medium term, but debt is expected to continue trending up. - The increase in the 2019 general government deficit is largely driven by: - Projected stimulus in China (about 1¼ percentage point of GDP) to mitigate the growth slowdown. - Deteriorating fiscal positions among oil exporters—particularly Russia and Saudi Arabia—expected to face lower oil revenues and plan to increase spending. - In contrast, several countries plan fiscal adjustment through expenditure rationalization or increased tax revenue (Argentina, Egypt, Malaysia, Turkey). - Medium-term adjustment strategy: - Expected to rely on spending restraint (over 1 percentage point of GDP by 2024) without mobilizing higher revenues. - Countries aim to contain current spending, including pensions and the wage bill (Brazil), while protecting capital spending (India) or increasing it (Indonesia). - Overall investment spending is expected to edge up steadily (cumulatively by ½ percentage point of GDP by 2024), albeit decline in oil exporters. - Total revenues as a share of GDP are expected to further decline over the medium term; for oil-exporting countries this reflects expected moderation of oil prices, while non-oil revenue is expected to pick up in some cases (Kuwait, Russia). - Projected fiscal improvements will not be sufficient to stabilize debt over the medium term, particularly in non–oil-exporting countries (Brazil, China). - Gross financing needs (Table 1.4 highlights, percent of GDP): - Selected country examples for 2019 (Maturing Debt | Budget Deficit | Total Financing Need): - Argentina: 12.7 | 2.7 | 15.3 - Brazil: 7.7 | 7.3 | 15.0 - Egypt: 28.0 | 8.6 | 36.6 - India: 3.8 | 6.9 | 10.7 - Pakistan: 35.1 | 7.2 | 42.3 - Average (selected economies): 2019 — 6.1 | 3.8 | 9.9; 2020 — 6.5 | 3.6 | 10.2 ### Low-Income Developing Countries (LIDCs): fiscal expansion and vulnerabilities - 2018 developments: - The overall fiscal deficit tightened slightly in 2018 to 4 percent of GDP. - Improvement in the average overall deficit of commodity exporters more than offset a slight deterioration in non-commodity exporters’ balances. - Weighted-average expenditures increased by 1/3 percentage point of GDP in LIDCs, including 3/4 percentage point of GDP in commodity exporters. - Country examples of notable expenditure increases: - Nigeria increased spending on capital projects while implicit fuel subsidies rose. - Ghana increased spending by more than 3½ percentage points of GDP largely to address banking sector problems. - Between 2012 and 2018, expenditure composition shifted away from public investments toward servicing existing debt. - Debt service pressure: - The proportion of tax revenue spent on servicing debt increased by 7 percentage points between 2012 and 2018 to 19½ percent. - Interest expenditures increased particularly sharply in Bangladesh, Kenya, Nigeria, and Zambia. - In Ghana, interest expenditures consume about 40 percent of domestic tax revenue. - Public debt and risk of distress: - Public debt rose further in 2018 and reached 45 percent of GDP. - General government debt increased by more than 2 percentage points of GDP in Bangladesh, Ethiopia, Ghana, Kenya, and Nigeria, and by close to 10 percentage points of GDP in Zambia. - The share of LIDCs in debt distress or at high risk of debt distress increased by almost a half from 2012 to 43 percent in 2018 (Figure 1.24). - 2019 projections and policy tensions: - The average headline fiscal deficit is projected to remain broadly unchanged in 2019 among both commodity and non–commodity exporters. - Headline deficits are expected to widen in some non–commodity exporters due to higher spending on social programs (Uzbekistan) and capital investments (Kyrgyz Republic, Madagascar, Uganda), offset by fiscal adjustment in other countries (cuts in non-investment spending in Senegal; income tax and revenue administration measures in Benin, Nepal). - Among commodity exporters, improvements in Côte d’Ivoire and Ghana are expected to offset deterioration in Nigeria. - General government debt is expected to trend down after 2019 if deficits decline as projected, largely through expenditure control. - Tension exists between expenditure-based debt stabilization and large spending gaps to meet the SDGs. - Continued reliance on non-concessional financing in many countries (Côte d’Ivoire, Ethiopia, Ghana, Kenya, Senegal) could add to debt vulnerability if proceeds are not properly managed to generate growth and repayment capacity. - Country-specific projections noted: - Nigeria: non-interest spending growth expected to align with revenue growth. - Bangladesh: expenditures expected to contract by about 1 percentage point of GDP between 2018 and 2024 due to winding down of large infrastructure investment and current spending restraint. *International Monetary Fund | April 2019* ### CHAPTER 1 FISCAL pOLICY FOR A CHANgINg gLObAL ECONOMY ### CHAPTER 1 FISCAL pOLICY FOR A CHANgINg gLObAL ECONOMY ### Risks to the Fiscal Outlook - Many risks from the April 2018 Fiscal Monitor have materialized: rising tariffs and trade policy uncertainty; reduced social and political cohesion delaying fiscal adjustment in several advanced economies; higher borrowing costs and US dollar appreciation worsening debt dynamics in vulnerable emerging market and frontier market economies with high external and foreign currency debt; and oil price volatility increasing revenue and energy-bill uncertainty. - Economic policy uncertainty and financial market volatility are at their highest levels in two years (Figure 1.26). - Key sources of downside risk: - Weaker nominal growth: - Continued escalation of trade tensions between the United States and China could sharpen the global slowdown and worsen fiscal accounts. - Weaker-than-expected growth in China could reduce activity in trading partners, depress global commodity prices, and prompt China to undertake a larger fiscal stimulus. - Failure to ratify an orderly Brexit could disrupt goods, labor, and financial markets and prompt stimulus responses in the United Kingdom and the European Union. - If trade disputes are resolved and sentiment recovers, growth and fiscal outturns could rise above the baseline. - Tighter financial conditions: - A sudden change in risk sentiment could tighten financial conditions even as major central banks pause monetary normalization (Global Financial Stability Report, Chapter 1). - Sharp tightening could expose high-debt emerging market and frontier economies to debt service, refinancing, and exchange rate risks. - Sustained high sovereign spreads in Italy would weigh on growth, fiscal, and banking prospects and could spill over regionally. - Commodity price volatility: - Commodity prices are projected to remain low relative to recent peaks (Figure 1.27). - Slowing global demand could reduce oil prices further; Middle East tensions or OPEC supply cuts pose upward risks. - Lower oil prices would directly worsen fiscal positions in oil exporters and indirectly through weaker activity; conversely, oil importers would, on average, experience fiscal improvement. - Contingent liabilities: - Weaker growth, tighter financial conditions, and a pullback in private investment could lower profitability in public and private corporations—especially those with high external and foreign currency debt and non-transparent financing—potentially triggering recapitalizations or debt assumptions that weaken public balance sheets. - Persistently lower oil prices could reduce profitability of state-owned energy companies in oil exporters, increasing contingent liability risks. ### Setting the Right Course for Fiscal Policy - Public debt remains elevated in advanced economies and has grown in emerging market and developing economies, limiting countercyclical policy capacity in the next downturn. - General guidance: - Tailor size, pace, and composition of adjustment to country circumstances (unemployment, excess capacity, market access) to balance growth and sustainability. - Prioritize growth-enhancing expenditures where growth is slowing toward a lower potential rate. - If a major cyclical downturn occurs, fiscal stimulus can complement monetary easing where there is policy space. - For low-income developing countries, boost revenue to stabilize high public debt and fund development objectives. - Advanced economies: - Fiscal restraint is appropriate for most high-debt countries to provide room for countercyclical policies and address aging-related expenditure pressures. - Rebuild buffers gradually to keep interest bills in check and free resources for growth-friendly uses or further debt reduction. - Specific recommendations: - High-debt economies should pursue gradual fiscal adjustment: Canada, France, Japan, Spain, United Kingdom, United States. Adjustment is especially relevant if spreads remain high and financing needs are large (Italy). - Japan: maintain a neutral fiscal stance during 2019–20 to support growth and reflation; Japan’s public debt is unsustainable under current policies and will start to increase again beyond the medium term. Starting in 2021, an annual consolidation of ½ percentage point of GDP in the structural primary balance could stabilize public debt below the current level of 235 percent of GDP by 2030. - Where fiscal space exists, boost aggregate demand if slack remains (examples: Korea—allow automatic stabilizers in 2019 and frontload planned spending; Australia—use discretionary infrastructure spending if the 2018 slowdown worsens). - Economies operating above potential with low debt can pursue fiscal reforms to raise potential GDP (Germany, Netherlands: investment in physical and human capital; reduce labor income taxes; increase R&D and lifelong learning). - Emerging market and middle-income economies: - Debt vulnerabilities, volatile oil prices, and risk of tighter financial conditions call for fiscal restraint, though limited support may be warranted where demand is weak and there is fiscal space. - Specific recommendations: - Non-oil exporters with no fiscal space (Argentina, Brazil) should continue consolidating to put debt on a firm downward trend. - Where limited fiscal space exists, faster consolidation is affordable in India given expected growth acceleration; necessary in South Africa to stabilize debt at a lower level than currently projected. Protect well-designed social transfers and productive infrastructure investment. - Where some fiscal space exists and risk of sharper slowdown is present (China, Turkey): - China: adopt a targeted high-quality stimulus to facilitate rebalancing, continue deleveraging efforts, and present a credible medium-term consolidation plan. - Turkey: allow automatic stabilizers to operate and improve fiscal transparency to identify scope for discretionary stimulus if needed. - Oil exporters: - Continue planned consolidation, balancing growth, equity, and sustainability. - Mexico and Russia could aim for faster consolidation to address demographic pressures and intergenerational equity. - Countries with fiscal space and weak non-oil growth (Kuwait, United Arab Emirates) can adjust gradually and save revenue windfalls. - Oil exporters, especially in the Gulf, need to develop the non-oil and private sector, mobilize revenue, reduce large public-sector wage bills, and eliminate energy subsidies (example: Gulf countries and Indonesia). - Low-income developing countries: - Focus on long-term growth and development: boost revenues, improve spending quality, and better manage debt burdens. - Specific recommendations: - Noncommodity exporters with high debt: pursue gradual adjustment. Kenya: adjustment of 3 percentage points of GDP over the next two fiscal years, including revenue measures, is recommended to keep public debt on a downward trajectory. - Vietnam: more ambitious revenue-based consolidation than currently planned is required to ensure long-term debt sustainability. - Noncommodity exporters with low to moderate debt: keep spending growth in line with revenue increases and pursue revenue/expenditure reforms supporting development (Bangladesh). - Myanmar and Tanzania: a low risk of debt distress allows for a fiscal deficit of 4 percent over the medium term to support social and infrastructure objectives. - Commodity exporters with high debt vulnerabilities: focus on growth-friendly adjustment (Ghana: run a positive primary budget balance and build domestic tax base). - Nigeria: fiscal consolidation based on non-oil revenue mobilization is necessary over the medium term. - Côte d’Ivoire: streamline substantial tax exemptions and contain fiscal risks from public enterprises and public-private partnerships. - Preparing for a major slowdown: - Countries will have less fiscal space than during the global financial crisis. - Fiscal stimulus can be potent when slack is prolonged and monetary policy is near the effective lower bound, but feasible primarily where public debt vulnerabilities are limited. - Policymakers should plan fiscal actions in advance to offset implementation lags; at a minimum, allow automatic stabilizers to work without discretionary offsets for countries with fiscal space. - Where output falls substantially below potential, fiscal adjustment can be back-loaded or fiscal stimulus pursued with monetary easing; quality of revenue and expenditure measures matters for stimulus effectiveness. - In a severe euro-area downside, monetary policy could be complemented by fiscal easing in countries with appropriate space and financing conditions; a synchronized, differentiated fiscal response can strengthen area-wide impact. ### Adapting to Global Trends - Reforms are needed to adapt to shifting demographics, technological advances, and global economic integration; these will require inclusive, growth-friendly fiscal adjustments, budget recomposition, and multilateral cooperation. - Reprioritization of expenditures in economies with debt vulnerabilities is imperative: - Cut wasteful spending (for example, untargeted energy subsidies). - Contain rigid recurrent spending (for example, wage bills). - Channel resources to investment and social spending to build infrastructure and skills. - Improve public financial management to increase spending efficiency. - Mobilize revenues in emerging market and low-income developing economies via tax policy and administration reforms. - Tax policy reforms in advanced economies should foster efficiency and a more equitable distribution of disposable income. - International cooperation on corporate taxation, climate change, corruption, and achieving the 2030 SDGs can amplify reform gains. ### Expenditure Reprioritization and Efficiency - Shift expenditures to high-quality investment in physical and human capital: - Public capital stock as a share of output trended downward across advanced, emerging market, and developing economies in the two decades before the global financial crisis and plateaued after stimulus-driven investment during the crisis (Figure 1.28). - Emerging market and developing economies need more and better-quality infrastructure for urban transportation, energy, water and sanitation, and digital infrastructure (examples: India, Indonesia). - Internet usage rates remain well below advanced-economy levels (Figure 1.29). - Sub-Saharan Africa digital investment needs are estimated at $4 billion to $7 billion a year (0.2 to 0.4 percent of the region’s GDP) (Abdychev and others 2018). - Delivering high performance on SDGs related to core infrastructure will require additional spending in 2030 of 4 and 9 percent of GDP in emerging market economies and low-income developing countries, respectively (Gaspar and others 2019), and policies that facilitate private sector involvement. - Public-private partnerships can help improve services but require strong governance to manage risks and avoid unexpected costs; governments should (1) develop and implement clear rules for PPP use; (2) identify, quantify, and disclose risks and expected costs; and (3) reform budget and government accounting frameworks to capture all fiscal costs comprehensively (Irwin, Mazraani, and Saxena 2018). - Improve investment quality as much as quantity: - An estimated 30 percent, on average, of investment is lost due to inefficiencies, with larger losses in emerging market and developing economies (IMF 2015a). - Reforms to improve investment efficiency span project planning, allocation, and implementation phases: - Nigeria: strengthen project appraisal and selection, cash disbursement practices, and states’ capital investment coordination. - Vietnam: improve spending allocation and coordination to avoid delays and overruns. - India and Indonesia: as infrastructure investment scales up, improve public financial management, including planning coordination among agencies, within-year budget execution, and implementation capacity. - Expenditure reprioritization and efficiency are also critical to human capital development and equal opportunity: - Workforce readiness requires advanced cognitive skills, teamwork, and adaptability (World Bank 2019). - Policies expanding access to quality education and healthcare improve productivity and equity. *International Monetary Fund | April 2019* ### 1. Advanced Economies2. Emerging Market and ### ch1 - 1. Advanced Economies2. Emerging Market and ### Public capital stock, investment, and infrastructure financing - Over the past decade, gross public investment has been insufficient to expand the public capital stock. (Figure 1.28: Public Capital Stock and Investment, 1995–2015; 2001 PPP adjusted, in percent of GDP.) - Efficiency gains in public investment management can increase the value obtained from existing resources, especially in education and healthcare. ### Human capital, social services, and Sustainable Development Goals (SDGs) - Projected additional spending needs by 2030 in emerging market and developing economies: - Education: 8 percent of GDP - Healthcare: 12 percent of GDP - Efficiency potential: - Among emerging market and developing economies, those in the bottom quartile of efficiency could raise healthy life expectancy by up to five years by addressing inefficiencies in public health spending (Grigoli and Kapsoli 2018). - Policy and program examples (country-specific measures as presented): - Education and lifelong learning: - Singapore: unconditional grants to all adults for training throughout their working lives. - Netherlands: tax deductions for training those already in the workforce. - France: portable individual learning accounts. - Chile: targeted scholarships and creation of new technical institutes. - South Africa: improve teacher training, strengthen accountability, align training with business requirements. - Colombia: expand higher-education coverage for low-income students and improve education quality. - Bangladesh, Indonesia, Uganda: strengthen initiatives that promote technical and vocational training. - Social protection and labor market adaptation: - Nordic countries: portability of social benefits. - Korea: room for more generous unemployment benefits to support adjustment to technological change. - Singapore: introduction of universal, transparent, and time-bound unemployment insurance recommended. - Emerging markets/developing economies (Bangladesh, Zambia): increase coverage of social safety net programs to expand opportunities and encourage human capital development. ### Reducing wasteful spending and subsidies; pensions and healthcare - Cutting wasteful spending can create fiscal room for public investment in human and physical capital after protecting the most vulnerable. - Untargeted energy subsidies should be cut in many countries, including (as listed): Finland, Italy, Latvia, Norway, Egypt, Kuwait, Saudi Arabia, Angola, Ethiopia, Nigeria. - Public sector payroll management: - Better medium-term wage forecasting and position-based employment systems could generate savings. - Limit public sector job creation in some regions (for instance in sub-Saharan Africa) and incentivize private sector employment to contain large wage bills. - Pension and healthcare reform priorities for fiscally pressured advanced and emerging market economies: - United States: raise the income ceiling for payroll taxes and index benefits to chained inflation. - Spain: consider comprehensive measures to safeguard financial viability after recent relaxation of pension indexation. - Italy: consider offsetting implications from early retirement rule easements. - Brazil: increase the retirement age, delink the minimum pension from the minimum wage, and moderate pension generosity (particularly for public employees). - Japan and the United States: adopt efficiency-improving technology and pursue greater cost sharing with beneficiaries to contain healthcare costs. ### Public Financial Management (PFM) reforms and fiscal space - PFM reforms can extend public resource envelopes through efficiency gains. - Enhance debt management capacity (example: Gulf countries). - Reduce off-budget activities (examples: China, Ghana). - Better management of public sector balance sheets, especially nonfinancial public corporations and government financial assets, could yield up to 3 percent of GDP a year in additional revenue (October 2018 Fiscal Monitor reference). - This 3 percent of GDP is equivalent to the average corporate income tax revenue in advanced economies (note: figure does not account for potential returns from better management of government nonfinancial fixed assets). - Use of new technologies: - Internet, big data, and increased connectivity can improve service delivery, governance, accountability, and social infrastructure. - India’s Direct Benefit Transfer program: digital delivery of direct subsidies to bank accounts of the poorest. - Slovenia: online platforms for citizens to report and monitor resolution of problems. ### Revenue mobilization opportunities - Tax revenue levels (Figure 1.30, Tax Revenue, 2017; percent of countries): - LIDC median: 15 - EMMIE median: 18 - AE median: 26 - Scope for increased tax revenue in emerging market and developing economies by broadening tax bases and improving efficiency (for instance by shifting from direct to indirect taxation), achievable with little impact on long-term growth (Dabla-Norris and others 2018; IMF 2015b). - Specific potential gains and reforms: - Removal of tax exemptions (examples: sub-Saharan Africa, Argentina, China, Sri Lanka, Turkey) and improved administrative efficiency to yield more revenue for priorities. - Sub-Saharan African countries could raise from 3 to 5 percent of GDP in additional revenue, on average, through reforms that improve tax system efficiency (October 2018 Regional Economic Outlook for Sub-Saharan Africa). Key steps: strengthen VAT systems, streamline exemptions, expand income tax coverage, and tackle informality. - Adoption and implementation of medium-term revenue strategies (policy + administrative reforms) as a guide; examples of engagement: Papua New Guinea (launched), Egypt, Lao P.D.R., Uganda (working), Indonesia, Senegal, Thailand (plan). ### Fuel and energy subsidy reform - Global fuel subsidies in 2017 were estimated at $5.2 trillion, or 6.5 percent of global GDP (Coady and others forthcoming). - Raising fuel prices to efficient levels through taxes would generate additional revenue of $3.2 trillion (4 percent of global GDP) over the long run (Figure 1.31). - To protect vulnerable households, compensation mechanisms should be put in place beforehand through scaling up benefits or expanding existing assistance programs, or designing new social safety nets (Abdallah and others 2018). - Examples of mitigation measures used: Saudi Arabia (measures to facilitate public support for fuel subsidy reforms); recommendations for Ethiopia and Nigeria. - Importance of transparent communication on subsidy size, fiscal impact, and use of savings to build support (IMF 2013). ### International cooperation priorities - Multilateralism supports growth, poverty reduction, and welfare gains and is important for transnational fiscal challenges that single governments cannot address alone. - Key areas for multilateral action: - Taxation of multinational and highly digitalized companies: uncoordinated ad hoc measures risk distortions and double taxation; multilateral cooperation preferred. - Climate change: a macro-critical, global issue with large fiscal implications, especially for low-income developing countries and small island states. - Carbon taxation or similar pricing is the most efficient mitigation tool; a carbon price floor among large emitters could promote coordination and strengthen Paris Agreement outcomes. - Advanced economies’ joint commitment to contribute $100 billion a year by 2020 for mitigation and adaptation in developing economies is highlighted as an important support. - International financial support for low-income developing countries to meet SDGs: - The annual spending gap to attain meaningful progress on SDGs related to infrastructure alone in low-income developing countries amounts to $358 billion, even after assuming an increase in their tax-to-GDP ratio of 5 percentage points over the next decade (Gaspar and others 2019). ### Fiscal costs of stress in global financial markets (modeling and scenario results) - Modeling framework: - Extended Global Vector Autoregression (GVAR) framework covering 33 country-specific models with interactions across countries; variables included real GDP, inflation, real exchange rate, short- and long-term interest rates, government debt-to-GDP ratio, primary fiscal balance, price of oil, and an index of financial stress in advanced economies; sample period 1981:Q2–2018:Q2. - Shadow interest rates used for periods with policy rates at effective lower bounds (following Wu and Xia 2016). - Fiscal impacts of a one standard deviation positive shock to the advanced-economies financial stress index (FSI): - Average increase in public debt-to-GDP ratios across country groups ranges between ½ and 1¼ percentage point of GDP after one year, with large cross-country variation (Figure 1.1.1). - Real GDP growth slows worldwide by ¼–½ percentage point on average. - Inflation-adjusted long-term interest rate rises by 10 basis points on average (and higher in emerging market economies). - Primary fiscal balances worsen by 0.1–0.2 percentage point of GDP on average. - Higher interest rate–growth differentials and weaker revenues contribute to worsened debt dynamics; impact larger for countries with high debt ratios, shorter residual debt maturities, higher shares of foreign-currency-denominated debt, and greater nonresident holdings. - FSI shock calibration: - A one standard deviation positive shock to FSI in advanced economies is ⅔ of the shock that occurred during the European sovereign debt crisis and 1/10 of the global financial crisis shock. *Italic source: International Monetary Fund, Fiscal Monitor: Curbing Corruption, April 2019 — Chapter 1 (content unit: ch1 - 1. Advanced Economies2. Emerging Market and).* ### Box 1.1. Fiscal Implications of Potential Stress in Global Financial Markets ### Box 1.1. Fiscal Implications of Potential Stress in Global Financial Markets ### Responses of key variables to potential stress in global financial markets - The figure depicts the range of change in macroeconomic/financial variables of a given group of countries—high-debt (HD) and low-debt (LD) advanced economies (AE) and emerging markets (EM)—after one year associated with a one-standard-deviation positive shock to FSI. - Country groups and classification: - HD-AE group: Austria, Belgium, Canada, France, Italy, Japan, Spain, the United Kingdom, and the United States. - LD-AE group: Australia, Finland, Germany, Korea, Netherlands, New Zealand, Norway, Sweden, and Switzerland. - HD-EM group: Argentina, Brazil, China, India, Philippines, and South Africa. - LD-EM group: Chile, Indonesia, Mexico, Peru, Thailand, and Turkey. - The median gross-debt-to-GDP ratio in each group (advanced and emerging market economies) is used as the cutoff value to classify countries as high debt or low debt. - Visualization conventions (as described): - Symbols × and — denote the average and median responses across countries in each group, respectively. - Boxes show the 25th–75th percentile responses; whiskers show the minimum and maximum responses. - Variables shown (percentage point of GDP difference): Debt-to-GDP, Interest rate (r), Growth rate (g), Primary balance-to-GDP. - Axis scale markers included in figure description: –1.5, –1.0, –0.5, 0.0, 0.5, 1.0, 1.5, 2.0, 2.5. ### China: How fiscal policy can support activity and rebalancing — principles and targeted measures - Three guiding principles for fiscal response: - The policy response should be on budget, to ensure transparency and avoid risks from excessive leverage incurred by borrowing entities. - It should facilitate the macroeconomic rebalancing of the Chinese economy. - Fiscal measures should be targeted to maximize their multiplier effects and to reduce poverty and inequality. - Revenue-side measures: - The recently announced personal income tax cuts support consumption temporarily but have reduced the progressivity of the overall tax system. - Going forward, tax cuts should be accompanied by medium-term reforms to: - Broaden the overall tax base. - Improve the progressivity of the tax system (including by alleviating the highly regressive nature of the social security system). - Introduce a recurrent property tax. - Expenditure-side measures: - Reprioritize spending toward education, healthcare, and social security to facilitate rebalancing. - Improve the social safety net by: - Increasing rural pension benefits. - Widening the coverage of unemployment insurance (currently 40 percent of urban workers). - Targeted measures aim to cushion the impact of slower growth and reduce poverty and inequality. - Large-scale infrastructure investment: - Deemed less desirable given the build-up of vulnerabilities from past stimuli. - Assessment requires examination of the general government’s balance sheet, returns on infrastructure investment, and broader macroeconomic growth impact. - A large component of past investment-led stimulus occurred off-budget through local governments and state-owned enterprises (SOEs). ### China: Balance-sheet evidence and past stimulus effects - Balance-sheet estimation approach: - General government financial balance sheet estimated for 1997–2017 based on methodology in the October 2018 Fiscal Monitor and various sources, adjusting for nonperforming assets of public corporations. - Data on valuation of fixed assets are limited; instead, estimated the shortfall of the returns of infrastructure assets relative to the cost of liabilities to finance such investment. - Key findings from the balance-sheet analysis: - The investment-led stimulus during 2009–12 contributed to a deterioration in the general government’s financial position. - Specific observations: - The stimulus—amounting to some 10 percent of GDP—supported economic growth in the early part of the decade. - Estimates of potential growth declined from double-digit levels to about 6¼ percent by 2015. - The stimulus led to a decline of net financial worth from 23 percent of GDP in 2009 to 11 percent of GDP in 2017 (still above the average for emerging market economies) as the rise in general government debt outstripped the increase in the general government’s financial assets. - Nonfinancial infrastructure assets rose, but the gap between government asset returns (and those on nonfinancial infrastructure assets) and the interest rate on debt widened, with an estimated shortfall of 1½–2 percentage points during 2013–15, partly driven by low profitability among SOEs. - Implication: A large-scale public investment stimulus now, while temporarily boosting growth, would add to vulnerabilities and raise the likelihood of a sharp slowdown when overall leverage is already high and credit allocation is increasingly inefficient. ### Table excerpts and indicators (as presented) - Table 1.2.1. China: Long Shadows of Investment-Led Stimulus during the Global Financial Crisis - Headings: Fiscal Stimulus during the Great Recession (2009–12) | 2017 or Latest Data Available | 2009 | 2015 - Entries (presented verbatim as in source): - General government - Debt to GDP 1 345768 - Net financial worth to GDP231911 - Macroeconomy - Potential growth rate10.46.36.3 - Credit intensity ratio2 2.53.54.1 - State-owned enterprises - Credit3 516674 - Returns on equity5.93.94.2 - Sources cited in table: CEIC; World Economic Outlook; Deutsche Bank; and IMF staff estimates. - Notes in table: - Indicators are in percent unless otherwise stated. - 1 Debt is measured using the augmented concept as in IMF 2017. - 2 The credit intensity ratio is measured by the change of credit per unit change of output. - 3 State-owned enterprise credit is measured in percent of GDP based on IMF 2017. ### SOE deleveraging and broader fiscal structural reforms - Rationale for deleveraging: - SOEs are highly leveraged and account for a large share of corporate credit. - Further deleveraging of underperforming SOEs could improve medium-term growth and strengthen the general government balance sheet. - Historical precedent: - Restructuring of public corporations during 1999–2003—SOE closures, restructuring, and recapitalization of state banks—improved SOE profitability and equity valuation of state-owned banks and raised the general government’s net financial worth from –8 percent of GDP in 1999 to 18 percent of GDP in 2005. - Additional necessary reforms: - Continued deleveraging. - Advancing fiscal structural reforms such as intergovernmental relations, improving fiscal data, and parametric reforms to the social security system to ensure long-term sustainability. ### The international tax system under stress — problems identified - Key strains on taxing multinationals: - Profit-shifting by multinationals—moving profit from high- to low-tax jurisdictions—is pervasive. - Problems center on: - The norm that companies are liable to corporation tax only where they are physically present. - Implementation challenges of the arm’s length principle in the presence of hard-to-value intangible assets and digitalization. - Tax competition remains largely unaddressed and may intensify, imposing pressures on tax revenues—especially problematic for low-income countries that rely relatively more on corporate taxation. - Developing countries’ interests are not well reflected in current norms; complexity and profit shifting bear disproportionately on them. - Fairness concerns and public perception of under-taxation have spurred debate on allocation of taxing rights. ### Preserving multilateralism and risks from unilateral actions - Unilateral initiatives going beyond BEPS risk jeopardizing multilateral cooperation achieved under BEPS. - Examples cited: - “Diverted profits taxes” adopted by the United Kingdom and Australia in 2016. - The 2017 US tax reform introduced fundamental and novel changes in international provisions. - Proposals for “digital service taxes” in Europe on revenues associated with selected digital activities. - Divergent views exist on whether digital service taxes are necessary to address perceived under-taxation or are a grab for revenue from prominent companies. - The debate over taxing where users reside (destination or “market” jurisdictions) would be a fundamental departure from current norms. ### Evaluating alternative reform directions (broad approaches and trade-offs) - OECD Inclusive Framework agreed to examine a wide range of policy options with the aim to reach consensus on a multilateral approach by 2020. - Broad reform directions described (not an endorsement): - Minimum effective taxation: - Can relate to outbound or inbound investment or both. - On outbound investment, ensures some minimum tax is paid wherever income arises; offers significant (though incomplete) protection against profit shifting and tax competition. - Minimum tax on inbound investment can be simple to administer and appealing for developing economies but may risk jeopardizing inward investment. - Allocating taxing rights to destination countries (destination-based systems): - Could rely on “border-adjusted” taxes combining VAT-like treatment of trade with a wage subsidy (or payroll tax relief). - Examples include the destination-based cash flow tax and destination-based allowance for corporate equity system. - These are the most complete solutions to tax competition and profit shifting but are furthest from current practice and face potential WTO issues; may amplify VAT refund problems and could have adverse spillovers if unilaterally adopted. - Unitary taxation with formula apportionment: - All affiliates consolidate accounts to generate a unitary tax base apportioned across jurisdictions based on a formula (assets, payroll, employees, sales). - Reduces scope for profit shifting and can simplify tax calculation. - Economic effects depend on allocation weights; employment-weighted formulas would likely benefit developing economies. - Agreeing on a common base may be difficult due to large redistribution of tax revenues. - “Residual profit allocation” schemes: - Split income into a “routine” return and a “residual” return; allocate a normal return to source countries and share residual profit according to a formula. - Closer to current practice than formula apportionment but further than minimum taxation; substantially reduces profit-shifting opportunities and simplifies the system. ### Urgent need for coordination - No single reform direction scores best on all criteria; assessment depends on specific design details and weighting of criteria (economic properties, impact on developing economies, ease of enforcement, departure from norms, and required cooperation). - Fundamental obstacles to agreement include differing views and interests of countries of different size and development levels; tax cooperation has so far been driven by the most advanced economies. - A cooperative multilateral approach is required to put international corporate tax on a sound basis. - The OECD Inclusive Framework’s deliberations and the 2020 deadline are critical to the future of the international tax system. *International Monetary Fund | April 2019 — Box 1.1. 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