## EXECUTIVE SUMMARY ## Source details **Canonical URL:** [EXECUTIVE SUMMARY](https://www.imf.org/-/media/files/publications/fiscal-monitor/2021/october/english/execsum.pdf) ## Other formats - [Markdown version](/-/media/files/publications/fiscal-monitor/2021/october/english/execsum.pdf.md) - [Structured JSON version](/-/media/files/publications/fiscal-monitor/2021/october/english/execsum.pdf.json) --- ### Chapter 1: Policy in an Uncertain Recovery - Context and evolving risks - COVID-19 remains a key fiscal challenge, marked by uncertainty and unequal access to vaccines across countries; the Delta variant has been associated with a resurgence of the virus. - Interplay between vaccines and variants contributes to elevated uncertainty going forward; fiscal policy needs to adapt to changing conditions. - Fiscal support and growth effects - In many advanced economies, fiscal policy remains accommodative and is shifting toward a green transition, digital transformation, and other longer-term investments. - The large fiscal packages announced or approved by the European Union and the United States could add a cumulative $4.6 trillion to global GDP between 2021 and 2026. - Additional measures (including in Europe) are expected with the forthcoming national budgets for 2022. - In emerging markets and low-income developing countries, growth is held back by low availability of vaccines; governments are shifting expenditures toward pandemic-related priorities. - Higher interest rates and lower government revenues have strained the capacity of low-income developing countries to provide fiscal support and service their debt. - Fiscal balances, debt, and financing - Overall, fiscal policy remains supportive, with 2021 deficits falling by about 2 percentage points of GDP in 2021, on average. - Deficits are still well above prepandemic levels, especially in advanced economies. - Deficits are projected to decrease further by almost 3 percentage points in 2022 and return to their prepandemic levels by 2026. - In emerging markets and low-income developing countries, output and tax revenues are not projected to regain their precrisis trajectory and the reduction in deficits will occur largely through lower spending. - Global government debt is expected to remain at record-high levels—close to, but below, 100 percent of GDP—in 2021 and to decrease slightly through 2026. - Large purchases of government debt by central banks (especially in advanced economies) and by the domestic banking sector have helped to contain the cost of new borrowing. - The debt buildup has led to a rise in governments’ gross financing needs. - Many low-income developing countries will likely need further international aid and in some cases debt restructuring. - Downside and upside risks - Upside: scaling up vaccine production and delivery, especially to emerging markets and low-income developing countries, would limit further damage to the global economy. - Downside: new variants, low vaccine coverage, and delays in vaccine acceptance could inflict new damage and increase pressures on public budgets. - Realization of contingent liabilities—including from loan and guarantee programs—may lead to unexpected increases in government debt. - Further pressures could come from social discontent; the crisis is estimated to have thrown between 65 and 75 million people into poverty in 2021 relative to prepandemic trends. - Large government financing needs are a source of vulnerability, especially in emerging markets and low-income developing countries, where financing conditions are sensitive to global interest rates and central banks have begun to raise short-term reference rates. - Policy priorities and steps - Fiscal policy must respond nimbly and facilitate a transformation of the global economy to make it more productive, inclusive, green, and resilient to future health or other crises. - Ensure transparency and accountability, plot a medium-term path to rebuilding fiscal buffers, and make progress toward the Sustainable Development Goals. - Specific steps highlighted: - International cooperation to address cross-country inequities in vaccines, treatments, therapeutics, and protective equipment; the general allocation by the IMF of Special Drawing Rights has given a fillip to global liquidity, and international financial support has been provided to low-income developing countries, but more is needed through grants, loans, and initiatives such as the G20 Common Framework for debt relief. - Increase public investment in high-quality physical capital, education, and health care; better target fiscal transfers toward retraining and reallocating workers; and strengthen social safety nets. - Calibrate fiscal policy to the cycle and speed of the recovery and achieve the right mix between fiscal and monetary policies; if private demand recovers more rapidly than expected, fiscal policy should be tightened to reduce the risk of a sudden rise in interest rates. - As access to low-cost borrowing becomes more difficult, especially for emerging markets and low-income developing countries, governments should strengthen the credibility of their fiscal policy by mobilizing more revenue in the medium term and improving expenditure efficiency. ### Chapter 2: Strengthening the Credibility of Public Finances - Legacy of pandemic support and financing vulnerabilities - Fiscal support during the COVID-19 pandemic has saved lives and jobs but resulted in higher gross financing needs and government debt that will likely remain high for many years. - Returning to prepandemic debt levels would require achieving, for more than a decade, larger primary fiscal balances than before the pandemic. - This task is complicated by crisis-related spending, preexisting pressures from aging populations or development needs, and resistance to raising revenues. - The appropriate timing to reduce deficits depends on country-specific conditions: stage of the pandemic, existing fiscal vulnerabilities, risk of economic scarring, and quality of public spending; distributional effects of revenue increases or spending cuts must be considered. - Financial conditions have been and may remain favorable despite uncertainty, but a sharp fall in global savings or a sudden jump in interest rates would adversely affect vulnerable emerging markets and frontier economies. - Role of fiscal frameworks and credibility - Committing to fiscal sustainability with credible frameworks—the set of rules and institutions that guide fiscal policy—can buy time and make debt stabilization or reduction less painful. - When lenders trust governments are fiscally responsible, financing larger deficits and debt rollovers becomes easier; countries with access to financing can maintain fiscal support while committing to future adjustment. - For countries with limited market access, fiscal credibility is important to achieve a more predictable outlook and foster private investment and macroeconomic stability. - Governments can signal commitment to fiscal sustainability while addressing the crisis by undertaking structural fiscal reforms or adopting strong fiscal frameworks that embed future deficit reduction. - Fiscal risks and history of debt jumps - Fiscal targets should be set against the fiscal risks faced by individual countries; public balance sheets have taken on sizable exposures through loans and guarantees to firms. - Over the past 25 years, when public debt exceeded projections, the median increase in debt ranged between 12 and 16 percent of GDP over five-year horizons. - Underlying such negative surprises were disappointing medium-term nominal GDP growth and unexpected stock-flow adjustments, including from firms’ bailouts and exchange rate depreciation. - These risks need to be managed within fiscal frameworks. - Design trade-offs and empirical findings - Fiscal frameworks should seek three overarching goals: sustainability, economic stabilization, and, for fiscal rules in particular, simplicity; satisfying all three is challenging. - Quantitative objectives may take a narrow view of sustainability while simple rules that reduce fiscal procyclicality (such as an expenditure ceiling) may enable debt to increase. - Procedural rules give governments flexibility, but may be harder to communicate and monitor without numerical targets, particularly without sound fiscal institutions. - Numerical rules promote fiscal prudence: countries that follow debt rules manage to reverse debt jumps of 15 percent of GDP in about 10 years in the absence of new shocks—significantly faster than other countries. - For countries with sufficient capacity, anchoring the medium-term fiscal strategy on the public sector balance sheet can preserve credibility and help protect public investment. - Credibility, transparency, and market outcomes - Commitment to fiscal discipline and clear communication of policy priorities, backed by fiscal transparency, can reduce borrowing costs. - Data on private sector expectations suggest budget announcements have been more credible in countries that follow fiscal rules and where independent bodies monitor the rules. - The gap between official and private forecasts of the fiscal deficit was 1 percent of GDP smaller in countries that followed budget balance rules. - Credible budget announcements were rewarded with a temporary reduction in 10-year sovereign yields by about 40 basis points. - Media reaction to suspension of fiscal rules was more positive in countries with higher fiscal transparency. - Announcements of large fiscal adjustments do not necessarily build fiscal credibility, as private forecasts of the budget deficit typically discount their short-term impact on the deficit. - Overall, strong fiscal frameworks can meaningfully contribute to strengthening the credibility of public finances. *International Monetary Fund | October 2021* --- _Source: https://www.imf.org/-/media/files/publications/fiscal-monitor/2021/october/english/execsum.pdf_