## CHAPTER 1 Policy in an Uncertain Recovery ## Source details **Canonical URL:** [CHAPTER 1 Policy in an Uncertain Recovery](https://www.imf.org/-/media/files/publications/fiscal-monitor/2021/october/english/text.pdf) ## Other formats - [Markdown version](/-/media/files/publications/fiscal-monitor/2021/october/english/text.pdf.md) - [Structured JSON version](/-/media/files/publications/fiscal-monitor/2021/october/english/text.pdf.json) --- ### Introduction - The COVID-19 pandemic has lasted over 20 months. - The world faces three global problems requiring global action: - the Great Vaccine Divide, - climate change, - the Great Financing Divide (financial constraints facing vulnerable people and countries). - Preliminary estimates from the Global Debt Database: debt—issued by governments, nonfinancial corporations, and households—in 2020 reached $226 trillion and increased by $27 trillion. - The increase in public debt in response to COVID-19 is characterized as justified and expected to be one-off. - Policy frameworks and credibility matter for access to financial markets; countries with high-credibility fiscal frameworks benefit from better bond market access and lower sovereign bond interest rates. - Bottom line: Fiscal responsibility pays off. ### Recent developments and outlook - Global debt accumulation, contributors: - Advanced economies and China together contributed more than 90 percent to the accumulation of worldwide debt in 2020. - Emerging markets and low-income developing countries contributed only around 7 percent to the accumulation of worldwide debt in 2020. - Growth and recovery: - Advanced economies are projected to recover to the pre-COVID growth path; fiscal support will persist but spending and revenues will gradually approach the pre-COVID path. - China and the United States stand out with early and strong recoveries. - Low-income developing countries are projected to suffer a persistent fall in growth relative to pre-COVID prospects. - Key projections and headline figures: - 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. - 2021 deficits are reported as falling by about 2 percentage points of GDP in 2021, on average. - Deficits are projected to decrease further by almost 3 percentage points in 2022 and return to their prepandemic levels by 2026. - 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. - The crisis is estimated to have thrown between 65 and 75 million people into poverty in 2021 relative to prepandemic trends. - Most of the $16.9 trillion in fiscal measures announced to fight the pandemic are set to expire this year. ### Cross-country divergence and financing constraints - Advanced economies: - Cyclically adjusted primary deficit for advanced economies: - Expected to decrease in 2021 by 0.5 percentage points of GDP (to 6.3 percent). - Projected to shrink by almost 2 percentage points on average in 2022 and fall further to 2.1 percent of GDP by 2026 (0.8 percent in the euro area and 3.5 percent in the United States). - Gross government debt for advanced economies: - Expected to decline marginally to about 120 percent in 2026. - Major multiyear packages: - European Union NGEU recovery plan: €750 billion total (of which €390 billion is in grants and €360 billion in loans). - United States proposals: American Families Plan (AFP) $2 trillion and American Jobs Plan (AJP) $2.3 trillion. - Macroeconomic simulation: - By 2026, the AFP, the AJP, and the NGEU could add $4.6 trillion to global GDP. - About 16 percent of this increase, or roughly 0.6 percent of global GDP, would correspond to international spillovers. - Emerging market economies: - Average fiscal deficit projected at 6.6 percent of GDP in 2021, down by 3 percentage points from 2020. - Average gross government debt predicted to reach 64 percent of GDP in 2021, up by almost 10 percentage points from 2019. - Medium-term projection: public debt for the emerging market group projected to reach 70 percent of GDP in 2026 (but remain stable at 60 percent of GDP excluding China). - Low-income developing countries: - Average overall fiscal deficit in 2021 remains at just above 5 percent of GDP, little changed from 2020, and 1.5 percentage points of GDP above its prepandemic value. - Over the medium term: - Average revenue is expected to increase and stabilize at 14½ percent of GDP but would still remain 0.5 percentage points of GDP below the 2019 level. - Expenditure is projected to decline to 18 percent of GDP by 2026, ½ percentage point of GDP below the 2019 value. - Average gross debt in 2021 is projected to remain stable at almost 50 percent in 2020, still 5 percentage points above its 2019 value. - Half of low-income developing countries are experiencing debt distress or are at risk of it. - As of the end of May 2021, 47 out of 73 eligible countries had joined the Debt Service Suspension Initiative (DSSI). - The IMF has extended $117 billion in new financing and debt service relief to 85 countries. ### Risks to the outlook and fiscal space - Principal short-term risk: evolution of the pandemic, vaccine distribution, and variants (e.g., Delta). - Rapid scaling up of vaccine production and delivery, especially to emerging markets and low-income developing countries, would accelerate resolution of the health crisis and improve fiscal prospects. - The spread of the Delta variant, vaccine hesitancy, and low vaccine coverage in some countries could inflict new damage and increase pressures on public budgets. - Financing constraints and vulnerabilities: - Debt-to-GDP and debt-to-revenue ratios have increased in 2021 relative to 2019, signaling a deterioration in fiscal space. - Interest rate spreads on foreign-currency debt have remained broadly stable for the median emerging and low-income countries but have increased in several cases. - Historical lessons: when public debt exceeded projections historically, the median increase in debt ranged between 12 and 16 percent of GDP over five-year horizons. - Stock-flow adjustments and contingent liabilities can cause major debt surprises. - Spillover risks from major advanced-economy packages: - Three large recovery packages together increase global GDP by 0.6 percent of global GDP. - Some countries may face adverse spillovers if global interest rates rise sharply; highly leveraged countries susceptible to changes in financing costs would be harmed by higher interest rates. ### Policy conclusions and recommendations - Global and multilateral actions: - Address the Great Vaccine Divide, climate change, and the Great Financing Divide through international cooperation. - The General Allocation of Special Drawing Rights (SDRs) amounts to US$650 billion; beneficial effects can be multiplied by rechanneling from higher income economies to low-income developing countries (possible channels include increased financing for the Poverty Reduction and Growth Trust and a new resilience and sustainability facility). - The expiration of the Debt Service Suspension Initiative (DSSI) at the end of the year makes a fully functioning G20 Common Framework urgently needed. - Increase official lending and aid to low-income developing countries; countries with strong external positions encouraged to channel resources from the new SDR allocation toward those most in need. - Short-term fiscal guidance: - Maintain nimble fiscal support targeted where vaccination coverage is limited and infections are resurgent. - Ensure emergency measures include transparency and accountability safeguards. - Medium-term fiscal guidance: - Credibly commit to rebuilding fiscal buffers and maintaining fiscal sustainability via transparent rules and institutions. - Mobilize more revenue in the medium term and improve expenditure efficiency to strengthen fiscal credibility. - Implement domestic reforms to boost sustainable and inclusive growth. - Use international cooperation, debt relief, and concessional finance to support vulnerable countries. - Country-specific trade-offs and sequencing: - In countries with tight borrowing constraints, prioritize saving lives and protecting the poor; be selective in spending, strengthen expenditure efficiency, and enhance growth prospects. - For advanced economies, calibrate fiscal policy to the cycle and speed of the recovery; retune fiscal policy if private demand recovers more rapidly than expected. - Climate and tax cooperation: - Concrete global policy actions at COP26 called for, including an international carbon price floor adjusted to country circumstances and a green public investment program and research (sentence in source cuts off). - Growing support for a global minimum effective corporate tax and for allocating corporate taxes more closely with the jurisdiction where consumers of major multinationals are located. ### Rebuilding fiscal space and debt-carrying capacity - Debt-readjustment exercises and required primary balances: - Using baseline projections and assumed post-2023 effective real interest rates of 1 percent for advanced economies and 2.5 percent for emerging markets and low-income developing countries: - Typical advanced economy: 0.5 percent of GDP higher average primary surplus required (relative to 2010–19). - Typical emerging market: 1.0 percent of GDP higher. - Typical low-income developing country: 0.3 percent of GDP higher. - Sensitivity to higher interest-rate assumptions (effective real interest rates set to 2 percent for advanced economies and 3.5 percent for emerging markets and low-income developing countries): - Advanced economies: 1.2 percent of GDP higher. - Emerging markets: 1.6 percent of GDP higher. - Low-income developing countries: 1.0 percent of GDP higher. - Shortened horizon to return to 2019 ratios (to 2035) — needed increase in primary surpluses: - Advanced economies: 0.9 percent of GDP higher. - Emerging markets: 1.4 percent of GDP higher. - Low-income developing countries: 0.5 percent of GDP higher. - Has debt-carrying capacity increased? - A 1-percentage-point increase in the debt-to-GDP ratio would have raised emerging market spreads in foreign currency by 2 percent in the early 2000s but by less than 1.5 percent in 2020. - The decline in sensitivity of spreads to debt levels is not well understood and may not persist. ### Assessing and managing fiscal risks - Unexpected jumps in debt (five-year windows, 1995–2019): - The median jump was 13.6 percent of GDP. - Median jumps by group: 16.5 percent of GDP for the median low-income developing country; 13.4 percent for the median emerging market; 12.3 percent for the median advanced economy. - Median contribution of growth forecast errors to unexpected increases in debt over the past 25 years: 6.5 percent of GDP. - Median contribution of surprises in stock-flow adjustments: 4.3 percent of GDP. - The 75th percentile of the contribution of stock-flow adjustment (excluding exchange rate effects) reached 10 percent of GDP in advanced economies; 12 percent of GDP in emerging markets; 20 percent of GDP in low-income developing countries. - Mitigation and good practices: - Budget for expected costs of contingent liabilities in medium-term fiscal plans (annual cash flow basis or net-present-value basis). - Build buffers when setting targets; use probabilistic approaches to estimate debt ceilings. - Risk-mitigation strategies: limits on loan sizes and maturities; partial guarantees to limit moral hazard; restructuring conditions for supported firms and SOEs. - Decisions to mitigate or assume risks depend on fiscal position, institutional strength, and economic conditions. ### Strengthening fiscal credibility and frameworks - Components of effective fiscal frameworks: - Long-term fiscal targets (anchors). - Fiscal rules imposing numerical limits on fiscal aggregates. - Fiscal institutions (for instance, fiscal councils) and transparent procedures. - Empirical evidence on rules and credibility: - 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. - Credible budget announcements were rewarded with a temporary reduction in 10-year sovereign yields by about 40 basis points. - The gap between official and private forecasts of the fiscal deficit was 1 percent of GDP smaller in countries that followed budget balance rules. - Announcements of large fiscal adjustments are typically discounted by private forecasters (private sector gives credit for only one-fourth of the adjustment planned for the next year). - Design considerations: - Embed flexibility (escape clauses, expenditure rules, cyclically adjusted measures) to allow countercyclical responses while preserving credibility. - Consider alternative anchors (interest bill, public sector net worth) where appropriate but mindful of cyclical properties and measurement challenges. - Strengthen institutions: independent review of macro assumptions, comprehensive medium-term budgets, effective financial controls and tax administration, transparent fiscal reporting. ### Accountability, transparency, and communication - Emergency spending should be accompanied by transparency and accountability safeguards. - Positive country practices: - Bangladesh: provided extensive information on the effect of policy measures on disadvantaged groups. - Sierra Leone: undertook a real-time audit of COVID-19 spending. - Chile: relied on a consultative body established before the crisis. - Media analysis of escape clause activation (1,364 articles across 36 countries): - More than half of the news articles acknowledged the effect on debt; share reached 73 percent among advanced economies. - Tone averaged about 0 on a –1 to +1 scale, with country differences; perception tended to be more positive in countries with stronger transparency standards. - Best-practice communication when activating escape clauses: publish a credible medium-term fiscal framework, report on relevant programs, and provide analysis by independent agencies. ### Concluding guidance - Fiscal support remains indispensable where needed, but buffers have dwindled. - Strengthening the credibility of public finances can make the trade-off between support and sustainability less painful. - Countries should: - Maintain nimble, targeted short-term support while protecting the poor and saving lives. - Credibly commit to medium-term consolidation when fiscal space is limited. - Mobilize revenue and improve expenditure efficiency. - Strengthen fiscal frameworks, transparency, and institutions to lower borrowing costs and preserve market access. - Pursue structural transformation via high-quality investment in physical capital and education, better-targeted fiscal transfers, and strengthened social safety nets to reduce scarring and make growth more inclusive. *Source: International Monetary Fund. Fiscal Monitor: Strengthening the Credibility of Public Finances, Chapter 1 (text provided).* ### CHAPTER 1 ### CHAPTER 1 Policy in an Uncertain Recovery ### Introduction - The COVID-19 pandemic has lasted over 20 months. - The world faces three global problems requiring global action: - the Great Vaccine Divide, - climate change, - the Great Financing Divide (financial constraints facing vulnerable people and countries). - Preliminary estimates from the Global Debt Database: debt—issued by governments, nonfinancial corporations, and households—in 2020 reached $226 trillion and increased by $27 trillion. - The increase in public debt in response to COVID-19 is characterized as justified and expected to be one-off, as documented in Chapter 1. - Policy frameworks and credibility matter for access to financial markets; Chapter 2 finds that countries with high-credibility fiscal frameworks benefit from better bond market access and lower sovereign bond interest rates. - The bottom line emphasized: Fiscal responsibility pays off. ### Recent Developments and Outlook - Advanced economies and China together contributed more than 90 percent to the accumulation of worldwide debt in 2020. - Emerging markets and low-income developing countries contributed only around 7 percent to the accumulation of worldwide debt in 2020. - Differences across country groups are evident in fiscal policy and economic developments, and also within country groups; policy advice must be tailored to: - the evolution of the epidemic, - economic and employment developments, - country characteristics. - Advanced economies are projected to recover to the pre-COVID growth path; fiscal support will persist but spending and revenues will gradually approach the pre-COVID path. - China and the United States stand out with early and strong recoveries. - Low-income developing countries are projected to suffer a persistent fall in growth relative to pre-COVID prospects. - Lower growth and shortfalls in revenues in poorer countries are major concerns for the eradication of extreme poverty and for sustainable and inclusive development. ### Risks to the Outlook: Uncertain Room to Maneuver - Data and forecasts suggest that the ability to issue debt at favorable terms was an important determinant of economic developments and prospects. - COVID-19 highlighted the impact of the existing Great Financing Divide and the risk that it could permanently hurt lower-income economies’ growth prospects. - Constraints on financing are particularly severe for poorer countries. ### Policy Conclusions - Global policy actions and international cooperation are needed to address the Great Vaccine Divide, climate change, and the Great Financing Divide. - The recent General Allocation of Special Drawing Rights (SDRs) amounts to US$650 billion and constitutes the largest allocation ever agreed upon. - The beneficial effects of the SDR allocation can be multiplied by rechanneling from higher income economies to low-income developing countries; possible channels mentioned include: - increased financing for the Poverty Reduction and Growth Trust, - a new resilience and sustainability facility. - Rechanneling SDRs in such ways would contribute to sustainable development and international convergence. - The expiration of the Debt Service Suspension Initiative (DSSI) at the end of the year makes a fully functioning G20 Common Framework urgently needed. - On climate change, concrete global policy actions at COP26 are called for, including: - an international carbon price floor adjusted to country circumstances, - a green public investment program and research (sentence in source cuts off here). *Source: International Monetary Fund. Fiscal Monitor: Strengthening the Credibility of Public Finances, Chapter 1 (text provided).* ### FOREWORD ### FOREWORD ### Climate and Global Support (selected points) - Policy responses discussed include: subsidies; (iii) targeted transfer schemes to households adversely affected by the climate policies; (iv) advanced economies’ pledge to mobilize USD100 billion annually in climate finance to support developing nations; and (v) strengthening of the global climate information architecture (data, disclosures, taxonomies). - The Great Vaccine Divide, the Great Financing Divide, and global warming affect everyone, but especially the poorest and most vulnerable. - Sustainable, inclusive, green recovery requires urgent longer-term investment and financing. *Vitor Gaspar, Director of the Fiscal Affairs Department* ### Chapter 1: Policy in an Uncertain Recovery — Key findings and projections - Vaccination and fiscal support have saved countless lives and facilitated an economic rebound, but uncertainty remains because of variants such as Delta and unequal vaccine access. - 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. - 2021 deficits are reported as falling by about 2 percentage points of GDP in 2021, on average. - Deficits are projected to decrease further by almost 3 percentage points in 2022 and return to their prepandemic levels by 2026. - 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. - Many low-income developing countries will likely need further international aid and in some cases debt restructuring. - The crisis is estimated to have thrown between 65 and 75 million people into poverty in 2021 relative to prepandemic trends. - Most of the $16.9 trillion in fiscal measures announced to fight the pandemic are set to expire this year. ### Chapter 1: Cross-country divergence and financing constraints - Advanced economies: fiscal policy remains accommodative and is shifting toward green transition, digital transformation, and longer-term investments; some jurisdictions are implementing large recovery plans (e.g., NGEU, Jobs and Families Plans). - Emerging markets and low-income developing countries: recovery held back by low vaccine availability; governments reorient expenditures to pandemic priorities; higher interest rates and lower revenues strain fiscal support and debt servicing. - By 2026, ratios of gross government debt to GDP are projected to begin to fall only marginally, relying almost entirely on economic growth. - In low-income developing countries, revenues are expected to be on average 2 percentage points lower than projected in 2019. - Income inequality is likely to rise persistently in emerging markets and low-income developing countries; overall poverty is expected to decline in 2021 but remain 65–75 million higher than prepandemic trends. ### Chapter 1: Risks - Upside: scaling up vaccine production and delivery, especially to emerging markets and low-income developing countries, would limit further damage. - Downside: new variants, low vaccine coverage, vaccine hesitancy, realization of contingent liabilities (including from loan and guarantee programs), social discontent, and sensitive financing conditions tied to global interest rates and central bank moves. ### Chapter 2: Strengthening the Credibility of Public Finances — Findings - Fiscal support during the COVID-19 pandemic increased gross financing needs and raised government debt, which 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. - When public debt exceeded projections historically, the median increase in debt ranged between 12 and 16 percent of GDP over five-year horizons. - 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. - Anchoring the medium-term fiscal strategy on the public sector balance sheet can preserve credibility and may help protect public investment, for countries with sufficient capacity. - 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. - Announcements of large fiscal adjustments do not necessarily build fiscal credibility, as private forecasts typically discount their short-term impact on the deficit. ### Chapter 2: Policy implications and recommendations - Commit to fiscal sustainability with credible frameworks (rules and institutions) to buy time and make debt stabilization or reduction less painful. - Use fiscal frameworks to balance three goals: sustainability, economic stabilization, and simplicity—recognizing these goals can be difficult to satisfy simultaneously. - Calibrate fiscal policy to the cycle and the speed of the recovery; tighten fiscal policy if private demand recovers more rapidly than expected to reduce the risk of a sudden rise in interest rates. - Mobilize more revenue in the medium term and improve expenditure efficiency to strengthen fiscal credibility. - Enhance transparency and accountability; strengthen fiscal institutions and independent monitoring to improve private-sector trust and lower borrowing costs. - International cooperation is vital: continue providing grants, loans, and initiatives such as the G20 Common Framework for debt relief; leverage IMF Special Drawing Rights allocation to support global liquidity. *International Monetary Fund | October 2021* ### 1. Advanced Economies2. Emerging Market Economies3. Low-Income Developing Countries ### 1. Advanced Economies2. Emerging Market Economies3. Low-Income Developing Countries ### Recent developments and outlook - The evolution of public finances depends on the depth of pandemic effects on growth; structural transformation and investment packages may help reduce future debt ratios (October 2021 World Economic Outlook). - Downsides: with debt at record-high levels, countries are exposed to changes in global interest rates, refinancing risks, and reduced fiscal space to respond to future shocks. This is especially relevant for emerging and developing economies, where public debt maturity is shorter and persistently low tax revenues risk straining governments’ capacity to service debt. - Fiscal policy needs to remain nimble to support lives and livelihoods where vaccination coverage is limited and infections are resurgent. - Emergency spending should be accompanied by measures ensuring transparency and accountability so that public money is well targeted to the most needy (IMF 2020a). - International cooperation, including financial support, is crucial to ensure vaccines, treatments, and medical supplies are distributed quickly and fairly (Agarwal and Gopinath 2021). - The adverse impact of the pandemic on development underlines the importance of domestic reforms and international aid, including debt relief and concessional finance, to foster sustainable and inclusive growth (Benedek and others 2021). ### Advanced economies: size and composition of fiscal responses - Fiscal policy in advanced economies is acting on two fronts: - Continued ample support while economies grapple with the pandemic and its unequal effects. - Multiyear plans to “build back better”: increase public investment, strengthen social safety nets, address climate change, and improve resilience to future health crises. - Cyclically adjusted primary deficit for advanced economies: - Expected to decrease in 2021 by 0.5 percentage points of GDP (to 6.3 percent). - Projected to shrink by almost 2 percentage points on average in 2022 and fall further to 2.1 percent of GDP by 2026 (0.8 percent in the euro area and 3.5 percent in the United States). - Gross government debt for advanced economies: - Expected to decline marginally to about 120 percent in 2026, driven by favorable interest rates, economic growth, and projected fiscal adjustments (including a decline in COVID-19–related spending). - Country variability: debt ratios expected to remain broadly stable in some countries (United Kingdom) or continue rising in others (Republic of Korea). - Major multiyear packages and their features: - European Union NGEU recovery plan: €750 billion total (of which €390 billion is in grants and €360 billion in loans). Prioritizes climate and digitalization investments; Recovery and Resilience Facility requires at least 37 percent of each plan’s allocation to support the green transition and at least 20 percent to be directed to digital transformation. - United States proposals: American Families Plan (AFP) $2 trillion and American Jobs Plan (AJP) $2.3 trillion aimed at redistributing resources to vulnerable households, investing in infrastructure and human capital, boosting labor force participation, and improving productivity. Costs are expected to be partially offset by revenue measures including increases in personal and capital income tax rates, an increase in the corporate tax rate, and a global minimum tax on corporate profits. - Macroeconomic simulation of these packages: - By 2026, the AFP, the AJP, and the NGEU could add $4.6 trillion to global GDP. - About 16 percent of this increase, or roughly 0.6 percent of global GDP, would correspond to international spillovers. - Effects are especially strong on exports; global investment increases more gradually. International prices rise modestly, with the impact on global interest rates occurring with a lag. ### Emerging market economies and low-income developing countries: differentiated responses and risks - Short-term differences in fiscal policy evolution reflect variation in the intensity of the health crisis, vaccine availability, and fiscal space to increase spending or reduce taxes. - Medium-term outcomes will depend on the composition and size of fiscal responses during the crisis and recovery, contributing to uneven economic damage across countries (April 2021 World Economic Outlook). - Emerging and developing economies face heightened vulnerability from: - Shorter public debt maturities. - Persistently low tax revenues. - Exposure to faster-than-expected increases in borrowing costs once exceptional monetary support is removed. - The ability to provide additional short-term fiscal support can be enhanced by credible commitments to rebuild fiscal buffers in the medium term and by transparent rules and institutions guiding fiscal policy (see Chapter 2). - International assistance is critical: financial support, debt relief, and concessional finance to foster sustainable and inclusive growth. ### Accountability, transparency, and policy design - Governments have faced challenges maintaining accountability in COVID-19 responses, though positive practices emerged across income groups: - Bangladesh: provided extensive information on the effect of policy measures on disadvantaged groups. - Sierra Leone: undertook a real-time audit of COVID-19 spending. - Chile: relied on a consultative body established before the crisis. - Emergency spending should be accompanied by measures ensuring transparency and accountability so public funds are well targeted (International Budget Partnership survey; El Khoury and others 2021). ### Policy implications and recommendations - Short term: - Maintain nimble fiscal support targeted where vaccination coverage is limited and infections are resurgent. - Ensure emergency measures include transparency and accountability safeguards. - Medium term: - Credibly commit to rebuilding fiscal buffers and maintaining fiscal sustainability via transparent rules and institutions. - Implement domestic reforms to boost sustainable and inclusive growth. - Use international cooperation, debt relief, and concessional finance to support vulnerable countries. - Cross-border considerations: - Recognize and account for international spillovers from major fiscal packages. - Coordinate policy where possible to limit adverse global spillovers via interest rates and commodity prices. *International Monetary Fund | October 2021* ### 0.6 percent of global GDP. Considering the joint effect of their ### text - 0.6 percent of global GDP. Considering the joint effect of their ### Global spillovers and macroeconomic effects - Three large recovery packages (European Union NextGenerationEU; United States American Families Plan and American Jobs Plan) together increase global GDP by 0.6 percent of global GDP. - Considering the joint effect of their domestic packages and the spillovers from other countries: - GDP, consumption, investment, and employment increase in the European Union and the United States. - Consumption would grow more markedly in the United States, reflecting the effect of the redistributive policies on overall aggregate demand. - Despite the large investment component of the US packages, investment growth would be higher in the European Union due to the focus of their packages on expanding the productive capacity of the economies. - Inflation in these three economies/regions is also expected to increase, but only moderately. - Most of the cumulative spillovers on GDP, consumption, investment, and employment are expected to accrue to advanced economies and to commodity-exporting economies. - For all economies other than the European Union and the United States, fiscal deficits and net debt as a share of GDP would fall relative to a baseline that does not include the packages. In most countries, this will reflect the positive effects of higher growth and fiscal revenues, but in some it would be the consequence of fiscal policy adjustment to tighter financing conditions. - Some countries may face adverse spillovers, especially if global interest rates were to rise sharply: - Real consumption in G20 emerging market economies is expected to contract slightly. - The extent of potentially negative spillovers depends crucially on the response of domestic inflation and, correspondingly, of monetary policy in the two source countries/regions (European Union, United States). - Commodity exporters and close trading partners of the two source countries/regions would benefit the most. - Highly leveraged countries susceptible to changes in financing costs would be harmed by higher interest rates. ### Emerging Markets: fiscal stance and prospects - Fiscal policy remains supportive on average amid limited vaccine coverage and resurgent waves of infection; many countries have approved new spending to cope with the virus in 2021. - Tight borrowing constraints are increasingly leading to some fiscal retrenchment in several countries and limiting the ability of fiscal policy to support people and firms. - The average fiscal deficit is projected at 6.6 percent of GDP in 2021, down by 3 percentage points from 2020. - The decrease can be split about equally between a recovery in tax revenues as economic conditions improve and a reduction in discretionary spending measures. - In two-thirds of emerging markets, real primary spending in 2021 will be above its 2019 level. - In half of the countries, real primary spending will have fallen from its 2020 peak as a result of contractions in both current and capital spending. - In 2022, the deficit is expected to fall by an additional 1 percentage point. - Country-specific examples: - China: cyclically adjusted primary deficit projected to fall by 2½ percentage points in 2021 compared with 2020 as most pandemic-related fiscal measures expire and public investment is reduced. - Brazil and Russia: 2021 fiscal retrenchment is even more marked. - Oil exporters: narrowing fiscal deficit in 2021 explained by significant revenue improvements as oil prices increase. - Chile: cyclically adjusted primary balance expected to deteriorate in 2021 due to new stimulus measures. - Average gross government debt in emerging markets is predicted to reach 64 percent of GDP in 2021, up by almost 10 percentage points from 2019. - The level rises by more than 20 percentage points in one-fifth of the countries. - Medium-term projection: public debt for the emerging market group projected to reach 70 percent of GDP in 2026 (but remain stable at 60 percent of GDP excluding China). - Asia would surpass Latin America as the region with the highest public debt as a share of GDP, with debt in China increasing despite fiscal tightening and renewed efforts to restrict debt in state-owned enterprises and local governments. - Some governments are raising revenues to counter debt trends (example: Indonesia). - Social and political tensions in several countries amid pandemic challenges limit the ability to plan medium-term fiscal consolidations (example: Colombia). ### Low-Income Developing Countries: fiscal dynamics and debt - The average overall fiscal deficit in 2021 in low-income developing countries remains at just above 5 percent of GDP, little changed from 2020, and 1.5 percentage points of GDP above its prepandemic value. - Limited fiscal support compared with other income groups explains this pattern. - In real terms, overall expenditure in 2021 is expected to increase in about 70 percent of the countries. - Current expenditure in 2021 will be above its 2019 level in real terms in the vast majority. - Capital spending in 2021 will be above its 2019 level in only 60 percent of countries. - Real revenues are projected to increase in 2021 in three-quarters of the countries but likely remain subdued in countries reliant on tourism. - In almost half of them, real revenues will exceed their 2019 level. - In almost half of the countries, grants are expected to be below their 2019 level in dollar terms. - Fiscal deficits as a share of GDP are expected to fall in half of the countries in 2021, especially: - Countries with elevated debt levels before the pandemic (Liberia, South Sudan, Zambia). - Countries with large fiscal deficits in 2020 (Ghana, Guinea-Bissau). - Certain commodity exporters (Sudan). - The average overall fiscal deficit is projected to return to its prepandemic level by 2025, as countries implement medium-term fiscal consolidation measures. - Over the medium term: - Average revenue is expected to increase and stabilize at 14½ percent of GDP but would still remain 0.5 percentage points of GDP below the 2019 level. - Expenditure is projected to decline to 18 percent of GDP by 2026, ½ percentage point of GDP below the 2019 value, with current spending gradually scaling down and capital expenditures holding steady as a share of GDP. - Average gross debt in 2021 is projected to remain stable at almost 50 percent in 2020, still 5 percentage points above its 2019 value. - Debt vulnerabilities remain high and the room for further borrowing is likely to get smaller, with the debt service relative to taxes trending upward. - Half of low-income developing countries are experiencing debt distress or are at risk of it. - Debt relief and IMF support: - As of the end of May 2021, 47 out of 73 eligible countries had joined the Debt Service Suspension Initiative (DSSI). - The IMF has extended $117 billion in new financing and debt service relief to 85 countries. This includes financial assistance to 53 low-income developing countries and grant-based debt service relief to 29 of the IMF’s poorest and most vulnerable members. - The IMF’s support to low-income developing countries has almost tripled and has increased by about 1 percent of GDP for emerging market economies. - The new Special Drawing Right (SDR) allocation will further help vulnerable countries. ### Risks to the outlook and fiscal space - The evolution of the pandemic, vaccine distribution, and variants (e.g., Delta) represent the most significant short-term risks to the global outlook. - Rapid scaling up of vaccine production and delivery, especially to emerging markets and low-income developing countries, would accelerate resolution of the health crisis, limit further damage to the global economy, and improve fiscal prospects. - The spread of the Delta variant, vaccine hesitancy, and low vaccine coverage in some countries could inflict new damage and increase pressures on public budgets. - Fiscal space indicators show deterioration: - Debt-to-GDP and debt-to-revenue ratios have increased in 2021 relative to 2019, signaling a deterioration in fiscal space. - The interest rate spread paid by emerging markets and low-income developing countries on foreign-currency debt has remained broadly stable for the median countries but has increased in several cases, signaling tightening financing constraints and credit rating downgrades over the past two years. - Higher borrowing rates make debt more onerous; the combination of higher interest rates and lower government revenues has progressively strained the capacity of low-income developing countries to service their debt. - Advanced-economy counterbalance: - A reduction in the gap between the interest rate they pay on public debt and their average growth rate projected over the next decade has helped advanced economies. - Higher debt levels have nonetheless increased gross financing needs significantly in many countries, posing challenges for debt management and increasing vulnerability to rising borrowing costs when central banks reduce large scale asset purchases. - Financing constraints have become tighter or prohibitive in several emerging market economies and low-income developing countries, representing a likely source of significant vulnerability for medium-term debt trajectories. - Historical lessons: - After the global financial crisis, disappointing growth performance and fiscal policy contributions pushed debt ratios higher than expected, with the average debt ratio in 2014 larger than projected by about 3 percentage points in advanced economies and by about 12 percentage points in emerging markets and low-income developing countries. - Stock-flow adjustments and contingent liabilities can cause major debt surprises, especially in emerging markets and low-income developing countries where accounting transparency is typically lower. - Examples of contingent liability risk: local government financing vehicles and local SOE debt in China; government guarantees and loans to SOEs in tourism sectors in other countries. - Government exposure to contingent liabilities: - In most sample countries, take-up of blanket COVID-19 support programs has been limited to date, reducing potential contingent liabilities. - Outstanding guarantees remain large in various countries; some have started estimating potential losses (example: United Kingdom Office of Budget Responsibility estimates up to 40 percent default in one guarantee program; Banque de France projects up to 6 percent default of guaranteed loans in France). ### Policy conclusions and recommendations - Fiscal policy needs to remain nimble and adapt to rapidly changing conditions; measures should be centered on: - Addressing the economic and social fallout from the pandemic where the virus is still spreading rapidly and vaccination rates are low. - Sustaining the recovery where widespread vaccination has been achieved. - Strengthening medium-term fiscal frameworks can help buy time to provide further fiscal support in the short term while ensuring fiscal space is rebuilt in the medium term. - Strong frameworks that ensure fiscal sustainability is not at risk, including by improving revenue mobilization, can help central banks credibly operate their asset purchase programs. - In countries with tight borrowing constraints (many emerging markets and low-income developing countries), fiscal policy must balance trade-offs: - Prioritize saving lives and protecting the poor. - Support the economy until vaccinations become widespread. - Fund development needs and contain the buildup of public debt. - Manage social tensions. - Where sustained large fiscal deficits are not an option, be selective: protect lives and the poor, strengthen expenditure efficiency, and enhance growth prospects. - For low-income developing countries to reverse pandemic damage and progress toward Sustainable Development Goals: - Significantly scale up spending on human and physical capital in the years ahead while ensuring debt sustainability. - Muster needed resources by reversing the decline in revenues as a share of GDP via a well-designed menu of taxes: value-added and property taxes, progressive income, corporate and capital taxation, and expansion of the base for corporate and personal income taxes. - Address distributional concerns by strengthening social safety nets. - In advanced economies: - Calibrate fiscal policy to the economic cycle and the speed of the recovery. - Achieve the right mix between fiscal and monetary policy. - Use protracted low interest rates to reduce scarring from the pandemic and close output gaps, but retune fiscal policy if private demand recovers faster than expected to avoid contributing to excessive or prolonged inflationary pressures. - Fiscal policy should support structural transformation to increase productivity and economic growth: - Increase high-quality investments in physical capital and education. - Better target fiscal transfers toward retraining and reallocation of workers across firms and sectors. - Strengthen social safety nets to make growth more inclusive and reduce economic scarring from the pandemic. *International Monetary Fund | October 2021 — Fiscal Monitor: Strengthening the Credibility of Public Finances — Chapter 1* ### CHAPTER 1 POLICy IN AN uNCeRTAIN ReCOVeRy ### CHAPTER 1 POLICy IN AN uNCeRTAIN ReCOVeRy ### Global cooperation, vaccines, and international finance - Immediate priority: ongoing national and multilateral efforts to vaccinate as many individuals as soon as possible. - Joint plan proposed by the IMF, World Bank, World Health Organization, and World Trade Organization provides a roadmap to address the health crisis and promote the economic recovery. - International community actions recommended: - Increase official lending and aid to low-income developing countries to help cover financing gaps and achieve development goals. - Countries with strong external positions encouraged to channel resources from the new SDR allocation toward those most in need. - Make the G20 Common Framework fully operational promptly and advance greater debt transparency. - Steps taken: extension of the Debt Service Suspension Initiative to the end of 2021 has bought additional time. - Tax cooperation and climate policy: - Growing support for a global minimum effective corporate tax and for allocating corporate taxes more closely with the jurisdiction where consumers of major multinationals are located. - Carbon taxes, supported by an international carbon price floor, can incentivize decarbonization. ### American Families Plan (Box 1.1): scope, distributional impact, and macro effects - Components and intended financing: - Extends changes from the American Rescue Plan (ARP): expanded health and insurance tax credits, the Earned Income Tax Credit, and the Child Tax Credit. - Adds universal preschool, increased access to high-quality affordable childcare, support for tertiary education, increased nutrition support to disadvantaged families, and paid family leave. - If legislated, financed by higher income and capital taxes on households at the top of the income distribution. - Main distributional and poverty impacts (model-based, over a decade or longer): - Gini coefficient for disposable income could fall by at least 4.3 points (from prepandemic levels). - The ratio of disposable income of the top 10 percent to the bottom 10 percent could fall from 14 to 10. - Poverty could fall by nearly one-third, from 10.5 percent (the prepandemic level) to 7.6 percent of the population. - Improving targeting of the Child Tax Credit (for example, by reducing phase-out income levels to 300–400 percent of the federal poverty level) could reduce the Gini by 0.7 points and decrease poverty by an additional 0.15 percentage points. - Labor market and efficiency considerations: - Transfers targeted to vulnerable households could reduce labor force participation, but package measures that encourage labor force participation (expanded earned income tax credit, paid family leave, universal preschool, high-quality affordable childcare) more than offset negative effects on labor supply. - Policies to raise education (tertiary education subsidies) increase productivity and encourage firm investment in sectors that depend on a highly educated labor force. - Macro multiplier: - AFP’s cumulative fiscal multiplier of approximately 1.0—that is, for every $1 spent, output would increase by $1.0—would leave the country with a higher level of GDP and a more equitable society. ### Debt Service Suspension Initiative (DSSI) and fiscal developments in low-income developing countries (Box 1.2) - Role of grants, concessional financing, and the DSSI: - Large external grants and exceptional emergency and concessional financing, including the IMF’s various lending facilities and the DSSI, have helped combat the COVID-19 crisis. - Despite support, many low-income developing countries still struggle with financing constraints. - Fiscal effects among DSSI beneficiaries: - The DSSI helped some low-income developing countries by contributing to increased government spending, but was not large enough to prevent a reduction in other priority spending. - Among DSSI beneficiaries, the overall increase in fiscal deficits in 2020 was contained at 1.8 percentage points of GDP compared to projections before the pandemic. - Grants and international financial support allowed phase 1 DSSI beneficiaries to increase COVID-19–related spending despite a fall in tax and other revenues. - However, non–COVID-19 expenditures have fallen: - 70 percent of DSSI beneficiaries have cut capital spending relative to prepandemic projections, with an average contraction for the group of 1.1 percentage points of GDP. - Within spending categories, education spending has been cut in about 70 percent of the DSSI beneficiaries in favor of increases in social protection and health. - Average COVID-19–related health spending (0.5 of a percentage point of GDP) has been larger than the average increase in health spending (0.2 of a percentage point of GDP), indicating cuts in non–COVID-19 health spending. ### Introduction: debt, deficits, and the challenge of rebuilding buffers - Debt increases by end-2021 (projections): - Advanced economies: debt as a share of GDP will be 18 percentage points higher than prepandemic levels. - Emerging markets: 10 percentage points higher. - Low-income developing countries: 6 percentage points higher. - Trade-offs and vulnerabilities: - Higher deficits have boosted gross financing needs, making countries more vulnerable to abrupt changes in market sentiment. - Higher debt has reduced available fiscal buffers for future crises. - Sovereign defaults have occurred and several countries face market scrutiny. - Interest burden and financing costs: - Despite the increase in debt, the interest burden of debt has virtually been unchanged between 2019 and 2021. - Since 2014 interest payments as a share of revenues have been rising in low-income developing countries and, to a lesser extent, in emerging markets. - Lessons and risks: - Drawing down buffers enabled resilience during the global financial crisis; premature tightening could delay recovery, while fiscal slippages could erode market confidence. - Global interest rates may rise sooner or more sharply than expected, increasing financing costs and vulnerabilities in emerging and frontier markets. - Many countries did not rebuild fiscal buffers after the global financial crisis and they have now dwindled. ### Strengthening fiscal credibility and fiscal frameworks - Definition and importance: - “Fiscal credibility” defined as the public’s confidence in the government’s fiscal plans and ability to achieve its commitments (meeting debt obligations, carrying out announced tax and spending plans). - Credible commitment to fiscal sustainability can buy flexibility and time; when lenders trust governments are fiscally responsible, financing deficits is easier and cheaper. - Components of fiscal frameworks: - Long-term fiscal targets (anchors), for example a debt ceiling. - Fiscal rules imposing numerical limits on fiscal aggregates (expenditure, deficits, debt). - Fiscal institutions (for instance, fiscal councils) and procedures for budget preparation, approval, and execution. - Role of fiscal councils (example functions): - Monitoring fiscal performance and compliance with fiscal rules. - Assessing costs and impacts of fiscal policy measures. - Preparing independent macroeconomic forecasts (used in some countries as the basis for budget projections). - Guidance for strategy: - Governments must determine their strategy for debt, including the long-run debt level targeted, and understand risks to their fiscal accounts to clarify feasible fiscal frameworks and calibrate them. *Source: CHAPTER 1 POLICy IN AN uNCeRTAIN ReCOVeRy (text unit).* ### 1. Debt2. Interest Expense3. Gross Financing Needs ### 1. Debt2. Interest Expense3. Gross Financing Needs ### Rebuilding fiscal space: required primary balance adjustments - Exercise setup: - Uses baseline projections for 2021–23 from the April 2021 World Economic Outlook. - Computes average primary balance needed in 2024–45 to bring the debt-to-GDP ratio back to 2019 levels by 2045. - Assumes long-term growth rates equal to IMF staff projections for 2024–26. - Assumes effective real interest rates after 2023 are 1 percent for advanced economies and 2.5 percent for emerging markets and low-income developing countries. - Note: interest rates assumed are lower than historical averages. - Main quantitative findings (average primary surplus required, relative to 2010–19): - Typical advanced economy: 0.5 percent of GDP higher. - Typical emerging market: 1.0 percent of GDP higher. - Typical low-income developing country: 0.3 percent of GDP higher. - Sensitivity to higher interest-rate assumptions (effective real interest rates set to 2 percent for advanced economies and 3.5 percent for emerging markets and low-income developing countries): - Advanced economies: 1.2 percent of GDP higher. - Emerging markets: 1.6 percent of GDP higher. - Low-income developing countries: 1.0 percent of GDP higher. - Shortened horizon to return to 2019 ratios (to 2035) — needed increase in primary surpluses (unweighted averages, excluding Venezuela and countries with population < 1 million): - Advanced economies: 0.9 percent of GDP higher than in the past. - Emerging markets: 1.4 percent of GDP higher. - Low-income developing countries: 0.5 percent of GDP higher. - Qualitative considerations affecting ambition of debt objectives: - Need for buffers where pre-COVID fiscal space was limited. - Greater macroeconomic uncertainty and more frequent/severe climate shocks imply larger buffers. - Possible improvement in debt-carrying capacity due to higher global demand for savings. - Long-term possibility that growth exceeding interest rates can allow debt-to-GDP convergence (holding mainly in the very long term). ### Complementary strategies and risks - Monetary policy: - Can support debt reduction via lower real interest rates and lower interest bills if inflation is sufficiently low. - Accommodative monetary policy increases fiscal multiplier and can address short-term market stress via asset purchases or communication. - Credibility and independence of the central bank are essential and should not be jeopardized. - Liabilities restructuring and financial repression: - Have reduced debt levels in the past but often associated with declines in output, investment, credit, and trade finance. - Preemptive restructurings may carry lower costs. - In countries with mostly domestic debt, restructuring may raise financial-sector stability concerns. - Confidence crises can generate negative externalities, potentially systemic if involving a reserve currency issuer. ### Trade-off with supporting the recovery: timing and country conditions - Key country-specific determinants for timing of deficit reduction: - Pandemic phase: continue protection where virus containment is incomplete; consider external support or IMF programs where fiscal space is lacking. - Balance sheets and risk premiums: initial debt levels influence policy stance; countries with lower debt have lower and less sensitive risk premiums. - Multiplier: lower fiscal multiplier strengthens case for reducing deficits; public investment yields higher returns if well chosen. - Scarring (hysteresis): risks of persistent output loss justify countercyclical fiscal support where feasible. - Debt composition and investor base: more domestic-currency, longer-maturity debt and stable investor bases reduce vulnerability. - Model-based trade-off (based on Bianchi, Ottonello, and Presno 2021): - A representative emerging market optimally increases the primary balance by 0.8 percent of GDP during a recession to mitigate higher spreads. - Even with such an optimal response, sovereign spreads increase by 0.7 percent on impact. - Baseline model parameters: government external debt is 23 percent of GDP; a lower initial level of debt corresponds to external debt 75 percent lower than baseline; a lower multiplier is 7 percent smaller on impact than baseline. - Timing and commitment to future consolidation: - Example: tightening the primary balance by 0.5 percent during the year of recession without credible future consolidation leads to employment loss. - Committing to reduce deficits by 0.5 percent of GDP after the worst of a crisis can allow modest support during the recession and yield small employment gains relative to the baseline. - Policy instruments for commitment: - Prelegislated tax or spending changes (example formats described). - Structural fiscal reforms (pensions, subsidies, public employment/wages) legislated promptly, implemented gradually with mitigation measures. - IMF- or EU-supported programs can improve credit ratings and lower spreads via financing and transparent monitoring. ### Has debt-carrying capacity increased? - Observed patterns: - Sovereign spreads widened modestly since the crisis, but real bond yields in 2021 remained close to historical averages due to declining interest rates in advanced economies. - Lower risk premiums may reflect increased debt-carrying capacity from expectations of low-for-long interest rates or weakened sensitivity of spreads to fiscal fundamentals. - Exceptional central bank interventions and quantitative easing may have contributed to reduced funding costs. - Empirical findings on sensitivity of spreads to debt: - A 1-percentage-point increase in the debt-to-GDP ratio would have raised emerging market spreads in foreign currency by 2 percent in the early 2000s but by less than 1.5 percent in 2020. - Similar decline found for local-currency borrowing interest rates for advanced economies and emerging markets. - After accounting for global factors, the sensitivity of emerging market foreign-currency spreads to debt relative to the global average has remained constant since 2013. - The sensitivity of spreads to the relative level of a country's debt has exceeded sensitivity to the global average debt level. - Uncertainty and potential reversals: - The decline in sensitivity of spreads to debt levels is not well understood and may not persist. - High global demand for savings in 2020 (due to constrained consumer spending) helped fund large gross financing needs of governments, partly lowering spreads. - If recent trends were temporary, declines in funding costs and weakened relationship between risk premiums and debt could reverse. *International Monetary Fund | October 2021* ### 1. Sensitivity of Spreads to the Debt-to-GDP Ratio2. Sensitivity of Spreads to the Debt-to-GDP Ratio Relative to the Glo ### 1. Sensitivity of Spreads to the Debt-to-GDP Ratio2. Sensitivity of Spreads to the Debt-to-GDP Ratio Relative to the Global Average ### Assessing and Managing Fiscal Risks - Fiscal frameworks should be designed to allow countercyclical responses in crises while ensuring large public debt increases in crisis times are offset by progressive debt reduction in good times (Escolano and Gaspar 2016). - Since 2007 the world experienced two of its worst crises in 100 years; such shocks cause revenues to collapse, spending to rise, and debt to jump. - Balance sheet risks and contingent liabilities have grown (implicit guarantees, state-owned enterprises, corporate support programs). Fiscal risks from state-owned enterprises, net acquisition of underperforming financial assets, and broader exposure to private sector debt have driven stock-flow adjustments behind large debt increases. - Because balance sheet risks and contingent liabilities are more likely to materialize when growth is slow, the risk of further large jumps in debt is significant. - To be credible, fiscal frameworks should: - Account for and manage fiscal risks using risk analysis to inform fiscal targets and embedded flexibility. - Budget for expected costs of loan guarantees and other contingent liabilities. - Cover at least the general government and be complemented by fiscal data for the whole public sector. ### Explaining Unexpected Increases in Debt - A simple decomposition compares expected macro-fiscal paths from past medium-term projections with realized developments; unexpected changes are decomposed into contributions from real interest rates, real growth (including automatic stabilizers), cyclically adjusted primary balances, valuation effects from real exchange rates, and other stock-flow adjustments (Online Annex 2.3). - Considering all unexpected increases in the debt ratio over five-year windows during 1995–2019: - The median jump was 13.6 percent of GDP. - Median jumps by country group: 16.5 percent of GDP for the median low-income developing country; 13.4 percent of GDP for the median emerging market; 12.3 percent of GDP for the median advanced economy. - Main drivers of unexpected jumps in debt: - Disappointing growth outcomes and larger-than-anticipated stock-flow adjustments. - Median contribution of growth forecast errors to unexpected increases in debt over the past 25 years: 6.5 percent of GDP. - Median contribution of surprises in stock-flow adjustments: 4.3 percent of GDP. - Exchange rate depreciations and other stock-flow adjustments are particularly important in emerging markets and low-income developing countries; drivers include insufficient information on quasi-fiscal operations, buildup of arrears, materialization of contingent liabilities, acquisition of financial assets, incomplete statistics, and creative accounting. - The 75th percentile of the contribution of stock-flow adjustment (excluding exchange rate effects) reached: 10 percent of GDP in advanced economies; 12 percent of GDP in emerging markets; 20 percent of GDP in low-income developing countries. - Contributions of cyclically adjusted primary balances (five-year cumulative median): - 2 to 3 percent of GDP for advanced economies and emerging markets. - 0.5 percent of GDP for low-income developing countries. - Dispersion: the 75th percentile reached 9.8 percent of GDP in advanced economies; 12.5 percent of GDP in emerging markets; 8.3 percent of GDP in low-income developing countries. - Real interest rate surprises at a five-year horizon have had little effect on unexpected debt increases: - Median contributions of less than 0.5 percent of GDP in advanced economies and low-income developing countries. - Median contribution of 1 percent of GDP in emerging markets. - Correlations and joint movements: - Decomposition of unexpected jumps in debt after the global financial crisis shows high correlation (in the range of 0.6 to 0.8) between contributions of surprises in primary balances and stock-flow adjustment, and between real interest rate surprises and real exchange rate surprises — implying risks often move together. ### Mitigating and Managing Fiscal Risks - Identifying and measuring specific fiscal risks complements debt sustainability and scenario analyses; this is critical given large loan, equity, and guarantee packages and quasi-fiscal measures during the pandemic. - Contingent liabilities created by government-guaranteed loans can be macroeconomically significant; they could fall if facilities are closed and firms repay loans, or rise if the pandemic deepens. - Good practices: - Budgeting for expected costs of contingent liabilities in medium-term fiscal plans to ensure resources are available and to make fiscal effects explicit when decisions are taken. - Budgeting for expected costs is in line with international accounting standards and statistical principles and can be done on an annual cash flow basis or on a net-present-value basis in the year of provision (examples: Colombia, New Zealand, United States). - A fair-value approach can complement provisioning to capture default risk, recovery rates, and the price of risk. - Building buffers when setting targets (for deficits or debt) to accommodate unexpected costs; a probabilistic approach using historical realization of fiscal risks can estimate debt ceilings. - Risk mitigation strategies can reduce exposures or limit fiscal costs: - Limits on loan sizes and maturities; restricting eligibility under credit support schemes (example: Ukraine’s COVID-19 portfolio guarantees restricted to enterprises above a certain risk class). - Providing partial guarantees to limit moral hazard (example: Spain’s COVID-19 guarantees limited guarantee coverage to 60–80 percent of a loan, depending on firm size and loan purpose). - Requiring supported state-owned enterprises or private companies to restructure, adopt more efficient production, or strengthen governance. - Decisions to mitigate or assume risks depend on fiscal position, institutional strength, and economic conditions; assuming fiscal risks in crises can bring net benefits, but guarantees and exposures should not outlive their initial motivation once recovery is under way. ### Fiscal Frameworks, Sustainability, and Credibility of Fiscal Plans - Fiscal frameworks (long-term targets, fiscal rules, fiscal institutions, budget procedures) support fiscal sustainability and predictability and guide political deliberation toward agreed fiscal objectives. - Procedural rules can work where fiscal transparency and constituencies for sustainability are strong; numerical rules facilitate communication and accountability. - Design goals for fiscal frameworks: 1. Sustainability of public finances. 2. Stabilization of the economy through countercyclical fiscal policy, when appropriate. 3. Simplicity for fiscal rules to facilitate communication and accountability. - Trade-offs and the "trilemma": - Long-term targets based on simple indicators (debt-to-GDP) may take a narrow view of sustainability. - Some fiscal rules reduce procyclicality but can be harder to monitor (structural balance rules) or can permit debt increases (commodity price or simple expenditure rules). - Numerical rules can be rigid; procedural rules flexible but harder to communicate and monitor without strong institutions. - Pandemic effects on rules: - Nearly 50 countries have activated escape clauses in their fiscal rules or suspended their fiscal rule since the onset of the pandemic. More than half of these are EU or West African Economic and Monetary Union members covered by supranational escape clause activation. At the national level, many activated escape clauses; some suspended rules because of high uncertainty (examples: Colombia, Ghana, Peru). - Countries are considering whether to converge back toward old targets or reset them within redesigned fiscal frameworks. ### Specifying and Pursuing the Long-Term Fiscal Target - Choice of long-term fiscal target (anchors) matters: common anchors include debt or the budget balance; proposals include the interest bill and public sector net worth. - Strengths and weaknesses: - Debt-to-GDP ratio: simple, easy to monitor, predictive power for crises; may understate costs when interest rates trend downward. - Interest bill as anchor: advantages when interest rates remain low (interest bill as share of GDP or of fiscal revenues); allows more space for primary spending or tax cuts if interest bill declines. But the interest-bill–to-GDP ratio is more cyclical than debt-to-GDP in countries where interest rates rise when GDP falls (often emerging markets); a binding interest bill ceiling could force more fiscal adjustment in a recession. - Public sector balance sheet measures: - Consider assets (financial assets, public buildings, infrastructure, land, natural resources) and provide an anchor for protecting public investment. - Example: New Zealand’s fiscal framework includes a long-term objective for net worth alongside a net debt anchor to protect public investment. - Measuring net worth requires sound valuation of public assets and high-quality, transparent, credible fiscal accounting; ringfencing can create incentives to misclassify current spending as protected investment. - Empirical note on cyclicality (from Figure 2.7): - The interest-bill–to-GDP ratio is more cyclical than the debt-to-GDP ratio in countries where interest rates tend to rise when GDP falls, such as in emerging markets. *International Monetary Fund | October 2021* ### CHAPTER 2 STRENGTHENING THE CREDIBILITY OF PUBLIC FINANCES ### CHAPTER 2 STRENGTHENING THE CREDIBILITY OF PUBLIC FINANCES ### Fiscal Rules and Fiscal Prudence - Empirical evidence suggests existing fiscal rules have contributed to lower deficits (Bergman, Hutchison, and Hougaard Jensen 2016). - Debrun and others (2008) find that, in 1990–2005, fiscal rules were associated with higher primary balances and structural primary balances, controlling for endogeneity. - Caselli, Stoehlker, and Wingender (2020): for countries that would have had large deficits absent a fiscal rule, adopting a fiscal rule improved the primary balance. - David, Gonçalves, and Perrelli (forthcoming) panel estimates (55 countries over 1970–2018) show: - On average, governments react to increases in debt and in the interest bill by tightening the primary balance (the fiscal reaction function), such that debt ratios can be expected to decline and stabilize after a shock to debt or to debt service. - In countries with debt rules, jumps in debt lead to an even stronger tightening of primary balances. - Countries that have followed a debt rule have typically managed to reverse a jump in debt amounting to 15 percent of GDP in about 10 years—in the absence of new shocks. - Statistical notes: - Figures based on panel estimation for 55 countries over 1970–2018. - Significance indicators: *p < 0.10; **p < 0.05; ***p < 0.01. ### Ensuring Flexibility - Risks of rigid fiscal rules: - Rules without flexibility tend to make fiscal policy more procyclical, especially for public investment (Fatás and Mihov 2007; Guerguil, Mandon, and Tapsoba 2017). - When flexibility is allowed, fiscal rules are not associated with more procyclicality (Bova, Carcenac, and Guerguil 2014; Gootjes and de Haan 2020). - Design options to improve flexibility: - Use cyclically adjusted fiscal balance or structural fiscal balance (Fedelino, Ivanova, and Horton 2009; Bornhorst and others 2011) — but this increases monitoring and enforcement challenges; real-time assessment is difficult (Orphanides and van Norden 2002). - Expenditure rules: - Easier to monitor and permit countercyclical policy by constraining spending during booms (Ayuso-i-Casal 2012; Belu Manescu and Bova 2020). - Can foster countercyclical fiscal policy and protect important spending during downturns. - Basic expenditure rules do not accommodate permanent changes in public sector size without recalibration; more sophisticated rules can allow spending to grow if matched by discretionary revenue increases, increasing complexity. - Automatic suspension of fiscal rule when monetary policy rate reaches its effective lower bound (Portes and Wren-Lewis 2015) — may be useful where policy rate is typically above the lower bound; effectiveness uncertain where policy rate has been close to the lower bound for long. - Escape clauses: - Should be well specified and activated only for events beyond government control (severe recessions, natural disasters, pandemics) (Eyraud and others 2018). - Many countries activated escape clauses in 2020 to accommodate drops in revenues and increases in health care and social spending. - Determining when and how to return to the rule after activation is difficult; some rules require offsetting accumulated deviations, which may be infeasible. ### Returning to the Rule? - Considerations when recalibrating rules after the pandemic: - Recalibrating can improve credibility if returning to an old rule would require excessive fiscal consolidation on macro stabilization or distributional grounds. - Introducing fiscal responsibility laws or fiscal pacts may be needed prior to recalibrating or adopting new rules. - Intermediate solution: transition regime with a less ambitious interim target consistent with eventual convergence to the old rule. - Post–COVID-19 may be an opportune time to redesign or recalibrate preexisting rules in need of updating. - Frequent revamping weakens credibility; avoid redesign where framework was implemented or reformed too recently. - Redesigned frameworks should include realistic goals agreed by a broad coalition (government, political parties, civil society). - Empirical context and communication matter: - Example: Israel’s 2013/14 revision of its deficit ceiling did not harm credit rating because commitment to consolidation remained clear. - Example: Mongolia’s 2015–17 revisions raised market concerns, though some credibility was restored via IMF program negotiations in 2017. - Media reaction to 2020 suspensions was more positive in countries with high fiscal transparency and established market access. - Active and comprehensive communication strategies can help explain reforms and protections for the vulnerable (Stankova 2019). ### Strengthening Underlying Fiscal Institutions - Institutional measures to improve credibility: - Independent review of macroeconomic assumptions: - Some advanced economies (for example, Austria and the United Kingdom) delegate macroeconomic forecast preparation to independent institutions (fiscal councils). - Evidence: well-designed fiscal councils are associated with stronger fiscal performance and more accurate and less biased forecasts (Debrun and Kinda 2014). - Comprehensive medium-term budgets reflecting all planned fiscal activities to reduce hidden deficits and ensure consistency with objectives. - Effective financial controls and tax administration to implement policies in line with plans. - Predictability of revenues is positively correlated with a tax administration’s effectiveness and the quality of governance (Figure 2.10). - Figure 2.10 based on revenue projections and outturns in the World Economic Outlook database and capacity development assessments in 30 low-income developing countries, 31 emerging markets, and 2 advanced economies using the Tax Administration Diagnostic Assessment Tool. - Implementing tax and spending reforms during or after a crisis while minimizing private-sector adverse effects is challenging. - Transparent reporting of macroeconomic and fiscal projections, their assumptions, and deviations, in line with international standards such as the IMF Fiscal Transparency Code (IMF 2019). - Disclosing risks (e.g., in fiscal risk statements), regular monitoring and assessment encourages better management. - Country-specific priorities: - Low-income developing countries and fragile states: develop core public financial management systems (annual budget processes, medium-term forecasts, financial controls, reporting). - Advanced economies and emerging markets: better-designed medium-term frameworks, more comprehensive budgets, improved risk analysis and management. ### Improving the Predictability and Credibility of Fiscal Plans - Role of fiscal frameworks in aligning private and official forecasts: - If budget announcements are credible, private expectations should center on government projections and forecaster disagreement should be minimal. - Empirical findings (End and Hong, forthcoming; regressions based on 423 observations covering 23 advanced economies and 9 emerging markets over 1997–2019): - On average, governments project significantly lower fiscal deficits than the private sector for both the current calendar year and the next fiscal year. - Strong fiscal frameworks and fiscal rules increase the credibility of official projections (Figure 2.11): - Private forecasts are closer to official projections in countries with debt rules or deficit rules, and where fiscal frameworks include a fiscal council or where the fiscal rule is monitored by an independent agency. - Budget balance rules tend to anchor private sector expectations near the rule’s deficit ceiling (example: EU fiscal rules and the −3 percent of GDP limit in the Stability and Growth Pact). - Good past track record matters: - Private sector is more pessimistic and uncertain about future deficits after large official forecast errors. - Downward revisions to official fiscal balance projections increase the gap between official and private forecasts. - Announcements of larger adjustments are discounted: - On average, private sector gives credit for only one-fourth of the adjustment planned for the next year (Figure 2.12). - Quantitative effects on market borrowing costs and interest rates: - When private forecasts of the deficit are more pessimistic than official projections by 2 percent of GDP, 10-year sovereign yields increase by 6 basis points (Figure 2.13; bin scatter plots based on 3,071 observations covering 34 countries from 2001 to 2019). - Budget announcements lead to a temporary fall in interest rates around the announcement in countries with high credibility, whereas there is no visible effect in countries with low credibility (Figure 2.14): - The difference can be as much as 40 basis points in the month of announcement, although the gap closes subsequently. - Credibility is slow and difficult to acquire but fast to lose; preserving credibility helps avoid adverse market conditions. - Additional statistical notes: - Binned scatter plots for 423 observations (23 advanced economies and 9 emerging markets from 1995 to 2019) show slope coefficient 0.23 for the relationship between announced and forecasted fiscal adjustment (controlling for macro factors and fixed effects). *International Monetary Fund | October 2021* ### Conclusion and Policy Recommendations ### Conclusion and Policy Recommendations ### Fiscal trade-offs and credibility - Fiscal support during the COVID-19 crisis remains indispensable in most places, but buffers have dwindled. - In countries with remaining fiscal space, prolonging fiscal support to fight the health crisis and bolster the recovery is the correct choice; in many other countries, governments face a stark trade-off between additional support to their people and preserving some space to address further possible emergencies. - Strengthening the credibility of public finances can make this trade-off less painful because market access is more favorable when the private sector trusts the government’s commitment to fiscal sustainability, increasing creditworthiness. - For countries with limited market access, credibility of the fiscal strategy is important to achieve a more predictable outlook and foster private investment and macroeconomic stability. - Fiscal frameworks provide the set of rules and institutions that allow countries to signal commitments to fiscal sustainability and to comply with them. ### Design and calibration of fiscal frameworks - The appropriate design of fiscal frameworks, including the choice and calibration of the long-term fiscal target, is country specific and may have to change with circumstances. - The persistent decline in global interest rates since the global financial crisis may have increased debt carrying capacity, so that debt anchors pre-dating the COVID-19 pandemic might be too conservative, providing breathing room given that returning to pre–COVID-19 debt levels would take a long time. - Easy financing conditions may continue for a few years, but an increase in interest rates cannot be ruled out, with the potential to worsen fiscal accounts and increase the risk of debt crisis. - Fiscal frameworks centered on the primary goal of promoting sustainability help improve access to finance. - More flexibility could be embedded into fiscal frameworks to support the exit from the crisis, for example: - Adopting expenditure rules instead of budget balance rules. - Giving more weight to objectives beyond the debt-to-GDP ratio—such as a net worth target for the public sector or an anchor based on the interest rate bill—especially where rollover risks are not a concern and transparency standards are high. - Countries that have suspended their fiscal rule may need to consider redesigning or recalibrating their pre–COVID-19 rules; the benefits depend on how constraining the existing rule is and on the credibility cost of reforming the fiscal framework. - Limited available experience suggests a well-reasoned recalibration may be consistent with maintaining credibility when outdated targets have become clearly unattainable and economically counterproductive. - Clear communication of government priorities, backed by fiscal transparency and strategies that strengthen commitment, is likely to help transition to new objectives. ### Signaling commitment to fiscal sustainability - Strategies to signal commitment to future deficit reduction include: - Strengthening fiscal frameworks to improve compliance with fiscal rules. - Undertaking structural fiscal reforms. - Entering into an IMF-supported program. - Legislating future tax or spending changes in advance. - Governments should explore these avenues to signal commitment to fiscal sustainability. - Activating escape clauses during the pandemic has been less controversial in countries that scored high in fiscal transparency. ### Systematic analysis of debt sustainability scenario performance - The chapter analyzes whether past scenario exercises in IMF and European Commission debt sustainability analyses appropriately captured key fiscal risks, covering: - 36 advanced economies, - 88 emerging markets, - 58 low-income developing countries. - The investigation is complemented by a review of fiscal risk analyses conducted by selected national fiscal institutions. - Key findings from scenario-performance analysis: - Unanticipated jumps in debt due to surprises in real economic growth are well captured by standardized scenarios in advanced economies and emerging markets, but less so in low-income developing countries. - In about 80 percent of the IMF’s debt sustainability analyses for market access countries (essentially advanced economies and emerging markets), growth scenarios envisioned short-term debt increases that turned out to be larger than the actual projection errors because of growth shocks. - In the IMF’s debt sustainability analyses for low-income developing countries, temporary growth scenarios anticipated short-term debt increases in only one-third of the episodes. - In all country groups, the capacity of growth scenarios to anticipate adverse debt dynamics is weaker over the medium term. - Risks from exchange rate depreciation, primary balance slippages, and contingent liabilities were better captured at the short-term horizon than at the medium-term horizon. - Scenarios had the greatest difficulty flagging risks of higher-than-expected real interest rates. - During the period considered, higher-than-expected real interest rates were driven by inflation undershooting expectations. - Such undershoots occurred in a wide range of countries, including Equatorial Guinea in 2015; China and Canada in 2014; and Iceland in 2016. - Despite the macroeconomic relevance, fiscal risk analyses by national fiscal institutions (for example, The Netherlands, New Zealand, the United Kingdom, and the United States) have not included the risk that inflation could undershoot expectations. - Data sample sizes for the effectiveness analysis of real interest rate scenarios: - 197 (139) IMF debt sustainability analyses for market access countries over the short term (medium term). - 56 (37) European Commission debt sustainability analyses over the short term (medium term). - Short term is defined as a time horizon of 1–2 years; medium term corresponds to a horizon of 3–5 years. ### Media coverage and public perception of escape clause activation - A text analysis investigated newspaper perception of suspension of fiscal rules in 2020 across 36 countries (including supranational escape clauses), using news articles in the country’s official language in the two weeks before and after activation. - Sample and methodology: - The text analysis covers 1,364 articles and follows approaches used in research on media perception of economic policies. - The sample includes 13 advanced economies, 15 emerging markets, and 8 low-income developing countries, with an average of 38 articles per country. - Key media-analysis findings: - Media coverage emphasized exceptional circumstances leading to escape clause activation (relevant keywords included “pandemic”, “COVID”, and “crisis”) and the central role of the government in addressing it (keywords included “fiscal”, “deficit”, “health”, “support”, “measure”, and “budget”). - More than half of the news articles acknowledged the effect on debt, with the share reaching 73 percent among advanced economies. - In European advanced economies, “corona bonds” were discussed in 7 percent of the news articles. - “Market access” was more prominent in emerging markets and low-income developing countries. - In emerging markets, “bonds” and “investors” were mentioned in 23 percent and 11 percent of the articles, respectively. - The name of a credit rating agency was between 7 and 10 times more likely to be mentioned for low-income developing countries and emerging markets, respectively, than for advanced economies. - The lower the income group, the more attention was paid to issues of credibility, the medium term, and debt sustainability. - Tone and transparency effects: - On a scale of –1 (most negative) to +1 (most positive), the average and median sentiment score across countries was about 0, but country differences existed. - Perception was especially positive in Honduras and Peru. - Perception tended to be more positive in countries with stronger standards of transparency, highlighting the importance of transparent, timely, and comprehensive reporting of fiscal information and extensive oversight by audit institutions, parliaments, and civil society to build credibility and trust. - Best-practice communication examples when preserving credibility while activating escape clauses: - Publication of a credible medium-term fiscal framework (examples: Honduras and Panama). - Government reports on relevant programs (examples: Chile and Germany). - Analysis by independent agencies (examples: Colombia and Peru). *International Monetary Fund | October 2021* ### CHAPTER 2 STRENGTHENING THE CREDIBILITY OF PUBLIC FINANCES ### CHAPTER 2 STRENGTHENING THE CREDIBILITY OF PUBLIC FINANCES ### Key literature and references - Extensive bibliography cited, including working papers, journal articles, IMF Policy Papers, IMF Working Papers, technical manuals, and institutional reports from 1994–2021. - Topics covered by the literature include: fiscal credibility, fiscal rules, fiscal councils, fiscal transparency, debt dynamics, fiscal risks, government credit support, fiscal frameworks, stock-flow adjustments, and fiscal policy during low interest rates and recessions. ### Economy abbreviations and groupings - Country classification in the Fiscal Monitor divides the world into three major groups: - 39 advanced economies - 96 emerging market and middle-income economies - 59 low-income developing countries - Fiscal Monitor tables display: - 35 advanced economies - 40 emerging market and middle-income economies - 40 low-income developing countries - The seven largest advanced economies by GDP constitute the subgroup of major advanced economies (the Group of Seven): Canada, France, Germany, Italy, Japan, United Kingdom, United States. - Euro area composite data cover current members for all years, even though membership has increased over time. - Low-income developing countries are those with per capita income levels below a threshold set at $2,700, as of 2016, measured by the World Bank Atlas method. - For data reporting, the Group of Twenty (G20) member aggregate refers to the 19 country members and does not include the European Union. - Composite data for country groups are weighted averages of individual-country data using annual nominal GDP converted to US dollars at average market exchange rates as a share of the group GDP. ### Fiscal year and data coverage conventions - Most fiscal data for advanced economies refer to the general government; for many emerging market and developing economies they refer to the central government or budgetary central government only. - All fiscal data refer to calendar years except for the following economies, for which data refer to the fiscal year: - The Bahamas, Bangladesh, Barbados, Bhutan, Botswana, Dominica, Egypt, Eswatini, Ethiopia, Haiti, Hong Kong Special Administrative Region, India, the Islamic Republic of Iran, Jamaica, Lesotho, Malawi, the Marshall Islands, Mauritius, Micronesia, Myanmar, Namibia, Nauru, Nepal, Pakistan, Palau, Puerto Rico, Rwanda, Samoa, Singapore, St. Lucia, Thailand, Tonga, Trinidad and Tobago - For economies whose fiscal years end before June 30, data are recorded in the previous calendar year. - For economies whose fiscal years end on or after June 30, data are recorded in the current calendar year. ### Data sources, timing, and methodological notes - Country-specific data and projections for key fiscal variables are based on the October 2021 World Economic Outlook database, unless indicated otherwise, and compiled by IMF staff. - Historical data and projections are based on information gathered by IMF country desk officers and updated continually as more information becomes available. - Structural breaks in data may be adjusted through splicing and other techniques to produce smooth series. - IMF staff estimates serve as proxies when complete information is unavailable; consequently, Fiscal Monitor data may differ from official data in other sources, including the IMF’s International Financial Statistics and the Government Finance Statistics Manual (GFSM 2014). - Data in statistical tables have been compiled based on the information available through September 27, 2021. - In the majority of advanced economies, and in some large emerging market and middle-income economies, fiscal data follow the GFSM 2014 or are produced using national accounts methodologies that follow SNA 2008 or ESA 2010, both broadly aligned with GFSM. ### Glossary of key fiscal terms and definitions - Debt service suspension initiative (DSSI): An initiative in which bilateral official creditors provide during a limited period a suspension of debt service payments for the poorest countries (73 low and lower middle-income countries) that request the suspension. - Economic scarring: Long-lasting economic damage. - Fiscal consolidation: Fiscal policy that reduces government deficits and government debt. - Fiscal council: A permanent agency with a statutory or executive mandate to assess publicly and independently fiscal policy, fiscal plans, and fiscal performance against official objectives, such as long-term sustainability of public finances and macroeconomic stability. - Fiscal framework: The set of rules, procedures, and institutions that guide fiscal policy. - Fiscal rule: Lasting constraints on fiscal policy through predetermined numerical limits on aggregate fiscal indicators (such as the budget balance, government expenditure, debt). - Fiscal space: The room for undertaking discretionary fiscal policy (increasing spending or reducing taxes) relative to existing plans without endangering market access and debt sustainability. - Gini: Statistical measure of dispersion used to measure inequality; values fall between 0 and 1. - Global minimum tax in corporate profits (GILTI): An agreement to limit tax competition among countries by putting a floor on effective tax rates applied to investments by large multinational corporations; the GILTI is designed to result in a range for tax rate on foreign income between 10.5 percent and 13.125 percent. - Government financing needs (also gross financing needs): Overall new borrowing requirement plus debt maturing during the year. - Labor force participation: The share of population of working age that is either looking for a job or working. - Special drawing rights (SDRs): An international reserve asset created by the IMF to supplement the official reserves of its member countries. - Stock-flow adjustments: Change in the gross debt explained by factors other than the overall fiscal balance (for example, valuation changes). - Sustainable Development Goals: A collection of 17 goals set by the United Nations General Assembly in 2015 covering multiple global development objectives; in total there are 169 targets. *International Monetary Fund | October 2021* ### 2014. Most other countries follow the GFSM 2001, ### 2014. Most other countries follow the GFSM 2001, ### Methodology and definitions - The overall fiscal balance refers to net lending and borrowing of the general government. In some cases, however, the overall balance refers to total revenue and grants minus total expenditure and net lending. - Fiscal gross and net debt data reported in the Fiscal Monitor are drawn from official data sources and IMF staff estimates. - Attempts are made to align gross and net debt data with the definitions in the GFSM, but data limitations or specific country circumstances can give rise to deviations from the formal definitions. - Differences in both sectoral and instrument coverage mean that the debt data are not universally comparable. - Changes in data sources or instrument coverage can give rise to data revisions that are sometimes substantial. - The data for the pension and health spending from Tables A23–A25 are updated once per year in the April edition of the Fiscal Monitor. - As used in the Fiscal Monitor, the term “country” also covers some territorial entities that are not states but whose statistical data are maintained separately and independently. ### Data coverage, adjustments, and caveats - Some countries, including a significant proportion of low-income developing countries, have fiscal data based on the 1986 GFSM. - As more information becomes available, revisions to data series may occur. - Fiscal balances may exclude certain expenditure items in some countries (for example, infrastructure investment financed off budget through land sales and local government financing vehicles in China). - Fiscal balances are not always consistent with reported debt where time series are not published in line with a particular debt definition (China: National Audit Office debt definition). ### Country-specific notes and adjustments (selected) - Australia: For cross-economy comparability, gross and net debt levels reported by national statistical agencies for economies that have adopted the 2008 SNA (Australia, Canada, Hong Kong Special Administrative Region, United States) are adjusted to exclude the unfunded pension liabilities of government employees’ defined-benefit pension plans. - Bangladesh: Data are on a fiscal year basis. - Brazil: - General government data refer to the non-financial public sector and are consolidated with those for the sovereign wealth fund. - Revenue and expenditures of federal public enterprises are added in full to the respective aggregates. - Transfers and withdrawals from the sovereign wealth fund do not affect the primary balance. - Disaggregated data on gross interest payments and interest receipts are available only from 2003 onward. Before 2003, total revenue of the general government excludes interest receipts; total expenditure of the general government includes net interest payments. - Gross public debt includes the Treasury bills on the central bank’s balance sheet, including those not used under repurchase agreements. - Net public debt consolidates nonfinancial public sector and central bank debt. - The national definition of general government gross debt excludes government securities held by the central bank, except the stock of Treasury securities used for monetary policy by the central bank (those pledged as security reverse repurchase agreement operations). - According to this national definition, gross debt amounted to 88.8 percent of GDP at the end of 2020. - Canada: Same cross-economy adjustment for unfunded pension liabilities as noted under Australia. - Chile: Cyclically adjusted balances refer to the structural balance, which includes adjustments for output and commodity price developments. - China: - Public debt data include central government debt as reported by the Ministry of Finance, explicit local government debt, and shares of contingent liabilities based on National Audit Office estimates. - IMF staff estimates exclude central government debt issued for the China Railway Corporation. - Relative to the authorities’ definition, consolidated general government net borrowing excludes transfers to and from stabilization funds, but includes (1) state-administered funds, state-owned enterprise funds, and social security contributions and expenses; and (2) some off-budget spending by local governments. - Fiscal balances do not include some expenditure items, mostly infrastructure investment financed off budget through land sales and local government financing vehicles. - Fiscal balances are not consistent with reported debt because no time series of data in line with the National Audit Office debt definition is published officially. - Colombia: Gross public debt refers to the combined public sector, including Ecopetrol and excluding Banco de la República’s outstanding external debt. - Dominican Republic: Public debt, debt service, and cyclically adjusted or structural balances are for the consolidated public sector; remaining fiscal series are for the central government. - Egypt, Ethiopia, Haiti, India, Iran (Islamic Republic of), Myanmar, Nepal, Pakistan, Singapore: Data are on a fiscal year basis. - Greece: General government gross debt follows the GFSM definition, and includes the stock of deferred interest. - Hong Kong Special Administrative Region: - Data are on a fiscal year basis. - Cyclically adjusted balances include adjustments for land revenue and investment income. - Cross-economy adjustment for unfunded pension liabilities applies as noted under Australia. - Iceland: Gross debt excludes insurance technical reserves (including pension liabilities) and other accounts payable. - Ireland: - General government balances for 2012 reflect the impact of banking sector support. - Fiscal balance estimates, excluding these measures, are −7.9 percent of GDP for 2012. - For 2015, if the conversion of the government’s remaining preference shares to ordinary shares in one bank is excluded, the fiscal balance is −1.1 percent of GDP. - Cyclically adjusted balances reported in Appendix Tables A3 and A4 exclude financial sector support measures. - Ireland’s 2015 national accounts were revised as a result of restructuring and relocation of multinational companies, which resulted in a level shift of nominal and real GDP. - Japan: Gross debt is on an unconsolidated basis. - Latvia: The fiscal deficit includes bank restructuring costs and thus is higher than the deficit in official statistics. - Mexico: General government refers to the central government, social security funds, public enterprises, development banks, the national insurance corporation, and the National Infrastructure Fund, but excludes subnational governments. - Norway: Cyclically adjusted balances correspond to the cyclically adjusted non-oil overall or primary balance and are in percent of non-oil potential GDP. - Peru: Cyclically adjusted balances include adjustments for commodity price developments. - Spain: Overall and primary balances include financial sector support measures estimated to be 3.7 percent of GDP for 2012, 0.3 percent of GDP for 2013. *International Monetary Fund | October 2021 — Methodological and Statistical Appendix* ### 0.1 percent of GDP for 2014, 0.1 percent of GDP for ### text - 0.1 percent of GDP for 2014, 0.1 percent of GDP for ### Country-specific data adjustments and notable events - Spain: Reclassification of Spain’s Asset Management Company SAREB into the general government increased the deficit by €9.9 billion. - Sweden: Cyclically adjusted balances account for output and employment gaps; the fiscal impact of cyclical developments is calculated using the 2014 OECD elasticity, which incorporates output and employment gaps. - Switzerland: Cantonal and commune data are received with a long and variable lag and are subject to sizable revisions. Cyclically adjusted balances include adjustments for extraordinary operations related to the banking sector. Authorities announced a discretionary stimulus reflected in fiscal projections for 2020 and 2021, permitted under the debt brake rule in “exceptional circumstances.” - Thailand: Data are on a fiscal year basis. - Turkey: Fiscal projections assume a more negative primary and overall balance than envisaged in authorities’ New Economic Program 2021–23 (September 2020); projections use the IMF-defined fiscal balance, which excludes some revenue and expenditure items included in the authorities’ headline balance. - United States: - Cyclically adjusted balances exclude financial sector support estimated at 0.1 percent of potential GDP for 2012, and 0.0 percent of potential GDP for 2013. - For cross-economy comparability, expenditures and fiscal balances are adjusted to exclude the imputed interest on unfunded pension liabilities and the imputed compensation of employees (counted as expenditures under the 2008 SNA adopted by the United States). - Fiscal projections are based on the July 2021 Congressional Budget Office baseline adjusted for IMF staff policy and macroeconomic assumptions and incorporate multiple COVID-19 response acts and proposed plans. - Uruguay: Data are for the nonfinancial public sector (central government, local government, social security funds, nonfinancial public corporations, and Banco de Seguros del Estado); coverage changed from consolidated public sector to nonfinancial public sector with the October 2019 submission; central bank balances are not included. - Venezuela: Fiscal accounts include the budgetary central government; social security funds, FOGADE, and a sample of public enterprises including PDVSA. Data for 2018–19 are IMF staff estimates; data for 2018–21 are IMF staff estimates. The effects of hyperinflation and lack of reported data complicate projections and require caution. - Lebanon, Afghanistan, Ethiopia, Libya: Projections for 2021–26 (Afghanistan) or 2021–26/2022–26 (Lebanon, Ethiopia) are omitted because of an unusually high degree of uncertainty or low data reliability. - India: Historical data based on budgetary execution; projections use authorities’ fiscal plans with IMF adjustments; from fiscal year 2020/21 expenditure includes the off-budget component of food subsidies; IMF staff adjusts expenditure to remove payments for previous years’ food subsidies included in budget estimates for fiscal years 2020/21 and 2021/22. ### Fiscal policy assumptions and projection methodology - Historical data and projections of key fiscal aggregates are in line with those of the October 2021 World Economic Outlook, unless noted otherwise. - Short-term fiscal policy assumptions: based on officially announced budgets, adjusted for differences between national authorities and IMF staff regarding macroeconomic assumptions and projected fiscal outturns. - Medium-term fiscal projections: incorporate policy measures judged likely to be implemented; when insufficient information, an unchanged structural primary balance is assumed. - Country-specific projection bases (examples): - Australia: Based on Australian Bureau of Statistics, Commonwealth and state/territorial budgets (as of September 10), and IMF staff estimates. - Brazil: Projections for 2021 reflect policy announcements as of May 31, 2021; medium-term reflect full compliance with Brazil’s constitutional expenditure ceiling. - China: After large fiscal expansion in 2020, significant tightening projected for 2021 based on 2021 government budget and fiscal outturn to date. - Spain: Fiscal projections for 2021 include COVID-19–related support measures, the legislated increase in pensions, and legislated revenue measures; projections from 2022 onward assume no policy changes; EU Recovery and Resilience Facility disbursements reflected for 2021–24. - United Kingdom: Projections based on GDP data as of June 30, 2021 and OBR forecasts from March 3, 2021; assume coronavirus measures expire as announced and include assumption of some additional fiscal consolidation starting fiscal year 2023/24 to stabilize public debt within five years. - United States: Projections incorporate American Jobs, American Families, Bipartisan Infrastructure Plans; American Rescue Plan; multiple prior coronavirus relief acts; data compiled using 2008 SNA and GFS Manual 2014 conventions; most series begin in 2001 due to data limitations. ### Definitions, coverage, and accounting practice notes - General notes: - The concept of overall fiscal balance generally refers to net lending and borrowing of the general government; in some cases refers to total revenue and grants minus total expenditure and net lending. - Coverage codes used: CG = central government; GG = general government; LG = local governments; SG = state governments; SS = social security funds; TG = territorial governments; BCG = budgetary central government; NFPC = nonfinancial public corporations; NFPS = nonfinancial public sector; NMPC = nonmonetary financial public corporations; PS = public sector. - Accounting practice codes: A = accrual; C = cash; Mixed = combination of accrual and cash accounting. - Valuation of debt: “Nominal” (valued at nominal values), “Face” (undiscounted principal), and “Current market” (market prices). - Table-specific coverage highlights (selected): - Table B: Advanced Economies coverage and accounting practice summarized for overall fiscal balance, cyclically adjusted balance, and gross debt (per-economy subsector coverage and valuation specified). - Table C: Emerging Market and Middle-Income Economies coverage and accounting practice; notes include special cases (e.g., Brazil: NFPS; Ecuador: NFPS; Thailand: PS; Venezuela: budgetary central government, social security, FOGADE and sample of public enterprises). - Table D: Low-Income Developing Countries coverage and accounting practice with country-specific notes (e.g., Madagascar commitments-based accounting (CB)). - Data conventions: - For cross-economy comparability, adjustments may be applied to exclude imputed interest on unfunded pension liabilities and imputed compensation of employees for economies adopting 2008 SNA (noted for United States and other adopters). - Some country series were revised due to adoption of ESA 2010 or other national statistical revisions (example: Netherlands historical revision following June 2014 adoption of ESA 2010). ### Key aggregate fiscal indicators and selected table highlights (exact figures preserved) - Advanced economies — General Government Overall Balance, 2012–26 (percent of GDP) — row labeled "Average": - Average –5.5 –3.7 –3.1 –2.6 –2.7 –2.4 –2.5 –3.0 –10.8 –8.8 –4.8 –3.6 –3.2 –3.1 –3.0 - Advanced economies — General Government Primary Balance, 2012–26 (percent of GDP) — row labeled "Average": - Average –3.7 –2.1 –1.5 –1.1 –1.2 –0.9 –1.0 –1.5 –9.5 –7.8 –4.0 –2.8 –2.2 –2.0 –1.8 - Advanced economies — General Government Cyclically Adjusted Balance, 2012–26 (percent of potential GDP) — row labeled "Average": - Average –4.0 –2.8 –2.3 –2.0 –2.3 –2.3 –2.6 –3.2 –8.1 –7.3 –5.3 –4.2 –3.7 –3.5 –3.4 - Advanced economies — General Government Cyclically Adjusted Primary Balance, 2012–26 (percent of potential GDP) — row labeled "Average": - Average –2.2 –1.2 –0.7 –0.6 –0.8 –0.9 –1.1 –1.8 –6.8 –6.3 –4.5 –3.3 –2.7 –2.4 –2.1 - Advanced economies — General Government Revenue, 2012–26 (percent of GDP) — row labeled "Average": - Average 35.3 36.5 36.5 36.1 36.0 35.9 35.9 35.7 35.9 36.0 36.5 36.6 36.5 36.4 36.4 - Advanced economies — General Government Expenditure, 2012–26 (percent of GDP) — row labeled "Average": - Average 40.7 40.2 39.6 38.7 38.7 38.3 38.4 38.6 46.7 44.8 41.3 40.2 39.7 39.5 39.4 - Advanced economies — General Government Gross Debt, 2012–26 (percent of GDP) — row labeled "Average": - Average 105.5 104.0 103.6 103.1 105.6 103.2 102.7 103.8 122.7 121.6 119.3 119.3 119.1 118.8 118.6 - Emerging Market and Middle-Income economies — General Government Overall Balance, 2012–26 (percent of GDP) — row labeled "Average": - Average –1.0 –1.6 –2.5 –4.3 –4.8 –4.1 –3.7 –4.7 –9.6 –6.6 –5.8 –5.2 –4.8 –4.4 –4.1 - Emerging Market and Middle-Income economies — General Government Primary Balance, 2012–26 (percent of GDP) — row labeled "Average": - Average 0.6 0.0 –0.9 –2.6 –3.1 –2.3 –1.9 –2.9 –7.8 –4.8 –3.8 –3.1 –2.7 –2.3 –2.0 - Emerging Market and Middle-Income economies — General Government Cyclically Adjusted Balance, 2012–26 (percent of potential GDP) — row labeled "Average": - Average –0.3 –0.4 –0.4 –0.6 –0.7 –0.6 –0.7 –0.8 –1.4 –1.2 –1.2 –1.1 –1.1 –1.1 –1.1 ### Methodological notes on specific table conventions and exceptions - Country tables (A1–A11 and B–D) present series by country with coverage, accounting practice, and valuation details; numerous country footnotes specify deviations or special treatments (examples included in country notes above). - Data sources and basis: - Source: IMF staff estimates and projections. - Projections are based on staff assessments of current policies and aligned with the October 2021 World Economic Outlook unless otherwise noted. - Special valuation/accounting adjustments: - For cross-economy comparison, national data for economies adopting 2008 SNA (Australia, Canada, Hong Kong SAR, United States) are adjusted to exclude unfunded pension liabilities of government employees’ defined-benefit pension plans in some debt series. - Use of “face” value as proxy for nominal value is noted as potentially inconsistent unless nominal and market values are unavailable. *Italic: Source: IMF staff estimates and projections; Fiscal Monitor: Strengthening the Credibility of Public Finances; International Monetary Fund | October 2021.* ### 0.6 percent of GDP in 2020, 0.2 percent of GDP in 2021, and zero thereafter. See IMF country report No. 19/64 for furthe ### text - 0.6 percent of GDP in 2020, 0.2 percent of GDP in 2021, and zero thereafter. See IMF country report No. 19/64 for furthe ### General government cyclically adjusted primary balance (Emerging Market and Middle-Income Economies, 2012–26) - Table A12 reports cyclically adjusted primary balance (percent of potential GDP) for 2012–26. - Averages and region aggregates (percent of potential GDP): - Average: –0.1, –0.1, –0.1, –0.3, –0.3, –0.3, –0.3, –0.5, –1.1, –0.8, –0.8, –0.7, –0.6, –0.6, –0.5 - Asia: –0.4, –0.6, –0.6, –1.8, –2.4, –2.3, –3.0, –4.2, –7.2, –5.5, –4.9, –4.3, –3.9, –3.5, –3.0 - Europe: 0.2, –0.7, 0.1, –1.0, –1.1, –0.5, 1.0, 0.0, –3.8, –1.8, –1.1, –0.8, –0.8, –0.9, –0.9 - Latin America: 0.0, –0.5, –1.8, –2.0, –1.6, –1.0, –0.6, 0.1, –3.8, –2.1, –0.9, –0.3, 0.2, 0.6, 0.9 - MENA: 0.0 repeated for 2012–26 (0.0,0.0,0.0,0.0,0.0,0.0,0.0,0.0,0.0,0.0,0.0,0.0,0.0,0.0,0.0) - G20 Emerging: –0.2, –0.7, –0.8, –2.0, –2.4, –2.0, –2.2, –3.2, –6.7, –4.5, –4.1, –3.6, –3.2, –2.8, –2.4 - Selected country rows (percent of potential GDP) as reported in Table A12: - Angola: 0.5, –1.8, –4.7, 1.9, 0.6, –0.8, 7.7, 6.8, 6.0, 8.4, 7.3, 7.0, 6.9, 6.4, 5.9 - Brazil: 0.9, 0.3, –2.1, –2.0, –1.4, –0.9, –1.1, –0.5, –8.0, –1.3, –0.5, –0.2, 0.3, 0.7, 1.2 - Chile: –0.3, –0.4, –0.4, 0.7, –0.7, –1.6, –1.1, –1.3, –2.0, –10.3, –3.4, –2.3, –1.2, –0.1, –0.1 - China: 0.1, –0.4, –0.4, –2.0, –2.7, –2.9, –3.7, –5.1, –8.6, –6.0, –5.5, –5.0, –4.6, –4.0, –3.5 - India: –3.0, –2.1, –2.3, –2.5, –2.7, –1.4, –2.0, –2.7, –4.0, –4.1, –3.7, –3.1, –2.7, –2.4, –2.2 - Mexico: –1.1, –0.9, –1.7, –1.4, –0.9, 1.1, 1.4, 1.6, 0.6, 0.2, 0.3, 0.5, 0.7, 0.8, 0.9 - Russia: 0.3, –1.2, 0.3, –2.8, –2.8, –0.5, 3.4, 2.3, –4.2, 0.0, 0.5, 0.7, 0.5, 0.1, –0.2 - Turkey: 0.8, 0.3, 0.4, 0.3, –0.7, –1.5, –2.6, –3.2, –2.3, –2.8, –2.8, –2.8, –2.6, –2.6, –2.6 - Ukraine: –2.6, –2.2, 0.0, 4.8, 2.8, 2.3, 1.2, 1.2, –1.8, –0.8, 0.5, 1.1, 0.6, 0.4, 0.2 ### General government revenue (Emerging Market and Middle-Income Economies, 2012–26) - Table A13 reports general government revenue (percent of GDP) for 2012–26. - Aggregate and regional revenue series (percent of GDP): - Average: 29.4, 29.0, 28.4, 27.2, 26.6, 26.7, 27.5, 27.0, 25.1, 25.5, 25.6, 25.6, 25.9, 26.1, 26.3 - Asia: 25.3, 25.4, 25.6, 26.2, 25.6, 25.2, 25.8, 25.3, 23.4, 23.9, 24.0, 24.1, 24.5, 24.9, 25.3 - Europe: 35.1, 34.4, 34.4, 33.4, 33.8, 33.8, 35.2, 35.1, 34.6, 34.8, 34.9, 34.7, 34.6, 34.4, 34.1 - Latin America: 30.1, 29.8, 28.9, 26.3, 26.8, 27.2, 27.1, 27.2, 25.9, 26.6, 26.4, 26.5, 26.7, 26.8, 26.8 - MENA: 38.0, 36.9, 35.8, 28.5, 24.9, 27.0, 30.2, 28.7, 24.2, 24.4, 24.8, 24.5, 24.3, 24.2, 24.1 - G20 Emerging: 28.9, 28.6, 28.1, 27.4, 27.1, 26.9, 27.5, 27.1, 25.2, 25.6, 25.6, 25.7, 26.0, 26.3, 26.5 - Selected country revenue levels (percent of GDP) as reported in Table A13: - Brazil: 34.7, 34.5, 32.5, 28.2, 30.6, 30.4, 30.6, 31.4, 29.4, 30.2, 29.6, 29.5, 29.6, 29.5, 29.4 - China: 27.9, 27.7, 28.1, 28.8, 28.2, 27.8, 28.3, 27.8, 25.3, 25.8, 25.9, 26.0, 26.5, 26.9, 27.4 - India: 19.8, 19.6, 19.1, 19.9, 20.1, 20.0, 20.0, 19.7, 18.3, 19.2, 19.5, 19.6, 19.8, 20.0, 20.1 - Mexico: 24.5, 24.1, 23.4, 23.5, 24.6, 24.6, 23.5, 23.6, 24.5, 24.0, 23.2, 22.9, 23.0, 23.0, 23.1 - Russia: 34.4, 33.5, 33.9, 31.9, 32.2, 32.9, 34.3, 35.5, 35.8, 35.4, 36.4, 36.0, 35.8, 35.4, 34.9 - South Africa: 24.6, 25.0, 25.4, 25.8, 26.2, 25.8, 26.4, 26.9, 25.2, 25.1, 26.1, 26.1, 26.2, 26.3, 26.4 - Uruguay: 25.6, 27.2, 26.6, 26.6, 27.1, 27.5, 28.8, 28.3, 28.1, 27.5, 27.5, 27.8, 28.0, 28.1, 28.2 ### Notes, methodology, and special country adjustments - Source and projection basis: - "Source: IMF staff estimates and projections. Projections are based on staff assessments of current policies (see 'Fiscal Policy Assumptions' in text)." - Definition: - Note: "Cyclically adjusted primary balance is defined as the cyclically adjusted balance plus net interest payable/paid (interest expense minus interest revenue) following the World Economic Outlook convention." - Country-specific data adjustments and coverage notes (verbatim excerpts): - Ecuador: "The data for Ecuador reflect net lending/borrowing for the nonfinancial public sector. Ecuadorian authorities, in the context of the Extended Fund Facility approved in March of 2019 and with technical support from IMF staff, are revising the historical fiscal data for the net lending/borrowing of the nonfinancial public sector to correct recently identified statistical errors, mostly in the recording of revenues and expenditures of local governments. Fiscal data reported in the table for 2018 and 2019 reflect the corrected series, while data for earlier years are still being revised and will be corrected in subsequent World Economic Outlook releases as far back as 2012. The authorities are also reconciling historical revenue and expenditure data with financing data." - Ecuador (Table A13 note 1): "The data for Ecuador reflect net lending/borrowing for the nonfinancial public sector. ... Fiscal data reported in the table for 2018 and 2019 reflect the corrected series, while data for earlier years are still being revised and will be corrected in subsequent World Economic Outlook releases as far back as 2012. The authorities are also reconciling historical revenue and expenditure data with financing data." - Egypt (Table A12 note 3): "These numbers are based on the nominal GDP series before the recent revision; therefore, data in the tables are not comparable to the authorities’ numbers." - Uruguay (Table A12 and A13 note 4): "Data are for the nonfinancial public sector, which includes central government, local government, social security funds, nonfinancial public corporations, and Banco de Seguros del Estado. The coverage of fiscal data was changed from the consolidated public sector to the nonfinancial public sector with the October 2019 submission. With this narrower coverage, the central bank balances are not included in the fiscal data. Historical data were also revised accordingly. Starting in October 2018, the public pension system has been receiving transfers in the context of a new law that compensates persons affected by the creation of the mixed pension system. These funds are recorded as revenues, consistent with the IMF’s methodology. Therefore, data and projections for 2018–21 have been affected by these transfers, which amounted to 1.2 percent of GDP in 2018 and 1.1 percent of GDP in 2019, and are projected to be 0.6 percent of GDP in 2020, 0.2 percent of GDP in 2021, and zero thereafter. See IMF Country Report No. 19/64 for further details." *Source: IMF staff estimates and projections. Projections are based on staff assessments of current policies (see “Fiscal Policy Assumptions” in text).* ### 0.6 percent of GDP in 2020, 0.2 percent of GDP in 2021, and zero thereafter. See IMF Country Report No. 19/64 for furthe ### FISCAL MONITOR : STRENGTHENING THE CREDIBILITY OF PUBLIC FINANCES ### Emerging Market and Middle-Income Economies — General Government Expenditure (Table A14) - Table covers 2012–26 (Percent of GDP). - "Average" row (2012–26): 30.4, 30.6, 30.9, 31.5, 31.4, 30.8, 31.2, 31.7, 34.6, 32.2, 31.4, 30.8, 30.6, 30.5, 30.4 - Regional "Asia" average row (2012–26): 26.9, 27.1, 27.4, 29.5, 29.5, 29.2, 30.3, 31.3, 34.1, 31.8, 30.9, 30.3, 30.2, 30.1, 30.1 - Regional "Europe" average row (2012–26): 35.9, 36.0, 35.9, 36.1, 36.6, 35.6, 34.9, 35.8, 40.2, 38.0, 37.3, 36.9, 36.8, 36.7, 36.6 ### Emerging Market and Middle-Income Economies — General Government Gross Debt (Table A15) - Table covers 2012–26 (Percent of GDP). - "Average" row (2012–26): 37.1, 38.3, 40.4, 43.9, 48.4, 50.5, 52.4, 54.7, 64.0, 64.3, 65.8, 67.1, 68.2, 69.0, 69.8 - Regional "Asia" average row (2012–26): 39.6, 41.3, 43.4, 45.0, 50.0, 52.8, 54.5, 57.3, 67.3, 70.1, 72.4, 74.2, 75.7, 77.0, 78.1 - Regional "Latin America" average row (2012–26): 46.8, 47.4, 49.5, 53.0, 56.4, 61.1, 67.4, 68.3, 78.1, 73.0, 73.6, 74.2, 74.2, 73.8, 73.2 ### Emerging Market and Middle-Income Economies — General Government Net Debt (Table A16) - Table covers 2012–26 (Percent of GDP). - "Average" row (2012–26): 23.0, 23.2, 24.7, 29.1, 34.7, 35.8, 36.7, 38.4, 44.7, 45.3, 46.3, 47.5, 48.2, 48.5, 48.6 - Regional "Europe" average row (2012–26): 31.8, 31.7, 30.3, 29.4, 31.4, 30.2, 30.4, 29.4, 36.9, 37.4, 37.8, 38.1, 38.4, 38.6, 38.8 - Regional "Latin America" average row (2012–26): 29.1, 29.1, 31.7, 34.9, 40.3, 42.5, 42.9, 44.1, 52.0, 51.4, 53.2, 55.2, 55.2, 56.6, 57.9 ### Low-Income Developing Countries — General Government Overall Balance (Table A17) - Table covers 2012–26 (Percent of GDP). - "Average" row (2012–26): –2.2, –3.4, –3.2, –3.9, –3.8, –3.6, –3.4, –3.9, –5.2, –5.4, –5.0, –4.5, –4.3, –4.1, –3.9 - Regional "Oil Producers" row (2012–26): –0.4, –3.0, –2.9, –4.6, –5.3, –5.4, –4.1, –4.5, –5.5, –5.9, –5.7, –5.4, –5.4, –5.7, –5.9 - Regional "Sub-Saharan Africa" row (2012–26): –1.6, –3.2, –3.4, –4.2, –4.5, –4.5, –4.0, –4.0, –5.7, –5.7, –5.1, –4.4, –4.2, –4.2, –4.1 ### Low-Income Developing Countries — Primary Balance, Revenue, Expenditure, Gross Debt (Tables A18–A21) - Primary balance "Average" row (Table A18, 2012–26): –1.1, –2.2, –2.0, –2.6, –2.3, –2.1, –1.7, –2.2, –3.4, –3.6, –3.1, –2.5, –2.1, –1.9, –1.7 - Revenue "Average" row (Table A19, 2012–26): 17.2, 16.2, 16.0, 14.5, 14.1, 14.6, 15.1, 14.9, 14.1, 13.9, 14.0, 14.0, 14.2, 14.3, 14.4 - Expenditure "Average" row (Table A20, 2012–26): 19.3, 19.6, 19.2, 18.5, 17.9, 18.2, 18.5, 18.8, 19.3, 19.3, 19.0, 18.6, 18.5, 18.4, 18.3 - Gross debt "Average" row (Table A21, 2012–26): 30.1, 31.3, 31.8, 36.2, 39.5, 42.1, 42.7, 44.2, 49.9, 50.2, 49.8, 49.0, 48.5, 48.0, 47.3 ### Structural Fiscal Indicators — Advanced Economies (Table A23) - Table reports multiple structural indicators (percent of GDP or other units). Selected "Average" row values: - Pension Spending Change, 2020–30: 0.8 - Net Present Value of Pension Spending Change, 2020–50: 25.0 - Health Care Spending Change, 2020–30: 2.6 - Net Present Value of Health Care Spending Change, 2020–50: 91.2 - Gross Financing Need, 2021: 32.8 - Average Term to Maturity, 2021 (years): 7.0 - Debt to Average Maturity, 2021: 19.4 - Projected Interest Rate–Growth Differential, 2021–26 (percent): –3.1 - Prepandemic Overall Balance, 2012–19: –3.2 - Projected Overall Balance, 2020–26: –5.3 - Nonresident Holding of General Government Debt, 2020 (percent of total): 33.5 ### Structural Fiscal Indicators — Emerging Market and Middle-Income Economies (Table A24) - Selected "Average" row values: - Pension Spending Change, 2020–30: 1.8 - Net Present Value of Pension Spending Change, 2020–50: 74.6 - Health Care Spending Change, 2020–30: 0.5 - Net Present Value of Health Care Spending Change, 2020–50: 20.1 - Gross Financing Need, 2021: 13.6 - Average Term to Maturity, 2021 (years): 7.3 - Debt to Average Maturity, 2021: 9.5 - Projected Interest Rate–Growth Differential, 2021–26 (percent): –4.8 - Prepandemic Overall Balance, 2012–19: –3.3 - Projected Overall Balance, 2020–26: –5.7 - Nonresident Holding of General Government Debt, 2020 (percent of total): 16.0 ### Structural Fiscal Indicators — Low-Income Developing Countries (Table A25) - Selected "Average" row values: - Pension Spending Change, 2020–30: 0.6 - Net Present Value of Pension Spending Change, 2020–50: 22.6 - Health Care Spending Change, 2020–30: 0.1 - Net Present Value of Health Care Spending Change, 2020–50: 5.8 - Average Term to Maturity, 2021 (years): 5.6 - Debt to Average Maturity, 2021: 9.8 - Projected Interest Rate–Growth Differential, 2021–26 (percent): –6.6 - Prepandemic Overall Balance, 2012–19: –3.5 - Projected Overall Balance, 2020–26: –4.6 - Nonresident Holding of General Government Debt, 2020 (percent of total): 54.7 *Source: IMF staff estimates and projections (tables and notes as provided in the text).* ### Conclusion and Risk Assessment April 2012, Chapter 7 ### Conclusion and Risk Assessment April 2012, Chapter 7 ### Global outlook and risk assessment - Executive Directors broadly agreed with staff’s assessment of the global economic outlook, risks, and policy priorities (discussion concluded on September 28, 2021). - Recovery continues despite: - resurgence of the pandemic driven by more contagious new variants of the virus; - ongoing supply shortages that brought the inflation risk to the forefront. - Economic divergences are more persistent, especially between advanced economies and low-income countries, reflecting: - differentiated vaccine access; - differentiated early policy support. - Uncertainties around the baseline projections remain large; risks to growth outcomes are tilted to the downside. - Inflation uncertainty is particularly large, stemming from: - the path of the pandemic; - the duration of supply disruptions; - how inflation expectations may evolve in this environment. - Noted vulnerabilities: - Higher debt levels and large government financing needs in many countries, especially if global interest rates were to rise faster than expected. ### Policy priorities — multilateral and national - Multilateral priorities highlighted by Directors: - global cooperation to ensure universal access to vaccines; - a strong financial safety net; - multilateral efforts to avoid international trade and supply chain disruptions; - providing liquidity and debt relief to constrained economies; - mitigating and adapting to climate change. - National-level policy priorities: - tailor policies to local pandemic and economic conditions to overcome the still-evolving health crisis and promote an inclusive recovery while protecting the credibility of policy frameworks; - shift progressively to measures that reverse scarring from the crisis as recovery progresses. - On international liquidity and support: - Directors highlighted the expected contribution of the recent General Allocation of Special Drawing Rights in providing much-needed international liquidity. - Given likely long-lasting negative impacts on budget revenues in developing economies, further efforts will be needed to mobilize revenues in the medium term and improve expenditure efficiency. - More is needed for low-income countries, including through debt relief in the context of early and timely implementation of multilateral initiatives, such as the G20 Common Framework. ### Fiscal policy guidance - Fiscal policy should remain supportive but needs to be: - well-targeted; - carefully calibrated; - tailored to country-specific circumstances. - Country-specific guidance: - In countries with high levels of vaccination and low funding costs: gradually shift from pandemic-fighting emergency measures toward promoting a transformation to more resilient and inclusive economies. - In countries with lower vaccination rates and tighter financing constraints: prioritize health-related spending and protecting the most vulnerable. - As countries converge back to precrisis GDP trends: - focus should shift toward ensuring fiscal sustainability, including through establishing credible medium-term fiscal frameworks; - promote fiscal transparency and sound governance practices. ### Monetary policy guidance - Monetary policy should remain accommodative where: - there are output gaps; - inflation pressures are contained; - inflation expectations are consistent with central bank targets. - Central banks should be prepared to act quickly if: - the recovery strengthens faster than expected; - inflation expectations are rising. - Transparent and clear communication about the outlook for monetary policy is critical to: - avoid de-anchoring of inflation expectations; - prevent financial instability. ### Financial vulnerabilities and policy response - Financial vulnerabilities remain elevated in several sectors, including: - nonbank financial institutions; - nonfinancial corporates; - the housing market. - These vulnerabilities are masked in part by substantial policy stimulus. - Risks of prolonged extremely easy financial conditions: - overly stretched asset valuations; - further fuel to financial vulnerabilities. - Recommended actions: - act preemptively to address vulnerabilities and avoid a buildup of legacy problems; - tighten selected macroprudential tools to tackle pockets of elevated vulnerabilities while avoiding a broad tightening of financial conditions. ### Emerging and frontier market considerations - Some emerging and frontier markets continue to face large financing needs. - While the outlook for capital flows has improved and monetary conditions remain broadly accommodative, a sudden change in the monetary policy stance of advanced economies may: - result in a sharp tightening of financial conditions; - adversely affect capital flows; - exacerbate pressures in countries facing debt sustainability concerns. - Policy response in these countries should center on: - implementing structural reforms; - rebuilding buffers; - strengthening financial market governance and infrastructure. *IMF Executive Board discussion of the outlook, September 28, 2021; Fiscal Monitor: Strengthening the Credibility of Public Finances, October 2021.* ### CHAPTER 1 ### CHAPTER 1 ### Policy in an Uncertain Recovery - Chapter title: "Policy in an Uncertain Recovery" *Source: https://www.imf.org/-/media/files/publications/fiscal-monitor/2021/october/english/text.pdf* --- _Source: https://www.imf.org/-/media/files/publications/fiscal-monitor/2021/october/english/text.pdf_