## Executive Summary

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### Chapter 1: Fiscal Policy in the Great Election Year — key findings and risks
- Global fiscal aggregates stabilized after 2021–22 but “fiscal aggregates turned in 2023, halting progress toward policy normalization.”
- Durable fiscal consolidation is needed amid slowing medium-term growth prospects and high real interest rates to safeguard sustainable public finances and rebuild buffers.
- Four years after the COVID-19 pandemic outbreak, fiscal deficits and debts are higher than prepandemic projections.
- Contributing factors to higher deficits and debts:
  - Higher interest rates pushed up interest expenses.
  - Spending on social benefits, subsidies, and transfers remained buoyed by extensions of crisis-era support measures.
  - New fiscal initiatives to cut taxes and social security contributions and increase spending (higher wage bills, social benefits, and industrial policy measures).
  - Revenue gains from past inflation were only partial as inflation surprises waned and tax brackets caught up with wage growth.
  - Financing remained scarce for most low-income developing economies.
- 2024 outlook and risks:
  - “In 2024, overall primary deficits are expected to narrow to 4.9 percent of GDP.”
  - The “Great Election Year”: 88 economies or economic areas representing more than half of the world’s population and GDP have already held or will hold elections during the year; empirical evidence shows fiscal policy tends to be looser and slippages larger during election years.
  - Inflation has been easing, but the pace of the “last mile” of descent to target remains uncertain.
  - Financing conditions are sensitive to the inflation outlook, interest rates, and fiscal policy in major economies.
  - Loose fiscal policy and rising debt levels, together with monetary tightening, have contributed to increased long-term government yields and heightened volatility in the United States, raising spillover risks.
  - Slowing growth and financial turbulence in China could weigh on global growth and trade, posing fiscal challenges for countries with strong trade and investment linkages.
  - Governments may feel pressure to extend fiscal support in the event of renewed supply disruptions and price shocks.
  - Debt refinancing risks remain high for many countries.
- Medium-term projections under current policies:
  - “Global public debt is projected to approach 99 percent of GDP by 2029, driven by China and the United States where, under current policies, public debt is projected to continue rising beyond historical peaks.”
  - Deficits and debts are projected to remain higher over the medium term than was expected before the pandemic.
- Policy priorities and recommendations:
  - Fiscal consolidation is needed in most countries to strengthen debt sustainability and financial stability; the pace should be calibrated to balance fiscal risks and private demand strength.
  - Up-front actions are needed where sovereign risks are elevated and credible medium-term frameworks are lacking.
  - Immediate termination of crisis-era support measures and resistance to the political budget cycle and further spending increases.
  - Reforms to contain rising spending pressures, including entitlement reforms in advanced economies with aging populations and improving targeting and efficiency of social safety nets.
  - Tax revenues should keep up with spending over time; emerging market and developing economies have scope to increase tax revenues by upgrading tax systems, expanding tax bases, and enhancing institutional capacity.
  - A risk-based credible fiscal framework could guide rebuilding fiscal space and reducing debt vulnerabilities.
  - Stronger international cooperation is needed:
    - Improve the global debt restructuring architecture, including through the Group of Twenty’s Common Framework and enhancement of the global financial safety net.
    - Continued engagement on technical issues through mechanisms such as the Global Sovereign Debt Roundtable.
    - Improve fiscal and debt transparency to facilitate debt restructuring.
    - International cooperation on corporate taxation and carbon pricing to mobilize resources for common concerns.

### Chapter 2: Expanding Frontiers — fiscal policies for innovation and technology diffusion
- Context and challenge:
  - Innovation is a key driver of productivity growth, but productivity growth has fallen over the past two decades and global medium-term growth prospects are weak.
  - Innovation is uneven across sectors and increasingly driven by applied research that does not generate wide-ranging knowledge spillovers; diffusion across countries and firms has slowed, particularly for low-carbon and digital technologies.
- When and how to direct innovation to specific sectors:
  - Industrial policy for sector-targeted innovation has resurged but carries high fiscal costs and risks of policy mistakes and negative cross-border spillovers.
  - A model-based framework shows industrial policy generates productivity and welfare gains only under restrictive conditions:
    - Targeted sectors must generate measurable social benefits (for example, lower carbon emissions or higher knowledge spillovers).
    - Implementation capacity must be strong.
  - Welfare gains can turn negative if subsidies are misdirected (for example, toward politically connected sectors).
  - Policies discriminating against foreign firms can be self-defeating given reliance on imported knowledge and potential for costly retaliation.
  - “The case for subsidizing innovation in AI is unclear, since the technology has already matured to the commercial adoption phase.” Priority should be given to technologies that expand human capabilities and facilitate AI adoption in sectors with greater social benefits.
- A pro-innovation fiscal policy mix (design and effects):
  - Cost-effective mix: public funding for fundamental research, R&D grants for innovative start-ups, and R&D tax incentives to encourage applied innovation across firms; close public–private cooperation to create synergies at lower fiscal cost.
  - Fiscal multiplier for innovation support:
    - “Analyses show that a well-designed innovation policy mix can yield substantial growth and fiscal dividends, raising long-term GDP by $3 to $4 for each dollar of fiscal cost.”
    - Example scenario: “Increasing R&D support by 0.5 percentage point of GDP annually, or about 50 percent of the current level in Organisation for Economic Co-operation and Development economies, could raise GDP by up to 2 percent and reduce the debt-to-GDP ratio for an average advanced economy over an eight-year horizon.”
  - Cautions on design:
    - Careful targeting across firms and the innovation lifecycle is crucial to minimize fiscal costs and avoid capture by large established firms.
    - Coherent and simple tax systems with broad bases and low rates, plus systematic evaluation, are critical.
    - Complementary structural, competition, trade, and financial policies are needed to ensure a level playing field and provide innovative firms with access to financing.
- Facilitating diffusion and adoption of technology (for economies below the frontier):
  - Priority public investments: human capital and infrastructure, especially digital infrastructure and skills, facilitate adoption of cross-border technology.
  - Education spending impact: “A 1 percent increase in education spending can boost medium-term GDP by as much as 1.9 percent in emerging market and developing economies, on average, by increasing technology diffusion.”
  - Infrastructure impact: “Improving the quality of trade and transport infrastructure in an average low-income country to bridge one-third of the gap with emerging market economies could lift GDP by 0.6 percent over the medium term.”
  - Public investment and financing are particularly beneficial to overcome barriers to green diffusion, since many technologies needed to cut carbon emissions already exist.
  - Investments in digital skills and infrastructure accelerate diffusion from frontier firms to laggard firms.
  - Targeted fiscal incentives, such as revenue-neutral investment tax credits for firms acquiring frontier technology, can speed green and digital technology diffusion and raise aggregate productivity.
- Paying for priority spending and improving revenue:
  - Improve expenditure efficiency and upgrade tax systems.
  - A broad-based value-added tax with a simplified collection mechanism for services trade can facilitate diffusion and help raise revenue.
  - Scale back ineffective corporate tax incentives and effectively address international tax avoidance by multinationals; this could increase annual tax revenue by up to 1 percent of GDP in some developing economies.
- International cooperation:
  - Maintaining and deepening international collaboration is essential so economies farther from the technological frontier do not lose out from inward-looking policies.
  - Coordinating innovation policies is critical to catalyze cross-border knowledge spillovers, harness green and digital transformations, and expand the frontier for all.

*Source: Executive Summary, Fiscal Monitor: Fiscal Policy in the Great Election Year. International Monetary Fund | April 2024*

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_Source: https://www.imf.org/-/media/files/publications/fiscal-monitor/2024/april/english/execsum.pdf_