## Fiscal Monitor (November 2010) — Selected Findings (_fm1002pdf)

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---

### Main findings and near-term outlook
- Global fiscal deficit projected to fall from 6¾ percent of GDP in 2009 to 6 percent in 2010.
- Some 60 percent of countries covered by the Monitor are projected to post smaller deficits in 2010 than in 2009.
- Cyclically adjusted balance is expected to worsen in 2010 (observed deficit decline owes much to improved cyclical conditions rather than discretionary consolidation).
- In 2011, 90 percent of countries are projected to record smaller deficits.
- Cyclically adjusted balance expected to improve by 1 percentage point of GDP in advanced economies in 2011 (and close to this in emerging economies).
- Policy guidance: the pace of adjustment in the baseline is broadly appropriate; advanced economies with fiscal room should allow fiscal stabilizers to operate if growth weakens appreciably more than the WEO baseline.

### Sovereign financing and market conditions
- Some advanced economies faced sharper tightening in 2010 because of market pressures; safe-haven countries benefited from very low interest rates.
- Crisis effects and central bank purchases:
  - Crisis initially increased home bias and decreased maturities; shortening of maturities has begun to reverse.
  - Net purchases of government securities by central banks in 2010 much more limited relative to 2009; euro area ECB purchases in May–Q2 2010 amount to about €61½ billion (¾ percent of GDP).
- Table 1.2 (selected central bank entries reported as in source):
  - U.S. Federal Reserve Treasury securities (Percent of GDP): 3.2 5.2 5.25.25.4 20.9   0.00.02.3
  - U.S. Federal Reserve Agency Debt and MBS: 0.1 7.2 8.38.68.4 ...   .........
  - European Central Bank Securities Market Program: 0.0 0.0 0.00.60.7 0.0   0.016.01.2
  - Bank of England Gilt Purchase under Asset Purchase Facility: 0.0 13.0 13.713.713.7 86.5   13.30.00.0

### Medium-term adjustment plans and realism of commitments
- Review of fiscal plans for 25 countries (including all of the G-20) finds 90 percent have announced gradual reductions in medium-term deficits, typically through 2013.
- Overall pace of underlying adjustment envisaged judged broadly appropriate.
- Composition:
  - Vast majority of announced adjustments intended to be expenditure-based.
- Shortcomings:
  - In many cases, detailed adjustment measures have not been identified.
  - Some plans address short-term health-care pressures, but none include comprehensive reforms needed to contain medium- and long-term health and pension spending pressures.
  - Few countries plan fundamental social-welfare reforms (for example, improved targeting of benefits).
  - Few countries have explicitly committed to a long-run target for their public debt ratio, or indicated when they intend to achieve such targets.

### Fiscal risks and scenarios
- Two key risks:
  - Short- to medium-term: sovereign rollover problems at regional or global levels.
  - Longer term: debt ratios stabilizing but at elevated levels.
- Risk status:
  - Risk that these events materialize remains high by historical standards for advanced economies—especially those already under market pressure—and is lower but nontrivial for emerging markets.
- Risk drivers:
  - Macro uncertainty increased relative to six months earlier amid concerns global recovery may be losing steam.
  - Risks related to quality of plans have broadly eased as countries announced or began implementing aspects of fiscal exit strategies.
  - Global market sentiment improved toward emerging markets but worsened toward advanced economies under pressure in May 2010.

### Financial sector support, recovery of outlays, and contingent liabilities
- Recovery and utilization (as of end-June 2010):
  - Recovery of outlays stood at 1½ percent of GDP (¼ percentage point higher than end-2009).
  - Recovery rate of utilized support increased from 21 percent to 25 percent.
  - Additional utilization raised average net fiscal cost marginally by US$13 billion, or less than ¼ percent of GDP, among the three largest economies that provided the bulk of support.
- Table 1.3 (Selected Advanced Economies: Recovery of Outlays and Net Cost of Financial Sector Support, end-June 2010) — selected figures (Percent of GDP unless otherwise indicated):
  - Germany: Direct Support Pledged 6.8; Utilized 4.7; Recovery 0.0; Net Direct Cost 4.6
  - United Kingdom: Direct Support Pledged 11.9; Utilized 7.3; Recovery 1.2; Net Direct Cost 6.1
  - United States: Direct Support Pledged 7.4; Utilized 5.3; Recovery 1.7; Net Direct Cost 3.7
  - Average (end-June 2010): Direct Support Pledged 7.9; Utilized 5.4; Recovery 1.4; Net Direct Cost 4.1
  - In billions of U.S. dollars (end-June 2010): Pledged 1,549; Utilized 1,074; Recovery 265; Net Direct Cost 809
  - Average (end-Dec 2009): Direct Support Pledged 7.9; Utilized 5.1; Recovery 1.1; Net Direct Cost 4.0
  - In billions of U.S. dollars (end-Dec 2009): Pledged 1,544; Utilized 1,006; Recovery 210; Net Direct Cost 796
- Notes:
  - Net fiscal cost defined as total outlays net of recovery by end-June 2010; an upper bound of expected net loss of financial sector support.
  - Banking sector contingent liabilities remain high in several European economies, ranging from under 1 percent of sovereign assets for Portugal and Spain up to 30 percent for Ireland (about 22 percent of GDP).

### Sovereign gross financing needs (selected country projections, Percent of GDP)
- Weighted Average:
  - 2010: Maturing Debt 17.0; Budget Deficit 9.1; Total Financing Need 26.1
  - 2011: Maturing Debt 19.3; Budget Deficit 7.6; Total Financing Need 26.9
- Selected country entries (2010 → 2011):
  - Japan 2010: Maturing Debt 43.4; Budget Deficit 9.65; Total Financing Need 53.0 — 2011: Maturing Debt 48.9; Budget Deficit 8.9; Total Financing Need 57.8
  - United States 2010: Maturing Debt 15.4; Budget Deficit 11.1; Total Financing Need 26.5 — 2011: Maturing Debt 18.1; Budget Deficit 9.7; Total Financing Need 27.8
  - Ireland 2010: Maturing Debt 6.5; Budget Deficit 31.9; Total Financing Need 38.4 — 2011: Maturing Debt 6.1; Budget Deficit 11.8; Total Financing Need 17.9
  - United Kingdom 2010: Maturing Debt 5.3; Budget Deficit 10.2; Total Financing Need 15.5 — 2011: Maturing Debt 7.5; Budget Deficit 8.1; Total Financing Need 15.6
  - Germany 2010: Maturing Debt 8.5; Budget Deficit 4.5; Total Financing Need 13.0 — 2011: Maturing Debt 9.1; Budget Deficit 3.7; Total Financing Need 12.8
- Observations:
  - Higher maturing debt in 2011 is likely to increase average financing need to about 27 percent of GDP.
  - Japan’s financing need remains largest, at over 50 percent of GDP.

### Government debt trajectories and distributional shifts
- Advanced economies:
  - "Public debt by end-2011 is projected to be 29 percentage points of GDP higher than before the crisis, on average, with four-fifths of the increase having already occurred."
  - Countries projected to see declines in debt ratios by 2011: Canada, Iceland, Israel, Korea, Sweden, Switzerland.
  - Largest projected increases between 2009 and 2011: Ireland, Greece, Japan, Spain, and the United States (between 15 and 42 percentage points).
  - Revisions since May Monitor (projected 2011 public debt ratios revised down):
    - Greece: down by 5¾ percentage points of GDP.
    - Spain: down by 5¼ percentage points of GDP.
    - Portugal: down by 4¾ percentage points of GDP.
    - United Kingdom: down by 3 percentage points of GDP.
    - Ireland: 2011 debt ratio now expected to be 21 percentage points higher than projected in May (reflecting additional banking sector support).
  - Distributional shift: 40 percent of countries now projected to have debt ratios above 80 percent of GDP by end-2011 (versus 17 percent pre-crisis).
- Emerging economies:
  - Average debt ratio expected to decline slightly to 37¼ percent in 2011.
  - By end-2011, about half the emerging economies projected to have debt ratios above 40 percent of GDP (versus about 35 percent in 2007).
- Low-income countries:
  - Average debt-to-GDP ratio expected to reach 43¾ percent in 2011; around two-thirds of LIC debt is concessional.

### Chapter 5 conclusions — four topical fiscal policy questions
- Pension reforms:
  - A two-year increase in the retirement age (needed to offset projected spending increases over next two decades) would increase GDP by
    - 1 percentage point in the short to medium run, on average, and by
    - 4½ percentage points over the long run.
- Financial sector taxation:
  - Summarizes IMF proposals including the "Financial Stability Contribution" (FSC) to internalize systemic risk and raise revenues to offset future financial support needs.
- Carbon pricing:
  - Efficient carbon-pricing schemes could raise
    - ¾ percent of GDP in advanced economies and
    - 1½ percent of GDP in emerging economies
    within the next ten years.
  - Targeted transfers could offset impact on the poor.
- The VAT:
  - Recommendations:
    - Advanced economies should concentrate on eliminating preferential rates.
    - Emerging economies should concentrate on improving compliance.

### Box 1.2 — "To Tighten or Not to Tighten"
- Two opposing arguments:
  - Tightening now is folly when unemployment is at a record high.
  - Not tightening is reckless when public debt is at a record high.
- Recommended approach:
  - A blend: a down payment on consolidation now, with continued gradual tightening over the medium term.
  - Avoid abrupt, front-loaded tightening except when market conditions make it inevitable.
- Technical points preserved:
  - Fiscal tightening multiplier estimated "small—0.5 to 1—but is not zero."
  - "A 10 percentage point increase in debt lowers annual potential output growth by some 0.15 point in advanced countries (Kumar and Woo, 2010)."
  - "A reduction in the advanced economies’ cyclically adjusted deficit by about 1 percentage point in 2011 would be consistent with a continuation of the world recovery."

### Box 2.1 — Market concerns and default risks (key findings)
- Historical frequency:
  - "During the past three decades, there have been 14 episodes in advanced economies and 26 in emerging economies when individual countries adjusted their structural primary balance by more than 7 percentage points of GDP."
- Haircut impact:
  - A "50 percent haircut" would reduce the primary adjustment needed to stabilize debt-to-GDP by only "0.5 percentage point of GDP on average (with a maximum of 2.7 percentage points for Greece)."
- Market signals:
  - "CDS spreads have recently touched record highs in Greece (exceeding 1100 bp in June...), Ireland, and Portugal."
- Main policy message:
  - "A large fiscal adjustment is unavoidable for today’s advanced economies and that a restructuring would be no substitute for—and would probably end up as a distraction from—the fiscal and structural reforms that are necessary for a durable increase in economic growth."

### Appendix highlights — interest-growth differential (r–g) and debt-risk scenarios
- Appendix 1: Interest Rate-Growth Differential (r–g) by public debt-to-GDP ratio (percentage points):
  - Less than 30: –0.07
  - 30–60: 0.61
  - 60–90: 1.44
  - Above 90: 3.20
- Average differential before versus after large fiscal consolidations:
  - Before consolidation (previous four years): 4.7 percentage points
  - After consolidation (following four years): 2.0 percentage points
- Appendix 4: Risks to medium-term public debt trajectories:
  - Germany, the United Kingdom, and the United States fall within a range of 30 to 40 percent of GDP around the baseline by 2015.
  - Greece: range exceeds 90 percent of GDP (historical policy response) and about 80 percent if current fiscal targets strictly adhered to.
  - Execution-risk scenario examples:
    - Greece: probability public debt-to-GDP ratio exceeds 150 percent by 2015 rises to about 45 percent (versus slightly less than 25 percent under baseline).
    - Germany: probability debt exceeds 90 percent by 2015 about 30 percent under execution-risk (more than double baseline).
    - United Kingdom: probability public debt exceeds 100 percent by 2015 rises to 35 percent (versus 15 percent baseline).

### Pension reform macro-fiscal simulations (GIMF model) — scenarios and impacts
- Raising retirement age by two years (Scenario 1) — average effects:
  - Raises GDP by almost 1 percentage point over short to medium term and by 4¼ percentage points over the long term.
  - Reduces debt-to-GDP ratio by 30 percentage points over the same period.
- Scenario 2 (reduce pension benefits by 15 percent) and Scenario 3 (increase contribution rates by 2½ percentage points) yield different growth and debt outcomes; Scenario 3 entails adverse supply-side effects and lower long-term GDP relative to Scenario 1.
- Cooperative reform strategy (multilateral action) magnifies macro and budgetary benefits relative to unilateral action (e.g., worldwide real GDP improvement 4 times larger than under Scenario 2 and over 10 times larger than under Scenario 3 in cooperative case).

### Financial sector taxation and the FSC
- Financial sector contributed 2.3 percent of total tax revenue just prior to the crisis (pre-crisis).
- Corporate Income Tax (financial sector share) — Simple average across selected G-20: In Percent of Corporate Taxes 17.5; In Percent of Total Tax Revenue 2.3.
- Financial Stability Contribution (FSC) proposal:
  - Tax liabilities of financial institutions exclusive of insured deposits, insurance reserves, and Tier-1 equity capital.
  - A 0.1 percent charge could raise the 2 percent to 4 percent of GDP needed to finance an adequate stability fund within 10 years.

### Carbon pricing and VAT reform: revenue potential and priorities
- Carbon pricing:
  - Estimates suggest revenue potential between 1 percent and 2 percent of GDP depending on design.
  - Simulations for a 550 ppm stabilization scenario show region examples (Percent of GDP): Africa 2.2; China 1.3; India 1.7; Latin America 1.1; United States 0.7; Western Europe 0.8.
  - Clean Energy and Security Act (U.S.) revenue potential reported as US$132 billion (0.6 percent of GDP).
- VAT:
  - C-efficiency concept: VAT revenue / (standard VAT rate × aggregate private consumption).
  - Reported C-efficiency among G-20 ranges from nearly 70 percent in Japan and China to 33 percent in Mexico.
  - Japan: each 1 percentage point hike in standard VAT rate would raise about 0.5 percent of GDP in revenue (OECD, 2008a).
  - Table 5.1 (corporate tax share of financial sector) and Table 5.4 (VAT potential) present country-level breakdowns; simple average financial sector share of corporate taxes = 17.5 percent.

*Italic: Source — _fm1002pdf_, Fiscal Monitor, November 2010 (International Monetary Fund).*

### 1. Financial crises—Periodicals. 2. Global Financial Crisis, 2008–2009—Periodicals.

### FISCAL MONITOR NOV. 2010

### Main findings and near-term outlook
- The global fiscal deficit is projected to fall from 6¾ percent of GDP in 2009 to 6 percent in 2010.
- Some 60 percent of countries covered by the Monitor are projected to post smaller deficits in 2010 than in 2009.
- The cyclically adjusted balance is expected to worsen in 2010 (that is, the observed deficit decline owes much to improved cyclical conditions rather than discretionary consolidation).
- In 2011, 90 percent of countries are projected to record smaller deficits.
- The cyclically adjusted balance is expected to improve by 1 percentage point of GDP in advanced economies in 2011 (and close to this in emerging economies).
- Policy guidance: The pace of adjustment in the baseline is broadly appropriate, balancing market concerns against avoiding an abrupt withdrawal of support; advanced economies with fiscal room should allow fiscal stabilizers to operate if growth weakens appreciably more than the WEO baseline.

### Sovereign financing and market conditions
- Some advanced economies faced sharper tightening in 2010 because of market pressures; others regarded as safe havens continued to benefit from very low interest rates.
- The crisis initially led to increased home bias and decreased maturities in sovereign bond markets; with market stabilization, the shortening of maturities has begun to reverse.
- Net purchases of government securities by central banks in 2010 have been much more limited relative to 2009, though sizable in the euro area during Q2 2010.

### Medium-term adjustment plans and realism of commitments
- A review of fiscal plans for 25 countries (including all of the G-20) finds that 90 percent have announced gradual reductions in medium-term deficits, typically through 2013.
- The overall pace of underlying adjustment envisaged is judged broadly appropriate.
- Composition: The vast majority of announced adjustments are intended to be expenditure-based.
- Shortcomings identified:
  - In many cases, detailed adjustment measures have not been identified.
  - Some plans include measures addressing short-term health-care pressures, but none include the comprehensive reforms needed to contain medium- and long-term health and pension spending pressures.
  - Few countries plan fundamental social-welfare reforms (for example, improved targeting of benefits).
  - Few countries have explicitly committed to a long-run target for their public debt ratio, or indicated when they intend to achieve such targets where they predated the crisis.

### Fiscal risks and scenarios
- Two key risks:
  - Short- to medium-term: sovereign rollover problems at regional or global levels.
  - Longer term: debt ratios stabilizing but at elevated levels.
- The risk that these events materialize remains high by historical standards for advanced economies—especially those already under market pressure—and is lower but nontrivial for emerging markets.
- Risk drivers:
  - Macro uncertainty has increased relative to six months earlier amid concerns the global recovery may be losing steam.
  - Risks related to the quality of plans have broadly eased as countries announced or began implementing aspects of fiscal exit strategies.
  - Global market sentiment improved toward emerging markets but worsened toward advanced economies that were under pressure in May 2010.

### Scope, methodology, and institutional notes
- Projections in the Monitor are based on the same database used for the October 2010 WEO and GFSR and are referred to as “IMF staff projections.”
- Fiscal projections refer to the general government unless otherwise indicated.
- Short-term projections are based on officially announced budgets, adjusted for differences between national authorities and IMF staff macroeconomic assumptions.
- Medium-term projections incorporate policy measures judged by IMF staff as likely to be implemented; for countries with IMF arrangements, medium-term projections follow the arrangement.
- Where IMF staff lack sufficient information on authorities’ intentions, an unchanged cyclically adjusted primary balance is assumed unless otherwise indicated.

*International Monetary Fund — Fiscal Monitor, November 2010*

### Chapter 5 concludes with an assessment of four topical fiscal policy

### Chapter 5 concludes with an assessment of four topical fiscal policy questions:

### Pension reforms
- Various reforms have been proposed to address long-term pension spending: what is their impact on economic growth?
- A two-year increase in the retirement age—the increase that would be needed to offset projected spending increases over the next two decades—would increase GDP by  
  - 1 percentage point in the short to medium run, on average, and by  
  - 4½ percentage points over the long run.

### Financial sector taxation
- How can the tax system be used to reduce systemic financial sector risk?
- The Monitor summarizes the proposals put forward in a recent IMF report in this area, notably the “Financial Stability Contribution,” proposed by the IMF to internalize systemic risk and raise revenues to offset future financial support needs.

### Carbon pricing
- What are the fiscal implications of regimes to address the environmental impact of carbon-based fuels?
- Efficient carbon-pricing schemes could raise  
  - ¾ percent of GDP in advanced economies and  
  - 1½ percent of GDP in emerging economies  
  within the next ten years.
- Targeted transfers could offset any impact on the poor.

### The VAT
- How can revenues from value-added taxes (VATs) be increased to support consolidation?
- Recommendations:
  - Advanced economies should concentrate on eliminating preferential rates.
  - Emerging economies should concentrate on improving compliance.

*FISCAL MONITOR   NOV. 2010 — Chapter 5 conclusions.*

### Box 1.2; Blanchard and Cottarelli, 2010; and IMF, 2010a).

### Box 1.2; Blanchard and Cottarelli, 2010; and IMF, 2010a

### To Tighten or Not to Tighten: Core policy dilemma (Box 1.2)
- Two opposing arguments:
  - Tightening now is folly when unemployment is at a record high.
  - Not tightening is reckless when public debt is at a record high.
- Recommended approach:
  - A blend: a down payment on consolidation now, with continued gradual tightening over the medium term.
  - Avoid abrupt, front-loaded tightening except when market conditions make it inevitable.
- Key technical points:
  - Fiscal tightening is likely to reduce GDP growth; estimated multiplier is "small—0.5 to 1—but is not zero."
  - Market confidence risk: markets react late and abruptly (example: spreads on Greek debt were as low as 100 basis points one year earlier).
  - Long-term fiscal pressures: "a 10 percentage point increase in debt lowers annual potential output growth by some 0.15 point in advanced countries (Kumar and Woo, 2010)."
  - Ideal policy: avoid tightening now while credibly committing to future tightening; some up-front tightening likely needed to ensure credibility.
  - WEO consistency: "a reduction in the advanced economies’ cyclically adjusted deficit by about 1 percentage point in 2011 would be consistent with a continuation of the world recovery."

### Differences across advanced countries and specific country plans
- Broad pattern:
  - Considerable cross-country variation in the extent and timing of fiscal tightening.
  - Three largest advanced economies’ expected CAB retrenchment in 2011:
    - Germany: ½ percentage point of GDP.
    - Japan: ½ percentage point of GDP.
    - United States: 1 percentage point of GDP.
- Notable country adjustments:
  - France: deficit projected to decline by 2 percentage points in 2011; this is ¾ percentage point more in cyclically adjusted terms than expected earlier (mostly new revenue measures).
  - United Kingdom: deficit projected to decline by 2 percentage points next year; 1¼ percentage points more than expected in May (measures: increase in the VAT rate, capital spending cuts, nominal public sector wage freeze).
  - Portugal: additional adjustment for 2011 announced to reduce deficits by a further 2 percentage points of GDP.
  - Spain: additional adjustment for 2011 announced to reduce deficits by a further 2¼ percentage points of GDP.
- Emerging economies:
  - Overall deficit projected to decline by 1 percent of GDP from its 2010 level.
  - Improvement largely reflects a CAB improvement of ¾ percent of GDP—bulk accounted for by the unwinding of fiscal stimulus.
- Low-income countries (LICs):
  - Fiscal adjustment in 2011 expected to be more modest than in 2010, with a decline in the overall deficit of ¼ percent of GDP.
  - Commodity-exporting LICs: fiscal adjustment slightly larger (about ½ percent of GDP).
  - Oil producers: expected to reduce overall deficit in 2011 by 1 percent of GDP (rebound in growth and unwinding of stimulus in Saudi Arabia and, to a lesser degree, the Russian Federation).

### Pace of fiscal consolidation: drivers and empirical findings
- Cross-country regressions (25 advanced economies; see footnote 4):
  - Dependent variable: change in cyclically adjusted primary balance (CAPB) between 2009–10 and 2009–11.
  - Explanatory variables: initial fiscal positions (public debt and CAPB in 2009, change in CAPB between 2007–09), government bond yields in 2009, cyclical position (unemployment rate in 2009 and change in unemployment over 2007–09).
- Main findings:
  - Initial fiscal conditions are key determinants: higher deficit-to-GDP ratios in 2009 are associated with larger adjustment during 2010–11.
  - High public debt (2007 or 2009) tends to lead to stronger adjustment, though effect is less clear than for deficits.
  - Deterioration during 2008–09 does not predict retrenchment size—suggests effort is commensurate with medium-term needs rather than a simple reversal.
  - Market pressure matters: countries facing higher borrowing costs in the immediate aftermath of the crisis tend to undertake larger near-term adjustments.
  - Labor market conditions: only unemployment among conventional indicators is associated with expected fiscal adjustment—economies with larger labor market hits tended to have less contractionary near-term policies.

### Public debt trajectory and distributional shifts
- Advanced economies:
  - "Public debt by end-2011 is projected to be 29 percentage points of GDP higher than before the crisis, on average, with four-fifths of the increase having already occurred."
  - Some countries projected to see declines in debt ratios by 2011 (Canada, Iceland, Israel, Korea, Sweden, Switzerland) because planned tightening is sufficient.
  - Largest projected increases between 2009 and 2011: Ireland, Greece, Japan, Spain, and the United States (between 15 and 42 percentage points).
  - Revisions since May Monitor (projected 2011 public debt ratios revised down):
    - Greece: down by 5¾ percentage points of GDP.
    - Spain: down by 5¼ percentage points of GDP.
    - Portugal: down by 4¾ percentage points of GDP.
    - United Kingdom: down by 3 percentage points of GDP.
    - Ireland: 2011 debt ratio now expected to be 21 percentage points higher than projected in May (reflecting additional banking sector support).
  - Distributional shift: 40 percent of countries now projected to have debt ratios above 80 percent of GDP by end-2011, compared to 17 percent pre-crisis.
- Emerging economies:
  - Average debt ratio expected to decline slightly to 37¼ percent in 2011.
  - Marked regional differences: largest declines in faster growing Asian and Latin American regions; emerging Europe (except Turkey) expected to see increases (e.g., Latvia, Lithuania).
  - By end-2011, about half the emerging economies projected to have debt ratios above 40 percent of GDP (versus about 35 percent in 2007).
- Low-income countries (LICs):
  - Debt ratios expected to remain stable through 2010–11; average debt-to-GDP ratio expected to reach 43¾ percent in 2011.
  - Note: around two-thirds of LIC debt is concessional (footnote).

### Net debt, central bank support, and securities holdings
- Net vs. gross:
  - Net public debt is around 25 percentage points of GDP lower than gross debt on average for advanced economies, and 10 percentage points lower for emerging markets (Statistical Table 8).
  - Over 2008–10: asset acquisitions reduced net debt accumulation by around 2 percentage points relative to gross debt in advanced economies; in emerging markets, capital losses and asset liquidations meant net debt increased by 2 percentage points more than gross debt, on average.
- Central bank purchases and holdings:
  - During 2009, about one-fifth of the U.S. deficit was financed by the Federal Reserve, while some 85 percent of the U.K. deficit was financed by the Bank of England (Table 1.2).
  - In 2010, purchases by the Fed and Bank of England mostly limited to rolling over government debt holdings, though the Federal Reserve resumed modest net purchases using principal repayments of GSE debt and MBS it had acquired.
  - European Central Bank purchases of euro area bonds started in May 2010; they "now amount to about €61½ billion (¾ percent of GDP)," with most intervention in Q2 2010.
- Table 1.2 entries (selected exact figures as presented):
  - U.S. Federal Reserve Treasury securities (Percent of GDP): 3.2 5.2 5.25.25.4 20.9   0.00.02.3
  - U.S. Federal Reserve Agency Debt and MBS: 0.1 7.2 8.38.68.4 ...   .........
  - European Central Bank Securities Market Program: 0.0 0.0 0.00.60.7 0.0   0.016.01.2
  - Bank of England Gilt Purchase under Asset Purchase Facility: 0.0 13.0 13.713.713.7 86.5   13.30.00.0
  - (Notes: denominators for quarterly data prorated; MBS = Mortgage-backed securities; ECB purchases restricted to secondary market; ECB purchased private-sector covered bonds totaling €60 billion under Covered Bond Purchase Program during June 2009 - June 2010.)

### Financial sector support, recovery of outlays, and contingent liabilities
- New direct financial sector support generally limited with the striking exception of Ireland.
- Utilization and recovery:
  - By end-June 2010, recovery of outlays stood at 1½ percent of GDP, ¼ percentage point higher than at end-2009.
  - Recovery rate of utilized support increased from 21 percent to 25 percent.
  - Additional recovery mainly via repurchase of shares, sales of warrants, and dividend receipts in the United States.
  - Pace of recovery appears somewhat faster than historical norms (historically bulk of recovery over five to seven years post-crisis).
- Net direct cost and contingent liabilities:
  - Additional utilization of pledged measures raised the average net fiscal cost marginally by US$13 billion, or less than ¼ percent of GDP, among the three largest economies that provided the bulk of the support.
  - Net direct cost remains below historical norms, but contingent liabilities remain high.
- Utilization specifics:
  - Small increase in utilization in the three largest economies largely reflects additional purchase of GSE preferred shares (~US$60 billion) in the United States.
  - Sharp increase in public outlays for the banking sector in Ireland, related predominantly to support to Anglo-Irish Bank.
  - Several liquidity support and guarantee programs expired in 2010 with only part of available funding utilized and without guarantees being called.

*Sources: October 2010 WEO; and IMF staff estimates.*

### 4.1 percent of GDP.

### _fm1002pdf - 4.1 percent of GDP.

### Recovery of Outlays and Net Cost of Financial Sector Support
- Table 1.3 (Selected Advanced Economies: Recovery of Outlays and Net Cost of Financial Sector Support, as of end-June 2010) — key figures (Percent of GDP unless otherwise indicated):
  - Germany: Direct Support Pledged 6.8; Utilized 4.7; Recovery 0.0; Net Direct Cost 4.6
  - United Kingdom: Direct Support Pledged 11.9; Utilized 7.3; Recovery 1.2; Net Direct Cost 6.1
  - United States: Direct Support Pledged 7.4; Utilized 5.3; Recovery 1.7; Net Direct Cost 3.7
  - Average (end-June 2010): Direct Support Pledged 7.9; Utilized 5.4; Recovery 1.4; Net Direct Cost 4.1
  - In billions of U.S. dollars (end-June 2010): Pledged 1,549; Utilized 1,074; Recovery 265; Net Direct Cost 809
  - Average (end-Dec 2009): Direct Support Pledged 7.9; Utilized 5.1; Recovery 1.1; Net Direct Cost 4.0
  - In billions of U.S. dollars (end-Dec 2009): Pledged 1,544; Utilized 1,006; Recovery 210; Net Direct Cost 796
- Notes and context from the source:
  - The net fiscal cost is defined as total outlays net of recovery by end-June 2010; it is an upper bound of the expected net loss of financial sector support.
  - Mark-to-market valuation of assets acquired by the government during the crisis suggests large losses are unlikely; there could even be net gains when divesting assets.
  - Banking sector contingent liabilities remain high in several European economies, ranging from under 1 percent of sovereign assets for Portugal and Spain up to 30 percent for Ireland (about 22 percent of GDP; see October 2010 GFSR).
  - The cost estimates refer only to direct support to the financial sector; the broader cost of the crisis (including the fiscal impact of induced recession) has been much higher, reflected in the surge in public debt in advanced economies.

### Sovereign Gross Financing Needs: Overview and Projections
- Summary findings:
  - The average gross financing need of the advanced economies is projected to increase somewhat in 2011.
  - Higher maturing debt in 2011 is likely to increase the average financing need to about 27 percent of GDP.
  - Japan’s financing need remains by far the largest, at over 50 percent of GDP.
  - The United States, Greece, Belgium, Italy, France, and Portugal have financing needs of more than 20 percent of GDP.
  - On average, maturing debt accounts for about two-thirds of the countries’ financing needs, except in Ireland and the United Kingdom where it is less than half.
- Table 2.1 (Selected Advanced Economies' Gross Financing Needs, 2010–11) — selected entries (Percent of GDP):
  - Japan 2010: Maturing Debt 43.4; Budget Deficit 9.65; Total Financing Need 53.0 — 2011: Maturing Debt 48.9; Budget Deficit 8.9; Total Financing Need 57.8
  - United States 2010: Maturing Debt 15.4; Budget Deficit 11.1; Total Financing Need 26.5 — 2011: Maturing Debt 18.1; Budget Deficit 9.7; Total Financing Need 27.8
  - Italy 2010: Maturing Debt 20.3; Budget Deficit 5.1; Total Financing Need 25.4 — 2011: Maturing Debt 18.2; Budget Deficit 4.3; Total Financing Need 22.5
  - Ireland 2010: Maturing Debt 6.5; Budget Deficit 31.9; Total Financing Need 38.4 — 2011: Maturing Debt 6.1; Budget Deficit 11.8; Total Financing Need 17.9
  - Belgium 2010: Maturing Debt 17.8; Budget Deficit 4.8; Total Financing Need 22.6 — 2011: Maturing Debt 18.4; Budget Deficit 5.1; Total Financing Need 23.4
  - France 2010: Maturing Debt 14.3; Budget Deficit 8.0; Total Financing Need 22.3 — 2011: Maturing Debt 16.0; Budget Deficit 6.0; Total Financing Need 22.0
  - Spain 2010: Maturing Debt 10.8; Budget Deficit 9.3; Total Financing Need 20.1 — 2011: Maturing Debt 11.0; Budget Deficit 6.9; Total Financing Need 17.9
  - Portugal 2010: Maturing Debt 11.6; Budget Deficit 7.3; Total Financing Need 18.9 — 2011: Maturing Debt 15.5; Budget Deficit 5.2; Total Financing Need 20.7
  - Greece 2010: Maturing Debt 10.3; Budget Deficit 7.9; Total Financing Need 18.2 — 2011: Maturing Debt 16.5; Budget Deficit 7.3; Total Financing Need 23.8
  - Canada 2010: Maturing Debt 13.1; Budget Deficit 4.9; Total Financing Need 18.0 — 2011: Maturing Debt 13.3; Budget Deficit 2.9; Total Financing Need 16.2
  - United Kingdom 2010: Maturing Debt 5.3; Budget Deficit 10.2; Total Financing Need 15.5 — 2011: Maturing Debt 7.5; Budget Deficit 8.1; Total Financing Need 15.6
  - Germany 2010: Maturing Debt 8.5; Budget Deficit 4.5; Total Financing Need 13.0 — 2011: Maturing Debt 9.1; Budget Deficit 3.7; Total Financing Need 12.8
  - Finland 2010: Maturing Debt 9.1; Budget Deficit 3.4; Total Financing Need 12.5 — 2011: Maturing Debt 9.3; Budget Deficit 1.8; Total Financing Need 11.1
  - Sweden 2010: Maturing Debt 4.1; Budget Deficit 2.2; Total Financing Need 6.3 — 2011: Maturing Debt 4.5; Budget Deficit 1.4; Total Financing Need 5.9
  - Australia 2010: Maturing Debt 1.5; Budget Deficit 4.6; Total Financing Need 6.1 — 2011: Maturing Debt 2.0; Budget Deficit 2.5; Total Financing Need 4.5
  - Weighted Average 2010: Maturing Debt 17.0; Budget Deficit 9.1; Total Financing Need 26.1 — 2011: Maturing Debt 19.3; Budget Deficit 7.6; Total Financing Need 26.9
- Notes:
  - For 2010, maturing debt is based on January 2010 Bloomberg projections and October 2010 WEO projection of general government deficit.
  - For 2011, maturing debt is based on Bloomberg projections from September 21, 2010, plus projection of short-term debt maturing in the remainder of 2010.
  - Ireland’s 2010 deficit includes outlays on bank recapitalization amounting to about €30 billion (20 percent of GDP) in the form of promissory notes that do not require upfront market financing and thus are not included in financing need.

### Financing Needs in Emerging and Low-Income Economies
- Emerging economies:
  - For the group of 52 emerging economies, the median aggregate gross financing requirement peaked at 10½ percent of GDP in 2009, less than half the financing needs of advanced economies.
  - That peak was only slightly higher than the 2000–08 average of 8 percent.
  - Projected financing needs are 9¾ percent of GDP in 2010 and 9 percent in 2011.
  - Some countries (e.g., Estonia, Latvia, Serbia) have projected 2011 financing needs above the 2000–08 average; others (including Brazil, Jamaica, Turkey) remain well below the last decade’s average.
- Low-income countries:
  - Stronger policy frameworks allowed resort to domestic financing of larger deficits without undermining macroeconomic stability.
  - Faster projected growth in 2010–11 and continued investor interest (sovereign spreads close to pre-crisis levels and successful bond issuance by some countries) point to access to more diversified financing sources.

### Government Debt Maturity and Holdings
- Average maturity:
  - The decline in average government debt maturity observed early in the crisis has been arrested or reversed as market conditions stabilized and investor sentiment improved.
  - The share of short-term debt issuance in total OECD debt issuance is projected to fall to 62½ percent in 2010 from 63½ percent in 2009 (OECD, 2010).
  - Among large economies, the average maturity in the United Kingdom is more than double that in the United States; the UK has the highest maturity among advanced economies.
- Nonresident holdings:
  - The share of nonresident holding of government debt has declined somewhat in several advanced economies during the crisis, reversing a decade-long increase.
  - The share of nonresident holding varies significantly across advanced economies: Japan and Canada rely almost exclusively on domestic investors, while in many other economies nonresidents hold more than half of government debt.

### Government Bond Yields and Spreads: Market Polarization
- Key observations:
  - Market views on fiscal developments have become more polarized.
  - Yields have declined in countries regarded as safe havens and increased (with wider spreads) for a few countries considered more at risk.
  - This polarization appears driven by a global shift in market sentiment rather than changes in fiscal fundamentals.
  - Emerging markets experienced declines in sovereign bond yields supported by strong fundamentals and search for returns.
- Euro area and policy actions:
  - Sentiment stabilized in May–June in Greece, Ireland, Portugal with the creation of the European Financial Stability Facility (EFSF), ECB actions under the Securities Markets Program (SMP), and the launch of Greece’s EU-IMF supported program; investor concerns reemerged more recently.
  - Some market analysis regards a credit event in some advanced countries as almost certain.
- Major advanced economies:
  - All major advanced economies recently recorded further declines in yields; benchmark 10-year sovereign bond yields touched near-historic lows at end-August and remain low.
  - Declines reflect lower inflation expectations and portfolio rebalancing toward perceived safer assets amid recovery uncertainty.
- Correlations and risk indicators:
  - There is empirical evidence that sovereign yields and bank equity prices are negatively correlated; sovereign yields and growth prospects show some negative cross-country correlation.
  - Relative asset swap (RAS) spreads have markedly increased in Euro area countries under market pressure (Greece, Ireland, Portugal) since early-2010, while returning to pre-crisis levels in the largest economies.

*FISCAL MONITOR   NOV. 2010*

### Box 2.1. Market Concerns about Advanced Economies and Default Risks

### Box 2.1. Market Concerns about Advanced Economies and Default Risks

### Key findings of the IMF Staff Position Note analysis
- Historical frequency of large fiscal adjustments:
  - "During the past three decades, there have been 14 episodes in advanced economies and 26 in emerging economies when individual countries adjusted their structural primary balance by more than 7 percentage points of GDP."
- Magnitude and precedents of required primary surpluses:
  - "Moreover, the level of the primary surplus required to stabilize debt is also not unprecedented."
  - Many large deficits "reflect wrong policy decisions taken relatively recently, which therefore could more easily be reversed."
  - Evidence suggests "many countries, once they have incurred the initial pain of adjustment, persevere and go to great lengths to avoid default."
- Limited impact of haircuts on needed fiscal adjustment:
  - "The needed fiscal adjustment will not be much lower even with a large haircut."
  - Applying a "50 percent haircut—an exceptionally large write-down by historical standards" would reduce the primary adjustment needed to stabilize the debt-to-GDP ratio by only "0.5 percentage point of GDP on average (with a maximum of 2.7 percentage points for Greece)."
- Interest rate structure and time to adjust:
  - For countries under market pressure, "marginal interest rates on government borrowing are high, but average interest rates on government debt remain relatively low."
  - "Interest rates and the projected interest–growth differential in today’s advanced economies are lower than for the economies that defaulted over the past two decades."
  - Debt maturity is relatively long for today’s advanced economies ("with Greece having the second longest maturity after the United Kingdom"), implying "considerable time to win over the markets before their total government interest bill becomes too high."
- Interpretation of current market signals:
  - "While it is true that the current juncture is unique—given the large number of countries that have to implement fiscal adjustment—many countries in the past experienced serious market tensions and recorded high spreads but were eventually able to stabilize the situation."
  - "So current market signals should not be interpreted as pointing to an inevitable negative outcome."

### Market indicators and recent observations
- Sovereign credit default swap (CDS) spreads:
  - "CDS spreads have recently touched record highs in Greece (exceeding 1100 bp in June, above the level in May, although they have recently eased), Ireland, and Portugal, while they are relatively low in the main advanced countries."
- Role of global factors:
  - CDS and RAS spreads reflect both country-specific fiscal fundamentals and global variables—"such as risk aversion and global growth—[which] have recently played an important role (Appendix 2)."
- Liquidity and reliability of price signals:
  - "An examination of co-movements between CDS and RAS series suggests that price signals are reliable only when markets are sufficiently liquid."
  - Trading activity of derivatives products has risen in countries under market pressure: "The increase since January in the gross notional value of contracts written on sovereign debts has been about 5 percent of the outstanding public debt in Portugal and about 3 percent in Greece and Ireland."

### Main policy message
- "A large fiscal adjustment is unavoidable for today’s advanced economies and that a restructuring would be no substitute for—and would probably end up as a distraction from—the fiscal and structural reforms that are necessary for a durable increase in economic growth."

### Method for measuring contagion (Spillover Coefficient, SC)
- Steps used to compute the SC:
  - (1) "For each country, marginal probabilities of default are extracted from each individual CDS spread series at each point in time, from January 2005 to August 2010;"
  - (2) "Joint and conditional probabilities of default are computed using a non-parametric technique;"
  - (3) "The SC is computed as the weighted sum of the probability of distress of each country given distress in the other countries in the sample."
- Interpretation and results:
  - "SC can be perceived as a measure of exposure of each of the sample countries to distress dependence or spillovers from the other countries in the sample."
  - Based on mid-August data, "Greece, Ireland, and Portugal exhibit high levels of stress dependence, significantly exceeding their values in early 2009, while the United States, Japan, and Germany show very low levels of stress dependence."

*Source: Fiscal Monitor, NOV. 2010 — Box 2.1.*

### Box 2.2 (concluded)

### Box 2.2 (concluded) — Fiscal Monitor, Nov. 2010

### Fiscal Conditions Index (FCI) and Distress Dependence
- FCI is an illustrative indicator of fiscal position that "takes into account primary deficit, interest payment, and public debt levels."3
- For each country, "FCI is obtained by taking the average of three variables in 2010—the primary deficit, interest payments, and public debt (all in percent of GDP)—relative to their average for each country over the past decade divided by their standard deviation."
- IMF staff calculations indicate the FCI "seems to be positively associated with high vulnerability to distress dependence" (second figure).

### Sovereign market developments and portfolio reallocation
- Developments in Europe favored a portfolio reallocation toward emerging markets, particularly emerging Asia.15
- After a rise following the outbreak of the Greek crisis, bond spreads for emerging markets have generally receded, though there has been some pickup recently in European and Latin American indexes (Figure 2.10).
- The Latin American index reflects an uptick in only three cases (Argentina, Ecuador, Venezuela), with others showing no increase or further declines.
- Emerging markets continue to experience historically low yields and spreads, reflecting large capital inflows spurred by relatively strong growth and fiscal positions and prospects.

*Source: IMF staff calculations; 1 This box draws on Caceres, Guzzo, and Segoviano (2010); 2 See Segoviano (2006a); Segoviano (2006b); and Segoviano and Goodhart (2009) for details.*

---

### Chapter 3 — Fiscal Adjustment Plans and Medium-Term Fiscal Outlook

### At a Glance — main conclusions
- Most countries have announced medium-term fiscal targets, up to 2013.
- Announced size and speed of adjustment generally strike a balance between fiscal consolidation and cyclical needs.
- Specific measures are identified mostly for 2011; outer years often lack detailed measures.
- Plans focus on expenditure cuts, appropriate given high revenue ratios in many countries needing adjustment.
- Many countries have not specified longer-term fiscal policy objectives, notably the debt level to which they intend to reverse public debt ratios.
- Pension reforms enacted or under way in many advanced economies; little specified on tackling long-term health care spending pressures.
- Many countries consider strengthening budgetary institutions; more is needed in several cases.
- Among low-income countries, medium-term outlook appears favorable, with variation by region and group.

### Time frame and commitment of adjustment plans
- "Fiscal plans typically cover the period until 2013, but few countries have identified a long-term debt objective."
- Most economies set targets until 2013; a few go beyond (United Kingdom and the United States to 2015).
- Half the countries announced medium-term goals in annual budgets; six used medium-term fiscal strategies or other government strategy documents.
- Many fiscal targets are set on a rolling basis and can be revised year-to-year. Germany is an exception with a legal requirement to reduce federal structural deficit to no more than 0.35 percent of GDP by 2016 in broadly equal annual steps.
- International commitments: under the Toronto Declaration of June 27, 2010, advanced G-20 economies announced they would "halve their headline deficits by 2013" and "stabilize or reduce their debt ratios by 2016." EU member states use Stability and Convergence Programs and Excessive Deficit Procedure requirements (reduce overall deficit to 3 percent of GDP between 2012 and 2014/FY 2014/15 depending on country). Greece and Latvia plans are supported by EU/IMF financing.

### Size and speed of adjustment — authorities’ plans vs. IMF staff projections
- "The planned size and speed of underlying adjustment appear to be broadly appropriate."
- Advanced G-20 economies on average plan to improve their CAB by "1¼ percentage point annually during 2011–13" (Table 3.1), including unwinding the 2009–10 stimulus.19
- Emerging economies plan lower annual improvements in overall balances, "about 1 percent of GDP."
- Under plans, CAB would strengthen from "5½ percent of GDP in 2010 (WEO estimate) to about 2½ percent of GDP in 2013" (simple average, Table 3.2).
- Many crisis-impacted countries envisage frontloaded adjustment with larger deficit reduction in 2011 than subsequent years; contrast with countries where market concerns are contained (e.g., United States largest adjustment expected in 2012; Germany roughly equal steps of about ½ percentage point each year in CAB; Japan translating into ½ percentage point for 2011 and minor action thereafter).
- Headline balances adjust more rapidly under authorities’ plans than in WEO, primarily reflecting more optimistic growth assumptions.
- Table 3.3 (average 2010–13):
  - Real GDP Growth — Authorities' plans: Total 3.5; Advanced 2.4; Emerging 4.8.
  - Real GDP Growth — WEO: Total 3.5; Advanced 2.1; Emerging 5.0.
  - Nominal GDP Growth — Authorities' plans: Total 6.3; Advanced 4.6; Emerging 8.4.
  - Nominal GDP Growth — WEO: Total 7.0; Advanced 4.2; Emerging 10.0.
  - Interest Payments (Percent of GDP) — Authorities' plans: Total 2.8; Advanced 3.7; Emerging 2.2.
  - Interest Payments (Percent of GDP) — WEO: Total 3.1; Advanced 3.7; Emerging 2.7.
- The plans, particularly in high-debt advanced economies, assume faster real and nominal GDP growth and lower interest payments.

### Debt outlook and required medium-term adjustment
- Based on WEO growth projections, in advanced economies "the average public debt ratio would increase by 35 percentage points to 108 percent of GDP from 2007 to 2015, of which two-thirds will be realized by end-2010."
- Evolution of debt varies: in about half the sample debt ratio projected to reverse upward trend by 2013; in one-third it would keep rising through 2015.
- For emerging economies, debt ratio projected on average to resume a downward trend starting in 2010, though some peak later (Latvia and Mexico in 2011; South Africa in 2012; the Russian Federation in 2013).
- Based on illustrative scenario: to bring public gross debt ratio back to 60 percent of GDP by 2030 in advanced economies (or stabilize at end-2012 level if below 60 percent), "an improvement of 8¼ percentage points of GDP would be needed" in CAPB between 2010 and 2020 (Appendix Table 1).
- "Planned adjustment by authorities by 2013 (in terms of CAPB) would currently cover, on average, 45 percent of this requirement." Many countries will therefore need additional adjustment over the longer term.
- Drivers of remaining needs: high debt levels (Japan, Italy), large deficits (Ireland, Spain, United States), gradual near-term adjustment (Japan, Germany).
- Exceptions with major efforts underway: Greece and the United Kingdom. Portugal and Lithuania plans appear to entail much of the adjustment need, but WEO projections show significantly smaller CAPB improvements because outer-year measures are unspecified.

### Composition of adjustment
- "In most countries, concrete adjustment measures have not yet been enacted and in many, they need to be specified in more detail." Only about half the countries have detailed measures for initial years; even then many measures not enacted or quantified.
- Adjustment plans are tilted toward expenditure cuts:
  - Majority of plans envisage mostly expenditure-based adjustments; others show a roughly equal mix or are largely revenue-based (Table 3.4).
  - Countries with large consolidation needs and high tax-to-GDP ratios tend to rely on expenditure-based adjustments. Examples of frontloaded adjustments that also use revenue measures: Portugal, Spain, United Kingdom (VAT rate increases).
  - China envisages budgetary improvements largely from revenue side given low tax ratio and need for spending to widen social security.
- Real expenditure projections:
  - In advanced countries, "expenditure is projected to remain constant in real terms in 2010–12," reflecting unwinding of stimulus (about two-thirds of which were expenditure-side).
  - The primary spending ratio in 2014 is projected to be larger than in 2007 by "2¼ percentage points" (weighted average based on October 2010 IMF staff projections for advanced economies), largely due to projected decline in potential output.
- Spending composition:
  - Spending cuts tilt toward the wage bill, size of civil service, and social transfers rather than public investment.
  - Many advanced countries announced public sector wage freeze or wage bill reduction (Canada, Greece, Ireland, Italy, Latvia, Portugal, Spain, United Kingdom).
  - Reduction in defense spending under consideration in Germany and the United States; United Kingdom proposals to reduce future defense spending by "8 percent from 2011–12 to 2014–15."
- Revenue-side measures:
  - Of announced/implemented revenue measures, PIT, CIT, and SSC account for nearly half of measures; VAT increases (ranging from "1 to 4 percentage points in Europe") and excise taxes about one quarter (by number of measures).
  - Some countries plan green taxes (Germany, Ireland, Korea, South Africa) or export taxes on commodities (Russian Federation).
  - Half of envisaged tax measures (notably PIT and CIT) aim to widen the tax base rather than only raise rates. Several countries plan to enhance revenue administrations (Greece, India, Italy, Korea, Latvia, Portugal, United Kingdom) to reduce evasion.
- Social protection:
  - Most countries announced piecemeal measures to protect vulnerable groups; none plan comprehensive reform of social protection networks.
  - Need to improve targeting of benefits, including enhanced means-testing, to improve efficiency and equity.

### Medium-term adjustment needs and structural reforms
- Entitlement reforms critical, particularly health care:
  - "Pension reforms have already been enacted in many advanced economies, so that pension spending in these economies is projected to rise on average by about 1 percentage point of GDP over the next two decades, compared to about 3 percentage points of GDP without such reforms."33
  - Despite reforms, projected future public pension spending increases over next twenty years amount to "8¾ percentage points of GDP in net present value terms."
  - Little has been done to control rise in health care spending in advanced economies; "expenditure estimated to surge by 3½ percentage points of GDP by 2030."
  - Where reforms under way, focus on trimming pharmaceutical bills (Greece, Ireland, Spain, United Kingdom). Germany considers reversing reduced health care contribution rate used for stimulus and short-term caps on expenditure. U.S. health care reform expands coverage; cost-reduction implications depend on future cost containment implementation.

### Reform of fiscal institutions
- Many countries strengthening fiscal and budget institutions:
  - Germany adopted a constitutional structural budget balance rule in June 2009.
  - United Kingdom set up an Office for Budget Responsibility (OBR); draft legislation presented to make OBR permanent; fiscal mandate to balance cyclically adjusted current budget by end of rolling five-year forecast; target to place public sector net debt on downward path by 2015/16.
  - Japan announced a medium-term fiscal framework including a pay-as-you-go rule.
  - United States adopted the Pay-As-You-Go-Act of 2010 (some programs exempted); U.S. President set up a bipartisan fiscal commission charged with developing options to reach primary balance by 2015.
  - EU-level measures to improve effectiveness of fiscal governance are making progress (Box 3.2).
- Countries under market stress have targeted fiscal institutions in exit strategies; "Four of the six high deficit countries plan to adopt a fiscal rule" (Table 3.5).

*Italic: Source — _fm1002pdf - Box 2.2 (concluded)_, IMF Fiscal Monitor, November 2010.*

### Box 3.1. Advanced Economies: The Outlook for Public Health Spending

### Box 3.1. Advanced Economies: The Outlook for Public Health Spending

### Projected increases in public health spending
- IMF staff project that public health spending in the European Union will rise by an average of 3 percentage points of GDP over 2011–30, under the assumption that health care costs will continue to increase in line with recent trends.
- IMF staff project an increase in the United States of 4½ percentage points of GDP from 2011 to 2030.
- A figure in the source summarizes "Projected Increases in Health Spending 2011–30 (Percent of GDP)" with bars for Advanced Economies, Europe, and United States (values as noted above).

### Short-term cost-containment measures and limits to their long-term impact
- Recent European measures have focused on pharmaceuticals; country examples and measures described include:
  - United Kingdom: introduction of value-based pricing for pharmaceuticals.
  - Germany: a three-year freeze on prices of pharmaceuticals covered by statutory health insurance and an increased rebate expected from drug manufacturers; the reform also increased social contributions from 14.9 to 15.5 percent of wages and increased statutory co-payments from 1 to 2 percent of income.
  - France: slashed reimbursement rates for a large number of drugs and imposed price caps on generics.
  - Italy: plans to centralize pharmaceutical procurement, reduce prices of generics, and introduce a tendering system for generics.
  - Ireland: cut prices of off-patent drugs and plans to introduce reference pricing and generic substitution of pharmaceuticals.
  - Spain: decrees strengthening reference-value pricing and lowering prices of pharmaceuticals not included in the system of reference pricing.
  - Greece: introducing a price-referencing system, cutting prices on certain drugs, and expanding the list of medications that are not reimbursed.
- These pharmaceutical measures are projected to have positive effects in the short term but are unlikely to have a major effect on long-term spending growth, especially given the modest share of pharmaceutical outlays in total public health outlays (about 15 percent in the OECD countries).

### United States outlook and risks
- Despite the 2010 health care reform, public health spending in the United States is likely to continue to consume a growing share of the federal budget.
- Under the 2010 reform, Medicare payment cuts would be at least partly offset by the expansion of eligibility and the provision of insurance subsidies, leaving net savings from the reform highly uncertain.
- IMF staff, supplementing Congressional Budget Office projections for federally mandated spending with estimated spending increases for subnational governments, forecast that general government health spending will rise by 4½ percentage points of GDP over the next 20 years.
- There are substantial upside risks: under less optimistic assumptions on Medicare payment reductions and the cost of subsidies, health care outlays could be 1 percentage point of GDP higher in 2030.
- The source notes the possibility that more effective therapies (e.g., gene therapy) may reduce trend cost increases.

### Comparison with other projections
- The source contrasts IMF staff projections with the baseline projection of the European Commission’s Aging Report (European Commission, 2009), which envisages an increase in public health spending of 0.7 percentage point of GDP—based on the optimistic assumption that technological progress will not contribute to rising health care costs.

### Policy recommendations and reform options
- More fundamental reforms are needed to contain spending growth while ensuring broad access to high quality health care. Measures fall into supply-side and demand-side approaches:
  - Supply-side options:
    - Reimbursing providers using case-based payment or global budgets, rather than fee-for-service.
  - Demand-side or fiscal measures:
    - Reducing tax expenditures on private health insurance.
    - Increasing cost sharing to rationalize demand for public health services.
- Lessons from past reforms:
  - Introduction of budget caps in a number of European countries.
  - Managed care in the United States in the 1990s.
- The source emphasizes that appropriate policies will be country-specific.

*Source: Box 3.1. Advanced Economies: The Outlook for Public Health Spending, _Fiscal Monitor_, November 2010.*

### Appendix 4 for selected countries, indicates that, under negative shocks,

### _fm1002pdf - Appendix 4 for selected countries, indicates that, under negative shocks,

### Fiscal risks under negative shocks and baseline assumptions
- Under negative shocks, debt ratios would continue to rise rapidly.
- Baseline fiscal projections assume the crisis led to a sharp decline in potential output (and revenues); this assumption may be wrong and represents an upside risk.
- IMF staff have revised upward their estimate of potential output in the United States since the last Monitor, making that upside risk less pronounced.
- A persistent downside risk is pressure that high debt levels could have on interest rates; the current fiscal baseline assumes relatively benign interest rate developments, especially in Europe.
- An assessment of spending pressures arising from global warming will be incorporated into future issues of the Monitor.

### Financial sector shocks and vulnerabilities
- Financial sector vulnerabilities are largely unchanged from May in most advanced and emerging economies, but have increased considerably among European countries currently under pressure.
- Vulnerabilities reflect developments in bank balance sheets, as well as liquidity and monetary conditions.
- Funding conditions remain favorable and the EU bank stress test provided some reassurance, but potential losses on private and public asset holdings weigh on bank balance sheets.
- Potential losses from sovereign risk repricing could be more relevant for banks in the European countries under pressure.
- Appendix 4 includes a statistical assessment focusing on the likelihood that guarantees on banking sector obligations are called.

### Policy shocks and quality of fiscal plans
- Risks related to the quality of fiscal plans and policies have declined among advanced economies since May.
- Most countries have made progress in setting out fiscal exit plans and some in strengthening fiscal institutions.
- Considerable room for further progress remains, including:
  - providing more detail on adjustment measures,
  - identifying long-term targets for the debt ratio,
  - ensuring the prudence of macroeconomic projections,
  - improving fiscal frameworks,
  - strengthening safety nets for the most vulnerable.
- Some key emerging economies have not spelled out medium-term adjustment plans or have indicated they do not plan significant fiscal consolidation, even where appropriate.

### Market sentiment
- Market sentiment has become more polarized, weakening for some European countries, and remains a significant source of risk.
- Broader market sentiment appears to have stabilized (for example, as captured by the VIX index), but risk appetite continues to be weak.
- Declines in sovereign yields for countries considered safe havens reflect weak risk appetite.
- High degree of risk aversion toward European countries under market pressure persists despite improvements in fiscal fundamentals; uncertainties about growth prospects and contingent liabilities weigh heavily on sentiment.
- Sentiment toward emerging economies has strengthened since May; these countries continue to experience strong inflows from investors.

### Risks of high long-term public indebtedness
- The likelihood that public debt ratios in advanced economies will stabilize at high levels over the medium term is difficult to quantify but has likely increased.
- Appendix 4 illustrates that the odds that public debt stabilizes within the next five years appear low, especially when implementation and guarantee risks are taken into account.
- Few governments have identified returning public debt ratios to more appropriate levels within a specific time frame as a specific policy objective.
- Despite initiation of fiscal consolidation in most advanced economies next year, debt ratios on average will continue to rise in most of them over the medium term.
- Reducing debt ratios will require sustained fiscal adjustment over an extended period and substantial political will.
- Few countries have undertaken measures to counter projected rising health care costs in the medium term; the present value of these and pension spending increases are expected to vastly outweigh the cost of the economic crisis, increasing the risk that debt ratios will stabilize only at very high levels.

### Pension reform—macroeconomic and fiscal effects (GIMF model simulations)
- On average across regions, raising the retirement age by two years:
  - would raise GDP by almost 1 percentage point over the short to medium term,
  - would raise GDP by 4¼ percentage points over the long term,
  - would reduce the debt-to-GDP ratio by 30 percentage points over the same period.
- Three reform options assessed (all broadly sufficient to offset projected increase in pension spending over the long run, excluding growth effects):
  - Scenario 1: Raising the statutory retirement age by two years (reduces lifetime benefits, encourages longer working lives, may reduce saving and increase consumption during working years; increases fiscal saving, lowers cost of capital).
  - Scenario 2: Reducing pension benefits by 15 percent (increases incentive to save, may reduce consumption short to medium term, increases investment long run).
  - Scenario 3: Increasing contribution rates by 2½ percentage points (adverse supply-side effects for labor, negative aggregate demand on real disposable income, depresses real activity short and long term).

- Scenario 1: Increasing the retirement age by two years — regional highlights
  - United States:
    - Real GDP rises above baseline by roughly 0.6 percentage point in period 2 and by 3¾ percentage points in the long run.
    - Debt-to-GDP ratio declines by over 40 percentage points relative to baseline.
  - Euro area:
    - Real GDP rises by 5¾ percentage points above baseline.
    - Debt level close to 47 percentage points below baseline.
  - Emerging Asia and remaining countries:
    - Similar improvements in output growth and public finances.

- Scenario 2: Reducing pension benefit payments
  - United States:
    - Consumption drops by about 1 percentage point below baseline in the short run.
    - Real GDP rises and settles at almost ½ percentage point above baseline in the long run.
    - Debt ratio close to 40 percentage points below baseline.
  - Spillovers:
    - Reforms by a large region (United States or euro area) generate spillovers on other regions’ real GDP four times that of reforms by a smaller region (emerging Asia).

- Scenario 3: Raising contribution rates
  - United States:
    - Short-term losses in real GDP about ¾ percentage point below baseline by period 10.
    - Real GDP remains close to 0.4 percentage point below baseline in the long term.
  - Similar adverse effects across other regions.

- Cooperative reform strategy (multilateral action)
  - Macro and budgetary benefits are larger in every reform case and in all regions.
  - Cooperative increase in retirement age:
    - Yields a substantially greater improvement in real GDP in the United States and euro area.
    - Results in a significantly larger decline in interest rates than individual action.
    - Relative improvement in real GDP worldwide is 4 times larger than under reform Scenario 2 and over 10 times larger than under reform Scenario 3.
    - Debt-to-GDP ratios decline by approximately 30 percent more in the cooperative strategy relative to a noncooperative strategy (under all types of reforms).
    - Region-specific relative improvement examples: euro area 40 percent and emerging Asia 110 percent improvement, respectively.

### Financial sector taxation—summary of IMF proposals and country examples
- In 2009 G-20 asked the IMF to report on how the financial sector could make a “fair and substantial contribution toward paying for any burden associated with government interventions to repair the banking system.”
- Temporary and permanent measures enacted in some countries:
  - U.K. “Bank Payroll Tax”: levied a 50 percent tax on financial sector bonuses in excess of GBP 25,000; it is expected to have raised GBP 1.3 billion.
  - French bonus tax: projected to raise EUR 360 million.
  - Sweden: established a financial stability fund in 2008 covering deposit-taking institutions; initially capitalized with government transfers of 0.5 percent of GDP; fund will receive revenues from a 3.6 basis point-levy on balance sheet liabilities.
  - Italy: introduced a permanent tax on bonuses and stock options paid to managers and independent professionals in the financial sector.
  - Germany: cabinet approved a levy enforced on all banks holding a German banking license; rate varies depending on systemic importance.
  - European Commission: proposed creation of resolution funds with target funding level of 2 percent to 4 percent of GDP, to be raised through a levy on liabilities of financial institutions, possibly calibrated to systemic risk.
- Rationale and IMF proposal (Financial Stability Contribution, FSC):
  - Large financial institutions benefit from an implicit government guarantee that lowers borrowing costs by about 0.2 percent and encourages excessive risk-taking.
  - The FSC would tax liabilities of financial institutions exclusive of insured deposits, insurance reserves, and Tier-1 equity capital.
  - The tax rate could be tailored to each institution’s systemic risk and vary countercyclically.
  - A 0.1 percent charge would likely raise the 2 percent to 4 percent of GDP needed to finance an adequate stability fund within 10 years.
  - Such a levy would complement strengthened regulatory and supervisory tools, not substitute for them.
- Pre-crisis contribution of the financial sector to tax revenue:
  - The financial sector contributed 2.3 percent of total tax revenue just prior to the financial crisis.

*Source: Appendix 4 and selected sections from the Fiscal Monitor, November 2010.*

### 17.5 percent of CIT revenue in the average G-20 country (Table 5.1).

### _fm1002pdf - 17.5 percent of CIT revenue in the average G-20 country (Table 5.1).

### Corporate Income Tax Paid by the Financial Sector (Selected G-20 Countries)
- Table 5.1 (periods and shares as reported):
  - Argentina 2006–08: In Percent of Corporate Taxes 6.0; In Percent of Total Tax Revenue 1.0
  - Australia FY2007: In Percent of Corporate Taxes 15.0; In Percent of Total Tax Revenue 2.8
  - Brazil 2006–08: In Percent of Corporate Taxes 15.4; In Percent of Total Tax Revenue 1.8
  - Canada 2006–07: In Percent of Corporate Taxes 23.5; In Percent of Total Tax Revenue 2.6
  - France 2006–08: In Percent of Corporate Taxes 18.0; In Percent of Total Tax Revenue 1.9
  - Italy 2006–08: In Percent of Corporate Taxes 26.3; In Percent of Total Tax Revenue 1.7
  - Mexico 2006–08: In Percent of Corporate Taxes 11.2; In Percent of Total Tax Revenue 3.1
  - South Africa FY2007–08: In Percent of Corporate Taxes 13.7; In Percent of Total Tax Revenue 3.5
  - Korea 2006–08: In Percent of Corporate Taxes 17.7; In Percent of Total Tax Revenue 3.0
  - Turkey 2006–08: In Percent of Corporate Taxes 23.6; In Percent of Total Tax Revenue 2.1
  - United Kingdom FY2006–08: In Percent of Corporate Taxes 20.9; In Percent of Total Tax Revenue 1.9
  - United States FY2006–07: In Percent of Corporate Taxes 18.2; In Percent of Total Tax Revenue 1.9
  - Simple Average: In Percent of Corporate Taxes 17.5; In Percent of Total Tax Revenue 2.3
- Contextual finding:
  - The 17.5 percent average is based on IMF staff estimates from a G-20 survey.
  - Revenues from the financial sector are likely to be much lower for the next few years because many financial institutions—particularly in advanced economies—racked up large losses during the crisis.

### Financial Activities Tax (FAT) — Design Options and Effects
- Possible FAT structures described:
  - An addition method value-added tax (VAT) on all compensation and profits of financial institutions.
  - A tax that exempts compensation and profits below a threshold level, i.e., a tax on economic rents in the financial sector.
  - A tax that targets only the higher returns to deter excessive risk-taking.
- Tradeoffs and incidence:
  - An addition method VAT could compensate for undertaxation of financial services under the standard VAT; its cost would partly be passed on to consumers and also borne by businesses because it does not allow business crediting.
  - A tax on supernormal profits (rents) would be less likely to be passed on to users of financial services.
- Revenue scale example:
  - Financial sector value-added tax averages about 4.7 percent of GDP in G-20 countries, so a 5 percent broad-based FAT could raise about 0.2 percent of GDP, on average.
- International considerations:
  - International coordination would facilitate enactment and help stem tax avoidance through cross-border shifting of income or debt, and avoid double-taxation.

### Carbon Pricing: Revenue Potential and Policy Issues
- Revenue potential and simulation results:
  - Estimates for actual carbon pricing proposals suggest a revenue potential of between 1 percent and 2 percent of GDP, depending on the exact design.
  - Simulations for a carbon price that stabilizes greenhouse gas concentrations at 550 parts per million carbon dioxide would raise between 0.7 and 2.2 percent of GDP in different regions.
  - The proposed Clean Energy and Security Act in the United States features revenue potential of US$132 billion (0.6 percent of GDP) (CBO, 2009).
- Table 5.2 (selected simulation results, Percent of GDP):
  - 550 ppm Scenario — Cap and Trade Scheme:
    - Africa: 2.2
    - China: 1.3
    - India: 1.7
    - Latin America: 1.1
    - Australia: ... (Cap and Trade column 550 ppm: ...; alternative column 0.9)
    - United States: 0.7 (550 ppm) and 0.6 (Cap and Trade Scheme)
    - Western Europe: 0.8 (550 ppm) and 0.3 (Cap and Trade Scheme)
- Policy design and distributional issues:
  - Grandfathering (free permits) in cap-and-trade schemes forfeits much revenue and creates windfall profits for incumbents; efficiency requires minimizing grandfathering and auctioning permits.
  - Resistance to carbon pricing arises from concerns about competitiveness and adverse income effects on the poor.
  - In developed countries, targeted low-cost compensation instruments (e.g., conditional transfers or tax cuts) can protect low-income groups.
  - In many developing countries, fossil-fuel subsidies largely benefit higher income households; eliminating such subsidies could save another US$300 billion in public spending globally, but alternative targeted instruments are preferable to subsidies for poverty reduction.
- International cooperation:
  - Coordination reduces competitiveness risks and carbon leakage and is important because emissions are projected to grow in many developing countries; developed-country leadership and transfers may be needed to ensure broader participation.

### The VAT: Untapped Potential and C-efficiency
- Key points:
  - VAT is an efficient revenue source; introducing or raising VAT has been recommended for the United States and Japan.
  - A VAT in the United States could increase revenues substantially; introducing VAT alongside the income tax would broaden the federal tax base and reduce cyclical volatility.
  - In Japan, each 1 percentage point hike in the standard VAT rate would raise about 0.5 percent of GDP in revenue (OECD, 2008a).
- C-efficiency concept and observed range:
  - C-efficiency = VAT revenue / (standard VAT rate × aggregate private consumption). For a VAT with no exemptions and full compliance, C-efficiency would be 100 percent.
  - Reported C-efficiency among G-20 countries ranges from nearly 70 percent in Japan and China to 33 percent in Mexico.
- Revenue gains from improving VAT efficiency:
  - Most countries could raise significant revenue by increasing C-efficiency to the levels of best performers without raising the standard rate.
  - Example: If Italy could increase its C-efficiency to the G-20 average, it would raise around 2.5 percent of GDP in revenues.
  - By comparison, Italy would gain around 0.4 percent of GDP from each 1 percentage point increase in its standard VAT rate.
- Specific national details and examples:
  - Mexico’s low C-efficiency partly reflects expensive preferential VAT rates applied to border regions, pharmaceuticals, educational services, nonstaple food items, and new dwellings.
  - Germany subjects around 16 percent of its VAT base to a reduced rate of 7 percent.
  - France could unify multiple VAT rates and broaden coverage to raise as much revenue with a headline rate significantly below the current 19.6 percent.
  - Concerns about VAT regressivity are mitigated when incidence is measured over lifetime income; targeted transfers are a better instrument to protect the poor than reduced or zero VAT rates.
  - Reduced and zero VAT rates are an expensive and poorly targeted means of redistribution; progressive income tax and targeted expenditure policies are more efficient.

*Source: IMF staff estimates and analysis as presented in FISCAL MONITOR: FISCAL EXIT: FROM STRATEGY TO IMPLEMENTATION, NOV. 2010.*

### 0.75 percent of GDP (Crawford, Keen, and Smith, 2008).

### _fm1002pdf - 0.75 percent of GDP (Crawford, Keen, and Smith, 2008).

### Rationale and critique of widespread VAT exemptions
- G-20 countries make extensive use of VAT exemptions—in particular in the health, education, and financial services sectors, and for non-profit organizations and cultural services.
- Exemption of health and education is often justified as limiting the competitive disadvantage to private providers that compete with the public sector.
- With the private sector taking an increasing role in providing nonbasic health and education services, the rationale for their exemption is weakening.
- Exemption of financial services usually rests on technical difficulties in identifying value added in financial intermediation.
- Huizinga (2002) and Poddar (2003) have suggested variations on a VAT system that would allow full taxation of financial intermediation.
- Difficulties would remain in levying VAT on complex forms of financial intermediation; the IMF has proposed the “Financial Activities Tax” (FAT) as an alternative means to “fix” the VAT and raise revenue from the financial services sector.

### VAT efficiency: decomposition and interpretation
- C-efficiency is a summary measure of the degree to which a country’s VAT system departs from a “pure” VAT with full compliance.
- C-efficiency can be decomposed into:
  - A “policy gap”: a policy gap of zero indicates a VAT with a single rate and no exemptions.
  - A “compliance gap”: a compliance gap of zero indicates full compliance with the prevailing VAT system.
- Decomposition helps prioritize VAT reforms by distinguishing improvements from policy changes versus administrative/compliance improvements.

### Table 5.4 — Additional VAT revenue from policy and administrative improvements, 2006 (selected reported figures and interpretations)
- Table 5.4 reports VAT Revenue (Percent of VAT, Percent of Tax Revenues, Percent of GDP) and decomposes C-efficiency into VAT Compliance Gap and VAT Policy Gap, then estimates Potential Extra Revenue (Percent of GDP) from improved policy and improved compliance under scenarios.
- Emerging Economies (selected entries):
  - Argentina: VAT Rate 29.9; C-efficiency 6.9; VAT Compliance Gap 21.0; VAT Policy Gap 46; Potential Extra Revenue: Max. Improvement (Reducing Gap by Half) 4.9; Improved Compliance (Max. Compliance Reducing Gap to 15%) 2.3; Additional entries: 1.9, 0.5.
  - Mexico: VAT Rate 20.4; C-efficiency 3.7; VAT Compliance Gap 15.0; VAT Policy Gap 33; Potential Extra Revenue: Max. Improvement 5.6; Reducing Gap by Half 2.8; Max. Compliance 0.8; Reducing Gap to 15% 0.1.
  - Hungary: VAT Rate 30.5; C-efficiency 7.4; VAT Compliance Gap 20.0; VAT Policy Gap 49; Potential Extra Revenue: Max. Improvement 4.3; Reducing Gap by Half 2.2; Max. Compliance 2.2; Reducing Gap to 15% 0.8.
  - Latvia: VAT Rate 39.1; C-efficiency 8.3; VAT Compliance Gap 21.0; VAT Policy Gap 49; Potential Extra Revenue: Max. Improvement 5.1; Reducing Gap by Half 2.5; Max. Compliance 2.3; Reducing Gap to 15% 0.7.
  - Lithuania: VAT Rate 36.1; C-efficiency 7.5; VAT Compliance Gap 18.0; VAT Policy Gap 50; Potential Extra Revenue: Max. Improvement 4.3; Reducing Gap by Half 2.1; Max. Compliance 2.1; Reducing Gap to 15% 0.7.
  - Brazil: VAT Rate 30.7; C-efficiency 7.3; VAT Compliance Gap 17.5; VAT Policy Gap 52; Potential Extra Revenue: Max. Improvement ... 3.8; Reducing Gap by Half 1.9; Max. Compliance 2.0; Reducing Gap to 15% 0.6.
  - Indonesia: VAT Rate 30.1; C-efficiency 3.7; VAT Compliance Gap 10.0; VAT Policy Gap 52; Potential Extra Revenue: Max. Improvement ... 1.9; Reducing Gap by Half 1.0; Max. Compliance 1.0; Reducing Gap to 15% 0.3.
  - China: VAT Rate 36.7; C-efficiency 6.0; VAT Compliance Gap 17.0; VAT Policy Gap 68; Potential Extra Revenue: Max. Improvement ... 1.0; Reducing Gap by Half 0.5; Max. Compliance 1.6; Reducing Gap to 15% 0.5.
  - South Africa: VAT Rate 28.2; C-efficiency 7.4; VAT Compliance Gap 14.0; VAT Policy Gap 65; Potential Extra Revenue: Max. Improvement ... 1.6; Reducing Gap by Half 0.8; Max. Compliance 2.0; Reducing Gap to 15% 0.6.
  - Bulgaria: VAT Rate 39.5; VAT Policy Gap 68; Potential Extra Revenue: Max. Improvement ... 1.9; Reducing Gap by Half 1.0; Max. Compliance 3.2; Reducing Gap to 15% 0.9.
  - Romania: VAT Rate 28.6; C-efficiency 8.1; VAT Compliance Gap 19.0; VAT Policy Gap 50; Potential Extra Revenue: Max. Improvement ... 4.8; Reducing Gap by Half 2.4; Max. Compliance 2.2; Reducing Gap to 15% 0.6.
  - Russian Federation: VAT Rate 11.0; C-efficiency 5.6; VAT Compliance Gap 18.0; VAT Policy Gap 48; Potential Extra Revenue: Max. Improvement ... 3.7; Reducing Gap by Half 1.8; Max. Compliance 1.5; Reducing Gap to 15% 0.4.
  - Turkey: VAT Rate 29.3; C-efficiency 5.5; VAT Compliance Gap 18.0; VAT Policy Gap 37; Potential Extra Revenue: Max. Improvement ... 6.3; Reducing Gap by Half 3.2; Max. Compliance 1.5; Reducing Gap to 15% 0.4.
  - Emerging Economies Average: VAT Rate 29.1; C-efficiency 7.1; VAT Compliance Gap 18.6; VAT Policy Gap 50; Additional group averages: 21; 43; Potential Extra Revenue: Max. Improvement 3.8; Reducing Gap by Half 1.9; Max. Compliance 1.8; Reducing Gap to 15% 0.5.
- Advanced Economies (selected entries):
  - France: VAT Rate 25.9; C-efficiency 7.1; VAT Compliance Gap 19.6; VAT Policy Gap 45; Additional group entries: 7; 52; Potential Extra Revenue: Max. Improvement 7.5; Reducing Gap by Half 3.8; Max. Compliance 0.5; Reducing Gap to 7% 0.0.
  - Germany: VAT Rate 27.1; C-efficiency 6.2; VAT Compliance Gap 16.0; VAT Policy Gap 50; Additional group entries: 10; 44; Potential Extra Revenue: Max. Improvement 4.9; Reducing Gap by Half 2.4; Max. Compliance 0.7; Reducing Gap to 7% 0.2.
  - Italy: VAT Rate 21.0; C-efficiency 6.1; VAT Compliance Gap 20.0; VAT Policy Gap 39; Additional group entries: 22; 50; Potential Extra Revenue: Max. Improvement 6.2; Reducing Gap by Half 3.1; Max. Compliance 1.7; Reducing Gap to 7% 1.2.
  - United Kingdom: VAT Rate 21.7; C-efficiency 6.5; VAT Compliance Gap 17.5; VAT Policy Gap 43; Additional group entries: 13; 50; Potential Extra Revenue: Max. Improvement 6.5; Reducing Gap by Half 3.3; Max. Compliance 1.0; Reducing Gap to 7% 0.5.
  - Australia: VAT Rate 12.9; C-efficiency 3.8; VAT Compliance Gap 10.0; VAT Policy Gap 51; Potential Extra Revenue: Max. Improvement ... 2.6; Reducing Gap by Half 1.3; Max. Compliance 0.6; Reducing Gap to 7% 0.1.
  - Japan: VAT Rate 14.2; C-efficiency 2.6; VAT Compliance Gap 5.0; VAT Policy Gap 69; Potential Extra Revenue: Max. Improvement ... 0.7; Reducing Gap by Half 0.3; Max. Compliance 0.4; Reducing Gap to 7% 0.1.
  - Korea: VAT Rate 20.9; C-efficiency 4.2; VAT Compliance Gap 10.0; VAT Policy Gap 61; Potential Extra Revenue: Max. Improvement ... 1.8; Reducing Gap by Half 0.9; Max. Compliance 0.6; Reducing Gap to 7% 0.1.
  - Canada: VAT Rate 9.2; C-efficiency 3.1; VAT Compliance Gap 5.0; VAT Policy Gap 50; Potential Extra Revenue: Max. Improvement ... 1.4; Reducing Gap by Half 0.7; Max. Compliance 0.3; Reducing Gap to 7% 0.1.
  - Advanced Economies Average: VAT Rate 19.1; C-efficiency 4.9; VAT Compliance Gap 12.9; VAT Policy Gap 51; Additional group averages: 13; 49; Potential Extra Revenue: Max. Improvement 3.9; Reducing Gap by Half 2.0; Max. Compliance 0.7; Reducing Gap to 7% 0.3.
- Notes from Table 5.4:
  - For countries where no VAT gap estimate is available, the average (21 percent for emerging economies and 13 percent for advanced economies) of those available has been used.
  - Improving VAT compliance is likely to have an indirect positive effect on income tax compliance which is not reflected in these figures.
  - The report has been produced by Reckon LLP following a study commissioned by the European Commission, Directorate-General for Taxation and Customs Union.

### VAT reform priorities and implications
- With some exceptions, VAT reform should concentrate on:
  - Closing the policy gap in advanced economies.
  - Cutting compliance gaps in emerging countries.
- Decomposition results:
  - C-efficiencies are broadly comparable between emerging and advanced economies, but underlying causes of VAT gaps differ.
  - Advanced economies appear to enjoy higher rates of compliance but have VAT systems that make greater use of exemptions and zero rates.
  - A small compliance gap of only 7 percent makes France a natural benchmark for other countries to emulate.
  - Achieving the France benchmark would raise three times as much revenue for emerging countries as for advanced countries, on average.

### Appendix 1 — Interest rate-growth differential (r–g): role and cross-country patterns
- Debt dynamics depend crucially on the interest rate-growth differential (r–g); the larger the differential, the larger the increase in the primary balance required to stabilize a given debt ratio.
- r should include a term capturing valuation changes owing to exchange rate movements when a portion of debt is denominated in foreign currency.
- A large depreciation of local currency can sharply raise the effective interest rate paid on debt by increasing the local currency value of foreign currency debt and its servicing cost.
- Patterns and magnitudes:
  - In the United States, r–g ranged between –2.3 percent and 6.5 percent (Table A1.1; Figure A1.1).
  - The differential averaged around 1.6 percentage points in the advanced economy group over 1981–2008.
  - The differential is often negative for many emerging economies (–10 percentage points on average in 1994–2008).
- Cross-country variation and correlations:
  - Rank correlation of average differentials within country groups shows significant variation across countries and time periods (Table A1.2).
  - For advanced economies, test statistics cannot reject the null that decadal averages of r–g in 1981–90 and 2001–08 are independent; a similar result holds for emerging economies.
- Relationship with public debt:
  - The differential is positively correlated with the level of public debt: the larger the public debt, the larger the differential (Table A1.3).
  - Large public debt is associated with high interest-growth differential; large debts and fiscal deficits raise long-term interest rates.
- Table A1.1 (selected differentials, Percent):
  - Advanced Economies examples: Austria 1.2 (1981–90), 1.4 (1991–2000), 1.1 (2001–08), 1.3 (1991–2008), 1.2 (1981–2008).
  - Canada: 6.3; 5.0; 1.7; 3.5; 4.4.
  - Japan: 0.2; 2.6; 1.6; 2.1; 1.4.
  - United Kingdom: 1.5; 2.7; 0.4; 1.7; 1.6.
  - United States: 1.9; 1.4; 0.3; 0.9; 1.3.
  - Emerging Economies examples (available from 1994 earliest): Chile n.a.; 4.2; –1.0; 0.4; n.a.
  - Groups of countries: G-7 1.7; 3.3; 1.2; 2.3; 2.2. Advanced G-20 2.7; 3.1; 0.8; 2.1; 2.3.
- Table A1.2 (Spearman rank correlation coefficients of decadal average differential within groups):
  - Advanced Economies: Correlation between 1981–2000 and 1991–2000 = 0.49 (0.06); between 1991–2000 and 2001–08 = 0.58 (0.00); between 1981–1990 and 2001–08 = 0.22 (0.43).
  - Emerging Economies: Correlation values reported as n.a.; 0.3 (0.37); n.a.

*Sources: WEO; GFS; and IMF staff estimates.*

### Appendix 1: Interest Rate-Growth Differential

### Appendix 1: Interest Rate-Growth Differential

### Key quantitative findings
- Interest Rate-Growth Differential (r–g) by public debt-to-GDP ratio (percentage points):
  - Less than 30: –0.07
  - 30–60: 0.61
  - 60–90: 1.44
  - Above 90: 3.20
- Interest Rate-Growth Differential (r–g) averaged over subsequent 3 years (percentage points):
  - Less than 30: 1.06
  - 30–60: 0.73
  - 60–90: 0.94
  - Above 90: 2.91
- Comparative statement preserved from source:
  - “For example, the average differential when the debt-to-GDP ratio is above 90 percent is 3.2 percentage points, which is twice as large as when the debt ratio is between 60 percent and 90 percent (1.4 percentage points).”
- Before versus after large fiscal consolidations (structural primary balance adjustment of at least 5 percent of GDP):
  - Average differential before consolidation (averaged over the previous four years): 4.7 percentage points
  - Average differential after consolidation (averaged over the following four years): 2.0 percentage points
  - Source wording: “On average, the differential was almost twice as high before consolidation as after (4.7 versus 2.0 percentage points; see Figure A1.3).”

### Interpretation and empirical patterns
- The differential corresponds to [(ρ–γ)/(1+γ)], as discussed in Table A1.1.
- The higher the debt-to-GDP ratio, the higher the differential tends to be (as shown by the tabulated averages).
- A comparison based on the differentials averaged over the subsequent three years yields similar results to annual observations.
- After a major fiscal consolidation, the interest-growth differential tends to fall below levels prevailing before consolidation.
- Short-term effects of fiscal consolidation on r–g can be ambiguous because:
  - Consolidation generally adversely affects growth in the short term.
  - Reducing debt tends to lower interest rates, leading to increased investment and growth in the longer term.
- Causality is not established by the observed correlation:
  - Footnote: “Note, however, that it does not establish the causality from large debt to the high differential. Indeed, causality could run in the opposite direction.”
  - Footnote: “A favorable r–g can also affect the fiscal adjustment outcome, of course. However, in the top largest debt reduction episodes in advanced economies, a primary deficit reduction was the main factor (IMF, 2010a).”

### Empirical visualization (referenced)
- Figure A1.3 illustrates interest-growth differentials before and after large fiscal consolidations for a set of advanced-economy episodes; the figure plots r–g before consolidation against r–g after consolidation and includes a 45-degree line to indicate unchanged differentials.
- Source note: “Data on large fiscal adjustment episodes are from (IMF, 2010a).”

*Source: IMF staff estimates. Appendix 1: Interest Rate-Growth Differential, Fiscal Monitor, November 2010.*

### Appendix 4: Risks to Medium-Term Public Debt Trajectories

### Appendix 4: Risks to Medium-Term Public Debt Trajectories

### Key findings on debt-path uncertainty and country ranges
- Germany, the United Kingdom, and the United States fall within a range of 30 to 40 percent of GDP around the baseline by 2015.
- For Greece, the similarly defined range exceeds 90 percent of GDP, assuming historical policy response, and about 80 percent of GDP if current fiscal targets under the authorities’ program are strictly adhered to, regardless of shocks.
- Shocks to growth and interest rates create greater upside risks than downside risks to public debt.
- The difference between the median and the 95th percentile of the debt distribution in 2015:
  - 20 percent of GDP in Germany (about three-fifths of the total range).
  - 28 percent of GDP in the United Kingdom (two-thirds of the total range).
  - 24 percent of GDP in the United States (slightly more than three-fifths of the total range).
  - 58 percent of GDP in Greece (almost two-thirds of the total range).

### Drivers of asymmetry in the debt-distribution
- Two effects explain the asymmetry toward larger upside risks:
  1. The mechanical “snowball” (or r-g) effect, which is directly proportional to the debt level.
  2. The assumption that fiscal policies are allowed to accommodate shocks in a similar fashion as in the past (either through automatic stabilizers or discretionary response), which was strongly asymmetric.
- Historical behavior of the primary balance:
  - Countries tended to accommodate bad shocks.
  - Countries generally failed to improve the balance in the event of positive shocks.

### Additional risk sources analyzed
- Two new sources of shocks are investigated on top of those occurring in the baseline:
  - Implementation risk: shocks arising from the difficulty in designing and implementing large fiscal adjustments, where consolidations involve conflicts over allocation of the adjustment burden and can cause delays in implementation.
  - Financial-sector contingent liabilities: large stocks of contingent liabilities—such as guarantees to the financial sector—that carry the risk of materialization.
- Modeling approach note:
  - The two risks are modeled as increasing the historical variance of budgetary shocks.
  - In the first case, the increase in variability of the primary fiscal balance is assumed to be proportional to the average planned annual

*Source: October 2010 WEO and IMF staff calculations.*

### Appendix 4: Risks to Medium-Term Public Debt Trajectories

### Appendix 4: Risks to Medium-Term Public Debt Trajectories

### Execution-risk scenario: key findings
- Execution risk scenario increases uncertainty around debt trajectories, widening the fan charts for implementation risk.
- Example probabilities comparing the execution-risk scenario with the baseline:
  - Greece: probability that the public debt-to-GDP ratio exceeds 150 percent of GDP by 2015 rises to about 45 percent, against slightly less than 25 percent under the baseline.
  - Germany: probability that debt exceeds 90 percent of GDP by 2015 is about 30 percent under the execution-risk scenario, more than double the corresponding probability under the baseline.
  - United Kingdom: probability that public debt exceeds 100 percent of GDP by 2015 rises to 35 percent, against 15 percent in the baseline simulation.
- In an alternative execution-risk case where the standard deviation of the budgetary shock is increased by 10 percent of the total stock of guarantees:
  - Upside risks to debt are particularly evident in the United Kingdom.
  - Greece is largely unaffected by this guarantees shock because of its relatively small stock of such guarantees.

### Data scope, timing, and baseline sources
- Data in the appendix are compiled on the basis of information available through mid-September 2010.
- Historical data and projections for 2010–15 are in line with those of the October 2010 World Economic Outlook (WEO), unless highlighted.
- Where the Fiscal Monitor includes additional fiscal data and projections not covered by the WEO, data sources are listed in the respective tables and figures.
- All fiscal data refer to the general government where available and to calendar years, with exceptions noted (Pakistan and Singapore use fiscal year data).

### Fiscal policy assumptions (summary and selected country specifics)
- Short-term fiscal policy assumptions used in the WEO are 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. Where IMF staff have insufficient information on authorities’ budget intentions and implementation prospects, an unchanged cyclically adjusted primary balance is assumed unless indicated otherwise.
- Selected country assumptions (as stated):
  - Argentina: 2010 forecasts based on the 2009 outturn and IMF staff assumptions; outer years assume unchanged policies.
  - Australia: projections based on the 2010–11 budget, July 2010 economic statement, 2010 pre-election economic and fiscal outlook, and IMF staff projections.
  - Austria: 2010 based on authorities’ budget adjusted for IMF macro framework; 2011 includes central government spending ceilings and health insurance package savings for 2011–13.
  - Belgium: 2010 projections IMF staff estimates based on 2010 budgets approved by federal, regional, and community parliaments and Intergovernmental Agreement 2009–10; outer years assume unchanged policies.
  - China: for 2010–11 assumed continuation and completion of the late-2008 stimulus program; IMF staff assumes the stimulus is not withdrawn in 2010.
  - Greece: macroeconomic and fiscal projections consistent with the authorities’ program supported by an IMF arrangement; fiscal projections assume a strong frontloaded fiscal adjustment in 2010, followed by further measures in 2011–13; growth expected to bottom out in late 2010 and become positive in 2012.
  - Ireland: 2010 projections based on the 2010 budget adjusted for financial sector support and macro differences; IMF staff projections include €8.3 billion from bank recapitalization as classified at time of finalization; Irish authorities announced amounts classified as expenditure from bank recapitalization would be about €30 billion (20 percent of GDP), bringing the deficit to about 32 percent of GDP in 2010.
  - Japan: 2010 projections assume fiscal plans implemented as announced; medium-term projections assume general government expenditure and revenue adjusted in line with demographic and economic trends (excluding fiscal stimulus).
  - Korea: 2010 budget scales back stimulus relative to 2009 implying a negative fiscal impulse estimated at 2 percent of GDP; medium-term projections assume resumption of consolidation and a balanced budget (excluding social security funds) in 2014.
  - Mexico: projections based on IMF macro projections, modified balanced budget rule under Fiscal Responsibility Legislation (including use of the exceptional clause), and authorities’ spending projections.
  - Saudi Arabia: oil revenue projections based on WEO baseline oil prices discounted by 5 percent; wages assume a salary increase of 15 percent distributed during 2008–10; capital spending in 2010 projected higher than budget by about 32 percent and in line with announced US$400 billion in spending over the medium term.
  - United Kingdom: projections based on the authorities’ 2010 budget announced in June 2010 and incorporate announced medium-term consolidation plans from 2010 onward.
  - United States: projections based on policies outlined in the administration’s Mid-Session Budget Review for FY 2011; federal budget projections adjusted for macro and one-off financial sector support costs and converted to general government basis.

### Data conventions and financial-sector support
- Fiscal data generally follow IMF’s Government Finance Statistics Manual (GFSM) 2001; overall fiscal balance refers to net lending (+)/borrowing (–) of the general government. In some cases, the overall balance refers to total revenue and grants minus total expenditure and net lending.
- Composite data for country groups are weighted averages of individual country data, weighted by GDP valued at PPP as a share of the group GDP in 2009, with fixed weights unless annual weights are specified.
- Data on financial sector support measures are based on the IMF Fiscal Affairs Department and Monetary and Capital Markets Department database on public interventions in the financial system, revised after a G-20 survey. Survey questionnaires covered recapitalization, asset purchases, liquidity support (asset swaps and treasury purchases), and guarantees for the period June 2007–June 2010. Follow-up questionnaires were sent to Germany, the United Kingdom, and the United States in August 2010.
- Statistical Tables 3 and 4 present IMF staff estimates of cyclically adjusted overall and primary balances; for some countries series reflect adjustments related to natural resource revenues, commodity-price developments, land revenue, investment income, tax policy changes, asset prices, or extraordinary banking sector operations (examples: Chile, Peru, Hong Kong SAR, Sweden, Switzerland, Norway).

### Economy groupings and coverage
- Country groupings used in the Monitor include Advanced Economies, Emerging Economies, G-7, G-20, Advanced G-20, Emerging G-20, Euro Area, Emerging Asia, Emerging Europe, Emerging Latin America, Low-Income Economies, Oil Producers, and ASEAN. (Group compositions are provided in the appendix.)
- All tables (Statistical Tables 1–8) present year-by-year fiscal aggregates for 2006–2015, including general government balance, primary balance, cyclically adjusted balances, expenditure, revenue, gross debt, and net debt for individual countries and aggregates.

### Selected numeric snapshots from Statistical Tables (exact values preserved)
- Statistical Table highlights (examples):
  - General Government Balance (Percent of GDP), 2010:
    - United States: -11.1
    - United Kingdom: -10.2
    - Japan: -9.6
    - Greece: -7.9
    - Germany: -4.5
  - General Government Gross Debt (Percent of GDP), 2010:
    - Japan: 225.8
    - Greece: 130.2
    - Italy: 118.4
    - United States: 92.7
    - United Kingdom: 76.8
  - General Government Expenditure (Percent of GDP), 2010:
    - France: 56.0
    - Sweden: 52.7
    - Belgium: 54.0
    - United States: 41.4
    - China: 23.0
  - General Government Revenue (Percent of GDP), 2010:
    - Norway: 56.0
    - Saudi Arabia: 42.2
    - France: 54.3
    - United States: 30.3
    - China: 19.4
  - General Government Net Debt (Percent of GDP), 2010 (selected):
    - Japan: 120.7
    - France: 74.5
    - United States: 65.8
    - United Kingdom: 61.0
    - Advanced economies average (2010): 67.3
- Averages and aggregates are reported exactly in the tables (e.g., Advanced average general government balance for 2010: -8.1 percent of GDP; Emerging average for 2010: -4.2 percent of GDP).

*Sources: October 2010 WEO; and IMF staff calculations.*

### Appendix Table 1. Advanced Economies: Needed Fiscal Adjustment

### Appendix Table 1. Advanced Economies: Needed Fiscal Adjustment An Illustrative Scenario (Gross Debt Target)

### Overview and methodology
- Scenario objective: Illustrative fiscal adjustment strategy to achieve specified debt targets in 2030 (gross debt targets described in notes).
- Data and projections: Current WEO Projections, 2010; Sources: October 2010 WEO; and IMF staff estimates.
- Key methodological assumptions:
  - CA primary balances are reported in percent of nominal GDP.
  - In the illustrative fiscal adjustment strategy, the CAPB is assumed to improve in line with WEO projections in 2011-12 and gradually from 2013 until 2020; thereafter, it is maintained constant until 2030.
  - Up to 2015, an interest rate–growth rate differential of 0 percentage point is assumed; 1 percentage point afterward.
  - The last column shows the CAPB adjustment needed to stabilize debt at the end-2012 level by 2030 if the respective debt-to-GDP ratio is less than 60 percent ("lower debt"); or to bring the debt ratio to 60 percent in 2030 ("higher debt"). Shaded entries correspond to "higher debt".
- Special-country notes:
  - Greece: data assume adjustment amounting to 7.6 percent of GDP implemented in 2010.
  - Japan: illustrative scenarios are based on net debt and assume a target of 80 percent of GDP, which corresponds to a target of 200 percent of GDP for gross debt.
  - Norway: maintenance of primary surpluses at projected 2012 level is assumed (primary balance includes oil revenue).
  - United States: CAPB excludes financial sector support recorded above the line.

### Key cross-country figures (selected entries preserved exactly as in table)
- Averages and aggregates:
  - Average (PPP-weighted): Gross Debt 97.3; Primary Balance (Cylically Adjusted PB) -6.4; Cyclically Adjusted PB in 2020-30 -4.5; Required Adjustment between 2010 and 2020 3.8; Required Adjustment (last column) 8.3.
  - G-20: Gross Debt 103.8; Primary Balance -6.9; CAPB in 2020-30 -4.9; Required Adjustment 4.0; Last column 8.9.
  - Higher Debt (group): Gross Debt 106.0; Primary Balance -7.2; CAPB in 2020-30 -5.1; Required Adjustment 4.2; Last column 9.3.
  - Lower Debt (group): Gross Debt 32.5; Primary Balance -0.5; CAPB in 2020-30 0.0; Required Adjustment 0.6; Last column 0.6.

- Notable country-level figures (Gross Debt | Cyclically Adjusted PB | CAPB in 2020-30 | Required Adjustment between 2010 and 2020 | Last-column adjustment):
  - Japan: 225.8 | -8.2 | -6.5 | 6.4 | 13.0
  - Greece: 130.2 | -2.2 | -1.5 | 6.4 | 8.0
  - Ireland: 99.4 | -29.3 | -6.6 | 5.3 | 11.9
  - Iceland: 115.6 | -2.7 | 8.7 | 2.4 | -6.2
  - United States: 92.7 | -9.5 | -6.8 | 4.8 | 11.6
  - France: 84.2 | -5.8 | -4.3 | 3.2 | 7.5
  - Italy: 118.4 | -0.8 | 0.7 | 4.5 | 3.8
  - United Kingdom: 76.7 | -7.6 | -5.6 | 3.2 | 8.8
  - Germany: 75.3 | -2.2 | -1.0 | 2.0 | 3.0
  - Australia: 21.9 | -4.3 | -4.1 | 0.3 | 4.4
  - Hong Kong SAR: 0.6 | 1.5 | -1.0 | -0.4 | 0.7
  - Norway: 54.3 | 8.6 | 9.4 | 9.4 | 0.0
  - Switzerland: 39.5 | 0.1 | 0.8 | 0.0 | -0.8

### Interpretation and implications (from table notes)
- The required CAPB adjustments between 2010 and 2020 vary widely across advanced economies; larger adjustments are required where gross debt is higher and current CAPBs are weaker.
- The last-column adjustments illustrate two objectives: stabilizing debt at end-2012 levels by 2030 for countries with net debt below thresholds (or reaching specified gross-debt targets of 60 percent), implying substantially larger adjustment needs for some high-debt countries.
- The illustrative nature and simplifying assumptions mean results are directional rather than precise country prescriptions; in particular, a uniform interest-growth differential assumption after 2015 abstracts from country-specific circumstances.

*Source: Appendix Table 1, FISCAL MONITOR NOV. 2010 (October 2010 WEO; IMF staff estimates).*

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_Source: https://www.imf.org/-/media/websites/imf/imported-flagship-issues/external/pubs/ft/fm/2010/_fm1002pdf.pdf_