## _fm1001

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### Preface (IMF Fiscal Monitor integration and methodology)
- The Fiscal Monitor was launched last year to survey and analyze public finance developments, update reporting on fiscal implications of the crisis and medium-term fiscal projections, and assess policies to put public finances on a sustainable footing.
- Previous issues published in IMF Staff Position Note series: Fiscal Implications of the Global Economic and Financial Crisis (July 2009), The State of Public Finances; Cross-Country Fiscal Monitor (November 2009).
- Starting with this issue, the Monitor is part of the IMF’s World Economic and Financial Surveys series to complement the WEO and GFSR.
- Projections based on the same database as the April 2010 WEO and GFSR and coincide with WEO country projections; fiscal projections refer to the general government unless unavailable.
- Short-term projections based on officially announced budgets adjusted for differences between national authorities and IMF staff macro assumptions.
- Medium-term projections incorporate policy measures judged by IMF staff as likely to be implemented; for countries with IMF arrangements, medium-term projections are those under the arrangement.
- Where insufficient information on budget intentions, an unchanged structural primary balance is assumed unless indicated otherwise.
- Prepared by the IMF Fiscal Affairs Department under direction of Carlo Cottarelli (Director) and Philip Gerson (Senior Advisor); coordinated by Manmohan S. Kumar and Mark Horton; contributors listed in source.

### Foreword (key message and role of the Monitor)
- Key messages:
  - The global crisis caused major output and employment costs and left weaker fiscal positions, especially in advanced economies.
  - Timely simultaneous fiscal and monetary support prevented a far worse outcome.
  - As economies recover, urgent to ensure crisis-induced increases in deficits and debts do not lead to fiscal sustainability problems; exit strategies must not undermine recovery.
  - Fiscal strategies should aim at gradually—but steadily and significantly—reducing public debt ratios, rather than stabilizing them at elevated postcrisis levels.
- Quantitative implication:
  - Based on current projections, if public debt is not lowered to precrisis levels, potential growth in advanced economies could decline by over ½ percent annually.
- Many countries will need sizable, sometimes unprecedented, fiscal adjustment; Monitor outlines policies to achieve adjustment while enhancing economic efficiency.

### Main themes and risks — summary of findings
- Fiscal risks have risen for three reasons:
  - underlying fiscal trends deteriorated since November Monitor;
  - financial markets increased focus on fiscal weaknesses;
  - progress in defining fiscal exit strategies has been slow.
- Market-loss-of-confidence remains a tail risk, but potential costs are large.
- New evidence: failure to lower public debt to precrisis levels could reduce potential growth in advanced economies by over ½ percent annually.
- Advanced-economy fiscal projections:
  - headline and cyclically adjusted (CA) fiscal deficits in advanced economies will increase in 2010 after discounting reduced financial sector support operations, relative to 2009 and to projections six months ago;
  - based on likely policies, advanced economies will continue running sizable primary deficits over the medium term;
  - average general government gross debt ratio has increased by close to 20 percent of GDP since onset of crisis and is projected to rise by a further 20 percentage points by 2015, reaching about 110 percent of GDP.
- Emerging economies:
  - CA fiscal balance expected to improve in 2010 relative to 2009, but projected improvement is barely half that projected in November.
  - Over the medium term, emerging economies expected to run primary deficits; with favorable interest rate–growth differential debt ratios should stabilize or decline but remain exposed.
- Low-income economies: fiscal outlook improving relative to last year but slower than six months ago.
- Adjustment needs:
  - To lower gross general government debt below 60 percent of GDP by 2030 in advanced economies: estimated improvement in primary CA balance is 8¾ percentage points of GDP on average (about ¾ of a percentage point more than last issue).
  - For emerging economies to restore debt to 40 percent of GDP: adjustment of 2½ percentage points of GDP on average, with cross-country variation.
- Policy options discussed include health and pension reforms, freezes on nonentitlement spending (about 3 percent of GDP savings over next decade on average), and revenue measures that could yield almost 2½ to 3 percentage points of GDP in advanced economies.

### Fiscal developments, 2009–2010 — headline figures
- World overall fiscal deficit projected to decline from "6.7 percent of GDP in 2009" to "6 percent of GDP in 2010".
- WEO growth projection upward revision by "1.1 percentage points" since November 2009, but improvement in fiscal balances smaller due to CA balance deterioration.
- Advanced economies:
  - Overall balances in 2010 improve by "0.4 percent of GDP" (limited), largely reflecting decline in U.S. financial sector support.
  - Excluding financial sector support, advanced economies overall balance: "–7.9" (2009) to "–8.2" (2010) in percent of PPP-weighted GDP.
  - CA primary balances deteriorate by "–0.6 percentage points" in 2010 relative to 2009.
  - U.S. new stimulus of "1.1 percent of GDP" and further military spending increases of "½ percent of GDP".
- Emerging economies:
  - Headline balances projected to improve by "1 percentage point" in 2010 (compared with "1.2 percentage points in November").
  - CA primary fiscal balances projected to improve by "½ percentage point" on average.
- Low-income economies:
  - Fiscal positions improve by "½ percentage point of GDP" in 2010.
  - Projected 2010 balances are "1½ percentage points" weaker than in November due to smoother adjustment paths in select countries.
- Selected Table 1 highlights (overall balance, percent of PPP-weighted GDP):
  - World: "2007 -0.3", "2009 -6.7", "2010 -6.0", "2011 -4.8", "2015 -3.3".
  - Advanced economies: "2007 -1.1", "2009 -8.8", "2010 -8.4", "2011 -6.7", "2015 -4.7".
  - Emerging economies: "2007 0.0", "2009 -4.9", "2010 -3.9", "2011 -3.0", "2015 -2.3".
- Changes in cyclically adjusted indicators (Table 2, percent of PPP-weighted potential GDP, change 2010–2009):
  - Advanced economies: Cyclically adjusted primary Balance "–0.6", Revenue "–0.1", Expenditure "0.5".
  - Emerging economies: Balance "0.5", Revenue "0.2", Expenditure "–0.3".
  - G-20 economies: Balance "–0.3", Revenue "0.0", Expenditure "0.3".

### Outlook for 2011–15 — medium-term projections and drivers
- CA primary balances expected to begin adjusting in advanced economies in 2011; adjustment in 2011 mainly due to nonrenewal of crisis-related fiscal stimulus.
- CA fiscal deterioration during 2007–10 estimated at about "5 percentage points of GDP"; crisis-related stimulus accounted for less than half of that deterioration.
- Policy changes expected in 2011 include reversal of 2001 tax cuts for high-income U.S. earners and scaling back itemized deductions; Germany envisaged permanent personal income tax cut of about "1 percent of GDP".
- 2012–15 projections:
  - Further improvement of CA primary balances of "2 percent of GDP" projected in advanced economies during 2012–15 based on announced policy plans (concrete measures still to be identified in most countries).
  - World overall deficits will remain "3 percentage points" larger on average in 2015 than in 2007.
  - Worsening of overall balances relative to precrisis levels: advanced economies by "3½ percentage points"; emerging economies by "2¼ percentage points".
- Changes in cyclically adjusted fiscal indicators, 2012–15 (Table 3, percent of PPP-weighted potential GDP):
  - Advanced economies: Change 2015-2012 — Cyclically adjusted primary Balance "2.0", Revenue "1.4", Expenditure "–0.6".
  - Emerging economies: Change 2015-2012 — Balance "0.2", Revenue "0.6", Expenditure "0.4".
  - G-20 economies: Change 2015-2012 — Balance "1.3", Revenue "1.2", Expenditure "–0.1".

### Debt dynamics and risks — advanced and emerging economies
- Advanced economies:
  - Average gross general government debt-to-GDP ratio projected rise from "almost 91 percent at end-2009" to "110 percent in 2015", increasing from pre-crisis levels by "37 percentage points".
  - Among G-7, government debt-to-GDP ratio rising to levels exceeding those after the Second World War.
  - Debt increases largest in the United Kingdom and the United States; also significant in Japan and some advanced European economies.
  - Public debt rising relative to household financial wealth.
- Emerging economies:
  - Debt-to-GDP ratios projected to resume gradual decline in 2011 assuming sustained growth and relatively low interest rates; yields projected to remain below GDP growth rate while primary balances are in a small deficit.
  - Vulnerability if interest rate-growth differential turns less favorable.
- G-20 specifics:
  - G-20 advanced economies total public debt increase, 2008–15 = "39.1 percentage points of GDP" (2009 PPP weighted GDP); about two-thirds explained by revenue weakness and GDP fall during 2008–09.
  - Fiscal stimulus accounts for about one-tenth of the debt increase; direct financial sector support somewhat smaller.
  - Emerging G-20 economies: public debt in 2015 projected almost "5 percentage points of GDP" lower than before the crisis.
  - Financial assets netted out against gross debt estimated at about "20 percent of GDP" on average for a broad sample of advanced economies (with cross-country variation and exclusions).

### Adjustment needs, scenarios, and sensitivity to r − g
- Illustrative required improvement to reduce debt under baseline: "8.7 percentage points of GDP".
- Stabilizing debt ratio at postcrisis level would require about "6.5 percentage points of GDP".
- Scenario “Endogenous r − g from 1 to 3”: r − g increases linearly from "1 to 3 percentage points" as average debt rises from "60 to 100 percent of GDP".
- Credibility effects:
  - Failure to credibly commit to reduce debt can increase interest rates and lower growth, substantially raising required fiscal effort.
  - A more optimistic cap of r − g increase at "2 percentage points" still loses about half of fiscal adjustment gains compared with constant r − g of "1 percentage point".
- Cross-country variation (advanced economies):
  - Adjustment highest—close to or above "10 percent of GDP" in the baseline—for Greece, Ireland, Japan, Spain, the United Kingdom, and the United States.
  - Some low-debt countries (example: Australia) must adjust to eliminate 2010 primary imbalances.
- Emerging economies:
  - China has fiscal space to support spending on education, health, and pensions; a "1 percent of GDP" increase evenly across these areas financed by reducing fiscal surpluses would increase household consumption by "1.2 percent of GDP"; all to health increases consumption by "1.3 percent of GDP"; all to pension increases consumption by "1.6 percent of GDP".
  - Financing fully through income taxation would reduce the consumption impact to "0.6 percent of GDP".
  - Some emerging markets (Chile, Kazakhstan, Panama) need little or no adjustment; others may require up to "8 percentage points of GDP" under scenario assumptions.
- Gross versus net debt targets:
  - Appendix 2 reports net debt target of "45 percent of GDP" (median for advanced G-20 in 2007); target "80 percent" for Japan.
  - Differences in cumulative 10-year illustrative adjustment exceed 1 percent of GDP only for Canada (1.7 percent), Iceland (1.3 percent), and Ireland (1.2 percent).

### Long-term spending pressures and entitlement reform implications
- Projected increases in health and pensions over next two decades often "4 to 5 percentage points of GDP" in advanced economies.
- Countries with above-average adjustment needs on both primary balance and age-related spending include the United States, Spain, the United Kingdom, France, and the Netherlands.
- Example: Greece illustrative 2011–30 adjustment need is "9.2 percent of GDP" after measures of "7.6 percent of GDP" undertaken in 2010; increase in health and pension spending projected at "7.6 percent of GDP".
- Entitlement reform recommendations:
  - Start now in all countries facing aging pressures; measures include increases in statutory retirement ages, benefit reductions, and contribution increases.
  - Some reforms yield short-term positive demand effects (e.g., higher retirement ages reduce saving).

### Policy options and recommendations — expenditure, revenue, and institutions
- Expenditure measures:
  - Strategic goal: freeze non-age-related per capita spending in real terms over the medium term.
  - Projected structural savings: "3 to 3½ percentage points of GDP" in advanced economies over next 10 years.
  - Health spending projected to rise by "3½ percentage points of GDP in 2010–30" in advanced economies.
  - Pension spending projected to rise by "1 percentage point of GDP" over next 20 years.
  - Illustrative equivalences to stabilize pension spending: two-year increase in statutory retirement age phased over next two decades; or cutting benefits by "15 percent"; or a "2 percentage point" increase in payroll taxes.
- Revenue measures:
  - Strengthen broad-based taxes on relatively immobile bases and increase externality-reducing taxes.
  - Eliminate VAT exemptions and reduced rates; raise tobacco and alcohol excises; carbon taxation; property taxes.
  - Estimated aggregate potential: relatively efficient measures could yield "2.8 percentage points of GDP" (weighted average) in G-7 economies.
  - Introducing a VAT or raising VAT rates:
    - Introducing a VAT in the United States at 10 percent could raise "4.5 percent of GDP".
    - Doubling the very low VAT rate in Japan could raise "2.6 percent of GDP".
  - VAT evasion estimate: averages "0.7 percent of GDP" in advanced economies.
- Table 11 selected estimates (In percent of GDP):
  - France total potential without full carbon: "5.1"; with carbon: "5.3".
  - Germany total potential: "3.8"; with carbon: "4.5".
  - Italy total potential: "4.6"; with carbon: "5.1".
  - Japan total potential: "2.4"; VAT at 10 percent adds "2.6"; combined total "5.0".
  - United Kingdom total potential: "3.5"; with carbon: "4.0".
  - United States total potential without VAT: "0.9"; introducing VAT at 10 percent yields "4.5"; combined total "6.1".
  - PPP GDP weighted average total potential: "2.2"; with carbon: "2.8" (note: table numbers preserved as in source).
- Institutional arrangements:
  - Improve breadth, depth, and timeliness of fiscal reporting and risk analysis.
  - More comprehensive and binding medium-term budget frameworks and independent scrutiny.
  - Use top-down budgeting, robust contingency arrangements, and numerical fiscal rules.
  - Diffusion of fiscal rules: from "7 countries" in 1990 to "80 countries" by 2009.
  - Credible, growth-oriented fiscal reforms can positively affect investment and potential output; simulation results show credibility matters for realizing investment and output gains.

### Financial sector support, recovery of outlays, and financing measures
- As of end-December 2009:
  - Advanced G-20 economies pledged direct financial sector support with potential cost of "6.2 percent of GDP" (Table 4).
  - Amounts utilized estimated at "3.5 percent of GDP" on average.
  - Estimated recovery of outlays so far in advanced economies amounting to "0.8 percent of GDP", implying a recovery rate to date of "22 percent".
  - Historical average recovery rate in past crises in advanced economies was "55 percent", with most recovery occurring over five to seven years postcrisis.
  - Net cost of direct support in advanced G-20 economies estimated at "2.7 percent of GDP" as of end-2009.
- Table 4 selected figures (percent of 2009 GDP):
  - G-20 Average: Pledged (A) "2.6"; Utilized (B) "1.3"; Pledged Direct Support (D) "4.0"; Pledged Asset Swap/Purchase by Central Bank "6.4".
  - Advanced Economies: Pledged (A) "3.8"; Utilized (B) "2.0"; Pledged Direct Support (D) "6.2"; Pledged Asset Swap/Purchase by Central Bank "10.9".
  - In billions of US$: Advanced Economies pledged "1,220"; utilized "639"; direct support pledged "1,976"; asset swap/purchase pledged "3,530".
- Measures to finance or prefund financial sector support (Box 3 examples):
  - U.S. Financial Crisis Responsibility Fee (FCRF): proposed "0.15 percent" tax on uninsured liabilities of large financial institutions; government estimates raise "US$90 billion" during 2011–20.
  - U.K. Bank Payroll Tax (BPT): applied to bonuses in excess of "£25,000"; originally forecast "£550 million"; later information indicates around "£2.5 billion".
  - France Bonus Tax: temporary tax "50 percent" on bonuses in excess of "€27,500"; projected to yield "€362.5 million".
  - Swedish Financial Stability Fund (SFSF): target size "2.5 percent of GDP" in 15 years; fee rate "0.036 percent" annually.

### Financing needs and sovereign market implications
- Aggregate gross financing needs = new overall borrowing requirement + debt maturing during the year; financing needs exceptionally high in most advanced economies in 2010.
- Examples for 2010 (percent of GDP):
  - Japan: Maturing Debt "54.2"; Deficit "-9.8"; Gross Financing Needs "64.0"; Gross Debt (2009) "217.7"; Average Maturity (years) "5.2".
  - United States: Maturing Debt "21.2"; Deficit "-11.0"; Gross Financing Needs "32.2"; Gross Debt (2009) "83.2"; Average Maturity (years) "4.4".
  - United Kingdom: Maturing Debt "8.6"; Deficit "-11.4"; Gross Financing Needs "20.0"; Gross Debt (2009) "68.2"; Average Maturity (years) "12.8".
  - Italy: Maturing Debt "21.2"; Deficit "-5.2"; Gross Financing Needs "26.4"; Gross Debt (2009) "115.8"; Average Maturity (years) "6.7".
  - Spain: Maturing Debt "10.3"; Deficit "-10.4"; Gross Financing Needs "20.7"; Gross Debt (2009) "55.2"; Average Maturity (years) "6.7".
- Average debt maturities shortened since mid-2009; weighted average shortening by "1.2 months".
- Central bank purchases notable: Bank of England acquired gilts in excess of "14 percent of GDP"; U.S. central bank holdings increased by "2.0" (percent of GDP change noted in table).
- Government bond yields remain relatively low in most advanced economies, but spreads rose sharply in some (Greece, Portugal, Ireland, Spain) with data up to "May 11, 2010".
- Net CDS positions as share of outstanding government debt:
  - Portugal "5 percent"; Ireland "4 percent"; Greece and Spain "2 percent".
- Fiscal-financial linkages: financial sector exposure to public sector debt rose from about "14 percent" to almost "19 percent" of consolidated foreign claims over eight quarters up to Q4 2009.

### Emerging and low-income economies — financing needs and vulnerabilities
- Emerging economies:
  - Median aggregate gross financing requirement for 49 emerging economies: "6½ to 7½ percent of GDP" during 2004–2008; "11 percent of GDP" in 2009; projected "9 percent" in 2010.
  - Yields and spreads have evolved favorably; increased demand shrank spreads.
- Low-income economies:
  - Debt fell to "36 percent of GDP" on average prior to the crisis; projected to be about "4 percentage points higher in 2010 than before the crisis".
  - Debt vulnerabilities manageable if deficit reduction plans implemented; risk of debt distress increased in select countries (Eritrea, Guinea-Bissau, Myanmar, Sudan, Zimbabwe).
  - Financing needs manageable but require stepped-up efforts to access foreign financing and concessional financing for high distress-risk economies.

### Petroleum subsidies — magnitude and reform implications (Appendix 5)
- Pretax subsidies projected to reach almost "US$250 billion", or "0.3 percent of global GDP" by end-2010.
- Tax-inclusive subsidies projected between "1.0 and 1.3 percent of GDP" depending on benchmark tax.
- Of 83 countries with tax-inclusive subsidies in 2010 (benchmark US$0.40 per liter), 69 have projected fiscal deficits for 2010:
  - In 43, deficit will exceed "3 percent of GDP".
  - In 22, deficit will exceed "5 percent of GDP".
- Reducing tax-inclusive subsidies by one-half in these countries would reduce their average deficit from "4.2 percent of GDP" to about "2.5 percent of GDP".
- Reform measures: replace subsidies with improved social safety nets, transparently record subsidies in government accounts, adopt automatic pricing mechanisms interim to liberalization.

*Italic: Source: _fm1001 — Preface and selected chapters and appendices as provided in the supplied IMF Fiscal Monitor content.*

### Preface            .....................................................................................................

### Preface

### Preface (IMF Fiscal Monitor integration and methodology)
- The Fiscal Monitor was launched last year to survey and analyze public finance developments, update reporting on fiscal implications of the crisis and medium-term fiscal projections, and assess policies to put public finances on a sustainable footing.
- Previous issues were published in the IMF Staff Position Note series: Fiscal Implications of the Global Economic and Financial Crisis in July 2009, and The State of Public Finances; Cross-Country Fiscal Monitor: November 2009.
- Starting with this issue, the Monitor is part of the IMF’s World Economic and Financial Surveys series, to complement the World Economic Outlook (WEO) and the Global Financial Stability Report (GFSR).
- Projections in this Fiscal Monitor are based on the same database as used for the April 2010 WEO and GFSR and coincide with the WEO country projections.
- Fiscal projections refer to the general government unless such data are not available.
- Short-term projections are based on officially announced budgets, adjusted for differences between national authorities and IMF staff regarding 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 are those under the arrangement.
- Where IMF staff have insufficient information to assess authorities’ budget intentions and prospects for implementation, an unchanged structural primary balance is assumed unless indicated otherwise.
- Prepared by the IMF Fiscal Affairs Department under the direction of Carlo Cottarelli (Director) and Philip Gerson (Senior Advisor). Coordinated by Manmohan S. Kumar and Mark Horton. Contributors include Emre Alper, Emanuele Baldacci, Fabian Bornhorst, Carlos Caceres, Reda Cherif, Ben Clements, David Coady, Gabriela Dobrescu, Julio Escolano, Annalisa Fedelino, Oriel Fernandes, Lorenzo Forni, Marc Gerard, Raquel Gomez Sirera, Jan Gottschalk, Julia Guerreiro, Borja Gracia, Fuad Hasanov, Jiri Jonas, Daehaeng Kim, Paolo Mauro, Junhyung Park, Iva Petrova, Andrea Schaechter, Anita Tuladhar, and Jaejoon Woo.
- Editorial assistance provided by Maria Delariarte and Nadia Malikyar.
- Analysis benefited from comments and suggestions by staff from other IMF departments.
- Projections and policy considerations are those of IMF staff and should not be attributed to Executive Directors or to their national authorities.

### Foreword (key message and role of the Monitor)
- The global crisis caused major output and employment costs and left weaker fiscal positions, especially in advanced economies.
- Timely, simultaneous fiscal and monetary support prevented a far worse outcome.
- As economies recover, it is urgent to ensure that crisis-induced increases in deficits and debts do not lead to fiscal sustainability problems; exit strategies must not undermine recovery.
- The Monitor’s key message: fiscal strategies should aim at gradually—but steadily and significantly—reducing public debt ratios, rather than stabilizing them at their elevated postcrisis levels. Failing to do so would weaken long-term growth prospects.
- Based on current projections, if public debt is not lowered to precrisis levels, potential growth in advanced economies could decline by over ½ percent annually.
- Many countries will need sizable, and sometimes unprecedented, fiscal adjustment. The Monitor outlines policies to achieve adjustment while enhancing economic efficiency.

### Main Themes in this Fiscal Monitor (summary of findings and risks)
- Fiscal risks have risen, especially in advanced economies, for three reasons:
  - underlying fiscal trends have further deteriorated since the November Monitor;
  - financial markets have increased their focus on fiscal weaknesses;
  - progress in defining fiscal exit strategies has been slow.
- While a widespread loss of confidence in fiscal solvency remains for now a tail risk, its potential costs are large and should not be ignored.
- Even absent a dramatic market event, high levels of public indebtedness could weigh on economic growth for years.
- New evidence in this Monitor suggests that, based on current projections, failure to lower public debt to precrisis levels could reduce potential growth in advanced economies by over ½ percent annually.
- Despite improved WEO projections for 2010 output growth in advanced economies (an increase by a full percentage point since the last Monitor), updated fiscal projections show:
  - after discounting for reduced financial sector support operations, both headline and cyclically adjusted (CA) fiscal deficits in advanced economies will increase in 2010—relative both to the 2009 outturn and to projections made six months ago.
  - Based on current likely policies, advanced economies will continue to run sizable primary deficits over the medium term.
  - The average general government gross debt ratio, which has already increased by close to 20 percent of GDP since the onset of the crisis, is projected to rise by a further 20 percentage points by 2015, reaching about 110 percent of GDP.
- Emerging economies:
  - CA fiscal balance is expected to improve in 2010 relative to 2009, but the projected improvement is barely half that projected in November.
  - Over the medium term, emerging economies are expected to run primary deficits; with a favorable interest rate–growth differential, debt ratios should stabilize or decline, but they remain exposed to interest rate and growth shocks, including fiscal spillovers from advanced economies.
- Low-income economies: fiscal outlook is improving relative to last year but at a slower pace than expected six months ago.
- Market sensitivity to fiscal performance has increased:
  - Many countries face historically high financing requirements in 2010, increasing susceptibility to market pressures.
  - Events in Europe illustrate heightened market attention to differences in underlying fiscal conditions; borrowing conditions vary across euro area members to an extent unimaginable in the recent past.
- Adjustment needs:
  - Section III updates estimates of the adjustment in the primary CA balance needed to lower gross general government debt below 60 percent of GDP by 2030 in advanced economies: the estimate is 8¾ percentage points of GDP on average, about ¾ of a percentage point more than in the last issue of the Monitor.
  - Many larger economies confront above-average adjustment needs.
  - Projected increases in spending for health care and pensions over the next two decades are often 4 to 5 percentage points of GDP, and these pressures are in addition to measures required to achieve the primary balance improvement.
  - For emerging economies, the adjustment needed to restore debt to prudent levels (40 percent of GDP) is 2½ percentage points of GDP on average, with important cross-country variation.
- Progress in exiting fiscal stimulus has been limited; where deficit reduction targets exist, details on underlying measures are often lacking.
- Timing for stimulus withdrawal should depend on macroeconomic and fiscal conditions:
  - Countries with weaker fiscal credibility and those facing a rapid recovery should tighten fiscal policy this year.
  - Other countries can wait until 2011, but all should introduce structural measures now to strengthen medium-term fiscal trends.
- Policy options discussed in Section IV:
  - In countries with unfavorable demographics, health and pension reforms (e.g., improved cost containment in health care and increases in retirement ages) are urgent; these reforms take time to yield savings but provide confidence about long-term fiscal direction.
  - Freezes on nonentitlement spending could generate savings of about 3 percent of GDP over the next decade on average.
  - For countries facing very large adjustment needs, increasing revenues may be necessary. A package of relatively less distortionary tax measures—including elimination of below-standard VAT rates and increases in tobacco and alcohol excises, carbon taxation, and property taxes—could yield almost 2½ to 3 percentage points of GDP in advanced economies.
  - Introducing a VAT or raising standard VAT rates in some countries could yield sizable revenues.
  - Fighting tax evasion should be a priority where it remains significant.
  - Institutional arrangements (fiscal rules or enhanced medium-term frameworks) could support implementation of fiscal consolidation.

_This content unit is the Preface and front-matter of the Fiscal Monitor PDF._

### 1. While global activity is rebounding faster than projected earlier, the fiscal outlook

### 1. While global activity is rebounding faster than projected earlier, the fiscal outlook

### Fiscal developments, 2009–2010
- World overall fiscal deficit projected to decline from "6.7 percent of GDP in 2009" to "6 percent of GDP in 2010".
- Improvement smaller than anticipated in November 2009 despite an upward revision in WEO growth projections (by "1.1 percentage points"); reflects underlying deterioration in cyclically adjusted (CA) balances across all country groups.
- Advanced economies:
  - Overall balances in 2010 improve by "0.4 percent of GDP" (limited), largely reflecting a decline in financial sector support in the United States.
  - Excluding financial sector support, advanced economies overall balance: "–7.9" (2009) to "–8.2" (2010) in percent of PPP-weighted GDP (memorandum item in Table 1).
  - CA primary balances deteriorate by a further "0.6 percentage points" (Table 2), reflecting further discretionary stimulus and underlying spending increases unrelated to the crisis.
  - Notable country movements: Germany sees a large deficit increase (new stimulus and weaker tax revenues); United States reflects new stimulus of "1.1 percent of GDP" and further increases in military spending ("½ percent of GDP").
  - Some countries show CA primary balance strengthening: Greece, Iceland, Ireland, Spain, Korea, and the United Kingdom.
- Emerging economies:
  - Headline balances projected to improve by "1 percentage point" in 2010 (compared with "1.2 percentage points in November").
  - Emerging Europe: significant correction of "2 percentage points of GDP".
  - Emerging Asia: stronger fiscal position projected by "0.4 percentage points".
  - Latin America: stronger fiscal position projected by "1.3 percentage points of GDP".
  - CA primary fiscal balances projected to improve by "½ percentage point" on average, driven by gains in Brazil, India and Russia.
  - Average improvement for emerging economies is barely half that projected in November.
- Low-income economies:
  - Fiscal positions will improve by "½ percentage point of GDP" in 2010.
  - Commodity producers show the most pronounced gains.
  - Projected 2010 balances are "1½ percentage points" weaker than in November due to smoother adjustment paths in Senegal, Tanzania, and Uganda.
- Oil-producing countries:
  - Overall balances expected to recover significantly due to higher oil prices.
  - Deficits exceeding "3 percent of GDP" still projected in 11 countries where oil production is important (including Algeria, Ecuador, Kazakhstan, Sudan, Vietnam, and Yemen).
- Selected table highlights (Table 1, overall balance, in percent of PPP-weighted GDP):
  - World: "2007 -0.3", "2009 -6.7", "2010 -6.0", "2011 -4.8", "2015 -3.3"; Differences from November 2009 projections: "2009 0.2", "2010 0.0", "2011 0.0".
  - Advanced economies: "2007 -1.1", "2009 -8.8", "2010 -8.4", "2011 -6.7", "2015 -4.7"; Differences: "2009 0.3", "2010 -0.1", "2011 -0.3".
  - Emerging economies: "2007 0.0", "2009 -4.9", "2010 -3.9", "2011 -3.0", "2015 -2.3"; Differences: "2009 0.3", "2010 0.1", "2011 0.2".
  - Memorandum: Advanced economies overall balance (excluding financial sector support): "2007 -1.1", "2009 -7.9", "2010 -8.2", "2011 -6.7", "2015 -4.6"; Differences: "2009 -0.1", "2010 -0.2", "2011 -0.3".
- Changes in cyclically adjusted indicators (Table 2, in percent of PPP-weighted potential GDP):
  - Advanced economies, Change 2010-2009: Cyclically adjusted primary Balance "–0.6", Revenue "–0.1", Expenditure "0.5".
  - Emerging economies, Change 2010-2009: Balance "0.5", Revenue "0.2", Expenditure "–0.3".
  - G-20 economies, Change 2010-2009: Balance "–0.3", Revenue "0.0", Expenditure "0.3".

### Outlook for 2011–15
- CA primary balances expected to begin adjusting in advanced economies in 2011, with continuing consolidation in emerging economies.
  - Adjustment in advanced economies in 2011 mainly due to projected nonrenewal of crisis-related fiscal stimulus.
  - CA fiscal deterioration during 2007–10 estimated at about "5 percentage points of GDP"; crisis-related stimulus accounted for less than half of that deterioration.
  - Policy changes expected in 2011 include reversal of 2001 tax cuts for high-income U.S. earners and scaling back of itemized deductions, and a permanent personal income tax cut of about "1 percent of GDP" in Germany envisaged as part of the coalition pact.
  - In emerging economies, unwinding of large-scale investment-related stimulus expected (e.g., China and South Africa).
- 2012–15 projections:
  - Based on announced policy plans, a further improvement of CA primary balances of "2 percent of GDP" is projected in advanced economies during 2012–15, though concrete measures are still to be identified in most countries.
  - Even with this adjustment, the 2007–10 deterioration will not be fully reversed.
  - For the world as a whole, overall deficits will remain "3 percentage points" larger on average in 2015 than in 2007.
  - Contributing factors: permanent revenue losses (from steep decline in potential GDP during the crisis and lower asset prices and financial sector profits), underlying spending pressures (health and pension outlays for aging populations, military spending), and higher interest expenditures.
  - Worsening of overall balances relative to precrisis levels: advanced economies by "3½ percentage points"; emerging economies by "2¼ percentage points".
- Table 3 (Changes in cyclically adjusted fiscal indicators, 2012–15; in percent of PPP-weighted potential GDP):
  - Advanced economies: Change 2015-2012 — Cyclically adjusted primary Balance "2.0", Revenue "1.4", Expenditure "–0.6".
  - Emerging economies: Change 2015-2012 — Balance "0.2", Revenue "0.6", Expenditure "0.4".
  - G-20 economies: Change 2015-2012 — Balance "1.3", Revenue "1.2", Expenditure "–0.1".

### Debt dynamics and risks
- Advanced economies:
  - Average gross general government debt-to-GDP ratio projected to rise from "almost 91 percent at end-2009" to "110 percent in 2015", bringing the increase from pre-crisis levels to "37 percentage points".
  - Among the G-7, government debt-to-GDP ratio is rising to levels exceeding those prevailing in the aftermath of the Second World War.
  - The debt increase is largest in the United Kingdom and the United States; also significant in Japan and some advanced European economies.
  - Public debt rising as a ratio of household financial wealth after decades of relative stability; household financial net worth growth likely to be slowed by crisis effects while public debt surges, increasing public obligations as a share of private portfolios.
- Emerging economies:
  - Debt-to-GDP ratios projected to resume a gradual decline in 2011, predicated on sustained growth and relatively low interest rates.
  - Yields are projected to remain below the growth rate of GDP while primary balances are expected to be in a small deficit during the forecast period.
  - Weak primary balances remain a vulnerability if the interest rate-growth differential turns out less favorable.
- G-20 specifics (Box 1 and Box 2):
  - G-20 advanced economies: total increase in public debt, 2008–15 = "39.1 percentage points of GDP" (2009 PPP weighted GDP); about two-thirds of this increase explained by revenue weakness and the fall in GDP during 2008–09.
  - Fiscal stimulus accounts for about one-tenth of the overall debt increase; direct financial sector support somewhat smaller.
  - Emerging G-20 economies: public debt in 2015 projected to be almost "5 percentage points of GDP" lower than before the crisis, reflecting stronger growth and lower deficits.
  - Gross versus net debt: financial assets netted out against gross debt estimated to amount to about "20 percent of GDP" on average for a broad sample of advanced economies (noting large cross-country variation and exclusions such as Japan and Norway).

### Key implications and policy notes
- Short-term: Faster-than-expected global activity in 2010 has led to only modest improvements in headline deficits because cyclically adjusted balances have deteriorated across country groups.
- Medium-term: Announced policy plans imply substantial consolidation in advanced economies over 2012–15 (CA primary balance improvement of "2 percent of GDP"), but this is insufficient to fully reverse 2007–10 deterioration; global deficits remain elevated relative to precrisis levels.
- Risks:
  - Rising public debt in advanced economies—both relative to GDP and to household financial wealth—creates rollover and fiscal sustainability concerns.
  - Emerging economies face vulnerability if interest rate-growth differentials worsen despite projected resumption of debt ratio declines.
  - Country-specific heterogeneity large, with Eastern Europe particularly affected among emerging economies.
- Priority areas for policy action (as reflected in projections and discussion):
  - Identify and implement concrete measures to deliver announced consolidation in advanced economies beyond 2011.
  - Strengthen revenue bases and address structural spending pressures (health, pensions, military) to stabilize debt trajectories.
  - In emerging and low-income commodity producers, manage withdrawal of stimulus while safeguarding growth and financial stability.

*Source: April 2010 WEO, computed using fixed 2009 PPP GDP weights.*

### 7. In low-income economies, debt levels are also projected to begin declining by

### 7. In low-income economies, debt levels are also projected to begin declining by

### Low-income economies: debt levels and projections
- Low-income country debt fell to 36 percent of GDP, on average, prior to the crisis, reflecting both debt relief initiatives and sustained economic performance.
- Debt was mostly owed to external creditors with a high degree of concessionality.
- The debt-to-GDP ratio is projected to be about 4 percentage points higher in 2010 than before the crisis, reflecting increased use of domestic sources to finance larger deficits.
- The deterioration in debt ratios is expected to taper off as growth resumes and budgetary conditions improve in:
  - oil-producing countries (example: Bolivia), and
  - other low-income economies with low or medium debt distress risk (examples: Cambodia, Ethiopia, Georgia, and Senegal).
- Debt vulnerabilities are likely to remain manageable if deficit reduction plans are successfully implemented (IMF, 2010e).
- Risk of debt distress has increased or remains elevated in a few low-income countries (examples: Eritrea, Guinea-Bissau, Myanmar, Sudan, and Zimbabwe).

### Financial sector support and recovery of outlays
- Projections assume no major additional outlays to support the financial sector and some recovery of previous disbursements.
- As of end-December 2009:
  - Advanced G-20 economies had pledged direct financial sector support for capital injections and purchase of assets with a potential cost of 6.2 percent of GDP (Table 4).
  - The average amounts utilized remain well below pledged amounts, at an estimated 3.5 percent of GDP (Table 5).
  - Uptake of guarantees has been markedly lower than the amount offered.
- Lower utilization of pledged support reflects:
  - the precautionary nature of initial pledges,
  - overlaps in coverage of some measures, and
  - authorities’ success in stabilizing market conditions.
- Some programs expired or were terminated end-December 2009 (examples: Canadian Lenders Assurance Facility and Canadian Life Insurers Facilities; Citigroup terminated a loss-sharing agreement in December 2009).

### Table 4 highlights (Amounts Pledged or Utilized for Financial Sector Support, in percent of 2009 GDP)
- G-20 Average: Pledged (A) 2.6; Utilized (B) 1.3; (A+B) Pledged 1.4; (C) Utilized 0.9; Pledged Direct Support (D) 4.0; Pledged Asset Swap/Purchase by Central Bank 6.4; Additional column value 4.6.
- Advanced Economies: Pledged (A) 3.8; Utilized (B) 2.0; (A+B) Pledged 2.4; (C) Utilized 1.4; Pledged Direct Support (D) 6.2; Pledged Asset Swap/Purchase by Central Bank 10.9; Additional column value 7.7.
- In billions of US$: Advanced Economies pledged 1,220; utilized 639; pledged (A+B) 756; utilized 461; direct support pledged 1,976; asset swap/purchase pledged 3,530; additional 2,400.
- Emerging Economies: Pledged (A) 0.7; Utilized (B) 0.3; (A+B) Pledged 0.1; (C) Utilized 0.0; Pledged Direct Support (D) 0.8; Pledged Asset Swap/Purchase by Central Bank 0.04; Additional column value 0.0.
- In billions of US$: Emerging Economies pledged 90; utilized 38.4; pledged (A+B) 18; utilized 5.0; direct support pledged 108; asset swap/purchase pledged 7; additional 0.

### Recovery of outlays and net cost (Table 5, as of end-December 2009)
- Some asset recovery has begun: estimates suggest a recovery of outlays so far in advanced economies amounting to 0.8 percent of GDP, implying a recovery rate to date of 22 percent.
- Historical context: average recovery rate in past crises in advanced economies was 55 percent; historically most recovery has occurred over five to seven years postcrisis.
- Recovery in 2009–10 occurred mainly through repurchase of shares and warrants, and via dividends, with the bulk accounted for by France, the United Kingdom, and the United States.
- Table 5 aggregates:
  - G-20 Average: Pledged 4.0; Utilized 2.2; Recovery 0.4; Net Direct Cost 1.7.
  - Advanced Economies: Pledged 6.2; Utilized 3.5; Recovery 0.8; Net Direct Cost 2.7; in billions of US$ pledged 1,976; utilized 1,100; recovery 237; net cost 862.
  - Emerging Economies: Pledged 0.8; Utilized 0.3; Recovery -; Net Direct Cost 0.3; in billions of US$ pledged 108; utilized 43; recovery -; net cost 43.
- Overall assessment: taking into account asset recovery through end-2009, the net cost of direct support in advanced G-20 economies is estimated at 2.7 percent of GDP.
- Medium-term expectation: given gradual cost recovery in past crises, the medium-term net cost is likely to be even lower and well below historical norms of 8 percent of GDP.

### Measures to finance or prefund financial sector support (Box 3)
- Examples of actual and proposed steps to recover costs:
  - United States Financial Crisis Responsibility Fee (FCRF):
    - Proposed 0.15 percent tax on uninsured liabilities of large financial institutions.
    - Government estimates FCRF will raise US$90 billion during 2011–20.
  - United Kingdom Bank Payroll Tax (BPT):
    - Introduced effective December 9, 2009 to April 5, 2010.
    - Applies to bonus payments in excess of £25,000 by banks and building societies.
    - Originally forecast to raise £550 million; more recent information indicates the tax could bring in around £2.5 billion.
  - Bonus Tax in France:
    - Temporary tax levied at 50 percent on bonuses in excess of €27,500.
    - Projected to yield €362.5 million.
- Steps to prefund future crisis costs:
  - United States Systemic Dissolution Fund (SDF):
    - Would cover financial firms with more than US$50 billion in assets and hedge funds with more than US$10 billion in assets.
    - Fee accumulated up to a target (legislative maximum US$150 billion); excess paid to general revenues.
  - Bank Levy in Germany:
    - Systemic risk-adjusted bank levy to be paid into a stability fund for a special resolution regime; size of the fund yet to be determined.
  - Swedish Financial Stability Fund (SFSF):
    - Target size of 2.5 percent of GDP in 15 years.
    - Fee rate 0.036 percent payable annually (transition rules: banks pay 50 percent of prescribed rate for 2009–2010).
    - Fee will be risk-based from 2011; details on risk weighting and merge with deposit insurance fee not available.

### Risks to the fiscal outlook
- Significant downside and upside risks around the fiscal projections:
  - Advanced economies:
    - Key downside risk: build-up of public debt leading to a less favorable interest rate-growth differential than assumed in the baseline.
    - Historical differential: averaged about 1 percentage point for advanced economies in the last two decades, although significantly lower in the run-up to the crisis (Escolano, 2010).
    - During 2010–15, the differential is expected to average close to zero for advanced economies, primarily for cyclical reasons.
    - Upward pressure on interest rates (e.g., from insufficiently credible adjustment plans) could significantly impact debt developments directly and indirectly by weighing on growth.
    - Upside: revenues could recover faster than expected if the estimated loss in potential output (on the order of 7 to 8 percent) proves overstated.
    - Policy implementation risks: baseline includes some fiscal adjustment, particularly in 2011–12; implementation may lag or countries may implement additional measures.
  - Emerging economies:
    - A less favorable interest rate-growth differential is also a key source of risk.
    - Projected decline in debt ratios assumes a negative interest rate-growth differential that offsets continued primary deficits.
    - If global conditions are less accommodating—e.g., higher global interest rates or lower growth—public debt ratios in emerging economies could start rising again.
  - Low-income economies:
    - Face spillover risks from weaker fiscal outlooks in advanced economies, including weaker donor support than assumed in projections.
    - The scaling-up of resources agreed in Gleneagles may not fully materialize given fiscal deterioration in advanced economies.

### Implications for government debt markets — Financing needs (Advanced economies)
- Government financing needs remain exceptionally high in most advanced economies in 2010.
- Definition: aggregate gross financing needs = new overall borrowing requirement + debt maturing during the year.
- Examples for 2010 (in percent of GDP):
  - Japan: Maturing Debt 54.2; Deficit -9.8; Gross Financing Needs 64.0; Gross Debt (2009) 217.7; Average Maturity (years) 5.2.
  - United States: Maturing Debt 21.2; Deficit -11.0; Gross Financing Needs 32.2; Gross Debt (2009) 83.2; Average Maturity (years) 4.4.
  - United Kingdom: Maturing Debt 8.6; Deficit -11.4; Gross Financing Needs 20.0; Gross Debt (2009) 68.2; Average Maturity (years) 12.8.
  - Italy: Maturing Debt 21.2; Deficit -5.2; Gross Financing Needs 26.4; Gross Debt (2009) 115.8; Average Maturity (years) 6.7.
  - France: Maturing Debt 16.9; Deficit -8.2; Gross Financing Needs 25.1; Gross Debt (2009) 77.4; Average Maturity (years) 6.5.
  - Canada: Maturing Debt 15.9; Deficit -5.3; Gross Financing Needs 21.2; Gross Debt (2009) 82.5; Average Maturity (years) 5.6.
  - Spain: Maturing Debt 10.3; Deficit -10.4; Gross Financing Needs 20.7; Gross Debt (2009) 55.2; Average Maturity (years) 6.7.
  - Germany: Maturing Debt 10.2; Deficit -5.7; Gross Financing Needs 15.9; Gross Debt (2009) 72.5; Average Maturity (years) 6.0.
  - Australia: Maturing Debt 2.0; Deficit -5.0; Gross Financing Needs 7.0; Gross Debt (2009) 15.5; Average Maturity (years) 4.8.
- Given relatively short average debt maturities—5½ years on average for advanced economies—and significant expected deficits, financing needs will remain high in the years to come.

*Source: IMF staff estimates and content as provided in the source document.*

### 14. By contrast, financing needs remain more moderate among emerging and low-

### 14. By contrast, financing needs remain more moderate among emerging and low-

### Emerging economies: financing needs and debt dynamics
- Debt ratios on average declined before the crisis; lengthening maturities helped create fiscal space for some countries (examples given: Brazil, Malaysia, Peru, and Turkey).
- Median aggregate gross financing requirement for a group of 49 emerging economies:
  - "6½ to 7½ percent of GDP" during 2004–2008.
  - "11 percent of GDP" in 2009.
  - projected to decline to "9 percent" in 2010.
- Some economies expected to experience significant increases in funding needs in 2010 relative to historic levels, including some with relatively moderate debt levels but increasing debt and credit risk spreads since 2007 (examples given: Latvia, Lithuania).
- Others, including some with relatively high public debt levels (examples given: Brazil, the Philippines), have projected financing needs that are in line with or below their historical averages.
- Figure note: "The size of the bubble reflects the debt-to-GDP ratio prior to the crisis."

### Low-income economies: financing needs and access to financing
- Financing needs are described as manageable but require stepped-up efforts to access foreign financing.
- During the crisis, low-income country governments resorted to domestic sources to finance larger deficits and protect pro-growth spending.
- As growth resumes, access to more diversified financing sources would be helpful to avoid putting pressure on interest rates and crowding out private investment.
- Access to concessional financing remains particularly important in economies with higher debt distress risk.
- Low-income economies with stronger fiscal positions are likely to resume precrisis efforts to tap capital markets to finance deficits.

### Central bank holdings and eventual unwinding of purchases
- Central bank purchases of government securities were part of extraordinary emergency operations to expand liquidity when policy interest rates approached the zero bound and many financial markets seized up.
- Largest purchases were made by the Bank of England, which since mid-2008 has acquired gilts in excess of "14 percent of GDP", described as more than a fifth of the outstanding gross debt of the general government of the United Kingdom.
- As liquidity conditions and interest rates return gradually to more normal levels, central banks can be expected to unwind these operations and further increase the supply of government securities (or central bank instruments) in the market.
- Table 7. Central Bank Holdings of Government Securities (In percent of 2009 GDP, end of period) — entries as presented:
  - Japan: "14.7", "13.8", "13.2", "13.8", "15.0", "15.2", Change from 2008Q2: "1.4"
  - United Kingdom: "0.0", "0.1", "0.3", "7.3", "13.8", "14.5", "14.4"
  - United States: "5.3", "3.4", "3.3", "4.6", "5.4", "5.4", "2.0"
- Sources for table: "National central banks’ balance sheets and flow of funds."

### Government debt maturities
- Since mid-2009, average government debt maturities have shortened.
- At the height of the crisis in 2008–09, a spike in risk aversion prompted strong demand for sovereign debt, primarily at the short-end of the yield curve, leading to increased issuance of short-term debt instruments.
- Notably, since the summer of 2009, average maturity declined in many advanced economies (exceptions listed: Australia, Ireland, Italy, Norway, Slovenia, the United States), resulting in a weighted average shortening by "1.2 months."
- Explanatory note: The United Kingdom stands out with an exceptionally long maturity, reflecting a deliberate strategy to lengthen maturities and the size of its financial system; Japan has relatively short average maturities despite large debt ratios.

### Government bond yields and spreads: recent patterns and risks
- Yields on government securities in most advanced economies remain relatively low, but spreads have risen sharply in some countries, reflecting concerns about the fiscal outlook.
- Over 2009, government bond yields in most advanced economies increased from record lows reached at the beginning of the year; yields generally remain low due to relaxed monetary conditions and weak private sector activity.
- Recent surges in yields in Greece, Portugal and Ireland, and to a lesser extent Spain, were triggered by downgrades and limited success in rolling over debt; yields declined substantially immediately after the announcement on May 10 of a package of measures adopted by the EU and the ECB to address financial market pressures.
- Relative Asset Swap (RAS) spreads confirm heightened concern over sovereign fiscal positions in Greece, Portugal, and Ireland, and to a lesser extent for Spain; RAS spreads are quite low for other countries, although they have recently become positive for the United Kingdom.
- CDS spreads have been more volatile than bond yields and RAS spreads since the inception of the crisis, likely due to the more limited size of the CDS market; evidence suggests the CDS market led the pickup in bond yields in recent episodes in Greece and Portugal.
- Data vintage note: "Data for yields and spreads reported in this section are up to May 11, 2010."
- Net CDS positions as a share of outstanding government debt (reported figures):
  - Portugal: "5 percent"
  - Ireland: "4 percent"
  - Greece and Spain: "2 percent"
  - In other countries including Italy the ratio is even lower; extremely small for Japan, the United Kingdom, and the United States.
- The analysis used "5-year CDS and 10-year bonds" for liquidity; Granger causality tests over January 2008–April 2010 show CDS spreads anticipated bond spreads (measured by RAS spreads), while the reverse is not true.

### Emerging markets: yields and risk perception
- Yields and spreads have evolved favorably for emerging economies in recent months.
- Increased risk appetite and search for yields led to sharply rising demand for emerging economy sovereign debt, producing shrinking emerging market spreads.
- Changing perception of sovereign risk is reflected in a divergence of CDS spreads between advanced and emerging economies.

### Fiscal-financial linkages and sovereign risk amplification
- Sovereign risk premiums increased sharply following financial sector distress events during 2008–09, as weak financial institutions can trigger implicit and explicit fiscal obligations.
- Sovereign credit problems could affect the financial sector by increasing losses on bank holdings of sovereign debt and by downgrades weakening bank capital positions.
- Recent BIS data indicate financial sector exposure to public sector debt as a share of consolidated foreign claims increased from about "14 percent" to almost "19 percent" over eight quarters up to Q4 2009.
- Higher holdings of U.S. and various European government debt account for most of the expansion.
- There could also be liability-side effects if bank wholesale funding costs rise with sovereign funding costs, and perceived value of sovereign guarantees to the banking system may weaken.

### The fiscal policy outlook: adjustment needs and plans
- Major fiscal consolidation will be needed over the years ahead to avoid doubts about fiscal solvency and to prevent accumulated public debt from slowing long-term potential growth.
- Policy focus: goals of fiscal policy in the years ahead; subsequent section addresses specific measures and institutional reforms.

#### Debt stabilization strategy and illustrative adjustment scenarios
- Key strategic decision: whether to stabilize public debt at post-crisis levels or to bring it down.
- Earlier projections indicated lowering gross general government debt-to-GDP ratio back to "60 percent" for advanced economies by 2030 (the pre-crisis median) would require improving the cyclically adjusted (CA) primary balance by "8 percentage points of GDP."
- Because of weakened CA positions, the required adjustment is now projected at "8.7 percentage points", from a projected deficit of "4.9 percent" in 2010 to a surplus of "3.8 percent of GDP" in 2020.
- For emerging economies, using a lower debt target of "40 percent" of GDP, the adjustment averages "2.7 percentage points of GDP."
- Considerations of less ambitious debt targets:
  - A 10 percentage point increase in the debt ratio is likely to lead to an increase in long-term real interest rates of around "50 basis points" over the medium run (econometric results cited).
  - Given average increases in debt ratios in advanced economies, this suggests interest rates could increase by almost "2 percentage points" over the medium term relative to stabilization at precrisis level.
  - Preliminary evidence suggests an increase in U.S. bond yields by "100 basis points" is associated with an increase in emerging market bond yields of around "30 to 60 basis points."
- New econometric evidence on high debt and potential growth:
  - On average, a 10 percentage point increase in the initial debt-to-GDP ratio is associated with a slowdown in annual real per capita GDP growth of around "0.2 percentage points per year", with the impact being smaller (around "0.15") in advanced economies.
  - Some evidence of nonlinearity: medium (30 to 60 percent of GDP) to high (above 90 percent) levels of debt have a significant negative effect on growth.
  - The adverse effect largely reflects a slowdown in labor productivity growth, mainly due to reduced investment and slower growth of the capital stock.
  - On average, a 10 percentage point increase in initial debt is associated with a decline of investment by about "0.4 percentage points of GDP", with a larger impact in emerging economies.
  - Higher initial debt is also associated to some extent with higher macroeconomic volatility and with lower total factor productivity growth.

#### Illustrative scenario for fiscal adjustment (Figure 11 summary)
- For advanced economies, CA balances reported in percent of nominal GDP; scenario assumes the CA primary balance (CAPB) improves gradually from 2011 to 2020 and is then maintained until 2030.
- CAPB path is set to stabilize a country's debt-to-GDP ratio at its end-2012 level by 2030 if this is less than "60 percent" (or "40 percent" for emerging economies); otherwise it is set to reduce the debt-to-GDP ratio to "60 percent" ("40 percent" for emerging economies) by 2030.
- Simplifying assumptions: up to 2015, a zero interest rate–growth rate differential is assumed; "1 percentage point" afterward regardless of country-specific circumstances.
- Japan: a gross debt target of "200 percent of GDP" (net debt target of "80 percent of GDP") is assumed.
- Norway and Saudi Arabia: maintenance of primary surpluses at the projected 2012 level is assumed.

#### Assessment of stabilizing at post-crisis levels
- Taking into account high debt impacts on interest rates and potential growth, stabilizing debt at post-crisis levels is characterized as less appealing.
- The increase in the primary balance needed to stabilize or lower the debt ratio depends on the interest rate (r) − growth (g) differential ("r − g"); the larger the differential the larger the increase in the primary balance needed.
- In Figure 12, the relationship between a particular debt reduction target and the needed fiscal adjustment is shown as the line "r − g=1," under the assumption that the differential ("1 percentage point") is unaffected by the debt level.

*Source: _fm1001 - 14. By contrast, financing needs remain more moderate among emerging and low-*

### 8.7 percentage points of GDP, while stabilizing the debt ratio at its postcrisis level would

### _fm1001 - 8.7 percentage points of GDP, while stabilizing the debt ratio at its postcrisis level would

### Fiscal adjustment needs and sensitivity to the interest rate−growth differential
- Illustrative required improvement: 8.7 percentage points of GDP to reduce debt under baseline assumptions.
- Stabilizing the debt ratio at its postcrisis level would require about 6.5 percentage points of GDP.
- Trade-off worsens if the interest rate-growth differential (r − g) increases with higher debt:
  - Scenario “Endogenous r − g from 1 to 3” assumes r − g increases linearly from 1 to 3 percentage points as average debt rises from 60 to 100 percent of GDP.
- Credibility effects:
  - If governments fail to credibly commit to reduce debt ratios, resulting higher interest rates and lower growth could markedly increase required fiscal effort.
  - Under loss of credibility, required adjustment to stabilize postcrisis debt can be almost as large as what would have been required to reduce debt had interest rates remained moderate.
  - A more optimistic alternative caps the increase in r − g at 2 percentage points; even then, about half of the fiscal adjustment gains from a constant r − g of 1 percentage point are lost to more adverse debt dynamics.

### Cross-country variation in adjustment needs (advanced economies)
- Adjustment highest—close to or above 10 percent of GDP in the baseline—for countries with high initial cyclically adjusted (CA) primary deficits and debt: Greece, Ireland, Japan, Spain, the United Kingdom, and the United States.
- Larger adjustment needs also reflect larger crisis deterioration in CA primary balances (example: Germany) compared with countries with higher initial debt but smaller balance changes (example: Italy).
- Even low-debt countries must adjust to eliminate the primary imbalances existing in 2010; some (e.g., Australia) must adjust not because debt exceeds thresholds but because running primary deficits would prevent debt stabilization at any level.
- Sensitivity to r − g assumptions:
  - Top panel of Figure 13 uses a uniform r − g across countries (plausible if all adopt credible adjustment strategies and some remove growth impediments).
  - Second panel uses country-specific r − g differentials linked to initial debt levels, implying larger adjustments for high-debt countries such as Japan and Italy.
- Composition and ease of adjustment differ:
  - In some countries, initial CA primary deficits reflect substantial temporary fiscal stimulus that may be easier to reverse.
  - In others, consolidation must address pre-existing structural weaknesses, implying harder adjustments.

### Emerging economies and country cases (including China)
- Illustrative adjustment needs for emerging economies vary widely.
- China:
  - Has fiscal space to continue supporting the economy, especially by strengthening spending for education, health, and pensions.
  - Strengthening social spending would reduce uncertainties about income security that have contributed to a sharp decline in the private consumption ratio pre-dating the crisis.
  - A 1 percent of GDP increase in spending allocated equally across education, health, and pension and financed by reducing fiscal surpluses of government and state enterprises would increase household consumption by 1.2 percent of GDP.
  - Allocating all of the 1 percent expenditure increase to health would raise consumption by 1.3 percent of GDP; allocating all to pension would raise consumption by 1.6 percent of GDP.
  - Financing fully through income taxation would reduce the consumption impact by half to 0.6 percent of GDP.
- Other emerging markets:
  - Several (for example, Chile, Kazakhstan, and Panama) need little or no adjustment given low initial debt and strong CA primary positions.
  - Some require large adjustments—up to 8 percentage points of GDP under scenario assumptions—reflecting high initial debt, crisis impact on CA primary balances, or both; these economies need to adjust more rapidly.

### Gross versus net debt targets
- Some countries prefer net debt targets due to large asset holdings.
- Appendix 2 reports results for achieving a net debt ratio of 45 percent of GDP (median for advanced G-20 in 2007); target is 80 percent for Japan.
- Calculated adjustment needs for net debt are similar to gross debt results.
  - Differences in cumulative 10-year illustrative adjustment exceed 1 percent of GDP only for Canada (1.7 percent), Iceland (1.3 percent), and Ireland (1.2 percent).
  - In these cases, required adjustment to achieve the net debt target is less than that for the gross debt target.

### Long-term spending pressures and interaction with required adjustment
- Adjustment needs are made more challenging by projected spending pressures, notably population aging.
- Spending increases in health and pensions are projected at 4 to 5 percentage points of GDP in advanced economies over the next 20 years (see IMF 2010c).
- Countries with adjustment requirements clearly above the simple averages on both dimensions (needed change in primary balance to lower public debt below 60 percent of GDP and projected age-related spending increases) include: the United States, Spain, the United Kingdom, France, and the Netherlands.
- Example: For Greece (not shown in Figure 14), illustrative 2011–30 adjustment need is 9.2 percent of GDP after measures of 7.6 percent of GDP undertaken in 2010; increase in health and pension spending is projected at 7.6 percent of GDP.

### Subnational government implications
- Fiscal adjustment at the central government level often must be accompanied by adjustment at the subnational level.
- Crisis effects on local governments: revenue collapses and increased spending needs.
- Country responses varied:
  - Some allowed local deficits to widen.
  - Others maintained limits on local deficits and borrowing and used procyclical spending cuts, tax base broadening, or tax rate increases.
- Where local governments were allowed countercyclical easing (e.g., cutting tax rates or increasing investment), gradual reversal will be needed so local governments contribute to fiscal adjustment and debt reduction.
- Where local governments cut spending and raised revenues, recovery should ease local budget pressures, allowing phase-out of some spending restraints or tax measures.

### Medium-term adjustment plans
- Most advanced economies plan significant adjustment starting from 2011, but few have provided detailed policy measures.
- Advanced G-20 economies with lowest projected 2010 deficits (Australia, Canada, Korea) envisage returning close to budget balance or surplus by 2012/13–16.
- EU member states face Stability and Growth Pact requirements to bring budget deficits below the 3 percent of GDP threshold between 2012 and 2014.
- United States: despite sizable medium-term budget proposals, an overall deficit of about 6 percent of GDP would remain by 2014 (Table 8).
- Emerging economies: some announced short-term adjustment targets:
  - Brazil: restore non-financial public sector deficit to precrisis level of 1.5 percent of GDP.
  - Mexico: return the debt ratio to a declining trend by 2011 and balance the budget by 2012.

*Source: IMF staff estimates and analysis, based on the April 2010 WEO and the referenced IMF staff material in the provided content.*

### 33. The planned composition of adjustment during 2010–15 differs between

### _fm1001 - 33. The planned composition of adjustment during 2010–15 differs between

### Planned composition of fiscal adjustment: advanced vs emerging economies
- Advanced economies intend to rely more on expenditure adjustment or a combination of spending and revenue measures, while emerging economies foresee greater reliance on revenue recoveries (Table 9).
- Based on IMF WEO projections:
  - Real primary spending is expected to decline modestly in the advanced economies over 2010–12 and subsequently to grow, albeit at a much slower pace compared to the 2007–09 period (Figure 15).
  - In emerging economies, revenue growth, which slowed markedly during the crisis, is expected to recover; primary spending will continue to rise in line with robust GDP growth.

### Country-level medium-term fiscal consolidation plans (highlights from Table 8)
- Argentina: "No exit strategy is anticipated beyond the functioning of automatic stabilizers."
- Australia: Return to surplus by allowing improvements in expected tax receipts to flow to the budget bottom line; restrain real growth in spending to 2 percent a year until the budget returns to surplus.
- Brazil: No concrete consolidation plans beyond the 2010 target of a non-financial public sector (NPFS) deficit 1.5 percent of GDP (precrisis levels). Public investment expected to increase under the Growth Acceleration Program and events tied to the 2014 FIFA World Cup and 2016 Olympic Games.
- Canada: Fiscal plan projects returning to a small deficit of -0.1 percent of GDP by 2014–15; winding-down of the Action Plan would cut the federal budget deficit in half by 2011–12; growth of direct program spending restrained yielding savings of $17.6 billion over five years.
- China: Fiscal stimulus package is temporary with an explicit timeline through 2010. No specific medium-term fiscal plans yet available.
- France: Reduce the deficit to 3 percent of GDP by 2013 through a mix of revenue and expenditure measures; limit real public expenditure growth at general government level to 0.9 percent per year between 2010 and 2012.
- Germany: Consolidation will start in 2011; SGP requires lowering general government deficit to 3 percent of GDP by 2013; constitutional rule mandates a 0.35 structural deficit at the federal level by 2016; consolidation planned to be expenditure based; a permanent income tax cut of about 1 percent of GDP planned in 2011.
- India: Reduce central government fiscal deficit to 3 percent of GDP by 2013/14; planned reduction mainly revenue-driven via higher growth and tax measures.
- Indonesia: Overall deficit target of 1.2 percent of GDP in 2014; revenue-based consolidation with projected increase in revenue-to-GDP ratio of 1.6 percentage points (2009–14); expenditure-to-GDP ratio projected to increase gradually.
- Italy: Net borrowing planned to fall from 5.3 percent of GDP in 2009 to 5.0 percent in 2010, 3.9 percent in 2011 and 2.7 percent in 2012; 2010 adjustment from reduction in total expenditures of 0.8 percent of GDP partially compensated by reduction in revenues (0.5 percent of GDP).
- Japan: By mid-2010 government expected to announce a medium-term fiscal framework covering next three years and develop a "Fiscal Management Strategy".
- Korea: 2010–13 budget envisages strengthening fiscal balance to 2 percent of GDP by 2013 largely through expenditure reduction; tax measures planned including scaling back income tax allowances, increasing social security contributions and raising environmental taxes; planned further rate cuts and targeted tax incentives for some brackets.
- Mexico: Fiscal adjustment starts in 2010 with a tax package of 1 percent of GDP enacted; aim to return debt ratio to declining trend by 2011 and fiscal balance to zero by 2012.
- Russia: 2010 general government deficit projected to improve by 3 percent of GDP reflecting gradual unwinding of anti-crisis package; 2010–12 federal budget implies steady decline in non-oil balance by about 1–2 percent of GDP a year to 9½ percent of GDP by 2012; plan to reduce non-oil deficit to 4.7 percent of GDP by 2013.
- Saudi Arabia: "There is no fiscal consolidation plan"—policy to save sufficient oil wealth while meeting demographic budget pressures; total expenditure expected to remain at historically elevated levels.
- South Africa: Gradual recovery projected through cyclical improvements, not an active fiscal adjustment; large infrastructure projects and stepped-up labor intensive public work program to continue; revenue measures to be discussed if needed.
- Turkey: Some exit measures implemented in second half of 2009; medium-term plan foresees a general government primary surplus from 2011 supported by a fiscal rule; most adjustment from 2011 expected on expenditure side; revenue adjustment to rely on excise increases (in 2010), tackling informality, strengthening tax administration and broadening tax base.
- United Kingdom: 2010 Budget reaffirmed objective of halving the deficit— 11.8 percent of GDP in 2009–10—over the next four years; current expenditure expected to grow at a slower real rate of 0.8 percent a year on average from 2011–12 to 2014–15; net public investment to fall to 1¼ percent of GDP by 2013–14 from 3.3 percent of GDP in 2008–09.
- United States: Budget proposal includes a 3-year freeze on nonsecurity discretionary funding, require TARP costs paid back, allow the 2001–03 tax cuts for households earning more than $250,000 to expire, broaden tax base for corporate and upper-income taxpayers, eliminate funding for inefficient fossil fuel subsidies; by 2014 deficit projected to reach 3.9 percent of GDP; enacted health care reform projected by the CBO to lower federal deficits by US$143 billion by 2019; administration created a fiscal commission aiming for primary balance by FY2015.

### Composition of adjustment by fiscal need (Table 9)
- Fiscal Adjustment Need classification:
  - HIGH (> 6 percent): India, France, United States, United Kingdom, Japan — composition shows Mostly Revenue; Revenue and Expenditure; Mostly Expenditure; Detailed plans in preparation (as indicated in the table layout).
  - MEDIUM (between 3 and 6 percent): Australia, Canada, Germany, China, Italy, South Africa — composition mixed across revenue and expenditure.
  - LOW (< 3 percent): Indonesia, Mexico, Korea, Russia, Turkey, Argentina, Brazil, Saudi Arabia — composition leans toward varied approaches; specific countries listed under Mostly Revenue, Revenue and Expenditure, Mostly Expenditure, or Detailed plans in preparation in the original table.

### Entitlement spending and reform plans (Tables 10 and Box 5)
- Plans for entitlement reforms vary across countries; some have undertaken meaningful pension reforms (e.g., Italy, Sweden) or have limited entitlement coverage (China).
- Health care reforms moving onto policy agendas in several countries (e.g., France, Germany); few concrete plans announced.
- U.S. health care reform (passed March 2010):
  - Aims to expand coverage to reach 94 percent of the population by 2019 (an increase of 11 percentage points).
  - Expansion achieved by raising Medicaid eligibility limits to 133 percent of the poverty line and providing tax breaks and subsidies for individuals between 133 percent and 400 percent of the poverty line purchasing insurance on exchanges.
  - Forbids insurance companies from denying coverage for preexisting conditions.
  - Includes cost containment and revenue measures: (i) reductions in the growth of Medicare payments to providers; (ii) increases in payroll taxes for Medicare hospital insurance; (iii) an excise tax on expensive employer-provided health plans.
  - CBO projects the legislation would reduce the federal budget deficit by a cumulative US$143 billion by 2019, or about 1 percent of today’s GDP (or about 0.1 percent of GDP per year, on average), with further savings of about ½ percent of GDP in the following decade.
  - CBO estimate risks include difficulty implementing substantial decreases in Medicare payment rates to providers.

### Timing and sequencing of adjustment and entitlement reform
- Entitlement reform should start now in all countries facing aging pressures; pension and health reforms may take several years to bear fruit.
- Some reforms (e.g., increase in retirement ages) may have short-term positive demand effects as individuals reduce saving.
- Timing of stimulus withdrawal should vary by country circumstances:
  - Many emerging economies experiencing rapid pickup in growth have begun withdrawing fiscal stimulus in 2010.
  - If the April WEO baseline materializes, all countries should be in a position to withdraw stimulus spending by 2011 when advanced-economy recovery is expected to be widely consolidated.
  - Countries facing market pressures have already begun withdrawing stimulus and will need to continue doing so irrespective of broader macroeconomic conditions.

*Source: IMF staff projections, IMF country reports, authorities’ reports, and April 2010 WEO (as cited in the chapter).*

### 36. Achieving large fiscal adjustments will require a variety of measures, with

### 36. Achieving large fiscal adjustments will require a variety of measures, with emphasis likely on the expenditure side

### Expenditure Measures — strategic approach and specific areas
- Strategic goal: freeze non-age-related per capita spending in real terms over the medium term.
  - Projected structural savings: 3 to 3½ percentage points of GDP in the advanced economies over the next 10 years.
  - Historical precedents: Belgium (1983–89), Denmark (1982–86), Finland (1993–2000), Israel (1980–83), Sweden (1993–2000).
- Specific measures to support the spending freeze:
  - Rationalize wages.
  - Improve targeting of subsidies, transfers, and expenditures on social benefits.
  - Note: Subsidy spending on energy products absorbs about 1 percent of world GDP (Appendix 5).
- Health care (key challenge for age-related spending):
  - Projected increase: Health care spending is projected to rise by 3½ percentage points of GDP in 2010–30 in advanced economies due to aging and technology-induced cost pressures.
  - Objective: contain growth of spending while ensuring broad access to high-quality health care.
  - Supply-side measures (most effective at containing costs):
    - Global budgets for provider reimbursement.
    - Evaluation of the cost-effectiveness of medical treatments and technology.
  - Demand-side measures:
    - Increase cost sharing to discourage moral hazard.
    - Reduce tax expenditures from subsidies for private health insurance.
  - Emerging economies: primary challenge is expanding health care coverage in a fiscally sustainable manner.
- Pensions:
  - Projected increase: Pension expenditure is currently projected to rise by 1 percentage point of GDP over the next 20 years.
  - Policy focus to stabilize pension spending relative to GDP:
    - Increase statutory retirement ages.
    - Benefit reductions and increases in contributions may also be needed.
  - Illustrative policy equivalences to stabilize pension spending at its 2010 share by 2030:
    - A two-year increase in the statutory retirement age phased over the next two decades; or
    - Cutting benefits by 15 percent; or
    - A 2 percentage point increase in payroll taxes.

### Revenue Measures — efficient revenue-raising options and potential magnitudes
- General strategy: strengthen broad-based taxes on relatively immobile bases and increase externality-reducing taxes.
- Areas with substantial scope for revenue improvement:
  - Value-added tax (VAT): reduce the VAT “policy gap” (e.g., eliminate exemptions and reduced rates).
  - Excises: tobacco and alcohol excises; fuel taxes.
  - Carbon pricing: taxing carbon or auctioning emissions permits could raise large sums.
  - Property taxes: efficient with a benign impact on growth.
- Estimated aggregate potential:
  - Relatively efficient measures could yield an estimated 2.8 percentage points of GDP (on a weighted average basis) in G-7 economies.
  - Additional revenues from introducing a VAT or raising standard VAT rates where low:
    - Introducing a VAT in the United States, and doubling the very low VAT rate in Japan, could raise 4.5 percent and 2.6 percent of GDP, respectively, in those countries.
- Strengthening tax compliance:
  - Renewed efforts to tackle aggressive tax planning, evasion, and fraud.
  - International collaboration in tax information exchange and transparency.
  - VAT evasion estimate: averages 0.7 percent of GDP in advanced economies (IMF, 2010c).
- Past evidence (Box 6):
  - Sample: 44 advanced and emerging economies over the past three decades.
  - Identified episodes: 29 episodes in 20 countries where tax revenues increased by more than 3 percentage points of GDP over 2 consecutive years.
  - Sustained increases: 14 cases in 10 countries where increases were broadly sustained for 10 years.
    - Natural resources-related revenues accounted for four cases (two in Indonesia, one each in Norway and the United Kingdom).
    - Ten other cases in seven countries resulted from “regime change” or comprehensive tax policy reforms (examples: introduction of VAT in Portugal and Spain in 1986 and in Iceland in 1989; Italy base-broadening in 1997 and 2004; tax administration reforms in Peru during the 1990s).
  - In long-lasting adjustments, 90 percent of the increase in revenues was accounted for by increases in income taxes (50 percent) and consumption-based taxes (40 percent).
  - Note: In some countries (e.g., Ireland in the 1990s), tax policy reforms that reduced rates or narrowed bases led to lower revenues.
- Table 11 — Estimated potential revenue increases in selected advanced G-20 economies (In percent of GDP)
  - France: Reduce VAT policy gap by half 3.8; Tobacco and Alcohol Excises 0.1; Fuel Excises 0.3; Property Taxes 1.0; Total 5.1; Total with Full Auctioning/Taxation of Carbon Emissions 5.3 (Carbon column 0.2).
  - Germany: Reduce VAT policy gap by half 2.4; Tobacco and Alcohol Excises 0.2; Fuel Excises (blank); Property Taxes 0.3; Total 1.0; Total 3.8; Full Auctioning/Taxation of Carbon Emissions 0.6; Total 4.5.
  - Italy: Reduce VAT policy gap by half 3.1; Tobacco and Alcohol Excises 0.3; Fuel Excises 0.3; Property Taxes 1.0; Total 4.6; Full Auctioning/Taxation of Carbon Emissions 0.5; Total 5.1.
  - Japan: Reduce VAT policy gap by half 0.3; Tobacco and Alcohol Excises 0.9; Fuel Excises 0.3; Property Taxes 1.0; Total 2.4; VAT at 10 percent Rate (doubling VAT) 2.6; Full Auctioning/Taxation of Carbon Emissions 0.0; Total 5.0.
  - United Kingdom: Reduce VAT policy gap by half 3.3; Tobacco and Alcohol Excises 0.0; Fuel Excises 0.2; Property Taxes 0.0; Total 3.5; Full Auctioning/Taxation of Carbon Emissions 0.5; Total 4.0.
  - United States: Reduce VAT policy gap by half 0.0; Tobacco and Alcohol Excises 0.3; Fuel Excises 0.6; Property Taxes 0.0; Total 0.9; VAT at 10 percent Rate (introduction of VAT) 4.5; Full Auctioning/Taxation of Carbon Emissions 0.8; Total 6.1.
  - Unweighted average: Reduce VAT policy gap by half 2.1; Tobacco and Alcohol Excises 0.3; Fuel Excises 0.3; Property Taxes 0.7; Total 3.4; Full Auctioning/Taxation of Carbon Emissions 0.4.
  - PPP GDP weighted average: Reduce VAT policy gap by half 1.1; Tobacco and Alcohol Excises 0.3; Fuel Excises 0.4; Property Taxes 0.4; Total 2.2; Full Auctioning/Taxation of Carbon Emissions 0.6.
  - Notes from table: Figures do not include increases from base broadening or rate increases in income taxes. Tobacco and alcohol excise figures based upon raising rates to the 2006 average across the six countries shown, assuming demand elasticity zero for illustrative purposes. Fuel excise figures based on raising gasoline and diesel rates by 10 cents per liter in each case. Raising the U.S. tax to 30 cents per liter would raise an additional 0.6 percentage point of GDP in the United States. Property tax increases are to yield average ratio to GDP in Canada, the United Kingdom, and the United States. For Japan, VAT estimate from doubling rate to 10 percent; for the United States, approximation of receipts from introduction of broad-based federal VAT at 10 percent. Estimates for European countries on carbon derived by weighting allocation of emission rights based on per-country emissions in 2007; a small proportion may double-count carbon-correcting portion of fuel excises.

### Institutional Arrangements — role of institutions, budget processes, and fiscal rules
- Rationale: Strong fiscal institutions can improve fiscal performance by providing a clear medium-term orientation, highlighting sustainability needs, and raising the cost of deviating from fiscal objectives; particularly important during retrenchment.
- Budgetary institutions — areas for improvement:
  - Breadth, depth, and timeliness of fiscal reporting and analysis of risks around fiscal forecasts.
  - More clearly articulated fiscal objectives and more comprehensive and binding medium-term budget frameworks with greater independent scrutiny.
  - Increased use of top-down budgeting to enforce prioritization across sectors and hard budget constraints, plus more robust contingency arrangements to ensure effective implementation through the annual budget.
- Medium-term budgetary frameworks and fiscal rules:
  - Medium-term frameworks supported by numerical fiscal rules can guide policy and anchor expectations regarding sustainability.
  - Formalizing medium-term objectives as permanent fiscal rules signals strong commitment to consolidation.
  - Diffusion of fiscal rules: In 1990, only 7 countries had fiscal rules; by 2009, 80 countries used them (including national and supranational rules covering at least the central government).
  - Recent developments: Some countries adopted or strengthened fiscal rules during or prior to the crisis; examples discussed include Austria, Germany, Hungary, Mexico, France (consideration), Poland (Public Finance Act, temporary rule limiting discretionary expenditure growth to CPI inflation plus one percentage point until medium-term objective reached), Serbia (studying options, considering expenditure ceilings), and Turkey (drafting legislation for budget balance rule with adjustment mechanism for GDP deviations, planned effective for 2011).
- Credibility and macroeconomic effects:
  - Credible, growth-oriented fiscal reform packages can positively affect investment and potential output through expectations of lower interest rates and lower future taxes.
  - Simulations (GIMF model, April 2010 WEO) illustrate effects of a hypothetical, supply-enhancing, five-year fiscal consolidation program under different assumptions on initial credibility:
    - Fiscal packages designed to produce a deficit reduction relative to the WEO baseline of 3 percentage points for the United States and Japan, and 2 percentage points in the euro area.
    - If credibility is full from onset, positive investment and output effects can be realized; lack of credibility (delays of two, three, or four years) undermines positive effects and can eliminate them.
    - Insight: Strong credibility could mitigate to a large extent the negative demand effects prompted by fiscal consolidation; lack of credibility undermines investment and output gains.

*Source: IMF staff; chapter text from the referenced IMF 2010 documents as provided.*

### Appendix 1. Update on Crisis-Related Discretionary Fiscal Stimulus in G-20 Economies

### Appendix 1. Update on Crisis-Related Discretionary Fiscal Stimulus in G-20 Economies

### Overview
- Since the November Monitor, a handful of G-20 economies adjusted their stimulus, adding new measures to address worsening unemployment and to further support key sectors and private consumption.
- With new measures in Germany, Japan, Russia, and the United States, stimulus will be higher (by 0.3 percent) than previously expected in 2010.
- In some countries stimulus was reoriented (for example from investment to transfers in Japan).
- Changes reflect front-loading of 2009–10 stimulus (France) or earlier withdrawal of part of crisis-related support due to a stronger-than-expected recovery and the objective of containing the rise in the public debt ratio (Korea).
- On balance, implementation in 2009 was broadly in line with expectations (2 percent of GDP for the G-20 economies as a whole).

### Table 1: Country updates and comments (selected highlights)
- Argentina: Previously-reported Crisis-Related Stimulus 2009 = 1.5, 2010 = 0.0; Update 2009 = 1.5, 2010 = 0.0; Comment: No update.
- Australia: Previously-reported 2009 = 2.9, 2010 = 2.0; Update 2009 = 2.8, 2010 = 1.8; Comment: Estimated stimulus implementation in 2009-10 is slightly lower, due largely to higher nominal GDP.
- Brazil: Previously-reported 2009 = 0.6, 2010 = 0.6; Update 2009 = 0.7, 2010 = 0.6; Comment: 2009 estimates higher due to greater revenue impacts; public lending via BNDES stepped up in 2009 and expected to continue at high levels in 2010.
- Canada: Previously-reported 2009 = 1.9, 2010 = 1.7; Update 2009 = 1.8, 2010 = 1.7; Comment: Implementation in line with expectations and higher GDP.
- China: Previously-reported 2009 = 3.1, 2010 = 2.7; Update 2009 = 3.1, 2010 = 2.7; Comment: No update; stimulus appears to have been implemented, particularly at the central government level.
- France: Previously-reported 2009 = 0.7, 2010 = 0.8; Update 2009 = 1.0, 2010 = 0.5; Comment: Some stimulus brought forward to 2009.
- Germany: Previously-reported 2009 = 1.6, 2010 = 2.0; Update 2009 = 1.5, 2010 = 2.1; Comment: 2009 estimates lower partly due to higher GDP and lags in capital spending implementation; 2010 estimates reflect new business tax rebates and higher family benefits. Additional discretionary measures in 2010 are much smaller than the estimated deterioration of the CAPB (2.8 percentage points), reflecting mainly a drop in revenues which exceeds standard approach estimates.
- India: Previously-reported 2009 = 0.6, 2010 = 0.6; Update 2009 = 0.6, 2010 = 0.4; Comment: 2009 stimulus implemented in full; revised 2010 reflects increased excise tax rates in the 2010/11 budget.
- Indonesia: Previously-reported 2009 = 1.4, 2010 = 0.6; Update 2009 = 1.1, 2010 = 0.6; Comment: Stimulus allocated in 2009 was lower due to lower fuel subsidies; outturn reflected less-than-full implementation of tax incentives.
- Italy: Previously-reported 2009 = 0.2, 2010 = 0.1; Update 2009 = 0.0, 2010 = 0.1; Comment: Updated estimate for 2009 stimulus is near zero on a net basis. New measures for 2010 introduced in a deficit-neutral manner, with spending increase of 0.2 percent of GDP expected to be fully offset by expenditure savings and collecting the postponed income tax installment from 2009.
- Japan: Previously-reported 2009 = 2.4, 2010 = 1.8; Update 2009 = 2.8, 2010 = 2.2; Comment: Update reflects new measures and a shift from investment to transfers and expanded energy efficient product incentives.
- Korea: Previously-reported 2009 = 3.6, 2010 = 4.7; Update 2009 = 3.6, 2010 = 1.1; Comment: No update for 2009. With faster-than-expected recovery, stimulus is being withdrawn in the 2010 budget, implying a withdrawal relative to 2009 of 2.5 percent of GDP and more than 3½ percent of GDP relative to earlier plans.
- Mexico: Previously-reported 2009 = 1.5, 2010 = 1.0; Update 2009 = 1.5, 2010 = 1.0; Comment: 2009 stimulus largely implemented. No new stimulus plans for 2010. Social spending, subsidies, and investment will decline in 2010; sizeable tax package introduced (1 percent of GDP).
- Russia: Previously-reported 2009 = 4.1, 2010 = 1.3; Update 2009 = 4.5, 2010 = 2.8; Comment: 2009 stimulus fully implemented with more support to strategic sectors. Higher 2010 stimulus reflects new social and labor market measures and further support to strategic sectors.
- Saudi Arabia: Previously-reported 2009 = 3.3, 2010 = 3.5; Update 2009 = 3.3, 2010 = 3.5; Comment: 2009 implementation in line with expectations; sizeable stimulus will continue in 2010.
- South Africa: Previously-reported 2009 = 3.0, 2010 = 2.1; Update 2009 = 3.0, 2010 = 2.1; Comment: 2009 and plans for 2010 in line with expectations.
- Turkey: Previously-reported 2009 = 1.2, 2010 = 0.5; Update 2009 = 1.2, 2010 = 0.5; Comment: 2009 implemented as planned; 2010 estimates unchanged.
- United Kingdom: Previously-reported 2009 = 1.6, 2010 = 0.0; Update 2009 = 1.6, 2010 = 0.2; Comment: 2009 implemented in full. Revised 2010 reflects new transfers and income tax allowances, partly offset by efficiency savings.
- United States: Previously-reported 2009 = 2.0, 2010 = 1.8; Update 2009 = 1.8, 2010 = 2.9; Comment: Additional corporate tax breaks, extended unemployment benefits, and homebuyer tax credits of 0.3 percent of GDP adopted in November 2009. 2010 also includes March 2010 jobs bill (0.1 percent of GDP), as well as additional possible sizeable mitigation measures under consideration in the Congress.

### G-20 averages and groupings
- G-20 Average (PPP GDP weighted): Previously-reported Crisis-Related Stimulus 2009 = 2.0, 2010 = 1.6; Update 2009 = 2.0, 2010 = 1.9.
- Advanced economies: Previously-reported 2009 = 1.9, 2010 = 1.6; Update 2009 = 1.8, 2010 = 2.0.
- Emerging economies: Previously-reported 2009 = 2.2, 2010 = 1.6; Update 2009 = 2.3, 2010 = 1.8.

### Implementation and measurement notes
- Source: Survey of IMF G-20 country desks; national budget documents and medium-term fiscal plans. For Argentina, IMF staff estimates are based on preliminary information. According to the authorities, the stimulus actually implemented was larger, but official pledged amounts are not available.
- Definition: Previously-reported Crisis-Related Stimulus series are relative to precrisis baseline (see, for example, November 2009 Fiscal Monitor, Annex Table 2).

*Source: Appendix 1, _fm1001 - Appendix 1. Update on Crisis-Related Discretionary Fiscal Stimulus in G-20 Economies*

### Box 1. Government Debt and Growth: Existing Empirical Studies

### Box 1. Government Debt and Growth: Existing Empirical Studies

### Existing empirical studies
- Reinhart and Rogoff (2010) find that the median GDP growth rate differential between low debt (below 30 percent of GDP) and high debt (above 90 percent of GDP) countries is 2.6 percent, based on a comparison of annual growth rates of GDP for the four debt level categories over the period 1946 to 2009.
- Studies of external debt in developing economies motivated by the “debt overhang” hypothesis report nonlinear effects:
  - Imbs and Ranciere (2009) and Pattillo, Poirson, and Ricci (2002, 2004) find a negative and significant impact on growth of high external debt levels (typically, over 60 percent of GDP), but an insignificant impact at low debt levels.
  - Reinhart and Rogoff (2010) report that when external debt reaches 60 percent of GDP or above, annual GDP growth declines by about 2 percent or more in emerging economies.
  - Cordella, Ricci, and Arranz (2005) find evidence of debt overhang for intermediate debt levels, but an insignificant debt-growth relationship at very low and very high levels of debt.

### Stylized facts
- There is a negative relationship between initial government debt and subsequent per capita GDP growth:
  - The fitted OLS line of a scatter plot of initial debt against subsequent growth over five-year periods shows a coefficient of initial debt of -0.025. Taken at face value, this suggests that a 10 percentage point of GDP increase in initial debt is associated with a slowdown in per capita GDP growth of 0.25 percentage points.
- Average growth during periods of rising debt is lower than during periods of falling debt (for initial debt > 60 percent of GDP).
- The adverse impact of debt on growth appears to be larger in emerging economies.

### Econometric analysis — main quantitative findings
- Baseline panel regression specification: y_it - y_it-1 = α y_it-1 + X_it' β + γ Z_it + η_t + ν_i + ε_it, where Z_it is initial government debt (in percent of GDP) and X_it includes controls such as schooling, government size, trade openness, financial depth, initial inflation, terms of trade growth, banking crisis indicator, and fiscal deficit.
- Average estimated effects:
  - A 10 percent of GDP increase in initial debt is associated with a decline in real per capita GDP growth of around 0.2 percent per year.
  - The coefficients of initial debt in regressions of per capita GDP growth range from -0.018 to -0.02 and are significant at the 5 percent level (Columns 1 and 2).
  - The negative impact of initial debt on growth in advanced economies tends to be smaller than in emerging economies.
  - Evidence of nonlinear effects: medium to high levels of debt have significant negative effects on subsequent growth, whereas low levels of debt have insignificant effects on growth.

- Growth-accounting and component effects (estimated magnitudes):
  - A 10 percent of GDP increase in initial debt is associated with:
    - A decline in growth of output per worker of about 0.2 percent per year (Column 3).
    - A decline in TFP growth of around 0.1 percent per year (Column 4).
    - A decline in growth of capital per worker of around 0.4 percent per year.
  - A 10 percent of GDP increase in initial debt is associated with a decline in investment of about 0.4 percentage points of GDP on average, with a larger impact of 0.9 in emerging economies (Column 5).
  - Higher initial debt is also associated with greater macroeconomic volatility (measured by standard deviation of annual GDP growth rates over each five-year period).

- Selected regression output for government debt, initial (1970–2007, five-year period panel; OECD and Emerging Economies with over 5 million population):
  - Dependent variable: Growth of real per capita GDP
    - (1) OLS: Government debt, initial = -0.018** (t-statistic -2.66)
    - (2) SGMM: Government debt, initial = -0.020** (t-statistic -2.49)
  - Dependent variable: Growth of output per worker
    - (3) SGMM: Government debt, initial = -0.022** (t-statistic -2.29)
  - Dependent variable: Growth of TFP
    - (4) SGMM: Government debt, initial = -0.011 (t-statistic -1.12)
  - Dependent variable: Domestic Investment
    - (5) SGMM: Government debt, initial = -0.038* (t-statistic -1.78)
  - Number of observations: 166 for Columns (1) and (2); 159 for Columns (3)–(5).
  - Levels of significance: *** 1%, ** 5%, * 10%.

### Box 2 — Debt and Growth: An Analytical Perspective
- Illustrative Cobb-Douglas production framework and full crowding-out premise (each dollar of debt crowds out one dollar of capital in the long run, per Elmendorf and Mankiw, 1999).
- Numerical example and implied magnitudes:
  - Historical capital income share ≈ one third.
  - Capital-output ratio in the United States ≈ 3.7 in 2010.
  - Implied marginal product of capital ≈ 9 percent (Elmendorf and Mankiw (1999) estimate the marginal product of capital to be 9.5 percent).
  - An increase in the ratio of net debt to GDP of 40 percent over the next five years amounts to an increase in net debt of around US$6,450 billion (in real terms based on the projection of 2 percent average growth of real GDP).
  - Under full crowding out (capital stock declining by the same amount as the increase in net debt), output would decline by about 4.4 percent in total (product of marginal productivity of capital and the decrease in capital stock as a percent of initial GDP).
  - This is approximately equivalent to growth slowdown of around 0.8 percent; or 0.2 percent per year on average for a 10 percent of GDP increase in government debt (assuming the output decline mostly occurs in the following five-year period).
- Caveats:
  - If private savings rise in response to increased public debt, or there are capital inflows from abroad, crowding out would be reduced and the effect of debt on growth would be smaller.
  - Endogenous growth models imply additional externalities: reduced capital accumulation can reduce technological change and economy-wide productivity, potentially amplifying the adverse effects of crowding out.

*Italic: Source: IMF staff estimates and analysis, as presented in Box 1 of the supplied content.*

### Appendix 5. Reforming Petroleum Subsidies

### Appendix 5. Reforming Petroleum Subsidies

### Overview
- Subsidies on petroleum products (gasoline, kerosene, etc.) are again on the rise with the rebound in international oil prices.
- These consumer subsidies are described as inefficient, inequitable, and environmentally unfriendly.
- Eliminating them can make an important contribution to reducing the large fiscal deficits that have accumulated in many countries during the recent financial crisis.

### Measuring petroleum product subsidies
- Coady and others (2010) estimate the global magnitude of fuel subsidies by comparing retail prices with “optimal” benchmark prices.
- The paper estimates subsidies based on pretax benchmark prices as well as on tax-inclusive subsidies for optimal tax rates of $0.30 and $0.40 per liter of gasoline, kerosene, and diesel.
- The methodology reflects that the optimal level of taxation can vary across countries for many legitimate reasons.

### The magnitude of subsidies
- Although subsidies fell sharply in the second half of 2008 due to the steep decline in international prices, they have again started to increase with the rebound in international oil prices.
- Pretax subsidies are projected to reach almost $250 billion, or 0.3 percent of global GDP by end-2010.
- Projected tax-inclusive subsidies are substantially higher at between 1.0 and 1.3 percent of GDP, depending on the benchmark optimal tax.
- Whereas advanced economies have zero pretax subsidies, they account for about a quarter of tax-inclusive subsidies.

### Fiscal context and impacts
- The increase in subsidies is taking place in the context of a more challenging fiscal backdrop.
- Of the 83 countries with tax-inclusive subsidies in 2010 (based on a benchmark tax of US$0.40 per liter), 69 have projected fiscal deficits for 2010:
  - In 43, the deficit will exceed 3 percent of GDP.
  - In 22, it will exceed 5 percent of GDP.
- Reducing tax-inclusive subsidies by one-half in these countries would result in their average deficit falling from 4.2 percent of GDP to about 2.5 percent of GDP.
- Figure 1 in the source shows Projected 2010 Fiscal Deficit and Fuel Subsidies (In percent of GDP).

### Reforming subsidies: policy measures
- Replacing subsidies with improved social safety nets can reduce the fiscal cost of protecting the poor from price increases.
- Transparently recording subsidies in government accounts ensures that they more explicitly compete with alternative uses of public funds.
- Although a liberalized approach to petroleum pricing is best, countries can adopt an automatic pricing mechanism in the interim while they develop a competitive supply system and an effective regulation capacity.

*Source: Appendix 5. Reforming Petroleum Subsidies (from the provided IMF content).*

### REFERENCES

### _fm1001 - REFERENCES

### References

- Adema, W., and M. Ladaique, 2009, “How Expensive is the Welfare State? Gross and Net Indicators in the OECD Social Expenditure Database (SOCX),” OECD Social, Employment, and Migration Working Papers No. 92 (Paris: Organization for Economic Cooperation and Development).  
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*Source: _fm1001 - REFERENCES*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/fm/2010/_fm1001.pdf_