Five Keys to a Smart Fiscal Policy

IMF Blog, April 19, 2017

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Five Keys to a Smart Fiscal Policy

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Bibliographic details

• Authors: Vitor Gaspar, Luc Eyraud
• Published: April 19, 2017

Overview

• Authors: Vitor Gaspar, Luc Eyraud
• Date: April 19, 2017
• Context: Summary of chapter one of the IMF’s April 2017 Fiscal Monitor outlining five guiding principles for "smart fiscal policies" to facilitate change, harness growth potential, and protect people affected by economic transformation.

1. Fiscal policy should be countercyclical

• Purpose: Use fiscal policy to smooth the business cycle by lowering taxes and increasing spending in bad times; reducing spending and raising taxes in good times.
• Rationale:
  • Central banks in many advanced countries have cut interest rates very close to zero, testing the limits of monetary policy and increasing the role of fiscal policy in stabilization.
• Tools:
  • Rely on "automatic stabilizers" (for example, unemployment insurance).
  • Use temporary fiscal stimulus in protracted slumps where interest rates can’t go any lower (example: Japan).
• Constraints and country-specific scenarios:
  • Economies with limited slack should withdraw fiscal support (example: the United States, which is close to full employment, "could start reducing its budget deficit next year to put public debt firmly on a downward path").
  • Some countries must focus on reducing public deficits regardless of cyclical conditions (example: oil exporting countries hit by a decline of more than 50 percent in the price of crude oil from the 2011 peak).
  • Adjustment evidence: "their collective budget deficits are expected to fall by about $150 billion in 2017 and 2018."

2. Fiscal policy should be growth friendly

• Objective: Support the three engines of long-term growth — capital, labor, and productivity.
• Capital:
  • Strong case for increasing public investment in many countries given low borrowing costs and substantial infrastructure deficiencies.
• Labor:
  • Policies to encourage job creation and labor market participation:
  • Reduce payroll taxation where it is high (advanced economies).
  • Make more intensive use of job-search assistance and training.
  • Adopt targeted spending for vulnerable groups such as low-skilled workers and the elderly.
  • Emerging markets and developing economies: improve access to health care and education.
• Productivity:
  • Foster productivity via a range of policies, including improvements to the tax system (see Chapter 2 of the Fiscal Monitor referenced).

3. Fiscal policy should promote inclusion

• Context:
  • Globalization and technological change have driven growth and convergence; "more than one billion people have been lifted out of extreme poverty since the early 1980s, most of them in China and India."
  • Simultaneous rise in within-country income inequality: "in advanced economies, incomes of the top 1 percent have grown at annual rates almost three times higher than those of the rest of the population over the past three decades."
• Policy levers:
  • Use taxes and public spending to share growth dividends.
  • Example: conditional cash transfers (benefits conditional on attendance of children at health clinics and at school) successfully reduced inequality in a number of Latin America countries.
  • Improve access to education, training, health services, and social insurance to help workers adapt and recover from job loss or illness.

4. Fiscal policy should be supported by a strong tax capacity

• Problem: High public debt limits fiscal space; need sustainable revenue sources.
• Key point:
  • Taxation provides stable and adjustable revenue and is central to a country's ability to repay debt.
• Low-income country challenge:
  • "Almost half of these countries have a ratio of tax-to-GDP that is below 15 percent."
  • Interest payments often consume a large share of their tax revenue.
  • Building tax capacity in low-income countries is a key priority for sustainable development.

5. Fiscal policy should be prudent

• Lesson from crisis:
  • The global financial crisis revealed large, often underestimated fiscal risks; bailouts and slumps drove public debt in advanced economies to unprecedented peacetime levels.
• Need for risk management:
  • Governments should better understand fiscal exposures and adopt strategies to manage them.
• Example — China:
  • "In China, debt has increased very fast in the past decade—faster than in any other major economy."
  • Authorities recognize the need to tame debt accumulation and reduce financial risks as part of rebalancing the growth model.
  • Importance of addressing risks early to improve prospects for sustainable medium- to long-term growth.
  • Fiscal policy can facilitate adjustment; "important steps have been taken or are in train concerning public financial management and the relations among different levels of government."

Conclusion and policy implications

• Overall message: Fiscal policy must "do more with less" by following five principles: be counter-cyclical, growth-friendly, inclusive, backed by strong tax capacity, and prudent.
• Outlook: "There is still room for more counter-cyclical, growth-friendly, inclusive, strong, and prudent fiscal policies around the world."

Source: Five Keys to a Smart Fiscal Policy (IMF blog), April 19, 2017.

Content in this bundle

• 明智财政政策的五项原则;IMF博客
  • 明智财政政策的五项原则;IMF博客 (Markdown version)
  • 明智财政政策的五项原则;IMF博客 (PDF)
• 賢明な財政政策への5つの鍵: ヴィトル・ガスパル 、 ルーク・エイロー; IMFブログ 2017年4月19日掲載
  • 賢明な財政政策への5つの鍵: ヴィトル・ガスパル 、 ルーク・エイロー; IMFブログ 2017年4月19日掲載 (Markdown version)
  • 賢明な財政政策への5つの鍵: ヴィトル・ガスパル 、 ルーク・エイロー; IMFブログ 2017年4月19日掲載 (PDF)
• Пять ключевых факторов разумной налогово-бюджетной политики
  • Пять ключевых факторов разумной налогово-бюджетной политики (Markdown version)
  • Пять ключевых факторов разумной налогово-бюджетной политики (PDF)

References

• عربي
• Fiscal Monitor