Transcript of the Fiscal Monitor Press Briefing

April 15, 2015

Washington, D.C.
April 15, 2015

Vitor, Gaspar, Director, Fiscal Affairs Department (FAD)
Martine Guerguil, Deputy Director, FAD
Ben Clements, Division Chief, FAD
Wafa Amr, Senior Communications Officer, Communications Department

Webcast of the press briefing Webcast

MS. AMR: My name is Wafa Amr. I'm from the Communications Department. I am pleased to introduce Mr. Vitor Gaspar, Director of the Fiscal Affairs Department, Martine Guerguil, Deputy Director, and Ben Clements, Division Chief. Mr. GASPAR will make a short presentation and we'll open the floor for questions.

MR. GASPAR: Good morning. Thanks for being here and for your interest in the Fiscal Monitor and public finance issues. I'm going to read out a brief introductory statement which will be slightly different from the one that was distributed to you just to avoid that we could in a sense read it all together at the same time.

So, the content is exactly the same. The language is slightly different.

So, one very important message in the Fiscal Monitor is that public finance risks remain elevated. Risks vary. We have high debt and low inflation in many advanced economies. We have foreign-denominated debt of government and corporates in many emerging market economies. We have low oil prices and commodity prices, affecting commodity exporters.

Everywhere countries should strengthen fiscal frameworks to prevent and manage finance risks. That is the first message from the Fiscal Monitor. The second message is that low oil prices and low inflation in many countries provide a golden opportunity to engage in energy subsidy and energy taxation reform.

In emerging markets and developing economies, reform of energy subsidies and taxation would provide space for growth enhancing spending in education, health, and infrastructure. In advanced economies, for example, taxes on labor could be reduced and paid for higher energy taxes. But more is needed. Not only are prices in some countries below international supply costs, everywhere energy prices fail to reflect fully the indirect damage inflicted on people and the environment. This includes carbon emissions and the local effect of air pollution.

The Fiscal Monitor argues that countries by starting a process of making energy prices reflect local damage, can contribute decisively to curb carbon emissions. In the run-up to the December UN climate change conference in Paris, it is timely to do so.

The third policy message comes from the analytical chapter of the Fiscal Monitor. It shows how the systematic conduct of fiscal policy can contribute to macroeconomic stability and growth. The Fiscal Monitor introduces a new concept. The fiscal stabilization coefficient that I call FISCO.

FISCO measures how much a country's overall balance responds to economic slack. The higher FISCO, the more counter-cyclical is fiscal policy. In the Fiscal Monitor you can find FISCO estimates for individual countries.

But there is more.

Our estimates suggest sizable effects on macroeconomic stability and growth. Take, for example, the case of an advanced economy that raises FISCO from the average level for advanced economies of 0.7 to that in the top third group of countries, which is about 0 .8. This would reduce output volatility by about 15 percent, which would deliver a growth dividend of 0 .3 percentage points. There are many relevant methodological details and caveats, but for that you will have to consult the Fiscal Monitor.

Still, as with most econometric findings, these results must be interpreted with caution.

How can we increase fiscal stabilization in practice?

Well, the Fiscal Monitor argues that the way to do it is by letting automatic stabilizers operate. Automatic stabilizers comprise, for example, social transfers like unemployment benefits and these automatically smooth aggregate demand during downturns and moderated during upswings. By doing so, governments build fiscal buffers in good times that they can rely on in bad times.

So what is the bottom line from the Fiscal Monitor?

Public finance risks remain elevated. Fiscal frameworks should be strengthened to manage public finance risks and provide a fiscal anchor. Low inflation and low oil prices provide an opportunity for energy subsidy and energy taxation reform. Finally, last but not least, the systematic conduct of fiscal policy can significantly contribute to macroeconomic stability and growth.

We are now ready for your questions.

QUESTIONER: I have a question on Greece. Debt sustainability in Greece will still remain a crucial factor even if the ongoing discussions conclude successfully. Where does the IMF stand on that?

MR. GASPAR: So as you well know the IMF is constructively engaged with the Greek authorities to determine policies that will ensure that the Greek program is on track, and that Greece has a viable path to macroeconomic stability and growth.

QUESTIONER: The good thing is to build buffers before the hard times arrive. What do you do if you hit hard times and have not built buffers?

MR. GASPAR: Let me turn your question around, if I may. The point that you make that when countries fail to build buffers in good times they are not in a good position to manage macroeconomic stability and growth when macroeconomic circumstances are unfavorable, is precisely the strongest argument to say that one must have sound fiscal frameworks in place so that one can manage public finance risks adequately and contribute to macroeconomic stability and growth.

What we do show in the Fiscal Monitor, which speaks to your question, is that in many cases you lack the fiscal space that you alluded to precisely because you did not let fiscal policy operate in a symmetric way in good times and in bad times. That is, in some countries, although the fiscal policy did respond to downturns, it failed to act symmetrically in good times, and the Fiscal Monitor shows a simulation in which countries would be spending 50 percent of the effects on the budget of the economic upswing. The simulation shows that in that case, the public debt-to-GDP ratio would be trending up, and that is precisely where you have the lack of fiscal space that you alluded to.

Now, clearly, if, still, you are put in a situation where you have to adjust under duress, the consequences for a macroeconomic stability and growth are going to be much more adverse.

QUESTIONER: Thank you for your presentation about the Fiscal Monitor. I think just for simple basic concepts, once the government will spend money, that will help growth and maybe for social resolution, those types of things, but the one problem is government expenditures, whether to the agencies or to help unemployed, or poor, that doesn't mean it is going to help them, because there are some middlemen that take that away. The IMF, the Fiscal Monitor, can this help whether, from developing countries to the United States, to really solve for fairness or justice, to prosecute those who take away the government resources or peoples' resources, so we can solve this problem and financial stability or fiscal stability?

MR. GASPAR: So, the Fiscal Monitor acknowledges that the design of national budgets serves many other purposes than macroeconomic stability and growth. Many of the measures, many of the rules that do deliver a response of the budget to economic circumstances are in the budget for other reasons, exactly as you say. They are there to provide social insurance to the unemployed. They are there to guarantee that citizens don't fall below a given standard. They are there to ensure fundamental capacities to the citizens of countries. FAD is very much involved around the world with the membership of the IMF looking at fiscal structural issues, taking all the complexity of the national budgets and national budget procedures into account.

Still, the point that I was trying to make from the current issue of the Fiscal Monitor is that the measures that you have for the reasons, among others, that you mentioned, also play a very important role in guaranteeing that budgets react systematically, they react systematically to economic developments. And by doing so, they contribute to macroeconomic stability and growth.

It is very important in our view that this stability and growth effect, which is potentially very important, is taken into account when designing programs that serve other purposes, which may even be the main purpose of the programs precisely as you referred.

QUESTIONER: I want you to, please, tell us more about this FISCO, this index, because it could be used like a benchmark. Is it the average of the level that a country must have in public debt, or in fiscal deficit? How could it be better understanding the budget side, not only the tax side?

MR. GASPAR: There are aspects in your question, and I'm very grateful for it, because it allows me to speak about FISCO, which is a favorite indicator of mine at this point in time.

What is FISCO?

FISCO is a measure of the effect on the overall budget balance of a change in economic slack. Let me be precise. Let's imagine that FISCO is .7, which is the average for advanced economies. That means that when the output gap measure of slack increases by 1 percentage point, the response in the overall balance is .7 percent of GDP. So this is what FISCO is. Now, what does FISCO do? What we show is that FISCO correlates with macroeconomic stability. That is, a higher FISCO, everything else constant, delivers a better macroeconomic stability outcome. And then we go further. We show that by delivering stronger macroeconomic stability, it also delivers a growth dividend.

How can we then strengthen FISCO?

We can strengthen FISCO by strengthening automatic stabilizers. The aspects of the budget that react timely and automatically to economic developments, be it income support measures, unemployment benefits, or other characteristics on the revenue side like the characteristics of the income tax or the indirect taxation. All these aspects of the budget provide automatic stabilization. And, by strengthening these elements, one is able to look at concrete measures to strengthen the fiscal stabilization coefficient, and the Fiscal Monitor actually gives some examples of how that design can take place.

I believe I answered your various questions.

QUESTIONER: In the case of Uruguay, you're estimating financial needs of about 17 points of GDP in 2015. These estimates are a little bit different, if you compare with government ones. I want to know how these estimates are built, how these estimates are made. And also with that level of financial needs, about 17 points of GDP, is something to be worried about, or something where measures need to be taken to it?

MR. GASPAR: I would suggest that Ben Clements would take on that question. We will be rotating the responder among us, so that you kind of get diversity and don't get completely bored.

MR. CLEMENTS: It would be helpful for me if you could reformulate the question, in terms of, is this a question about the difference in the fiscal measures, the fiscal balance?

QUESTIONER: In the gross financial needs for Uruguay, you are estimating that there are 17 points of GDP considering fiscal deficit and also the debt maturity, and the government thinks it is like 4 or 5 points of GDP. So there is a very big difference between one and the other. I want to know how the estimates are built and also if we have to be concerned about such an amount of financial needs.

MR. CLEMENTS: One difference could be what is the definition of government that is being covered, in terms of what these gross financing needs are, and in one case you may be looking at what are the gross financing needs of just the central government, another one could be gross financing needs of the broader public sector. So that could be a reason why you see differences in different data sources on gross financing needs.

QUESTIONER: Is there a concern about the level of financial need? Like 15 or more points of GDP for an emerging market, is that something to be concerned about?

MR. CLEMENTS: It always needs to be put in the context of what is the government's access to financing, the overall general macroeconomic framework, what borrowing rates the country faces, the sustainability of its public debt, all those things have to be taken into account when one is assessing gross financing needs, is this high or low.

MS. AMR: We will take two questions that we received online and then we will get back to your questions.

One question, what do you think about the social security tax reduction for the enterprises as a way to lower labor costs? How should the government compensate it when workers' taxation will still be the same?

MS. GUERGUIL: We have done a number of studies that show that effectively labor taxes, or taxes that are associated with employment, are generally among the most detrimental to growth and to employment, and therefore it is generally important to see if there is a way to make the tax system more friendly toward growth and employment. As has been argued in previous Fiscal Monitors, this rebalancing in many countries, leaves space for a reduction in payroll taxes, taxes paid on employment or associated with employment. That is compensated by an increase in other taxes, particular consumption taxes that have been shown in empirical studies to have less of a negative fact on growth and employment, and this is in general advice that we have given to a number of countries, particularly countries that have important fiscal consolidation needs and in a situation where it is difficult to reduce overall tax collection.

Of course, this depends across countries, and certainly requires discussion and negotiations to be sure that these changes can be implemented in an effective manner.

MS. AMR: One more question online. Could you please clarify which are the political turbulences in Europe, apart from Greece, that the Fiscal Monitor reports as a risk?

MR. GASPAR: The Fiscal Monitor does not go into details about what political risks or geopolitical risk happens to be. The indicators of political risk and geopolitical risk have recently increased, and the developments in the eastern most part of Europe have been widely reported and so they provide a second example to add to the one example which you mention in your question.

But, the main point to retain is that in terms of general analysis, political risks and geopolitical risks have become more pronounced during the period, and that is one aspect which is part of our overall assessment of risks to macroeconomic developments, financial developments, and public finance developments.

QUESTIONER: (Interpreted). I would like to know what budgetary policy tools that the free zone countries can use for budgetary stabilization, given the fall in commodity prices such as oil?

MS. GUERGUIL: (Interpreted).

The countries of the free trade zone do have some challenges regarding the drop in commodity prices, which has a negative impact on their fiscal balance. On the other side, the drop in the euro should allow them to increase the competitiveness of their exports. So it really is a factor that can offset economic activity effects. For these countries, it is very important to diversify their fiscal revenues in order to depend less on commodity revenues, which are always volatile and cause budgetary balance to be subjected to a great deal of ups and downs. So the present period where the prices of commodities are dropping is a favorable circumstance to set up reforms in the tax systems which would allow more diversification of those revenues.

QUESTIONER: I want to speak in Arabic. (Interpreted). I would like to ask about the impact of the low prices of oil. I would like to ask about the low prices of oil. Can you hear me? The impact of the reduced revenues of oil in Arab countries who are producing oil and what is the impact on their budgets, and if they can go ahead with investments, either in the field of economics or the social field, or the expenditure on the social level, therefore how do you estimate or evaluate this situation that they can have a better scene.

MR. GASPAR: Thank you for the question. That is very central and Ben Clements will provide you with an answer.

MR. CLEMENTS: The impact, as we discuss in the Fiscal Monitor, the decline in oil prices has had a big effect for both oil importing and oil exporting countries. Let's first start with the oil exporters. This has had a big effect on fiscal revenues. On average, say of all oil exporters around the world, the average decline in revenues is about 4 percentage points of GDP. So it is a large effect.

One question is, what is the right policy response to this, and that actually varies across countries. For countries that have built up big buffers, have savings, have low public debt levels, they can afford to adjust gradually to this, so they do not have to engage in very deep spending cuts. Some of them in effect using the savings they accumulated earlier, the space they have to do this. But some countries, some oil exporters actually have high levels of public debt. They cannot afford to, say, have a gradual path in order to maintain fiscal sustainability, so some will have to engage in spending reductions now.

On the oil importers, on the other hand, in the Middle East this has been a benefit. For those with energy subsidies, it has reduced their cost of the subsidies. We find this a very encouraging sign, and this is why we think in this environment also of many countries of low inflation that it is a good time to keep going further on energy subsidy reforms and energy taxation reforms, because still in many countries revenues are not high enough to fund the social spending that countries need and aspire to, so we think it is actually an excellent time to keep moving forward on this, taking advantage of these low oil prices.

QUESTIONER: Are you concerned at all, just picking up on the question you got on line about Europe, that you are losing the argument in Europe, that although it is not a risk, you see lots of parties gaining ground who fundamentally disagree with the IMF's outlook, fiscal austerity, paying down debt by cutting public spending, the rise of Sinn Fein in Ireland, Podemus in Spain and the Urban League, across Europe you are losing the argument.

MR. GASPAR: You should not ask us whether we're losing an argument. Clearly from our viewpoint we're not. And, I would characterize the position of the IMF very differently than what you have done.

The IMF does emphasize the need for a fiscal anchor and does emphasize the need to bring public debt down to safer levels, eventually bring down debt to safe levels. And the reason why that is important, brings us back to the very first question that I got in this session, that has to do with what happens if a country is affected by an adverse shock, in a situation where the country lacks fiscal space. And, the answer is, well, that is a very uncomfortable position to be in, and in some extreme cases, one has to adjust under duress and that is something that has deep economic, financial, and social consequences. So that is something that should be avoided. Avoided how? Well, by having strong fiscal frameworks that allow public finance risks to be properly prevented and managed, and at the same time, allow fiscal policy to contribute to macroeconomic stability and growth.

In the case of Europe, we do see a lot of progress in terms of the fiscal governance rules and procedures since the beginning of the global financial crisis, since the beginning of the euro area crisis, and we see that there are important aspects in which further progress in the direction of fiscal union, would be called for and advisable, while at the same time the framework of rules and procedures in the European Union could be streamlined and simplified.

To me, but again, as you can imagine, I'm very biased, I believe that this is a very strong and compelling argument, and I hope I persuaded you.

QUESTIONER: It is not about persuading me, is it? It's about persuading people in Europe. Low wages, low inflation austerity pressures have brought on, is something your policies will also dig them out of, it just doesn't look like it at the moment. You documented in your statement how there is still high debt, and we have low growth and low inflation, which means we will continue with high debt, and people don't want to continue paying those debts, they want to be free of them, don't they, your policies, most of the governments in Europe that are continuing fiscal consolidation, and that is what is being rejected.

MR. GASPAR: If you allow me a rejoinder on that, the view of the IMF is that it is very important in the euro area, to get back to price stability and to growth. That is something which can be attained on the basis of the policies that we are recommending.

The current stance of fiscal policy in Europe is broadly neutral, and in our view that is exactly what the current macroeconomic situation recommends.

Monetary policy action has been taken by the European Central Bank, and the very preliminary indications that we have suggest that quantitative easing is working. It is working through an ample set of channels, including credit, asset prices, and the exchange rate.

The euro area macroeconomic situation has actually improved and you may have attended the conference on the World Economic Outlook and the risks of recession in the euro area have declined quite substantially, so to my mind the facts actually don't back the way you framed the economic side of your question.

MS. AMR: We'll take another online question.

What kind of reduction in labor taxes and higher energy taxes are you referring to in advanced economies?

MR. GASPAR: On this question of the composition of the fiscal balance, when countries engage in energy taxation reforms, something that Ben Clements will answer.

MR. CLEMENTS: Could you please repeat the question? It seemed also some of it was a question on labor taxation.

MR. CLEMENTS: The question on energy taxation, what we've been saying is that, getting energy prices right could actually be quite helpful for countries' growth strategies. For example, higher energy taxation could then be used to finance reductions in labor taxes. That would be very good for growth. Higher energy taxes could also be used in countries that have fiscal space to increase growth-enhancing spending.

So, we really see the energy taxation as part of a pro-growth kind of economic strategy, and also higher energy prices and would provide a better incentive for investment in green technology and alternative energy. So if we stop subsidizing dirty energy, we can really level the playing field and allow countries to provide incentives, then, appropriate market-based incentives for clean energy.

In terms of which taxes countries could cut to compensate for higher energy taxes that would be country specific, but one tax we have mentioned that tends to have high distortions in terms of its cost in economic growth are labor taxes, so a reduction of payroll taxes especially then would be something that countries could target.

QUESTIONER: (Interpreted).

I would like to know the following. Peru is greatly dependent on raw materials for its growth year in, year out. I would like to know what the Fiscal Monitor indicates concerning this problem, which Peru has? Given that we also greatly depend on mining operations. And some of those have been greatly affecting us recently.

I would like to know what value you are attaching to this regionally as well, because for technical reasons I wasn't able to get ahold of the report.

MR. CLEMENTS: What we see for Latin America and Peru, also, is that if you have, if you are in a country that has natural resources, it is really important to have a good fiscal framework in place to make sure you can deal with the volatility of those revenues. So it is not really a problem per se, of course, to have natural resources. The problem is how do you manage them well. And, what we see, for example, in Peru does have a good fiscal framework has allowed it to not spend all the revenues in good times, but actually keep debt at adequate low levels. This has allowed Peru to have a, to be able to react, then, to the decline in commodity prices, which is a long-term trend affecting Latin America and reducing growth. But because Peru has had a good framework, this has allowed them to in effect expand government spending at a time where other sources of income from mining are going down. A good fiscal framework really is important and Peru actually stands out as a good example of how to do this. What we like to see in countries, also, is fiscal rules that in effect help lock this into place, that the government's policy response, the kind of rules in Colombia and Chile, as well, these countries have been successful in managing the ups and downs that inevitably come from being a resource producer and making sure, then, that this doesn't have a negative long-term effect on growth.

MR. GASPAR: Allow me to add little points of publicity.

FAD does a lot of work with countries on how to manage an economy that is a natural resource one. That is one of the areas where we engage with national authorities in terms of capacity building. And we have collaborated, precisely with Peru in these areas, and that something which is very important for us, and we believe it is very useful for countries.

The issue of how to manage the specific public finance challenges associated with the very ample fluctuations in production levels and prices, in particular oil but also some other commodities, is a topic that we are very much engaged in researching, and we expect to have results, conclusive results to presents at the time of the Annual Meetings.

QUESTIONER: Regarding Brazil's growth, is very low, as the WEO puts it, and part of the fiscal measures that were announced are still pending congressional approval in a very pertinent political environment. Is the fiscal target of 1.2 percent of GDP still feasible and realistic? If it is not to be delivered, what are the implications for credibility and confidence in Brazil, and what are the general risks?

MR. GASPAR: Thank you for your question, which is very rich and interesting. So Ben Clements will answer it. I was eager to do it, but Ben doesn't let me.

MR. CLEMENTS: Yes, growth is slowing, but we actually believe the authorities have put in place a good fiscal response, so we think they are making progress toward rebuilding confidence, and we think the target, the primary target of 1.2 percent of GDP in 2015 and 2 percent primary surplus in the years beyond is appropriate, because it is important then to get debt going back down on a declining path. We believe this target is feasible, that the government is firmly committed to this. Already measures have been taken, for example the increase in fuel taxes, the reduction in electricity subsidies, but more needs to be done to meet this target. The government remains firmly committed to it and we believe they will achieve it.

QUESTIONER: One question on Greece. There is a debate in Europe whether the country needs haircut and some experts are saying this is not necessary because debt may be high, but the payments in the next years are not, and interest rates are already low. Could you comment on that?

Just one remark for your discussion with my colleague from The Guardian. You mentioned the WEO, but there is clearly written that it is not the IMF policies that have changed the economic grounds, but rather the cheap oil and the weak euro. So, except for Ireland I'm not aware of one country doing well because of these reforms. Just a remark.

MR. GASPAR: So one question at a time. We in the Fiscal Monitor very much emphasize the importance of fiscal frameworks. So, we are moving in terms of the emphasis of the Fiscal Monitor from comments on specific fiscal policy actions to a study of the systematic behavior of fiscal policy in the context of a framework.

So, our reading of the existing evidence is that countries with better fiscal frameworks perform significantly better in terms of macroeconomic stability and growth. The empirical evidence seems to be persuasive to that effect.

Countries that fail to build buffers in good times often find themselves without fiscal space to manage a crisis. And that is very costly. So from that viewpoint I would not expect to do any advice fine-tuning, that is. The general approach of the IMF has always been to have fiscal policy helping macroeconomic stability and stabilizing macroeconomic developments in the short run, while at the same time anchoring public debt developments in the longer run, and more broadly allow public finance risks to be contained.

Now, on your question concerning Greece, the important debate which is taking place now is about policies. What policies can and should Greece take to ensure public finance sustainability and a successful return to macroeconomic stability and growth? That work on policies is currently going on involving the Greek authorities and various international parties.

We are working hard to make sure that process is successful.

QUESTIONER: (Inaudible).

MR. GASPAR: I don't think any unconditional statement would be meaningful. What we're working on is a situation where policies which are decided and adopted in Greece are such that public finance sustainability is guaranteed and Greece successfully returns to macroeconomic stability and growth.

MS. AMR: Any further questions?

We will take this one last question.

QUESTIONER: My reading is that you are giving two advices. The first best is to have buffers. The second best is if you don't have fiscal space, you have to let that take priority. But, I guess the policy problem is that what this means for most countries, is it possible that, for example, most countries in Europe would have to disregard your first advice, that is symmetric application of automatic stabilizers, and continue giving priority to restoring fiscal space for the foreseeable future? For example, until the aging population becomes a reel problem in 2025, and then also have to continue fiscal austerity policies?

MR. GASPAR: Have you read Anna Karenina? Anna Karenina has a very famous beginning. It says something like, all happy families are alike. Unhappy families are unhappy in their own specific way.

So, as you said, as you put it, the recommendation, the general recommendation is that countries should have strong fiscal frameworks, they should build buffers in good times. They should have the ability to manage public finance risks and to contribute to macroeconomic stability. That is the general advice. That corresponds to the happy families of Anna Karenina.

Now, as in the case of Anna Karenina, unhappy families are unhappy in their own specific way. So there is no blanket advice that one can give for countries that are in adverse circumstances, that like fiscal space, that they may be under market duress. You have to go through the process of looking in a very detailed way to the characteristics of the particular case, and you have to give advice which is tailor made to that one particular case.

So, I don't have general principles that I can recommend.

MS. AMR: So, with Anna Karenina we end the press conference.

Thank you all for attending.


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