Transcript of the Press Conference on the Release of the April 2017 Fiscal Monitor

April 19, 2017

Vitor Gaspar, Director, Fiscal Affairs Department, IMF 

Abdelhak Senhadji, Deputy Director, Fiscal Affairs Department, IMF   

Catherine Pattillo, Assistant Director and Chief of Fiscal Policy and Surveillance Division, IMF

Wiktor Krzyzanowski, Senior Communications Officer, Communications Department, IMF 

Mr. Krzyzanowski ‑ Good morning, everybody. Thank you very much for joining us for the presentation of the most recent IMF’s Fiscal Monitor. My name is Wiktor Krzyzanowski and I am with the IMF's Communications Department. We also appreciate everybody joining us online on Let me first present the speakers: Vitor Gaspar, Director of the Fiscal Affairs Department; Abdelhak Senhadji, Deputy Director of the Fiscal Affairs Department; and Cathy Pattillo, Assistant Director in the Fiscal Affairs Department. They are the key authors of the Fiscal Monitor.

I will now ask Vitor to introduce to all of us the main findings of the Fiscal Monitor, and then we will be happy to answer any questions you may have.

Mr. Gaspar ‑ Many thanks for your interest in the Fiscal Monitor, which is entitled “Achieving More with Less.”

We live in a world of ever faster change and radical transformation. Disruptive technological change, increased complexity and cross‑country interdependencies brought about by globalization of trade, finance, communication and migration, led to perceptions of uncertainty and insecurity. There is a growing concern about whether our children will have better living standards than ourselves.

Such a world requires smart and growth‑friendly policies, policies that facilitate change, foster growth, and protect people. Hence, fiscal policy is being asked to do much more. Fortunately, researchers and policymakers are realizing that the fiscal toolkit is broader and the tools it includes are more powerful than previously believed.

The spring Fiscal Monitor is organized around five guiding principles for fiscal policy. Fiscal policy should be countercyclical, growth‑friendly, inclusive, supported by tax capacity, and conducted with prudence.

Instead of explaining these guiding principles, I would like to illustrate them with examples. We will start with countercyclical, and let us consider the US. In the coming weeks, we will be learning a lot about US fiscal policy from the current US Administration and Congress. The scenario presented in the Fiscal Monitor assumes a modest stimulus. Specifically, it is based on lower personal income tax, and corporate income tax, amounting to a stimulus of 1 percent of GDP for the financial years 2018 and 2019.

The assumed policy is modestly procyclical, as the economy is close to potential in 2017. The interesting point is that, with some minor revisions, this is enough to explain a large part of the increase in the debt‑to‑GDP ratio of 11.3 percent of GDP by 2022, which corresponds to about 4 percent of GDP for the group of advanced economies. This hypothetical scenario that we assume illustrates that procyclical policies in good times can be a major factor ratcheting up the public debt ratios.

Let us now turn to growth‑friendly policies. Chapter 2 of the Fiscal Monitor covers the ground while illustrating the design of smart fiscal policies as well. The Fiscal Monitor shows how a neutral tax system, together with effective and evenhanded revenue administration, can contribute to significant increases in productivity. Specifically, the chapter shows that a misallocation of resources among firms within narrowly‑defined industries has large costs. Eliminating these could add roughly 1 percentage point to growth over 20 years.

When we look at taxation specifically, its contribution to misallocation is particularly important for emerging markets and low‑income developing countries. In these countries, about a quarter of these gains can be realized through changes in tax policy and revenue administration.

As I said right at the beginning, globalization and technological change have been major drivers of economic growth and cross‑country convergence. More than 1 billion people have been lifted out of extreme poverty since the early 1980s, and most of them come from China and India. At the same time, when you focus on country indicators, you see that inequality has increased in most advanced economies and large emerging economies – I am referring to China and India.

The clear perception around the world of widespread increases in income inequality illustrates the dominance of national politics shaping these perceptions. Fiscal policies, government expenditures and revenues are powerful means to ensure the sharing of the growth dividend. The next Fiscal Monitor in the fall will be precisely dedicated to inclusive fiscal policies.

Now to the next topic. Taxation provides the most stable and elastic source of revenue that can be mobilized by general government. Hence, tax capacity is a foundation of state capacity. Tax capacity supports the three government functions that we have already covered. It is also an important factor in determining the ability of a country to sustain public debt.

It turns out that almost half of the low‑income developing countries have a tax‑to‑GDP ratio below 15 percent. Many of the low‑income developing countries have high interest payment ratios as a percentage of tax revenue. In these countries, building tax capacity is a core priority, as stated in the Sustainable Development Goals.

To conclude the picture, China provides a clear example of the role of prudent fiscal policies. In some cases, the government must be prepared to act as insurer of last resort against macroeconomic risks. In China, all debt indicators have been increasing fast and have been doing so for the last decade. These trends stand out in international comparisons, and given the size of China, they are globally relevant as well.

The crucial challenge in China is that of rebalancing growth and addressing the fast advance of leverage. That will improve the prospects for sustainable growth and reduce the associated risks, even if it entails costs in the short run. Our specific advice includes prudent fiscal policy, with fiscal resources moving on‑budget. Moreover, in the medium term, the augmented budget deficit should trend down.

To conclude, I will repeat the main messages from the Fiscal Monitor – it is based on five key guiding principles: Fiscal policy should be countercyclical, growth‑friendly, inclusive, grounded on tax capacity, and conducted with prudence.

Mr. Krzyzanowski – Thanks you. We are now happy to answer your questions. We are also taking questions online in the Media Briefing Center on

Question ‑ You focused your remarks on the report on the big run‑up that you are now expecting in US government debt over the next few years that is more significant than you thought a year ago, even though the US economy is obviously operating at close to full capacity. How worried are you about the amount that it increases the vulnerability of the US government to future shocks and their reduced room for maneuver, what the implications of that would be for the global economy given how large the US economy is, and what would you recommend they do to mitigate that potential risk.

Mr. Gaspar ‑ The first thing to recognize is that the scenario that I presented is predicated on assumptions that we ourselves have made. Those are of a moderate expansion based on cuts in the personal income tax and the corporate income tax amounting to a fiscal impulse of about 1 percentage point of GDP. This is not something that the US administration and Congress are certainly planning to do. Those plans have not been articulated yet; they are in the making. The point that we are illustrating with this scenario is that, even when you assume a modest fiscal expansion in good times, it turns out that this procyclical loosening of policy can have a surprisingly large effect in the accumulation of debt over the medium term, and therefore an increase of the public debt‑to‑GDP ratio by slightly more than 11 percentage point of GDP by 2022.

Our recommendation is that the US should have a medium‑term fiscal framework and, in the context of that medium‑term fiscal framework, should follow a path of a gradual reduction in the budget deficit so as to stabilize the public debt over the medium to long run.

When one makes this type of forecast, one has to have a consistent scenario for growth. How one sees growth evolving is crucial for the dynamics of the public debt‑to‑GDP ratio. That is a point that the Secretary of the Treasury has emphasized in a recent interview with The Financial Times.

We do have in the World Economic Outlook a box in which there are two scenarios presented for a package of structural measures that include investment in infrastructure, PIT and CIT tax reforms. The box spells out the medium‑term effects. Taking into account both supply and demand effects from these scenarios, you will get a notion of how things can change as a function of the details of the package of measures which is effectively adopted by the US administration.

Question ‑ What is your impression about the efforts being made by the Indian government on fiscal consolidation. Are they meeting your expectations?

Mr. Gaspar ‑ India has recorded quite an impressive growth performance in recent years. Our view is that the elimination of fuel subsidies and the targeting of social benefits has delivered in terms of allowing the union budget target to be achieved at 3.5 percent of GDP.

We have been collaborating with the Indian authorities in terms of looking at fiscal structural measures, including expenditure rationalization while protecting infrastructure investment, tax broadening efforts. In this context, the rollout of services and goods tax, which is on schedule to enter into force on July 1, is an extremely important step that will create a true unified national market in India.

We do see room for tax broadening efforts. We see room for more progressive income taxes in line with the trends in income inequality that I reported when I referred to the important principle that fiscal policy should foster inclusive growth. Perhaps more generally, we do see a case for a medium‑term framework and we know that the authorities are actively working on that.

Question ‑ According to your report, Greece achieved in 2016 a primary surplus of 3.3 percent of GDP. Do you believe that maintaining that kind of surplus for a period of three, five, or ten years is feasible for the weak Greek economy? Are you advocating such a thing, high primary surpluses for a long time of period?

Mr. Krzyzanowski ‑ We also have a question online on Greece in the same vein: Do the predictions of the primary surplus of Greece suggest that the Fund will demand the enforcement of measures of 2020 earlier?

Mr. Gaspar ‑ The two questions are very closely related. At this point in time, we do not have final numbers for the outturn of Greek public finances for the year 2016. We expect to have that very soon, but we do not have them yet. The number that you quoted and that is in the Fiscal Monitor is an estimate. If the estimate is confirmed, it is true that the outturn would have been significantly stronger than what we expected for 2016. We are of the view that that is largely due to temporary factors.

Going forward, I will not speculate along the political lines that you did refer to, but I can reaffirm that the IMF sees a primary surplus of 1.5 as an appropriate level to be sustained over the medium to long run. We would like to see that backed by realistic measures and in the context of a program of structural reforms that support growth in the Greek economy.

We have been insisting that it is crucial to make sure that Greek public debt is sustainable according to IMF’s methodology and that does require a second leg of the program for Greece, which is debt restructuring on the part of official creditors.

Question ‑ The IMF says in the Fiscal Monitor that social security reform in Brazil is key to curb the increase of expenditures or government expenditures for medium and long term. Two questions. First, what would happen with the Brazilian fiscal side if social security reform would not be approved this year? Secondly, your predictions as far as the primary surplus, growth, debt‑to‑GDP until 2022 take account of pension and social security reform approved by Congress this year?

Mr. Gaspar ‑ As usual, we do not comment on political developments as such. What we can offer as the Fund is a position that regards the current pace of fiscal adjustment foreseen as appropriate, given the ongoing macroeconomic conditions. The adjustment that is in the pipeline is slightly procyclical in 2017, but we regard it as crucial for the government to be able to meet the announced target. That, in turn, is an important pillar for restoring confidence and allowing a sustained fall in the financing costs of the general government.

It could be that one will need temporary tax measures to achieve those goals. From a more structural viewpoint, the key is to address unsustainable expenditure mandates at all levels of government, and those include the pensions that you referred to. From that viewpoint, the pension reform is extremely important.

On issues of politics and timing, I will not comment.

Question ‑ The second part of the question was regarding the IMF projections for the fiscal side until 2022. I am asking if those projections, those numbers that you show there take into account social security reform taking place in Brazil.

Mr. Gaspar ‑ We will come back to you on that.

Question ‑ In the report you put some emphasis on China's income inequality and tax reforms. Are you suggesting a shift in priorities from spending to more redistributive measures?

Mr. Gaspar ‑ I think that the issue that you raise illustrates how fiscal policy can help China in rebalancing it growth model. As was the case for India, in China you see that inequality has increased. From that viewpoint, you should advocate social spending and taxation reform in order to address that issue. But at the same time, it turns out that that increase in social spending and that change in taxation does support the transfer of expenditure from investment to consumption. That is part of the overall rebalancing of the Chinese economy.

Question ‑ My question is about the consolidation in Mexico. For the first time, we are going to have a surplus and little decline in debt. In the Fiscal Monitor, you said it could accumulate more or less at 1.3 percent. In the absence of the return of the oil income, what could be done on the budgeting side, while corruption is increasing, especially in the level of states?

Mr. Gaspar ‑ You are right that Mexico's public debt‑to‑GDP ratio is forecast to decline, but after quite a sharp increase in 2016: according to the Fiscal Monitor, debt increased from 53.7 percent of GDP in 2015 to 58.1 in 2016. We expect that this ratio will decline gradually to 57.2 percent this year and finally to 54.1 percent by 2022.

We do regard this path, which reflects the plans of the government of Mexico, as being appropriate, because despite the fact that the debt level is not very high from the viewpoint of standards around the world, it is also true that the costs of the financing of the government are relatively high. The credibility which is associated with a gradual decline in the public debt‑to‑GDP ratio is bound to affect those financing costs.

We do see the effort of consolidation in Mexico to be based on a holistic approach grounded on an updating of the Fiscal Responsibility Law that will program a link between the fiscal deficit and the public debt. In this context, the authorities could even consider a deeper institutional change, including the creation of an independent Fiscal Council that would increase the transparency of the debate around fiscal policy in Mexico and would deepen the technical base for that debate, as it has occurred in other countries in the world.

Question ‑ There have been a lot of rather prescriptive recommendations in this report and the previous one, the GFSR, about policies that the Trump administration should take. Here you seem to be suggesting that maybe they might consider making their tax reforms more revenue‑neutral. Could you comment on that? Are you trying to influence future policies? What kind of pushback might we see from the administration to this? I would guess that Secretary Mnuchin might argue that tax cuts would really increase the growth rate a lot more than what you are assuming.

Mr. Gaspar ‑ If you go to the box in the World Economic Outlook that I just quoted some minutes ago, you actually see the argument that if the reform is done in a revenue‑neutral way, the impact for growth in the medium to long term is stronger. So, at least under the assumptions which we have in the box of the World Economic Outlook, doing it in a way that does not increase the deficit is better for growth.

If you think about growth, you need to think about structural policies that affect labor market participation, affect capital accumulation, and affect productivity growth. In order for us to be able to discuss the growth impacts from structural fiscal policies, we do need to have the details. As soon as we have a detailed plan that we can evaluate, we will be doing it as quickly as we possibly can.

Question ‑ We have an economic recovery growth plan in Nigeria. I want to know what is your take on that plan and if you believe it is going to help the government move out of its present economic situation?

Mr. Gaspar ‑ I had the privilege of visiting Nigeria some months ago. I was very happy to understand that, for the authorities of Nigeria, fiscal policy in general, and tax policy in particular, are part of the strategy for development. And that is precisely how I believe fiscal policy should be thought about in developing countries – as part of the development strategy.

Ms. Pattillo ‑ The economic growth and recovery program is very welcome. It focuses on private sector‑led diversification, and addressing some of the deep‑seated problems related to strengthening infrastructure, which is necessary for diversification, as well as building revenues, particularly non-oil revenues

It is at an opportune time. As you pointed out. Nigeria was in recession last year. We forecast a recovery this year – but still very fragile. The need to address the fiscal situation is quite urgent. The recommendation is for continued strong fiscal consolidation. Debt has risen and its profile has weakened.

I think one striking statistic is the fact that, over the past year, the ratio of interest payments to tax revenue has doubled to 66 percent in Nigeria. So, a full two thirds of all tax revenue now are going to pay for interest payments, illustrating both the debt risks and the need to raise tax revenue. As Mr. Gaspar pointed out, in many low‑income countries, a priority is raising tax revenue as part of state capacity and development that then would allow the government to have the space for both social- and growth‑friendly policies that are part of the objective of the economic growth and recovery program.

Question ‑ How would you assess sub‑Saharan Africa? If you are going to give a recommendation, what will it be as regards fiscal policy?

Ms. Pattillo ‑ In terms of the fiscal outlook this year in sub‑Saharan Africa, we are seeing increases in deficits in many countries, particularly in the commodity exporters and the oil exporters, who have been hit hard by the low oil prices.

In addition to the commodity exporters, the other countries have also seen some rising deficits because of expansionary policies that were appropriate, but now are raising the question of rising debt and high borrowing costs. So, in many countries, there is the need for fiscal consolidation, particularly growth‑friendly, emphasizing domestic revenue mobilization through both basis expansion and improved tax administration and improved spending efficiency.

Improving tax administration in sub‑Saharan Africa will have benefits for improved revenues that will allow spending on big development needs in the continent. It will also contribute to productivity, which is important for growth and makes the fiscal outlook more promising.

Question ‑ Arising from the fiscal challenges that Nigeria is going through currently, we are concerned about some of our funds that are transferred. These amounts can help us fight some of the fiscal challenges that we are having. We are just asking how multilateral institutions like the IMF and the World Bank are going to help, because so many questions are asked when we want to get the money.

Ms. Pattillo ‑ I think the specific question would be something you could discuss more in the upcoming African Department’s press conference. But clearly the types of strong fiscal institutions that we have talked about are important for all governments continuing to ensure funds flow back to their countries.

Question ‑ Just two quick questions on Europe. The first one, I was wondering whether you had done any work on what would be the consequences of an election of populist parties in Europe, say Marine Le Pen in France, the Five Star Movement in Italy, because they seem to have rather expansionary fiscal plans. Second, on Portugal, it seems to have achieved quite a remarkably low fiscal deficit while increasing pension spending and payroll spending. I was wondering whether there were broader lessons from the Portuguese experience in terms of whether austerity works in Europe or whether there is a different way to reduce the deficit.

Mr. Gaspar ‑ We do not comment on specific political developments, but we do study the relation between fiscal policy and politics in general. We have just put out a book “Fiscal Politics”, where you do see the link between the electoral politics and fiscal policy outcomes. You do see the role that institutions have in controlling the performance of fiscal policy and contributing to eliminating biases that you do identify in some political systems, and last but not least, looks at fiscal policy in the international context. If you are interested in the type of issues that you covered in your question, I would highly recommend the book.

Me. Senhadji - On Portugal, we certainly commend the authorities for the significant progress in trying to reduce the deficit and put debt on a downward trajectory. However, we should recognize that the debt dynamics are still not really favorable for Portugal. The debt ratio stood at 130 percent of GDP in 2016. So, there is significant progress to be made going forward. There is not only more consolidation to be made. Also, the quality of measures that would be sustaining the consolidation effort need to be improved. For instance, the adjustment or the slight reduction in the deficit in the past few years was predicated on cutting public investment, which we believe is not necessarily the right policy mix in the sense that it will jeopardize potential growth going forward, and obviously, growth is critical for bringing in a sustainable level the debt ratio.

Question ‑ Do you believe that Russia is making enough efforts to make its taxation work in the new environment of oil prices or do you think it has to make extra efforts to make its taxation base more equitable?

Mr. Senhadji - We would prefer to refer you to the briefing by the Middle East and Central Asia Department on Friday. They can give you more details on that.

Question ‑ China's Cabinet said on Wednesday that risks of mass unemployment in some regions and sectors have increased and the Cabinet pledged more fiscal policy to address the potential rise in the jobless rate. I wonder if you could share your thoughts on this and elaborate more on what role could fiscal policy play to push forward the structural reform in China.

Mr. Gaspar ‑ When we looked at the reform of fiscal structural policies in China, the issue of the relations between the various levels of government is absolutely crucial. As you know, the State Council has put out a White Paper on the relations between the various levels of government back in August and that can be seen as a very complete survey of crucial issues for the future of fiscal federalism in China.

When you look at the issue of fiscal policy and regional developments, you have a very good illustration of one of our key messages in the Fiscal Monitor, which is the realization that fiscal instruments are extremely powerful and can be used to address issues that are below the national level. They can be used to solve allocation problems and distribution problems like the ones you described.

In the case of China, we would recommend that it be done in a way which is compatible with the fundamental principles of the 2014 Budget Law; that is, bringing off‑budget activities into the budget and, in the medium term, having the augmented budget deficit trending down.

Mr. Krzyzanowski ‑ If there are any further questions, we will be happy to follow up after the press conference. Thank you very much for joining us. Have a great day.

IMF Communications Department

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