Upgrading Fiscal Frameworks in Asia-Pacific

Departmental Papers, September 16, 2024

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Upgrading Fiscal Frameworks in Asia-Pacific

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Bibliographic details

• Authors: Enrique Flores, Pranav Gupta, Miss Yinqiu Lu, Paulo A Medas, Dinar Prihardini, Hoda Selim, Weining Xin, Masafumi Yabara
• Published: September 16, 2024
• Series: Departmental Papers
• DOI: https://doi.org/10.5089/9798400284915.087

Overview

• Objective: Guide the reform of fiscal frameworks in Asia-Pacific amid calls for a more active fiscal policy in a shock-prone world.
• Context: Cost of fiscal support is large; fiscal frameworks and fiscal rules are being tested by a sharp increase in debt, high interest, and weaker growth prospects.
• Long-term stressors highlighted: aging populations, climate change, and the need to deliver on the sustainable development goals.

Key findings

• Countercyclicality and responses to shocks:
  • After the global financial crisis, fiscal policy in Asia-Pacific became more countercyclical and stronger than in other regions—especially in advanced economies.
  • The degree of countercyclicality has been asymmetric, with larger responses during periods of weak growth and in response to large shocks—the global financial crisis and the pandemic.
  • Responses to the pandemic were large and used a wide range of tools; fiscal and monetary policy complemented each other in response to large shocks.
• Debt dynamics:
  • Public debt has been rising persistently across most countries in Asia-Pacific.
  • Drivers identified: declining growth and rising deficits—particularly after the global financial crisis for advanced economies and after the pandemic for emerging market and low income countries.
• Fiscal frameworks and performance:
  • Fiscal rules: usually focus on debt and budget balances and are set by law but tend to lack well-specified enforcement mechanisms or escape clauses.
  • Compliance with rules has worsened following the pandemic; Asia-Pacific countries show larger deviations relative to other regions compared with outturns before the pandemic.
  • Medium-term fiscal frameworks (MTFFs): adoption has increased, but forward guidance has been hampered by the lack of binding targets and ex-post analysis.
  • MTFFs do not seem to have produced better macro-fiscal forecasts, partly due to weak capacity and enforcement, lack of integration with the annual budget, and exposure to shocks—with risk analysis mostly limited to qualitative discussions.

Proposed reforms and recommendations

• Adopt a comprehensive, risk-based approach to public finances.
• Strengthen medium-term orientation of fiscal policy by:
  • Implementing credible medium-term fiscal plans.
  • Linking fiscal rules to the medium-term strategy and the annual budgets.
  • Increasing reliance on fiscal councils.
• Broaden the view of the public sector:
  • Recognize that fiscal policy is conducted through multiple channels; assess and manage vulnerabilities across those channels.
  • Significantly improve fiscal statistics.
• Address aging and climate change by:
  • Assessing large intergenerational trade-offs.
  • Reporting on long-term debt dynamics.
  • Developing green medium-term fiscal frameworks that incorporate the effects of climate change and climate policies.

Publication and metadata (as stated)

• Authors: Enrique Flores, Pranav Gupta, Yinqiu Lu, Paulo A Medas, Dinar Prihardini, Hoda Selim, Weining Xin, Masafumi Yabara
• Date: September 16, 2024
• Pages: 62
• Volume: 2024
• Issue: 008
• Series: Departmental Paper No 2024/008
• DOI: https://doi.org/10.5089/9798400284915.087
• Stock No: DPEA2024UFFAP
• ISBN: 9798400284915
• ISSN: 2616-5333
• Subject tags (as provided): Expenditure, Financial crises, Fiscal governance, Fiscal policy, Fiscal rules, Global financial crisis of 2008-2009, Public debt
• Keywords (as provided): automatic stabilizers, Climate Change, Fiscal Frameworks, Fiscal Rules, Medium-term Fiscal Frameworks, Population Aging, Public Debt

Upgrading Fiscal Frameworks in Asia-Pacific, Departmental Papers 2024, 008 (2024), Enrique Flores et al., published September 16, 2024.

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