IMF Fiscal Monitor -- Fiscal Adjustment in an Uncertain World, April 2013
Fiscal Monitor, April 16, 2013
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Bibliographic details
- Published: April 16, 2013
- Series: Fiscal Monitor
Overview
- The Fiscal Monitor was launched in 2009 to survey and analyze public finance developments, update fiscal implications of the crisis and medium-term fiscal projections, and assess policies to put public finances on a sustainable footing.
- It is prepared twice a year by the IMF’s Fiscal Affairs Department.
- Continued progress in reducing advanced economy deficits and a gradually improving external environment have lowered short-term fiscal risks, but global prospects remain subdued and many advanced economies face a lengthy, difficult, and uncertain path to fiscal sustainability.
Recent short-term fiscal developments and outlook
- Deficits in advanced economies fell by some ¾ percent of GDP in cyclically adjusted terms last year and are projected to decline at a somewhat faster pace in 2013.
- Many advanced economies are now close to achieving primary surpluses that would allow them to stabilize their debt ratios.
- Sharp increases in public debt have not yet provoked a surge in interest rates in many advanced economies, but lower rates are unlikely to persist indefinitely.
Key short-term observations:
- Lowered short-term fiscal risks due to reduced deficits and a gradually improving external environment.
- Important caveat: subdued global prospects and potential reversal of very relaxed monetary conditions.
Medium-term challenges and debt dynamics
- Merely stabilizing advanced economy debt at current levels would be detrimental to medium- and longer-term economic prospects.
- High debt—even if stable—retards potential growth, constrains scope for discretionary policy, and leaves economies exposed to market shocks.
- To make rapid progress in bringing down debt ratios, it is critical to maintain the minimum possible differential between the interest rate on public debt and the growth rate of the economy.
Quantitative and structural points:
- Several advanced economies are now within about 1 percentage point of a primary surplus that, if maintained, would bring their debt ratios to 60 percent of GDP by 2030.
- About one-third of advanced economies—representing some 40 percent of global GDP—still face major fiscal challenges.
- Many of these countries have never experienced debt levels similar to the current ones and will need unprecedented fiscal efforts to bring debt ratios to traditional norms.
Policy package and specific recommendations for advanced economies
- Foremost: set out—and implement—a clear and credible plan to bring debt ratios down over the medium term.
- Authorities should focus on structural balances and, if financing allows, let automatic fiscal stabilizers operate fully to avoid procyclical policies.
- Countries with chronically weak private demand and fiscal room should consider smoothing the pace of consolidation.
- Structural reforms to raise potential growth are essential to lower debt-to-GDP ratios through fiscal balance improvements and denominator effects.
- Maintaining market confidence is essential to keep interest rates low.
Noted country-specific concerns from the text:
- Continued absence of such plans in Japan and the United States remains a significant concern.
- In Japan: introduction of new short-term stimulus (described as temporary) combined with insufficient progress on measures to restore medium-term fiscal sustainability is worrying.
- In the United States: insufficient progress on entitlement reform is highlighted; a credible plan could avoid excessively large tightening resulting from sequestering that began in March if it were to continue beyond the current fiscal year.
Non-viable or limited options:
- High inflation aimed at eroding debt and debt restructuring would entail substantial and long-lasting economic and social costs.
- Privatization can contribute but the stock of salable assets in most advanced economies is insufficient to substantially reduce debt.
Emerging market economies and low-income countries
- Debt dynamics have remained relatively positive in most emerging market economies and low-income countries, thanks to a negative interest rate–growth differential.
- These countries generally allowed automatic stabilizers to operate fully last year and plan to continue to do so.
- Those with low general government debt and deficits can afford a neutral stance in response to a weaker global outlook.
- Countries with relatively high or quickly increasing debt levels are exposed to sizable risks once effective interest rates rise and concessional financing declines.
- Many Arab countries in transition have exhausted fiscal buffers and need to contain rising deficits and debt levels.
Specific vulnerabilities and reforms:
- Widespread use of energy subsidies makes commodity prices an additional source of vulnerability in many emerging market and low-income economies.
- Recommended measures: subsidy reform, higher revenue from consumption taxes, and broadening of tax bases to support consolidation efforts.
- Commodity exporters need to strengthen nonresource revenue and establish fiscal frameworks to limit short-term volatility and ensure long-term fiscal sustainability.
Fiscal risks and contingent liabilities
- Structural changes in sovereign debt markets may gradually erode some of the special status countries like Japan and the United States currently enjoy.
- With financial sector reform proceeding slowly, the potential for contingent liabilities to materialize from future financial sector disturbances remains sizable.
- The amount of fiscal adjustment required depends on initial conditions, ultimate objectives, and interim macroeconomic conditions.
Key statistics and figures cited in the text
- Fiscal Monitor launched in 2009.
- Prepared twice a year.
- Deficits in advanced economies fell by some ¾ percent of GDP in cyclically adjusted terms last year.
- Projected faster decline in 2013.
- Several advanced economies within about 1 percentage point of a primary surplus that would bring debt ratios to 60 percent of GDP by 2030.
- About one-third of advanced economies represent some 40 percent of global GDP.
IMF Fiscal Monitor -- Fiscal Adjustment in an Uncertain World, April 2013
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