Strengthening Fiscal Credibility: Fiscal Monitor Update -- January 2011
Fiscal Monitor, January 27, 2011
Source details
- Canonical URL
- Strengthening Fiscal Credibility: Fiscal Monitor Update -- January 2011
Other formats
Bibliographic details
- Published: January 27, 2011
- Series: Fiscal Monitor
Global fiscal outlook and cross-country divergence
- Despite an improving global outlook, the pace of fiscal consolidation in 2011 is slowing in some key countries, with more variation across countries than in November 2010.
- Sovereign risks remain elevated and in some cases have increased since November 2010, underscoring the need for more robust and specific medium-term consolidation plans.
2010 fiscal outturns — aggregate findings
- Advanced economies:
- On average, revenue collection exceeded expectations and spending was lower.
- The average deficit fell compared with 2009 by about 1 percentage point, to about 8 percent of GDP (0.3 percent better than projected).
- Excluding the impact of growth and financial sector support, the cyclically adjusted balance widened slightly.
- Advanced economy gross general government debt continued to rise rapidly in 2010, topping 96 percent of GDP.
- Emerging economies:
- Average headline deficit in 2010 is projected at about 4 percent of GDP, ¾ percentage point lower than in 2009.
- Average gross general government debt broadly stable at about 37 percent of GDP.
- Average cyclically adjusted deficit in 2010 was almost unchanged from the previous year.
- Revenue overperformance in some countries reflected stronger growth, higher commodity prices, and sizable one-off receipts (sale of oil concessions in Brazil; auction of telecommunication licenses in India).
- In several key emerging economies (notably Brazil, China, and India) fiscal balances turned out weaker than projected in the November Monitor.
- Offsetting improvements expected in Russia and Saudi Arabia (higher commodity prices) and Turkey (delays in capital expenditure).
Key table highlights (selected figures reported in text)
- Advanced economies average overall fiscal balance: about -8.0 percent of GDP in 2010.
- Advanced economy gross general government debt: topping 96.5 percent of GDP in 2010 (Table 1 series shows continuation upward).
- Emerging economies average overall fiscal balance: about -3.2 percent of GDP in 2010; projected -2.8 in 2011 (Table 1).
- Brazil: fiscal balances do not include policy lending to Brazil's development bank exceeding 3 percent of GDP in both 2009 and 2010 (footnote).
2011 projections and notable country developments
- Advanced G20:
- Fiscal consolidation among advanced G20 in cyclically adjusted terms is now projected to equal less than ¼ percent of GDP in 2011 (compared to 1 percent projected in November).
- Debt ratio anticipated to rise by almost 5 percentage points, to exceed 107 percent of GDP.
- United States:
- Congress approved a December stimulus package with income and payroll tax cuts and extended unemployment benefits.
- Package composition implies small stimulative impact relative to fiscal cost (see January 2011 WEO Update reference in source).
- Combined with better-than-expected 2010 outturn, the new measures mean the deficit is expected to increase slightly in 2011, compared to the decline of 1½ percent of GDP forecast in November.
- The United States will be the only major advanced economy implementing procyclical fiscal policies in 2011.
- Achieving the Toronto Declaration commitment to halve the deficit by 2013 will require a significant adjustment in 2012; the 2012 deficit forecast is consistent with targets in the recent mid-session budget review.
- Progress on a medium-term consolidation plan has been slow; the President’s Fiscal Commission laid out a comprehensive strategy but failed to garner the supermajority needed to formally submit its report to Congress.
- Japan:
- Narrowing of the overall deficit planned for 2011 has been reduced after Diet-approved expenditure increases.
- A proposed corporate tax cut is expected to be offset by other revenue measures.
- A deficit reduction of about 1 percent of GDP is projected for 2012.
- Europe (largest countries):
- Germany, France, Spain, United Kingdom: projected to consolidate in 2011 broadly in line with earlier plans; Spain’s reduction will be the most pronounced and rely heavily on expenditure measures (wages, pensions, public investment).
- Greece, Ireland, Portugal: continued sizable frontloaded consolidation expected to yield large improvements in headline and cyclically adjusted balances (averaging 2 and 2¾ percentage points of GDP, respectively), driven mainly by expenditure cuts.
- Emerging G20:
- Average deficit in 2011 expected to decline by about ¾ percent of GDP, keeping average gross debt ratio constant.
- Increased cross-country variation: Russia and Saudi Arabia may perform better (revenue windfalls); Brazil, China, and India face higher deficits due to carryover spending or non-recurrence of receipts.
- Brazil’s deterioration is particularly pronounced; government now expected to miss its fiscal target (a primary balance of about 3 percent of GDP) by a wide margin.
Fiscal measures adopted or announced since November (selected advanced economies)
- Greece: revenue measures—speed up tax arrears and penalties, tackle fuel smuggling, renew Telecom licenses, extend airport concessions (1.0 percent of GDP); expenditure—wage cuts, cost savings, means-testing, reductions in transfers and operational expenditures (1.2 percent of GDP); total fiscal tightening cited as 3.5 percent of GDP in table aggregate.
- Ireland: revenue—revisions to PIT bands and credits, integration of levies, tightening tax reliefs (0.9 percent of GDP); expenditure—public payroll and discretionary cuts, social welfare and capital spending reductions (2.4 percent of GDP); total 3.5 percent of GDP.
- Portugal: VAT increase by additional 2 percentage points and cuts in tax expenditures (0.8 percent of GDP); expenditure—reduction in public wages, pensions and social transfers (2.2 percent of GDP).
- Japan: revenue—reduction of effective corporate tax by 5 pps to 35 percent offset by reducing deductions and raising fuel levies (0.1 percent of GDP); expenditure—increase in capital spending and transfers and support programs (1.0 percent of GDP).
- United States: revenue—two-year extension of the 2001 and 2003 tax cuts; one-year 2 pps reduction in employee payroll tax; extension of 2009 estate tax regime and accelerated depreciation (0.8 percent of GDP); expenditure—13-month renewal of emergency unemployment benefits (0.1 percent of GDP).
- Note: Spain measures’ fiscal impact not available in table.
Market developments and risks
- Government bond yields have increased across major advanced economies:
- Since early November, nominal yields on United States government paper have jumped 80 basis points at 10-year maturities.
- Similar increases observed elsewhere except Japan, where movements were more moderate.
- These upticks occurred amid rising government bond purchases by major central banks.
- Inflation expectations remained broadly well-anchored and CDS spreads stayed essentially flat in the United States.
- Intensified market pressure has remained limited to a small number of euro area member states.
- Large rollover needs in 2011:
- Pressures especially high in the first half of 2011, with euro-area countries competing with about $5 trillion in sovereign rollover needs in other advanced economies.
- Funding requirements will be compounded by large needs from financial groups in many countries.
Institutional developments and credibility
- Mixed progress in strengthening fiscal institutions:
- U.S. House adopted procedural rules constraining expenditure growth but permitting deficit-financed tax cuts and tax expenditures.
- Euro area: improvement in Stability and Growth Pact procedures and implementation of the European semester; European Council cleared the way for creation of the European Stability Mechanism (ESM), which by June 2013 will combine a liquidity-provision arm similar to the EFSF with a crisis resolution procedure mandating bondholder bail-in for any country deemed insolvent.
- Hungary: closure of the non-partisan fiscal watchdog, undermining transparency and checks and balances.
- Attempts to soften supporting institutional arrangements should be resisted; strong and transparent fiscal and budgetary institutions are critical to sustain medium-term adjustment and enhance credibility.
Policy recommendations and priorities
- Advanced economies under renewed market pressure:
- Underline commitment to deficit targets and devise contingency plans to ensure adjustment goals are met.
- In the euro area, adopt a more comprehensive crisis management approach to break the fiscal-financial spiral and reduce cross-border contagion risk.
- In advanced economies not yet under market pressure, implement credible plans going well beyond 2011 to lock in market sentiment. The United States and Japan in particular should detail measures to honor commitments to reduce deficits and debt.
- Emerging economies:
- Rebuild fiscal buffers more rapidly to address overheating, create scope to respond to a growth slowdown, and avoid procyclical policies that would undermine credibility.
- Resist spending pressures and save revenue overperformance in full.
Source: Strengthening Fiscal Credibility: Fiscal Monitor Update -- January 2011
Content in this bundle
- تعزيز مصداقية المالية العامة -- مستجدات الراصد المالي؛ يناير 2011
- 《财政监测报告》2011 年 1 月更新: 增强财政信誉
- fmindexf
- 財政モニター・アップデート、2011年1月
- Strengthening Fiscal Credibility; Fiscal Monitor Update; January 2011
- Укрепление доверия к налогово-бюджетной политике; Бюджетном вестнике Бюллетень; 27 января 2011 года
- Fortalecer la credibilidad fiscal; Monitor Fiscal -- actualización, Enero 2011