Taking Stock: A Progress Report on Fiscal Adjustment
Fiscal Monitor, October 9, 2012
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Bibliographic details
- Published: October 9, 2012
- Series: Fiscal Monitor
Overview and purpose
- The Fiscal Monitor was launched in 2009 to survey and analyze the latest 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.
- Prepared twice a year by the IMF’s Fiscal Affairs Department.
- This issue focuses on the size, composition, and implications for employment and social equity of fiscal consolidation since the 2008–09 shock.
Key findings
- Most countries have made significant headway in rolling back fiscal deficits; in about half of the countries covered in this Monitor, deficits are expected to be at or lower than their precrisis levels next year.
- Improvement in fiscal balances is most pronounced in advanced economies, followed by emerging market economies and to a lesser extent by low-income countries.
- Efforts at controlling debt stocks are taking longer to yield results: debt ratios peaked early in emerging market economies but are not expected to stabilize before 2014–15 in many advanced economies.
- The slower progress in advanced economies reflects the magnitude of the shock, the sluggishness of the recovery, and in some cases high interest rates affected by policy uncertainties and banking fragilities.
- Countries with sizable fiscal consolidation needs have typically relied on a mix of revenue and expenditure policies; advanced economies have in general relied more on spending retrenchment than emerging markets and low-income countries.
- Most countries have tried to focus on measures with the smallest negative impact on growth, such as entitlement reforms and increases in less distortionary taxes, for instance, property levies.
- Some countries—especially those with large fiscal adjustment plans—have included investment cuts and broader tax increases that may weigh on longterm growth.
- Despite substantial progress, fiscal vulnerabilities remain elevated: public debt rollover requirements are still very high and expose countries to financial market vagaries.
- Market responses to large debt increases have been largely benign in most cases, premised on continued fiscal adjustment and a favorable growth environment; solvency concerns remain elevated only for a subset of euro area countries.
Employment, equity, and distributional implications
- Both spending and revenue measures have important implications for employment and social equity and these implications need to be taken into account for sustainable consolidation.
- An appropriate degree of progressivity in taxation and access to social benefits is imperative for limiting the negative social effects of adjustment packages.
- Better-designed tax and social benefit policies, accompanied by active labor market programs, can help boost labor supply and demand.
- Structural reforms remain the key to better growth and employment prospects.
Policy recommendations and scenarios
- With downside risks mounting, policymakers must balance strengthening public finances with avoiding excessive withdrawal of fiscal support for a still-fragile recovery.
- Most emerging markets and low-income countries can afford to pause adjustment to await a more hospitable growth outlook; many advanced economies do not have that luxury.
- To the extent financing conditions allow, adjustment should proceed at a pace consistent with the state of the economy.
- Policymakers should focus on structural or cyclically adjusted targets to take cyclical considerations better into account.
- If growth disappoints, the first line of defense should be monetary policy and the free play of automatic fiscal stabilizers.
- If growth falls significantly below current World Economic Outlook projections, countries with room for maneuver should slow their pace of planned adjustment over 2013 and beyond.
- Short-term caution should not be an excuse to delay medium-term efforts to put public finances on a sounder footing; even countries with comfortable fiscal positions should maintain appropriate buffers to confront future shocks.
Evidence base and content elements
- Text, figures, boxes, tables, and statistical tables covering topics such as: Revisions to Overall Balance and Debt-to-GDP Forecasts; Phasing of Fiscal Adjustment; Cumulative Change in Gross Debt to GDP since the Start of Recessions; Interest Rate–Growth Differential, 2012; Advanced Economies: Interest Expenditure; Change in Revenue and Expenditure, 2009–13; and numerous country- and region-level fiscal indicators and vulnerability assessments.
- Appendixes include Distributional Consequences of Alternative Fiscal Consolidation Measures; Fiscal Policies to Address Weak Employment; Methodological and Statistical Appendix; Acronyms; Country Abbreviations; Glossary; References.
IMF Fiscal Monitor -- Taking Stock: A Progress Report on Fiscal Adjustment, October 2012
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