{
  "title": "Ten Commandments for Fiscal Adjustment in Advanced Economies",
  "publication": "IMF Blog, June 24, 2010",
  "sourceUrl": "https://www.imf.org/en/blogs/articles/2010/06/24/ten-commandments-for-fiscal-adjustment-in-advanced-economies",
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  "summary": "Commandment I: You shall have a credible medium-term fiscal plan with a visible anchor (in terms of either an average pace of adjustment, or of a fiscal target to be achieved within four–five years).",
  "sections": [
    {
      "heading": "The Ten Commandments (findings and recommendations)",
      "content": "- Commandment I: You shall have a credible medium-term fiscal plan with a visible anchor (in terms of either an average pace of adjustment, or of a fiscal target to be achieved within four–five years).\n  - Recommendation: An average improvement in the cyclically-adjusted primary balance of some 1 percentage point per year during the next four–five years would be consistent with gradually closing the output gap and stabilizing the average debt ratio by the middle of this decade.\n  - Caveat: Countries with higher deficits/debt should do more, others should do less. Pace must be backed by fairly specific spending and revenue projections and supported by structural reforms.\n\n- Commandment II: You shall not front-load your fiscal adjustment, unless financing needs require it.\n  - Recommendation: A steady pace of adjustment is generally preferable to front-loading, which could undermine the recovery and be reversed.\n  - Note: A non-trivial first installment is needed; current consolidation plans in advanced G-20 countries imply on average a reduction in the cyclically adjusted deficit of some 1¼ percentage point of GDP in 2011, with significant dispersion across countries.\n  - Implementation detail: Front-loading approval of policy measures that become effective later enhances credibility.\n\n- Commandment III: You shall target a long-term decline in the public debt-to-GDP ratio, not just its stabilization at post-crisis levels.\n  - Finding: In the G-7 average, gross debt was 82 percent of GDP in 2007, a level never reached before without a major war.\n  - Rationale: High public debt tends to raise interest rates, lower potential growth, and impede fiscal flexibility; the final goal must be to lower public debt ratios gradually but steadily.\n\n- Commandment IV: You shall focus on fiscal consolidation tools that are conducive to strong potential growth.\n  - Recommendation: Bias towards current spending cuts because spending ratios are high and tax levels are distortionary.\n  - Examples: Shift from universal to targeted social transfers; contain public sector wages.\n  - Caveat: Nothing should be ruled out—countries with low revenue ratios and large adjustment needs will also have to act on the revenue side.\n\n- Commandment V: You shall pass early pension and health care reforms as current trends are unsustainable.\n  - Finding: Increases in pension and health care spending represented over 80 percent of the increase in primary public spending to GDP ratio observed in the G-7 countries in the last decades.\n  - Finding: The net present value of future increases in health care and pension spending is more than ten times larger than the increase in public debt due to the crisis.\n  - Recommendation: Early action in these areas increases credibility more than fiscal front-loading and may have positive effects on demand and supply (for example, committing to an increase in the retirement age over time).\n\n- Commandment VI: You shall be fair. To be sustainable over time, the fiscal adjustment should be equitable.\n  - Dimensions: Maintain adequate social safety nets and public services; fight tax evasion.\n  - Fact: For VAT, tax evasion averages about 15 percent of revenues in G-20 advanced countries. Evasion for other taxes is likely to be higher.\n\n- Commandment VII: You shall implement wide reforms to boost potential growth.\n  - Quantified effect: A one percentage point increase in potential growth—assuming a tax ratio of 40 percent—lowers the debt ratio by 10 percentage points within 5 years and by 30 percentage points within 10 years, if the resulting higher revenues are saved.\n  - Recommendation: Accelerate labor, product and financial market reforms.\n  - Policy preference: In a context of weak aggregate demand, reforms that increase investment are more desirable than reforms that increase saving.\n  - Caution: Timing and magnitude of structural reform effects on growth are uncertain; plans relying on faster growth would not be credible.\n\n- Commandment VIII: You shall strengthen your fiscal institutions.\n  - Finding: Current institutions allowed record public debt accumulation before the crisis and are insufficient.\n  - Recommendations: Better fiscal rules (including in Europe); better budgetary processes (including in the United States); better fiscal monitoring, including independent fiscal agencies.\n\n- Commandment IX: You shall properly coordinate monetary and fiscal policy.\n  - Recommendation: If fiscal policy is tightened, interest rates should not be raised as rapidly as in other phases of recovery.\n  - Judgment: Calls for an early monetary policy tightening in advanced economies are misplaced.\n\n- Commandment X: You shall coordinate your policies with other countries.\n  - Issue: In many advanced countries, reduction in budget deficits must come with a reduction in current account deficits; to maintain recovery, initial adverse effects of fiscal consolidation on internal demand must be offset by stronger external demand.\n  - Recommendation for emerging markets: Some emerging market economies with current account surpluses must shift from external to internal demand; recent decisions taken by China are cited as an important step.\n  - Additional point: Policy coordination will be important to protect fiscal revenues from rising tax competition."
    },
    {
      "heading": "Key statistics and quantitative benchmarks",
      "content": "- Average improvement suggested: some 1 percentage point per year in the cyclically-adjusted primary balance during the next four–five years.\n- Current consolidation plans: on average a reduction in the cyclically adjusted deficit of some 1¼ percentage point of GDP in 2011 for advanced G-20 countries.\n- G-7 gross debt: 82 percent of GDP in 2007.\n- Contribution of pensions and health care: over 80 percent of the increase in primary public spending to GDP ratio in the G-7 over recent decades.\n- Net present value of future pension and health care increases: more than ten times larger than the increase in public debt due to the crisis.\n- VAT evasion: about 15 percent of revenues in G-20 advanced countries.\n- Growth effect on debt: one percentage point increase in potential growth lowers debt by 10 percentage points within 5 years and by 30 percentage points within 10 years, assuming a tax ratio of 40 percent and that higher revenues are saved.\n\nSource: Ten Commandments for Fiscal Adjustment in Advanced Economies, Olivier Blanchard and Carlo Cottarelli, June 24, 2010.\n\n---\n\n\nSource: https://www.imf.org/en/blogs/articles/2010/06/24/ten-commandments-for-fiscal-adjustment-in-advanced-economies"
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    "Authors: Olivier Blanchard, Carlo Cottarelli",
    "Published: June 24, 2010",
    "Commandment I: You shall have a credible medium-term fiscal plan with a visible anchor (in terms of either an average pace of adjustment, or of a fiscal target to be achieved within four–five years).",
    "Commandment II: You shall not front-load your fiscal adjustment, unless financing needs require it.",
    "Commandment III: You shall target a long-term decline in the public debt-to-GDP ratio, not just its stabilization at post-crisis levels.",
    "Commandment IV: You shall focus on fiscal consolidation tools that are conducive to strong potential growth.",
    "Commandment V: You shall pass early pension and health care reforms as current trends are unsustainable.",
    "Commandment VI: You shall be fair. To be sustainable over time, the fiscal adjustment should be equitable.",
    "Commandment VII: You shall implement wide reforms to boost potential growth.",
    "Commandment VIII: You shall strengthen your fiscal institutions.",
    "Commandment IX: You shall properly coordinate monetary and fiscal policy.",
    "Commandment X: You shall coordinate your policies with other countries.",
    "Average improvement suggested: some 1 percentage point per year in the cyclically-adjusted primary balance during the next four–five years.",
    "Current consolidation plans: on average a reduction in the cyclically adjusted deficit of some 1¼ percentage point of GDP in 2011 for advanced G-20 countries.",
    "G-7 gross debt: 82 percent of GDP in 2007.",
    "Contribution of pensions and health care: over 80 percent of the increase in primary public spending to GDP ratio in the G-7 over recent decades.",
    "Net present value of future pension and health care increases: more than ten times larger than the increase in public debt due to the crisis.",
    "VAT evasion: about 15 percent of revenues in G-20 advanced countries.",
    "Growth effect on debt: one percentage point increase in potential growth lowers debt by 10 percentage points within 5 years and by 30 percentage points within 10 years, assuming a tax ratio of 40 percent and that higher revenues are saved."
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