Fiscal Glass is Half Full: Some Reasons for Optimism

IMF Blog, September 21, 2011

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Fiscal Glass is Half Full: Some Reasons for Optimism

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Bibliographic details

• Authors: Carlo Cottarelli
• Published: September 21, 2011

Overview

• Author: Carlo Cottarelli
• Date: September 21, 2011
• Main message: Despite high public debt and fiscal deficits in many advanced economies, important progress has been made in fiscal adjustment over the last couple of years; nevertheless, significant challenges remain to stabilize and reduce public debt without undermining fragile economic recoveries.

Fiscal progress and projections

• For most countries, government deficits have fallen substantially—by 2¼ percentage points of GDP on average compared to two years ago.
• The fiscal outlook in most countries is stronger than projected two years ago.
• For the five largest European countries:
  • Previous projections (from two years ago) showed larger increases in public debt to GDP ratios for the period 2012 through 2014 (described as shown in gray).
  • Current projections show smaller increases in debt over that same period, and in some cases debt is now expected to fall (described as shown in blue).
  • This improvement reflects commitments by these countries to reduce their deficits over an extended period.

Europe: market perceptions, communications, and political implementation

• Observed gap: Europe’s financial markets appear to think the region is not doing enough on the fiscal front despite measurable progress.
• Possible causes:
  • Communications: The Euro area has "a cacophony of voices" with 17 policymakers expressing views, creating uncertainty when markets seek a clear voice and message.
  • Implementation: Summer agreements by European leaders give flexibility to address problems early, but these agreements still need to be implemented. Prompt implementation would send a clear political signal that Euro area members will continue to do whatever it takes to preserve confidence.

Policy challenges and country-specific approaches

• Dual objective for fiscal policymakers:
  • Commit to a plan that will stabilize and then bring down public debt so the public sector is not a source of instability.
  • Ensure fiscal tightening does not itself become a source of instability by undermining the economic recovery, which is at a delicate moment.
• Country circumstances determine the appropriate mix of short- and long-term adjustment:
  • Some countries will have no choice but to tighten significantly in the short term because of market conditions, while minimizing the growth fallout.
  • Others with easier financing conditions may have scope for a more moderate pace of short-term adjustment, especially if their medium-term commitment is seen as highly credible.

United States: example and policy elements

• A credible program to reduce debt and deficits over the medium term could free up space for a short-term stance more attuned to the economic cycle.
• The American Jobs Act proposed by President Obama can play an important role in supporting growth and employment if embedded in an appropriate medium-term framework to bring down public debt.
• Given the size of the adjustment needed in the United States:
  • The medium-term framework will need to involve an increase in tax revenues.
  • It will be important to ensure that the burden of increased tax revenues is distributed equitably across society.
  • Reform of entitlements—both health care and social security—to contain the growth of spending on these items is also needed.
  • Any debt reduction package must be the product of a broad political consensus to give financial markets confidence that it will be adhered to over the long haul.

Tone and concluding guidance

• Advice to audiences:
  • To pessimists: do not lose sight of what has been achieved.
  • To optimists: do not underestimate what still needs to be done.
• Metaphor: Markets seem to focus on the glass being half empty and ignore that it is also half full; take stock of progress before tackling the remaining challenges.
• Related media: a video is embedded in the original content (youtube=http://www.youtube.com/watch?v=t1-Qb0jhVsA).

Source: Carlo Cottarelli, September 21, 2011.

Content in this bundle

• 092111ba
  • 092111ba (PDF)
• iMFdirect 博客: 财政水杯半满：有一些乐观的理由, 2011 年 9 月 21 日
  • iMFdirect 博客: 财政水杯半满：有一些乐观的理由, 2011 年 9 月 21 日 (Markdown version)
  • iMFdirect 博客: 财政水杯半满：有一些乐观的理由, 2011 年 9 月 21 日 (PDF)
• Бюджетный стакан наполовину полон: некоторые причины для оптимизма
  • Бюджетный стакан наполовину полон: некоторые причины для оптимизма (Markdown version)
  • Бюджетный стакан наполовину полон: некоторые причины для оптимизма (PDF)

References

• fiscal outlook