## Resolutions for the Fiscal New Year—Staying on Track Is No Easy Task

_IMF Blog, February 4, 2013_

## Source details

**Canonical URL:** [Resolutions for the Fiscal New Year—Staying on Track Is No Easy Task](https://www.imf.org/en/blogs/articles/2013/02/04/resolutions-for-the-fiscal-new-year-staying-on-track-is-no-easy-task)

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## Bibliographic details
- Authors: Carlo Cottarelli, Philip Gerson
- Published: February 4, 2013

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### Context and overview
- One month into 2013, many private New Year resolutions have already been forgotten; fiscal resolutions in advanced economies have largely been kept.
- The article compares typical personal resolutions (e.g., achieving a healthier weight) with countries’ commitments to fiscal deficit reduction, arguing that keeping fiscal commitments is difficult but essential.

### Key findings and statistics
- The average headline deficit in advanced economies fell by about ¾ percent of GDP in 2012.
- Cumulative deficit decline since budget shortfalls peaked in 2009 is 3 percent of GDP.
- In some advanced economies:
  - Debt ratios have begun to decline.
  - In several others, debt ratios have stabilized.
- In another group of countries (including some very large economies):
  - Debt ratios are continuing to rise rapidly or have stabilized at very elevated levels.
  - These countries will need significant deficit reduction in coming years to return debt ratios to more sustainable levels.
- The United States and Japan are specifically identified as needing credible medium-term plans to restore public finances.
- The United States must resolve to increase the debt ceiling expeditiously (and not just for a few months).

### Analysis of fiscal consolidation and growth interactions
- The impact of deficit reductions on growth depends on the design and timing of fiscal adjustment policies.
- Under normal circumstances, a $1 cut in government spending typically reduces output by less than $1 because resources shift from public to private production.
- With a weak private sector:
  - Cuts in government spending are not partially offset by higher household and firm spending.
- With interest rates in many advanced economies close to zero:
  - There is limited scope for central banks to offset fiscal tightening by loosening monetary policy.
- Therefore, countries that can afford gradual adjustment should avoid excessive front-loading of fiscal consolidation now.
- As private sector balance sheets mend and banks recover lending capacity:
  - Private demand should pick up and partially replace lower government demand.
  - This replacement requires monetary conditions to remain relaxed for a long time—consistent with recent Fed guidance and advice for other central banks.

### Policy recommendations
- Countries that need to tighten policy should:
  - Resolve to reduce fiscal deficits in a gradual and steady manner.
  - Avoid excessive front-loading of consolidation.
  - Commit to credible medium-term plans rather than postponing adjustment entirely.
- Specific national recommendations:
  - The United States: increase the debt ceiling expeditiously (and not just for a few months).
  - Japan: adopt and begin enacting credible medium-term plans to restore public finances, especially given recent short-term fiscal stimulus.
- For countries with Fund-supported adjustment programs:
  - Allow for revised fiscal targets in response to slow growth to achieve a more gradual pace of consolidation (examples given: Ireland and Portugal).

### Concluding assessment
- Gradual but steady progress is the safest and surest approach to restoring fiscal health.
- Maintaining credible, medium-term commitments is essential for returning public debt to safer levels and for ensuring that consolidation does not unduly harm growth.

*Carlo Cottarelli, Philip Gerson — February 4, 2013*

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## References

- [عربي](http://blog-montada.imf.org/?p=2060)

_Source: https://www.imf.org/en/blogs/articles/2013/02/04/resolutions-for-the-fiscal-new-year-staying-on-track-is-no-easy-task_