## Act Now, Act Together

_IMF Blog, April 13, 2016_

## Source details

**Canonical URL:** [Act Now, Act Together](https://www.imf.org/en/blogs/articles/2016/04/13/act-now-act-together)

## Other formats

- [Markdown version](/en/blogs/articles/2016/04/13/act-now-act-together/index.md)
- [Structured JSON version](/en/blogs/articles/2016/04/13/act-now-act-together/index.json)
- [Bundle manifest](/en/blogs/articles/2016/04/13/act-now-act-together/bundle-manifest.json)

## Bibliographic details
- Authors: Vitor Gaspar, Luc Eyraud
- Published: April 13, 2016

---

### Worsening public finances
- The April 2016 Fiscal Monitor shows public debt continues to rise worldwide; fiscal deficits have gone up in many countries.
- On average, public debt now exceeds the level observed during the Great Depression and is approaching the level immediately after World War II.
- In emerging markets and low-income countries, fiscal deficits in 2016 are projected to be even higher than in 2009 during the global financial crisis.
- The fiscal positions of commodity exporters have been especially hard hit by the collapse in revenues.
- In the Middle East and North Africa, the cumulative fiscal balances of oil exporters alone are set to deteriorate by a staggering $2 trillion in the next five years, compared to the pre-crisis period 2004–08.
- Major structural and cyclical forces affecting public finances:
  - Continued weakness in global activity and entrenched low inflation pressures in advanced economies.
  - The decline in commodity prices (about 35 percent in the past 12 months and 65 percent since mid-2014 for oil).
  - The slowdown in trade.
  - Emerging market and developing economies facing higher interest rates and dwindling capital inflows.
  - Rising risks across almost all regions.

### Three challenges
- Policymakers must adapt to new realities; "no one-size-fits-all." Appropriate responses vary across countries depending on the nature of the fiscal challenge.

- Challenge 1: Avoiding the low growth-low inflation trap
  - Advanced economies face the triple threat of low growth, low inflation, and high public debt, creating potential self-reinforcing downward spirals.
  - Recommended three-pronged approach:
    - Expansionary monetary policy.
    - Growth-friendly fiscal policy (examples: higher infrastructure investment; using public funds to compensate losers from reform to support implementation).
    - Productivity-enhancing structural reforms.
  - In countries with fiscal space, budgets could do more to support aggregate demand; where fiscal space is lacking, governments should protect growth by avoiding cuts to highly productive public spending and scaling down less efficient programs.
  - If global macro conditions worsen substantially, individual country responses may be insufficient; policymakers should act quickly and act together with coordinated demand- and supply-side policies, implemented simultaneously to amplify benefits.

- Challenge 2: Addressing the big and lasting drop in revenues
  - Between 2014 and 2016, about two-thirds of all countries experienced a decline in their revenue-to-GDP ratios.
  - Commodity exporters saw the largest revenue shortfalls—an average of 7 percent of GDP for oil exporters.
  - With commodity prices likely to remain low for some time, producers must reduce public spending and align it with lower revenues.
  - Adjustment can be less painful by:
    - Mobilizing non-commodity revenues.
    - Cutting poorly targeted and wasteful spending, including reforming fuel subsidies.
  - Countries that have accumulated financial assets and face less market pressure can consolidate at a more gradual pace.

- Challenge 3: Achieving development goals with constrained budgetary resources
  - Almost half of low-income developing countries have a tax ratio below 15 percent of GDP.
  - Low revenue mobilization limits funding for pro-growth spending and is often associated with weak institutional capacity.
  - Building minimum tax capacity supports broader state and legal capacity; stable, broad-based taxation governed by clear rules is necessary for an effective budget process.
  - Combined with improvements in expenditure efficiency, better revenue mobilization can help achieve the Sustainable Development Goals by enhancing health and education services and developing infrastructure.
  - Practical measures for low-income countries include introducing or expanding the value added tax or the property tax, and strengthening tax compliance—areas where the IMF provides extensive technical assistance.

### Medium-term objectives
- Two main objectives all countries should pursue over the medium term:

  - Enhancing the resilience of public finances
    - Make public finances less sensitive to shocks (e.g., drops in commodity prices or currency depreciations) by:
      - Improving disclosure and analysis of risks through comprehensive, reliable, and timely public reporting.
      - Developing and implementing risk management strategies to reduce the probability of adverse events and limit government exposure (example: introducing caps on government guarantees).
      - Creating adequate cushions in budgets—"provisions"—as safety margins to cope with unexpected events.

  - Promoting sustainable growth
    - Raising medium-term growth is necessary everywhere; in advanced economies, a sustained increase in growth of 1 percentage point could bring debt ratios to pre-crisis levels within a decade.
    - An IMF study suggests reforms of tax and expenditure policies could lift medium- to long-term growth by ¾ of a percentage point in advanced economies and even more in developing economies.
    - Fiscal measures that support innovation and productivity can be powerful:
      - Fiscal support to private research and development costing 0.4 percent of GDP to the budget can deliver 5 percent higher GDP in advanced economies in the long run.

- Summary conclusion: Policymakers, individually and in concert, still have adequate policy tools to restore vigorous growth and build healthy, resilient public finances.

*Source: Act Now, Act Together — Vitor Gaspar, Luc Eyraud, April 13, 2016 (web overview).*

---

## Content in this bundle

- **Fiscal Policy and Long-Term Growth; IMF Policy Paper, April 20, 2015**
  - [Fiscal Policy and Long-Term Growth; IMF Policy Paper, April 20, 2015 (Markdown version)](/external/np/pp/eng/2015/042015.pdf.md){rel="alternate" type="text/markdown"}
  - [Fiscal Policy and Long-Term Growth; IMF Policy Paper, April 20, 2015 (PDF)](/external/np/pp/eng/2015/042015.pdf){rel="external" type="application/pdf"}

---

## References

- [April 2016 Fiscal Monitor](http://www.imf.org/external/pubs/ft/fm/2016/01/fmindex.htm)
- [analysis in Chapter 2](https://blogs.imf.org/2016/03/31/imagine-what-fiscal-policy-could-do-for-innovation/)

_Source: https://www.imf.org/en/blogs/articles/2016/04/13/act-now-act-together_