## IMF Survey : Crisis Offers Preliminary Lessons on Fiscal Policy

_IMF News, September 17, 2013_

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**Canonical URL:** [IMF Survey : Crisis Offers Preliminary Lessons on Fiscal Policy](https://www.imf.org/en/news/articles/2015/09/28/04/53/sopol091313a)

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## Bibliographic details
- Published: September 17, 2013

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### Overview
- Publication: IMF Survey  
- Date: September 17, 2013
- Core message: Evidence from how advanced economies performed during and after the 2008–09 crisis sheds new light on fiscal risks and on the effectiveness of using fiscal policy to stabilize the economy.
- Lead commentators: Bernardin Akitoby (division chief, Fiscal Affairs Department) and Daniel Leigh (Research Department).

### Fiscal policy to fight recessions
- Main findings:
  - "Fiscal policy can have powerful short-run effects on the economy" under certain conditions.
  - Fiscal effects are larger when:
    - central banks are unable to reduce interest rates below zero,
    - the financial sector is weak,
    - the economy is producing at significantly below its potential.
  - New research raises doubts about precrisis evidence that fiscal contractions can be expansionary.
  - Precrisis concerns about the timing and implementation of discretionary fiscal stimulus were overblown in many cases.
  - Most advanced economies quickly enacted fiscal stimulus measures when the crisis erupted, and most temporary measures were allowed to lapse or were rolled back after the crisis’s initial phase.
  - Concerns remain that discretionary stimulus measures may not always be timely and reversible, especially during less severe recessions.
- Policy implication:
  - Use of discretionary fiscal stimulus going forward should depend on whether future conditions resemble those during the crisis (for example, "monetary policy constrained by near-zero interest rates").

### Fiscal risks and debt sustainability
- Main findings:
  - Before the crisis a full-blown fiscal crisis in an advanced economy was generally considered remote; events since 2008 showed otherwise.
  - Most advanced economies’ fiscal buffers were not big enough to absorb the severe shocks experienced since 2008, and several countries experienced sovereign debt crises.
  - Lesson: governments should take a "risk-based" approach to analyzing public debt sustainability, including risks from the financial sector and other country-specific fiscal vulnerabilities.
  - The level of debt considered "safe" depends on the potential risks each country faces.
  - As countries rebuild buffers, prudent policymakers should aim for a long-run debt level that is lower than what was considered reasonable before the crisis.

### Designing fiscal adjustments
- Main findings:
  - Economists are questioning the merits of doing the bulk of fiscal adjustment upfront.
  - Appropriate speed of adjustment depends on:
    - the state of the economy,
    - the condition of public finances,
    - the extent of financial market pressures.
  - Most advanced economies should adjust at a gradual pace within a credible medium-term plan to limit short-run growth impact.
  - Excessive delay in adjustment risks loss of investor confidence, higher interest rates, and destabilizing debt dynamics at high debt levels.
  - Countries under market pressure or without market access may need to "frontload" adjustments, but there may be a "speed limit" beyond which faster adjustment is counterproductive.
- Revenue/expenditure mix guidance:
  - Evidence is less clear-cut on the best mix of measures.
  - Importance of equity considerations, for example through better targeting of revenue and spending measures.
  - "Raising taxes further when the tax burden is already high can undermine a country’s potential growth," so:
    - Countries with a relatively high tax burden should focus on reducing spending.
    - Countries with lower spending and revenue levels would have more scope to boost revenues.

### Fiscal institutions and transparency
- Main findings and recommendations:
  - Well-functioning fiscal institutions (e.g., medium-term budget frameworks and fiscal rules) are important to ensure fiscal sustainability.
  - These tools need credibility and sufficient flexibility to respond to economic fluctuations.
  - Design features:
    - Targeting structural fiscal balance can help avoid overspending in good times.
    - “Escape clauses” allow freedom to use fiscal policy when hit by large shocks.
    - Independent fiscal agencies can help monitor rule adherence and prevent abuse of flexibility.
  - Crisis revealed shortcomings in fiscal transparency.
    - Further efforts needed to improve the timeliness and institutional coverage of fiscal reporting.
    - Countries should publish fiscal risk assessments to raise awareness about potential sources of fiscal risks.

*IMF Survey : Crisis Offers Preliminary Lessons on Fiscal Policy — IMF Survey, September 17, 2013*

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## Content in this bundle

- [072113pdf (PDF)](/-/media/websites/imf/imported/external/np/pp/eng/2013/_072113pdf.pdf){rel="external" type="application/pdf"}
- [Sdn1208pdf (PDF)](/-/media/websites/imf/imported/external/pubs/ft/sdn/2012/_sdn1208pdf.pdf){rel="external" type="application/pdf"}

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## References

- [https://www.imf.org/en/News/country-focus](https://www.imf.org/en/News/country-focus)
- [PRESS CENTER](http://presscenter.imf.org/)
- [Policy](https://www.imf.org/en/news/search)
- [Historical look at debt & deficits](http://www.imf.org/external/pubs/ft/survey/so/2013/RES012513A.htm)
- [Fiscal adjustment in an uncertain world](http://www.imf.org/external/pubs/ft/fm/2013/01/fmindex.htm)
- [Strengthening transparency](http://www.imf.org/external/pubs/ft/survey/so/2013/POL061713A.htm)
- [The basics of fiscal policy](http://www.imf.org/external/pubs/ft/fandd/basics/fiscpol.htm)
- [paper](http://www.imf.org/external/pp/longres.aspx?id=4801)
- [https://www.imf.org/en/home](https://www.imf.org/en/home)

_Source: https://www.imf.org/en/news/articles/2015/09/28/04/53/sopol091313a_