Fiscal Monitor Press Conference

IMF News, October 16, 2019

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Fiscal policy plays a central role in:
- managing the synchronized slowdown;
- preparing for downside risks;
- contributing to financial stability;
- financing the Sustainable Development Goals;
- addressing climate change—the topic of the Fiscal Monitor.
Countries with budgetary room should use it to support aggregate demand given that inflation and inflation expectations are drifting below target and interest rates are negative in many advanced economies.

Be prepared for coordinated action in case of a severe downturn.
Use fiscal space now where available to support aggregate demand because further decreases in policy interest rates are limited.
Avoid complacency fueled by low interest rates that may lead to overborrowing, investors’ panic, and market disruption.
Prudent fiscal policies should be anchored by a medium‐term framework where public debt and interest‐to‐tax ratios are high and rising.

Sovereign bond yields are negative across the maturity spectrum in most advanced economies; policy interest rate scope is limited relative to the pre-Global Financial Crisis period.
In emerging markets and low‐income developing countries:
- public debt ratios are high and rising;
- the cost of servicing debt is increasing;
- some countries are vulnerable to exchange and interest rate shocks.
Low interest rates in advanced economies have compensated for high debt levels, a dynamic not present in many emerging markets and low‐income countries.

In China, the largest emerging market economy:
- the economic slowdown and fiscal stimulus are expected to widen the deficit;
- fiscal policy should help dampen the negative impact on growth from trade disputes and support long‐term re‐balancing.

Many countries, particularly low‐income developing economies, need to substantially raise spending to meet the SDGs by 2030.
Spending increases should be framed within a comprehensive growth and development strategy.
Building tax capacity is necessary to generate the extra revenue for inclusive development.
Improving spending efficiency is crucial for good governance and to ensure complementarities between public finance, private investment, and official development assistance.

The Fiscal Monitor is fully digital to contribute to limiting global warming.
Current pledges under the Paris Agreement are not enough; they will limit global warming to 3°C.
To limit global warming to 2°C or less, finance ministers need to take further substantial fiscal policy actions.
Illustration using a single instrument (not a recommendation): a carbon tax rising to $75 per ton by 2030.
- If the carbon tax of $75 per ton were implemented globally:
- China and India would account for almost 70 percent of CO2 reductions among G20 economies (compared with a no action scenario).
- Retail electricity price increases would vary between 2 percent in France and 89 percent in South Africa, reflecting differences in the share of coal in power generation.
The goal is to reshape the tax system and fiscal policy more generally to discourage emissions.
It is crucial that additional revenues from carbon taxation are used appropriately to reduce burdens and make reform more politically acceptable; options include labor tax cuts, payments to households, and public investment.

Source: Fiscal Monitor Press Conference — Vitor Gaspar, Director Fiscal Affairs Department, October 16, 2019.