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Fiscal Monitor
Nurturing Credibility While Managing Risks to Growth
July 2012
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Fiscal adjustment is proceeding generally as expected in advanced economies, with headline and underlying fiscal deficits that are broadly in line with projections in the April 2012 Fiscal Monitor. Overall, advanced economy deficits are forecast to decline by about ¾ percentage point of GDP this year and about 1 percent of GDP next year in both headline and cyclically adjusted terms, a rate that strikes a compromise between restoring fiscal sustainability and supporting growth. However, continued focus on nominal deficit targets runs the risk of compelling excessive fiscal tightening if growth weakens. In addition, there is a risk in the United States of political gridlock that puts fiscal policy on autopilot and results in a sharp and sudden decline in deficits—the “fiscal cliff.” In most advanced economies, a steady pace of adjustment focused on the measures to be implemented rather than on headline deficit targets is preferable, especially in light of heightened downside risks to the outlook. In most emerging economies, headline and cyclically adjusted deficits are projected to remain broadly unchanged over 2012–13, which is appropriate given these countries’ generally stronger fiscal positions and the downside risks to the global economy. However, some emerging economies need to be more ambitious to reduce vulnerabilities.
Fiscal imbalances are being gradually corrected in line with expectations in most advanced economies. Cyclically adjusted deficits in 2012–13 are expected to fall by close to 1 percent of GDP annually on average in advanced economies—about the same amount as last year and broadly as projected in the April 2012 Fiscal Monitor—with greater reductions in countries under market pressure (Table 1, Figure 1).
The two largest such countries are implementing sizeable fiscal consolidation in the next two years in efforts to improve debt dynamics and regain market confidence.
| Table 1. Fiscal Indicators, 2008–13 | ||||||||||
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Est. | Projections |
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Difference from April 2012 Fiscal Monitor1 | ||||
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2008 | 2009 | 2010 | 2011 | 2012 | 2013 | 2011 | 2012 | 2013 | |
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Overall Fiscal Balance |
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Advanced economies |
-3.5 | -8.8 | -7.6 | -6.5 | -5.8 | -4.7 | 0.0 | -0.1 | -0.2 | |
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United States |
-6.7 | -13.0 | -10.5 | -9.6 | -8.2 | -6.8 | 0.0 | -0.1 | -0.5 | |
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Euro area |
-2.1 | -6.4 | -6.2 | -4.1 | -3.2 | -2.5 | 0.0 | 0.0 | 0.2 | |
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France |
-3.3 | -7.6 | -7.1 | -5.2 | -4.5 | -3.9 | 0.1 | 0.1 | 0.0 | |
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Germany |
-0.1 | -3.2 | -4.3 | -1.0 | -0.7 | -0.4 | 0.0 | 0.1 | 0.2 | |
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Greece2 |
-12.2 | -15.6 | -10.5 | -9.2 | -7.0 | -2.7 | 0.0 | 0.2 | 1.9 | |
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Ireland |
-7.3 | -14.0 | -31.2 | -13.1 | -8.3 | -7.5 | -3.3 | 0.2 | -0.2 | |
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Italy |
-2.7 | -5.4 | -4.5 | -3.9 | -2.6 | -1.5 | 0.0 | -0.2 | 0.1 | |
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Portugal |
-3.7 | -10.2 | -9.8 | -4.2 | -4.5 | -3.0 | -0.2 | 0.0 | 0.0 | |
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Spain3 |
-4.5 | -11.2 | -9.3 | -8.9 | -7.0 | -5.9 | -0.4 | -1.0 | -0.2 | |
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Japan |
-4.1 | -10.4 | -9.4 | -10.1 | -9.9 | -8.6 | 0.0 | 0.1 | 0.2 | |
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United Kingdom |
-5.0 | -10.4 | -9.9 | -8.6 | -8.1 | -7.1 | 0.1 | -0.2 | -0.5 | |
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Canada |
-0.1 | -4.9 | -5.6 | -4.4 | -3.8 | -2.9 | 0.2 | -0.2 | 0.0 | |
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Emerging economies |
0.2 | -4.5 | -3.3 | -1.7 | -1.9 | -2.0 | -0.1 | -0.3 | -0.3 | |
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China |
-0.4 | -3.1 | -2.3 | -1.2 | -1.3 | -1.0 | 0.0 | 0.0 | 0.0 | |
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India |
-8.8 | -9.7 | -9.4 | -8.9 | -8.9 | -8.8 | -0.2 | -0.6 | -0.6 | |
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Russia |
4.9 | -6.3 | -3.5 | 1.6 | 0.1 | -0.7 | 0.0 | -0.5 | -0.4 | |
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Turkey |
-2.4 | -5.6 | -2.7 | -0.3 | -1.7 | -2.0 | 0.0 | 0.0 | 0.0 | |
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Brazil |
-1.3 | -3.0 | -2.7 | -2.6 | -1.9 | -2.1 | 0.0 | 0.5 | 0.3 | |
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Mexico |
-1.1 | -4.7 | -4.3 | -3.4 | -2.4 | -2.2 | 0.0 | -0.1 | -0.1 | |
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South Africa |
-0.5 | -5.3 | -4.8 | -4.5 | -4.4 | -3.8 | 0.1 | -0.1 | -0.1 | |
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Low-income economies |
-1.0 | -4.0 | -2.7 | -2.4 | -3.0 | -2.5 | -0.1 | -0.1 | -0.2 | |
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General Government Cyclically Adjusted Balance |
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Advanced economies |
-3.8 | -6.0 | -6.1 | -5.4 | -4.7 | -3.6 | -0.2 | -0.2 | -0.2 | |
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United States4 |
-5.5 | -7.9 | -8.1 | -7.5 | -6.3 | -5.0 | -0.4 | -0.4 | -0.6 | |
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Euro area |
-3.1 | -4.5 | -4.6 | -3.3 | -2.0 | -1.4 | 0.0 | 0.0 | 0.1 | |
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France |
-3.1 | -5.1 | -5.1 | -3.8 | -3.1 | -2.6 | 0.2 | 0.1 | 0.1 | |
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Germany |
-1.3 | -1.3 | -3.4 | -1.2 | -0.6 | -0.4 | 0.0 | 0.0 | 0.1 | |
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Greece2 |
-16.4 | -18.5 | -12.5 | -9.0 | -4.5 | 0.2 | -2.2 | 0.1 | 2.9 | |
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Ireland |
-11.9 | -10.6 | -9.8 | -7.7 | -6.0 | -5.6 | … | … | … | |
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Italy |
-3.3 | -3.0 | -3.1 | -2.7 | -0.5 | 0.7 | 0.0 | -0.2 | 0.0 | |
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Portugal |
-3.6 | -8.8 | -9.1 | -2.9 | -2.1 | -0.9 | -0.2 | -0.1 | -0.1 | |
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Spain3 |
-5.6 | -9.7 | -7.6 | -7.3 | -5.0 | -3.9 | -0.4 | -1.1 | -0.3 | |
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Japan |
-3.5 | -7.4 | -7.9 | -8.2 | -8.8 | -7.9 | 0.0 | -0.1 | 0.1 | |
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United Kingdom |
-7.2 | -9.7 | -8.4 | -6.6 | -5.5 | -4.2 | -0.3 | -0.4 | -0.4 | |
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Canada |
-0.6 | -2.6 | -4.1 | -3.4 | -3.0 | -2.2 | 0.2 | -0.2 | 0.0 | |
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Emerging economies |
-1.5 | -3.6 | -3.1 | -1.9 | -1.7 | -1.7 | 0.0 | -0.1 | 0.0 | |
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China |
0.0 | -2.4 | -1.5 | 0.0 | 0.0 | 0.2 | 0.0 | 0.0 | 0.0 | |
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India |
-8.8 | -9.8 | -9.6 | -9.1 | -9.0 | -8.7 | 0.0 | -0.2 | 0.0 | |
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Russia |
3.9 | -3.3 | -2.2 | 1.7 | -0.2 | -1.1 | 0.1 | -0.4 | -0.3 | |
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Turkey |
-3.2 | -4.7 | -3.4 | -1.8 | -2.8 | -2.8 | 0.0 | 0.0 | 0.0 | |
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Brazil |
-2.1 | -2.2 | -3.2 | -2.8 | -1.5 | -2.0 | -0.1 | 0.6 | 0.3 | |
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Mexico |
-1.3 | -3.8 | -3.9 | -3.2 | -2.4 | -2.2 | 0.0 | -0.1 | -0.1 | |
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South Africa |
-2.3 | -5.1 | -4.5 | -4.1 | -3.7 | -3.3 | 0.1 | -0.1 | -0.1 | |
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General Government Gross Debt |
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Advanced economies |
81.6 | 95.4 | 101.5 | 105.6 | 110.0 | 112.2 | 0.0 | 0.8 | 1.0 | |
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United States |
76.1 | 89.9 | 98.4 | 102.8 | 106.7 | 110.7 | -0.1 | 0.1 | 0.5 | |
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Euro area |
70.2 | 80.0 | 85.8 | 88.1 | 91.4 | 92.4 | 0.0 | 1.4 | 1.4 | |
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France |
68.3 | 79.2 | 82.4 | 86.1 | 88.2 | 90.1 | -0.2 | -0.9 | -0.7 | |
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Germany |
66.9 | 74.7 | 83.5 | 81.2 | 82.2 | 80.1 | -0.3 | 3.3 | 2.7 | |
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Greece2 |
112.6 | 129.0 | 144.5 | 165.4 | 162.6 | 171.0 | 4.6 | 9.4 | 10.1 | |
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Ireland |
44.2 | 65.1 | 92.5 | 108.2 | 117.6 | 121.2 | 3.2 | 4.4 | 3.5 | |
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Italy |
105.8 | 116.1 | 118.7 | 120.1 | 125.8 | 126.4 | 0.0 | 2.5 | 2.6 | |
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Portugal |
71.6 | 83.1 | 93.3 | 107.8 | 114.4 | 118.6 | 1.0 | 2.0 | 3.3 | |
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Spain3 |
40.2 | 53.9 | 61.2 | 68.5 | 90.3 | 96.5 | 0.0 | 11.2 | 12.5 | |
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Japan |
191.8 | 210.2 | 215.3 | 229.9 | 234.5 | 240.0 | 0.1 | -1.3 | -1.1 | |
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United Kingdom |
52.5 | 68.4 | 75.1 | 82.3 | 88.6 | 92.7 | -0.2 | 0.2 | 1.3 | |
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Canada |
71.1 | 83.6 | 85.1 | 84.7 | 85.4 | 82.7 | -0.3 | 0.7 | 0.8 | |
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Emerging economies |
33.3 | 35.4 | 40.1 | 36.4 | 34.2 | 32.7 | 0.0 | 0.3 | 0.5 | |
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China |
17.0 | 17.7 | 33.5 | 25.8 | 22.0 | 19.4 | 0.0 | 0.0 | 0.0 | |
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India |
75.2 | 72.2 | 67.7 | 67.1 | 68.0 | 68.6 | -1.0 | 0.4 | 1.8 | |
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Russia |
7.9 | 11.3 | 11.8 | 12.0 | 11.5 | 11.3 | 2.4 | 3.1 | 3.4 | |
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Turkey |
40.0 | 46.1 | 42.2 | 39.4 | 36.0 | 34.6 | 0.0 | 0.0 | 0.0 | |
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Brazil |
63.5 | 66.9 | 65.2 | 64.9 | 64.2 | 61.7 | -1.2 | -0.9 | -1.4 | |
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Mexico |
43.1 | 44.5 | 42.9 | 43.8 | 42.7 | 42.9 | 0.0 | -0.1 | 0.0 | |
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South Africa |
27.4 | 31.5 | 35.3 | 38.7 | 40.2 | 41.3 | -0.1 | 0.2 | 0.5 | |
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Low-income countries |
40.8 | 42.5 | 40.2 | 39.3 | 41.6 | 39.7 | 0.4 | 0.9 | 0.3 | |
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Memorandum: |
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World Growth (Percent) |
2.8 | -0.6 | 5.3 | 3.9 | 3.5 | 3.9 | 0.0 | -0.1 | -0.2 | |
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Sources: IMF staff estimates and projections. Note: All fiscal data country averages are weighted by nominal GDP converted to U.S. dollars at average market exchange rates in the years indicated and based on data availability. Projections are based on IMF staff assessment of current policies. 1 For overall fiscal balance and cyclically adjusted balance, positive values indicate a smaller fiscal deficit; for gross debt, positive values indicate a larger debt. 2 For Greece, projections to be revised. 3 For Spain, projections do not reflect the measures announced on July 11, 2012. 4 Excluding financial sector support. | ||||||||||

The new targets, respectively 1 and 1½ percentage points above the previous ones, appropriately accommodate the weak growth outlook. On July 11, the government announced a series of measures—including increases in VAT rates, the elimination of mortgage interest deductibility under the income tax, and cuts in civil service pay and unemployment benefits—to help achieve the new targets. To recapitalize the banking system, Spain’s bank support fund—Fondo de Reestructuración Ordenada Bancaria (FROB)—is to have access to a financial sector recapitalization loan by the European Financial Stability Facility (EFSF) for up to 9 percent of GDP (€100 billion) committed by the Eurogroup, which would be reflected in the general government gross debt. However, once a single supervisory system is established in the euro area, the European Stability Mechanism (ESM) will be allowed to inject capital directly into the banks.1
In the three euro area countries with programs supported by EU/IMF lending, adjustment is proceeding, but the recent deterioration in the political and economic climate in Greece serves as a warning about the potential onset of “adjustment fatigue,” which remains a threat to continued program implementation.
In advanced economies with easier market access, fiscal adjustment in 2012–13 is broadly on track to meet medium-term targets.
The decline in deficits is gradually affecting public debt dynamics. While the average debt-to-GDP ratio among advanced economies is projected to continue to rise over the next two years, surpassing 110 percent of GDP on average in 2013, debt ratios will by then have peaked in several advanced economies (Figure 3). Already this year, about one-third of advanced economies will have declining debt ratios, although debt ratios will still exceed their 2007 levels in almost all cases. In the euro area other than Greece, gross debt dynamics in 2012–13 will be negatively (and temporarily) affected by the pooling of resources to support countries in crisis (Figure 4, box). Of course, the corresponding acquisition of assets leaves net debts unchanged.

Deficits in emerging economies are expected to be somewhat weaker than projected in April, as some draw on fiscal space in response to slowing economic activity. No significant fiscal consolidation is on tap in 2012–13, reflecting generally stronger fiscal positions than in advanced economies and downside risks to global growth.

That said, some emerging economies should pursue more ambitious consolidation strategies, reflecting macroeconomic or fiscal considerations.
Governments face the task of credibly dealing with large fiscal adjustment needs in a time of slow and uncertain growth. Reconciling these needs may be challenging, but following some basic fiscal principles (to be adapted on a case- by-case basis) should help:7
Effects of EU Firewalls on Gross Public Debt RatiosPooling of resources through the EFSF and contributions to the paid-in capital of the ESM largely explain upward revisions to projected gross debt levels for this year and next compared to the April 2012 Fiscal Monitor in several euro area countries, notably Germany (3 percentage points of GDP) and Italy (2½ percentage points).1 EFSF disbursements directly increase gross liabilities of the countries guaranteeing the EFSF’s debt in proportion to these countries’ capital shares in the European Central Bank (ECB) adjusted to exclude countries with EU/IMF supported programs. Existing loans represent slightly more than 1 percent of euro area GDP in mid-2012, with a corresponding increase in EFSF guarantors’ debt. In the case of Italy and Spain, this represents 1.6 percent of GDP. The recently announced financing of the Spanish bank recapitalization will initially be channeled through an EFSF loan to the sovereign, increasing the euro area debt by an additional ¾ percent of GDP. Of course, these additions to public debts are by nature temporary and matched by an accumulation of assets. Because it predates the EFSF, the first Greek program was largely financed by €80 billion in bilateral loans, pooled by the European Commission (EC) in proportion to countries’ ECB capital shares. Disbursements to Greece amounted to ½ percent of euro area GDP, though loans provided by Italy, Portugal, and Spain were higher in proportion to their GDP. __________________________________ 1 A second firewall, the European Financial Stabilization Mechanism (EFSM), allows the EC to borrow up to €60 billion on behalf of the European Union. The corresponding bond issuances do not affect national public debts. Euro area countries must also capitalize the ESM, slated to become operational in July 2012 once ratified by national parliaments. The ESM will have an initial lending capacity of €500 billion and a total subscribed capital of €700 billion, of which €80 billion will be in the form of paid-in capital to be phased in with a maximum of five installments. Part of these capital contributions has already been incorporated into debt projections, as mentioned earlier. |

However, fiscal policy alone cannot stabilize market conditions in the euro area. Current sovereign spreads are well above what could be justified on the basis of fiscal and other long-term fundamentals (Figure 6), suggesting that wide-ranging reforms durably affecting expectations—discussed in more detail in the WEO and GFSR Updates—are needed. In particular, it will be critical to delink sovereigns’ and banks’ balance sheets. The European leaders agreed at their June summit upon significant steps to address the immediate crisis, which, if implemented in full, will help break these adverse links. In particular, once a single supervisory mechanism is established, the ESM would be able to recapitalize banks directly. These initiatives are steps in the right direction, but will need to be complemented by more progress toward deeper fiscal integration and a full-fledged banking union. In the meantime, there has been notable progress in ongoing initiatives to strengthen fiscal governance in the last few months. To date, 10 of the 25 EU member signatories have ratified the so-called Fiscal Compact treaty, which mandates the adoption by 2014 of rules-based national fiscal frameworks capping structural deficits. The recent adoption by the European Parliament of two draft regulations aimed at further enhancing fiscal policy coordination in the euro area (known as the “two-pack”) is also welcome, and swift approval by the Council would be desirable. Among other proposals, the two-pack mandates harmonized national fiscal rules under nonpartisan oversight, establishes common budget timelines, and enhances surveillance by the Commission.

Nevertheless, these steps would usefully be complemented by plans for fiscal integration, as anticipated in the report of the “Four Presidents” submitted to the summit. It is encouraging that the leaders have asked the Council President to develop proposals for a more complete union over the next three months. Ultimately, this could mean sufficiently large resources at the center matched by proper democratic controls and oversight. Introduction of a limited form of common debt, with appropriate governance safeguards, could provide an intermediate step towards greater fiscal integration. Issuance of such securities could, at first, be relatively small and restricted to shorter maturities, and could be conditional on more centralized control (e.g., limited to countries that deliver on policy commitments; veto powers over national deficits; pledging of national tax revenues). Common bonds/bills financing could, for example, be used to provide the backstops for the common frameworks within the proposed banking union (see the GFSR Update).
1 IMF staff projections currently include the maximum amount of the loan in the debt but not in the deficit.
2 The structural budget balance is equal to the cyclically adjusted balance adjusted for one-off measures. As one-off measures are typically not included in projections, structural and cyclically adjusted balances are expected to be equivalent in 2012–13.
3 Changes to the 2011 deficit compared to the April 2012 Fiscal Monitor reflect a revision to include part of the bank recapitalizations (already accounted for in the debt ratio) in the deficit.
4 IMF staff projections in Table 1 are based on current policies and do not take into account forthcoming additional measures that will be taken to reach the 3 percent deficit target.
5 Changes in the cyclically adjusted balance in 2011–12 with respect to the April 2012 Fiscal Monitor are due mainly to revisions to the estimate of potential GDP.
6 The IMF staff’s baseline scenario incorporates a 1¼ percent of GDP reduction in the structural primary balance in 2013, largely on account of expiring stimulus measures and some savings in defense spending. The Bush tax cuts and certain other revenue provisions are expected to be extended fully for at least one year, while the automatic spending cuts are assumed to be replaced by other measures over the medium term.
7 Of course, other policies must work in tandem with fiscal policy to mitigate downside risks to growth and boost activity and employment in the longer term. These policies are discussed in more detail in the WEO and GFSR Updates.
8 See IMF, “Fiscal Policy and Employment in Advanced and Emerging Economies” (forthcoming).
9 See IMF, “Recent Developments in Fuel Pricing and Fiscal Implications” (forthcoming).
10 It will be equally important not to reverse previously introduced reforms. For instance, France has recently cut back the pension age to 60 for some long-time workers, at an estimated cost of 0.1 percent of GDP by 2017, fully covered by higher labor taxes.
11 See IMF, “The Challenge of Public Pension Reform in Advanced and Emerging Economies,” IMF Policy Paper (Washington, 2011), available via the Internet: http://www.imf.org/external/pp/longres.aspx?id=4626
12 This issue had already been raised with respect to the previous Ageing Report; see B. Clements, D. Coady, and S. Gupta, eds., The Economics of Public Health Care Reform in Advanced and Emerging Economies (Washington: IMF 2012), available via the Internet: http://www.imf.org/external/pubs/ft/books/2012/health/healthcare.pdf