Fiscal Monitor, October 2021: Strengthening the Credibility of Public Finances

Fiscal Monitor, October 13, 2021

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Vaccination has saved lives and is helping fuel a nascent recovery, but risks are elevated amidst new virus variants, high debt, and poverty.
Advanced economies: the shift in fiscal support toward medium-term packages to “build back better” will have overall positive effects globally.
Emerging markets and low-income developing countries:
- Face a more challenging outlook, with permanent economic scarring and revenue losses.
- Need international support to increase vaccine availability and financing to achieve the Sustainable Development Goals.
Many countries remain in a situation where fiscal support is still invaluable to protect lives and livelihoods, while simultaneously facing questions on elevated debt and gross financing needs.

Objective: avoid withdrawing fiscal support too early while signaling to the public that debt levels are sustainable in the long run.
Instruments for committing to future deficit reduction:
- Undertaking structural fiscal reforms (examples given: pension reform, subsidies reform).
- Pre-legislating changes to taxes or spending.
- Committing to fiscal rules that lead to deficit reduction in the future.
Evidence and design considerations:
- Countries that follow debt rules manage to reduce debt faster than other countries, although fiscal rules should also provide enough flexibility to spend in times of need.
- High levels of fiscal transparency and commitments to sound public finances deliver benefits:
- Budgets are more credible.
- Announcements are better perceived by the media.
- Governments pay lower interest rates on their debt.

Maintain nimble fiscal policy and strengthen medium-term frameworks amid high uncertainty and differentiated recovery paths.
In advanced economies, pivoting support toward medium-term “build back better” packages can have positive global spillovers.
For emerging markets and low-income developing countries:
- Prioritize international support for vaccine access and financing tied to the Sustainable Development Goals.
- Address permanent economic scarring and revenue shortfalls with tailored fiscal strategies.
Use a mix of structural reforms, pre-legislated measures, and credible fiscal rules to commit to future deficit reduction without prematurely withdrawing needed support.
Design fiscal rules with built-in flexibility to respond to crises while preserving long-run debt reduction incentives.
Improve fiscal transparency to enhance budget credibility, media perception, and borrowing costs.

Subject: Economic and financial statistics, Expenditure, Financial markets, Fiscal policy, Monetary policy, Public debt, Public financial management (PFM)
Keywords: Africa, Asia and Pacific, Caribbean, COVID-19, credibility, Delta variant, economic scarring, economic stabilization, economy abbreviation, Emerging and frontier financial markets, fiscal consolidation, fiscal council, Fiscal risks, fiscal rules, fiscal space, Global, global integration, government debt, Government finance statistics, government financing, guide fiscal policy, inclusive growth, inflation expectation, Middle East, North Africa, p LW, public finances, sustainability, Sustainable Development Goals