Transcript of a Press Conference on the Fiscal Monitor
April 12, 2011with Mr. Cottarelli, Mr. Gerson, Mr. Kumar, and Mr. Mauro, FAD
Ms. Nardin, EXR
Tuesday, April 12, 2011
Ms. Nardin: Good morning and welcome to the journalists in the room and the journalists following us online to the press conference on the launch of the 2011 spring edition of the Fiscal Monitor.
I am Simonetta Nardin with the External Affairs Department of the IMF, and with me on the podium for this press conference are Mr. COTTARELLI, who is the head of the Fiscal Affairs Department here in the IMF, Mr. Gerson, who is a senior advisor, Mr. Kumar, an Assistant Director, and Mr. Mauro, Division Chief, -- all in the Fiscal Affairs Department.
Mr. COTTARELLI will offer brief opening remarks, and then we will open it up for questions, both here in the room and online. And, to the journalists following us online, please do send us questions now.
Mr. COTTARELLI - Thank you very much. I'm going to show you some charts and some figures. Some of them are not in the Fiscal Monitor. This is just another way of looking at the same numbers. I'm going to talk about four topics: Fiscal developments in 2008-2010 in the world. The extent of fiscal imbalances in 2010. The projected adjustment in 2011 and 2012. And something very briefly about the risks around our baseline projections.
Let me start with the fiscal developments in 2008-2010. Here, I would like to show you a short movie, a movie on the fiscal situation of the world. On the horizontal axis you will see the debt-to-GDP ratio increase with respect to 2007 in the various countries. On the vertical axis you will see the increase in the deficit-to-GDP ratio for various countries. This refers to advanced economies. You will see balloons moving on the screen. The size of each balloon represents the size of GDP of each country.
So, this is what happened in 2008, at the beginning of the crisis. You see deficits and debt increasing around the world. So you see that, for example, in 2008 the big red balloon there is the United States. In 2008, after one year, since the beginning of the crisis, the debt-to-GDP ratio had already increased by almost 10 percentage points, and the deficit had increased by about 4 percentage points.
The big change is in 2009, when you see all balloons moving up and to the right, with deficits and debt increasing very rapidly.
2010, in a way nothing much happened. You see increasing debt ratios, balloons moved to the right. Deficits stay more or less are where they are. You see that at the end of 2010, for example, the debt-to-GDP ratio for countries like the United States, Japan and the United Kingdom had already increased by about 30 percentage points of GDP.
So, what was the picture in 2010? For emerging economies, you see much less movement, the shock was much milder for emerging economies, the fiscal shock. As a reference, we also put here a balloon representing the advanced economies to show you in perspective how emerging economies move. This is 2008. 2009, again, you see the advanced economies deteriorating faster. For emerging economies, the picture is much, the deterioration is much smaller. 2008 you see already some improvements in emerging economies, while the situation in advanced countries continues to deteriorate.
So, going back to the advanced countries, let's see the extent of fiscal imbalances.
In this chart I would like you to focus on this quadrant. You have here highlighted the countries that have both the debt-to-GDP ratio above average, and the deficit-to-GDP ratio above average. You don't find this here because the deficit in 2010 in Ireland was so high, it is outside this scale because of the recapitalization of the banking system, the cost recapitalization. But, you see many other countries that are currently under pressure, like Greece, for example, Portugal, you also see the big countries, big advanced countries, like the United States, and Japan. Were running in 2010 both a deficit and debt ratio well above the average.
So, this is another measure of the disequilibrium in the countries they were facing in 2010 and gives you our most recent projection of the increase in spending for pensions and health care that will happen over the next 20 years. Those countries, we have to reduce deficits and debt while at the same time fighting against the pressure of increasing costs, spending for health care and pension. Again, you see at the top of the list here countries like the United States, Finland, Belgium, and so. While the others are in a relatively strong position.
Let's see what is happening this year and next.
This is the where we left our planets in 2010. And, let's see what happens in 2011. Quite interesting. Looking in particular at what happens in the United States and Japan, for all the other advanced countries, there is an improvement in, at least in the deficit, the deficit crunch, but not for the United States and Japan. Even before the recent earthquake, Japan was not planning a major fiscal adjustment in 2011. Bottom line, 2011 is characterized for advanced countries by the fact that most of them are adjusting with declining deficit, debt ratio sometimes still going up, but deficits declining, except two major economies, the United States and Japan.
However, in 2012, based on current plans, a major adjustment is expected to take place in the United States, what happened in -- look at the been alone, look at how rapidly the balloon for the US declines, which means an improvement in the deficit, the debt ratio still goes up slightly, but the deficit declines rapidly, as does Japan.
2012 would be characterized, based on current plans, at least, a major tightening of fiscal policy in 2012 in the United States, particularly, but also in Japan (though less so).
One last word. This is what I showed you, our baseline projections.
There are risks about these baseline projections, and the Fiscal Monitor discusses in detail financial sector shocks, interest rate shocks, which are very important. But here, I would like focus on what I would call implementation shocks, namely the fact that some policies that are based on existing plans would not be implemented.
To give you an idea of the implementation shocks, implementation risks for next year, we have put in this chart the change in the general government deficit, the primary balance, the balance net of interest payments, over the last 40 years, for each year you see the change in the deficit, the primary balance, with respect to the previous year. Positive means an improvement, a reduction in the primary deficit, or an increase in the primary surplus.
Looking at what is expected for 2012.
Major tightening of fiscal policy driven by the United States and Japan.
So, we see obviously some implementation risk in this area. These are not the only risks which exist, but again, other risks are discussed like in interest rate risks, which are significant in our view. These are discussed in the Fiscal Monitor.
QUESTION: You say in the report, Brazil is going through a fiscal consolidation. My question is it credible to say that Brazil will deliver this consolidation? Is it fast enough when you take into consideration that Brazil has to do something to not over burden the monetary policy, and it has to do something to not prevent all the capital flows to Brazil? Is it fast enough?
Mr. COTTARELLI - The Brazilian government has recently undertaken measures to tighten fiscal policy, as you know, and achieve its target primary surplus of 3 percent of GDP. I think there are concrete signs that the Brazilian government is committed to achieving its fiscal targets. I have no doubt that based on current practices, based on current action, the targets will be achieved. I think that the pace of fiscal consolidation is proceeding as expected, at an appropriate pace and measures have been taken to support the targets.
QUESTION: You say that the U.K. is having the largest fiscal adjustment of any of the major advanced economies in your monitor report, and yet you also, according to the table, show that the fiscal balance is worsening compared to previous projections. I wonder if you could say a few words about why that has happened and what are the risks for the U.K. as it attempts this gargantuan task?
Mr. COTTARELLI - I don't think the change with respect to the deficit is very large. What has happened in the U.K. is that the U.K. is undertaking a very large fiscal adjustment. The United Kingdom suffered quite a lot from the crisis, the fiscal accounts suffered quite a lot. As you said, it was running last year a very large deficit, which is expected to improve this year. I think the actions of the government are from this point of view entirely appropriate. Want to keep in mind that in 2009, 85 percent of the deficit in 2009 was financed by the Bank of England, so there was clearly a need to do something to strengthen the fiscal account and the government is taking action for this, we think the targets are going to be achieved.
QUESTION: My first question is about Japan. How will the recent events influence your picture? You say they will undertake major adjustment anyway in 2012. I'm wondering what happened with the tsunami and the nuclear problems, whether they will affect your prediction?
The other question is about Europe and how the raising of interest rates, you mention possible interest rate shocks, how the raising of interest rates by the ECB could affect the debt sustainability of some of the peripheral countries in Europe, in particular.
Mr. COTTARELLI - Let me start with the second one. I don't think increasing the interest rate of 25 basis points will make any major difference to our projections. In a way our projection already envisages a gradual increase in interest rates. I don't think even for the peripherals that it makes any major difference.
On the earthquake and the effect on the fiscal accounts of Japan, obviously there is still a lot of uncertainty about this. Spending will have to be increased, but the Japanese government has indicated it is not yet clear to what extent this would be financed by reducing other spending, or possibly even raising taxes are or by borrowing. So, there is still some significant degree of uncertainty on this.
In the broader picture, I don't think the spending will alter fundamentally the fiscal accounts outlook for Japan. Japan has for several years run large deficits, and an increasing debt-to-GDP ratio. The Japanese authorities know that they will have to intervene on this issue. What we underscore in the Fiscal Monitor is that leaving aside the possible additional spending necessary, because of the earthquake, it would be critical that the Japanese authorities clarify their plans in more concrete way, more concrete way than in the past. Particularly the measures to consolidate the fiscal accounts over the medium term.
QUESTION: I just wanted to go back to your U.S. scenario, where you were saying that the adjustment will have to take place over the next two years and will amount to 5 percentage points of GDP. How do you think that could affect U.S. growth? Is it possible? You said it is the largest in 50 years, can the U.S. economy take it?
Mr. COTTARELLI - Yes, it is a very large adjustment. This kind of adjustment is already reflected in our projections for growth for the United States. It is clear in our view that we have indicated this in the past, that taking already some action to strengthen the fiscal account in 2011 would facilitate, would facilitate the adjustment in 2012, would make it a bit more gradual. But, if monetary policy remains supportive as it is now, the fiscal tightening will not necessarily imply a major shock. This will be taken into account for the GDP projection for the United States that you have seen yesterday in the WEO.
QUESTION: I would like to ask you, first of all, what is the situation of Spain in a fiscal perspective? We see that Spain is not going to cut the deficit below below 3 percent in the next five years, at least. We need much more reforms to be done? And also we have really a very slow GDP growth. Also, in reference to the earlier question, if the ECB continues hiking rates, how does that affect the peripheral countries?
Mr. MAURO - You asked about Spain, what is the situation. As you know, Spain started before the fiscal crisis with pretty good fiscal accounts. During the crisis it undertook a lot of fiscal stimulus, and for 2010 the outturn is 9 percent deficit, for 2011 we're projecting 6 percent. This is one of the two largest adjustments that we have in the advanced economies, so we see that as being very positive, very good. And, as you know, there is a medium-term path that the authorities are committed to. They certainly want to bring down the deficit below 3 percent, even before what you indicated.
I would say that the policy response of the Spanish authorities has been strong, and is deservedly being recognized by financial markets. You have seen the bond spreads coming down in recent weeks. So, that is very welcome.
I wouldn't say that Spain is out of the woods. Of course, this fiscal adjustment has to continue. I would indicate that a very important step was the pension reform, sometimes we don't pay a lot of attention to these things, but it really helps the long-term finances. And, one of the issues going forward is to pay attention to the regional governments. Certainly that is an area where action is taking place, and more should occur in the future.
As Mr. COTTARELLI indicated, we don't see [ECB interest rates increase] that as being a major concern. Some increase in interest rates is already built into the projections. Obviously, interest rates have an impact on the debt, but the numbers don't seem particularly concerning on that account.
Mr. COTTARELLI - I can add something on this. The Fiscal Monitor does discuss this issue of risk in interest rates, but it is more a medium-term concern related to the piling up of this increased amount of debt across, for most advanced countries. What is very important for the dynamics of the debt-to-GDP ratio is what economists call R minus G, the difference between the interest rate and the growth rate of the economy. You see in Chapter 3 of the Fiscal Monitor we underscore for advanced economies, our baseline is relatively optimistic, which can happen, because, again, the economic activity is still low in this period. We do see some risks, more of a medium-term nature, than something that will affect the fiscal accounts in the immediate future.
Ms. Nardin - I will ask one question from online.
"The WEO spoke of an urgent need in the U.S. to undertake fiscal consolidation to stem the risk of globally destabilizing changes in bond markets. Can you elaborate on this?"
Mr. COTTARELLI - For the United States, the figures are pretty clear. The deficit in 2010 is the second highest among advanced countries. The debt ratio is projected for this year in our figures for the general government to increase to 100 percent of GDP. It is clear this is putting a lot of pressure in principle on the fiscal account. The positive aspect for the United States is that the United States has a lot of credibility. And, also with respect, say, for Europe, historically we have seen a stronger growth rate in the United States than in Europe.
Another point is that, it is important to keep in mind that there is much less uncertainty now in the United States about the banking system. All these are favorable factors which help explain why we believe that the risk of problems for the United States in terms of debt management are relatively, the risk is relatively low, what we would call a tail event, a low probability event.
But, it is a risk that if it materializes would have very important consequences, not only for these countries, but also for the rest of the world.
So, it is important that the United States undertakes fiscal adjustment in a way sooner rather than later.
QUESTION: In the Fiscal Monitor you talk about the fiscal stratagems, you say there is a resurgence of this problem and there some evidence. Do you know in which country and what kind of evidence? The second question is about Italy, about the fiscal outlook of Italy and the pace of fiscal consolidation, and if you think our government is going on the right way.
Mr. COTTARELLI - On the first question, the difficulty when you talk about fiscal stratagems, it is easy to see them after the fact. We put in our appendix some examples, so you can go back to the appendix to see specific examples. I will mention, however, one example that is particularly important, namely this, in a way, artificial improvement of the fiscal accounts that some countries have achieved by merging the second pillar of the pension system in the fiscal accounts.
For example, you will see for Hungary, Hungary this year is running a surplus, budgetary surplus because they took back the second pillar of the pension system. Now, this is one example, there are several others. The problem is, as I said, unfortunately these things become obvious only after the fact. I think in general there is, therefore, a need to act in a way preemptively and enhance our work, the work that the IMF is doing about fiscal transparency. We have a fiscal ROSC, review of standards and codes. We have a fiscal module on transparency as part of our actually and we will try to strengthen it this year by extending it to more countries.
The second question about Italy. The first important thing to keep in mind is that Italy's fiscal accounts during this crisis have deteriorated much less than other fiscal accounts, particularly the deficit and the primary position. The debt ratio has traditionally been high for Italy, but the deficit increase has not been as strong as in other countries.
The fiscal targets of the government, I think, are more or less appropriate. We have also seen in 2010 the deficit was actually lower than initially projected. And, this will help with the attainment of further improvements in the fiscal accounts next year.
QUESTION: I find your report to be quite pessimistic on some points; i.e., you say that even in the medium term some advanced countries, such as the U.S. and Japan, in particular, will have deficit ratios which are way above precrisis levels. Is that something that you see as a structural change? Something which is here to last, or when do you envisage these countries to return back to precrisis levels?
Mr. COTTARELLI - It depends, obviously on the policies that are implemented. One key reason why deficits do not go back to where they were before the crisis is that our projections assume that, because of the crisis, there has been a loss, a permanent loss in the level of output of GDP, which involves a loss of revenues over the medium term for advanced countries, on average of about 2.5, 3 percentage points. This is why in spite of fiscal tightening it is difficult to go back where countries were before the crisis.
But, over the long run, there is no reason, is there a structural change? There is no reason why deficits cannot go back to where they were through an adjustment. What would be more difficult would be to bring down the debt-to-GDP ratio to where they were before the crisis. It is possible it is still in our baseline scenario, a scenario extending to 2030 in which debt ratios go back to where they were before the crisis, but definitely this kind of adjustment, not on the deficit, but on the debt, is going to take several, several years.
QUESTION: When you look at what you say is the required illustrative strategy for reducing deficits to stabilize the debt ratio of 11.3 percent for the U.S., 9.3 for the U.K., 13.3 percent of GDP for Japan, can you say when this has happened before, and does that suggest to you how likely it is to be achieved, and if not what do you think happens?
Mr. MAURO - We did a report that I could forward to you, maybe a year ago, it was called strategies for fiscal consolidation in the post-crisis world, and in that study we went through all of the episodes in which historically countries have reduced budget deficits by more than 5 percentage points above GDP, more than 10 percentage points of GDP, but I can summarize that, yes, there are instances in which this has happened, there are about 20 advanced economies episodes in which we have seen this, and even more for the emerging markets. Of course, this is probably the first time that the challenge is more global. So, the previous episodes were a little bit more country specific, and I think this is more of a generalized challenge, because the crisis was global.
But, I think based on historical evidence, yes, it is going to be difficult, but it has been done before. There are precedents.
QUESTION: Would you please help me to explain how the main effect of these fiscal problems, did the rest of the world, on especially the poor countries, in terms of economic growth, financial markets, and low material demand? Thank you.
Mr. COTTARELLI - You are referring to the fiscal situation in advanced countries, how this is affecting the rest of the world.
The answer is that over the medium term we see two risks for the advanced countries, and in a way implicitly for the rest of the world. Even if the fiscal situation is stabilized so the debt-to-GDP ratio is stabilized, if it is stabilized at levels of 100, 120 percent of GDP, the cost of this is going to be higher real interest rates for these countries, but also with spillover effects for the rest of the world. And, in our estimates, also, lower growth in these countries, but again with possible spillover effects on the rest of the world.
We have actually done some calculations about the impact, keeping debt ratios at, say, 100, 120 percent of GDP would have on interest rates with respect to a scenario which interest rates are lower to say where they were before the crisis, 60 percent of GDP for instance. This is a study that has been conducted by Mr. Kumar . Essentially the effect of this would be about 2 percentage points of real interest rates if debt ratios remain at these levels. So it is a significant impact.
QUESTION: I would like to dive a little bit more on the path of fiscal consolidation in the so-called peripheral countries, because apparently only Greece is going to match the goal for 2014, so Ireland and Spain, Portugal, which is 3 percent in the fiscal position. I would like to know exactly how this effect of these countries, because Spain is doing worse than Ireland and Greece in your predictions. So second question, very quick, just to know if the bailout for Portugal is to be included in these projections?
Mr. COTTARELLI - On Portugal, the answer is very brief. A technical mission is already there in Portugal and the policy discussion will start next week and as part of this, they will look at the fiscal numbers again. Clearly, this does not yet take into account the discussion that have not taken place yet. On the question of the overall situation of what you call -- I don't like the term peripheral, some advanced countries in Europe that are now under pressure, I think that these countries are implementing major fiscal adjustment. It is inevitable, the way you start with deficits of the magnitude you see for 2009 or 2010 for these countries is going to take time before you can bring them down. I would say that at the moment, the programs are on track. And, deficits are being reduced. In some countries, the composition of the measures do not match exactly what was supposed to be at the beginning, for example Greece is acting more than expected on the spending side, but more or less in terms of deficits, these countries are doing what they are expected to do to address these fiscal problems. I don't know whether you want to add anything?
Mr. Mauro - Just highlight, first of all, that these are very different cases. They have different challenges. Of course, medium-term fiscal adjustment applies to all of them, but the speed and composition does not need to be the same. In terms of the objectives and this is more to your question, the objective for Greece under the government's medium-term fiscal strategy is to bring the deficit below 3 percent by 2014. The objective for Ireland is also to get to below 3 percent by 2014, I could give you details on that strategy. I think here, for Ireland, there is a national recovery plan. It is a medium-term plan which has been agreed. And, is being implemented. I guess the headline number that is in the plan is an adjustment by 15 billion euro starting in 2011, with 6 billion, and then 3 billion, 3 billion, and 3 billion, that is the general envelope. It is two thirds on expenditure, one third on revenue raising.
For Spain, the objective is to get to 3 percent by 2013. I think in terms of -- maybe I don't want to over simplify, but in terms of the broad adjustment everybody is trying to get to 3 percent within the next few years, but the starting positions are different, the challenges are very different. In terms of how we report the projection, in some cases we only take into account measures that are already implemented. So, when you see that we do medium-term scenarios in countries not projected to get to 3 percent, it is because more measures are needed, but certainly not saying that they will not get there. It is under current policies that is the baseline projection. And there are country-specific details on what is behind the assumptions in the statistical notes. I'm happy to go further into details on an e-mail basis.
QUESTION: Could you please explain why you expect improvements in Ukrainian balance deficit from the level of 6 percent past two years, to 2.5 this and the next year, and 2 percent then? In your view what is behind these projections?
Mr. MAURO - I don't think we can give a precise answer on the numbers. We would have to come back to you on the precise numerical aspects. But basically the big picture again this is another country in which major fiscal adjustment is needed and that is why this is being pursued.
QUESTION: I was wondering if you can tell us a little more about the Middle East? I could only find a paragraph.
Mr. COTTARELLI – In the Middle Eastthere is a lot of uncertainty now. It is clear that the political developments will involve some increase in spending and in the short run this is going to affect the fiscal account deficit measures. You may note for example that we have not included in our statistical tables at the end a country like Egypt because the situation is very uncertain. We just had a staff team that visited Egypt to reassess fiscal, economic, and in particular fiscal developments. But, it is clear that in the short run, there will be a deterioration related to the developments, political developments, and also the shock in terms, for example, of food prices, some of these countries are suffering.
In the short run, it may have been inevitable to increase the subsidies, generalized subsidies. Over the medium term, there is definitely a need for better targeting of these subsidies. And, this is true for the Middle East, but it is true for, if I can broaden the question, many developing countries that are facing this problem of rising food prices. There is a need of maintaining a strong safety net for the poor in these countries. At the same time, there is a need for finding the ways of financing these increased costs for the government. One way is to make the transfer, the subsidies more targeted. Another way is to try to raise domestic revenues, also, by making those who can pay taxes. In many of these developing countries, there is still a lot of tax evasion, from those who can actually afford, from the elite, in a way.
On this, just to advertise, this Sunday we are going to have a conference, Sunday and Monday here in Washington, at the Fund, on how to increase revenues in developing countries, including by fighting tax evasion, and by those who can afford to pay tax, but do not.
QUESTION: I just want to draw your attention to this paragraph where you say that in low-income economies, fiscal balances are expected to return to precrisis levels over the medium term, believing that has mitigated the path of the crisis. The question is, how do you view the problem of the fiscal deficit in the sub-Saharan Africa albeit its lower revenue against its increased public expenditure?
Mr. COTTARELLI - The question, if I understood correctly is, how is this tendency, attempt to bring the deficit back to where they were before the crisis, consistent with the need to increase spending to support development?
Mr. GERSON - One thing that was noteworthy about the reaction to the crisis in low-income countries this time is that this was essentially the first opportunity for many of those countries to use counter-cyclical fiscal policies to deal with the crisis. And, it is because of the significant improvements that have been made in fiscal policy in the years leading up to the outbreak of the crisis. The challenge for them now, as you pointed out, is to try to rebuild fiscal space, so that they are in a better position to deal with the next crisis that comes along, as sooner or later it surely will. And the particular challenge for them going forward, the delicate part for fiscal policy, will be to try to balance the need for continued spending, both social spending and infrastructure development, against the need to rebuild fiscal space, and that is an issue that all countries in sub-Saharan Africa and all low-income countries more generally will need to deal with, and each country will need to find its own balance.
Mr. COTTARELLI - Linking to my remark earlier, it is clear that over the medium term these countries in sub-Saharan Africa will have to find also a way of finding internal resources to finance increased spending. Again, this issue of revenue mobilization is a very important one. The revenues, the tax revenues to GDP ratio in sub-Saharan Africa, if you exclude the revenues from taxing natural resources, as remaining essentially flat over the last decade, there have been some success stories in and some countries have actually been weakened. It is critical that these countries, in order to achieve the MDGs, the assumption was that the revenue-to-GDP ratio in these countries would increase by about 4 percentage points of GDP. And, there has not yet been enough progress in this area on average.
Again, I think it is possible to have an improvement because we have seen some countries achieving results. But, it is necessary to do more in this area, including as I said, making sure that tax evasion is reduced, that the elite pay sufficient amount of, do not evade taxes.
QUESTION: One question about the accounting stratagems. You mention that Italy is one of the countries that did it. Can you please tell us what kind of strategy, or tricks, have been used?
And also one more question. The study stops at 2003. What happened then? After that, didn't -- no tricks anymore, or simply the study was finished at that time?
Mr. COTTARELLI - The reference to Italy referred to swap operations earlier this decade. The study that you refer to, that we report in the Fiscal Monitor, is not our study. We report the result of a study that was undertaken several years ago to show some estimates of the accounting tricks, let's say, or stratagems. We quoted it as it was a relevant piece of evidence,. But we are not updating the study. Of course, our appendix on this issue does talk about more recent examples, but that specific paper is not our paper. It was not updated.
Ms. Nardin - Thank you very much. This concludes the press conference of the Fiscal Monitor.