Transcript of the Fiscal Monitor Press Conference

April 17, 2012

Carlo Cottarelli, Director, Fiscal Affairs Department, IMF
Philip Gerson, Deputy Director, Fiscal Affairs Department
Martine Guerguil, Assistant Director, Fiscal Affairs Department
Simonetta Nardin, Senior External Relations Officer, External Relations Department, IMF
Webcast of the press conference Webcast

Ms. Nardin - Good morning, everybody, and welcome to the press conference on the April edition of the 2012 Fiscal Monitor. Mr. Cottarelli will open with some opening remarks and then we'll open the floor to ask questions. I invite all the journalists watching online to send questions through the Press Center now.

Mr. Cottarelli - Thank you very much, and thanks to all of you for being here. As Ms. Nardin was saying, before my colleagues and I answer your questions, I would like to underscore a few messages from this issue of the Fiscal Monitor. I will focus particularly on advanced economies, because that is where the fiscal problems are most acute at the moment.

The first message is that fiscal risks are declining, but still very high. Compared to six months ago, there has been some reduction in risks. This is primarily because there has been some policy action, with progress being made particularly in Europe, in implementing fiscal adjustment measures, in Italy for example, but also elsewhere. However, the risks remain very high, as underscored by continued market volatility, and by the fact that public debt is still on the rise. This is a chart with the public debt-to-GDP ratio over the last 130 years. As you can see, we are now on average, for the advanced economies, at a very high level, reached only once in the last 130 years, at the time of the Second World War.

So, the risks are still elevated in advanced economies. As the Fiscal Monitor underscores, the outlook is better in emerging economies, although they are still exposed to spillovers from advanced economies.

The second message is that fiscal adjustment, is nonetheless taking place, and that it is critical that it takes place at the right speed. Too little adjustment would raise concerns in terms of fiscal solvency. Too much adjustment leads to insufficient demand for goods and services in the economy, and both are bad for economic growth. What is needed is a steady but gradual adjustment. That is, unless you are already subject to market pressures, and you already have to borrow at very high interest rates, in which case front-loaded fiscal adjustment becomes very difficult, almost impossible, to avoid.

Altogether, we can say that the fiscal adjustment is proceeding on average this year more or less at apace that we regard as appropriate, taking into account the need to balance the different risks that countries are facing. The countries that have fiscal space can consider slowing down the adjustment if they want to reduce downside risks to growth, but overall we think the pace of adjustment is broadly appropriate.

Let's look at some numbers.

In 2011, the change in the structural balance, country by country, amounted on average to 3/4 to 1 percentage points of GDP. More or less the same adjustment is taking place this year, three quarters to 1 percent of GDP, on average.

The largest adjustment is observed in countries that are subject to market pressures, but we see that also that some larger economies, like the United States and Germany, which are not subject to market pressure, are adjusting more or less by the same amount over 2011-12.

So the adjustment is proceeding and will continue next year. You will find more specific numbers in the Fiscal Monitor.

But there is still a long way to go. We have updated our calculation of the fiscal adjustment that would be needed to lower the public debt-to-GDP ratio in advanced economies to below 60 percent by 2030. In many cases very large adjustments are needed. The chart shows what adjustment has been achieved in 2012 and what is planned for 2013. For some countries, a lot of progress will be made during these two years. But for others, a lot will remain to be done in the following years. And even for countries with good progress in 2012.13, the challenge will remain to maintain a high primary surplus for several years, although at least there will be no need for major further tightening. Other countries will have to continue the fiscal adjustment over time.

What is needed in each country is a clear medium-term fiscal adjustment plan to reduce public debt over time. Some countries, like the United States and Japan, still have to clarify fully their plans to reduce public debt over the medium term. It is important that these plans are clarified soon. Paradoxically, in the absence of such plans, even more fiscal tightening may be needed than if there was a plan for a gradual adjustment.

For example, again, in the United States, in the absence of any additional measures the deficit will narrow in 2013 by about 3.5 percentage points of GDP, which will be the largest fiscal adjustment in a single year since, I believe, 1947, when the deficit declined a lot because of the ending of military spending at the end of the War.

Just a few words on emerging economies.

They saw considerable adjustment in 2011. The adjustment is virtually coming to an end in 2012, but we regard this as broadly appropriate, because on average the fiscal accounts of the emerging economies are not in such weak shape as those of advanced economies.

But emerging economies with high deficits and high debt will also have to continue the adjustment over time.

Let me just summarize some key policy conclusions.

First, the fiscal adjustment must proceed at a steady pace, not too fast, not too slow, if there is fiscal space.

This means that if growth were to falter with respect to our current projections, countries should let the automatic stabilizers operate. This means that if there is a loss of revenues because there is less growth, this loss of revenue should not be offset by further tightening measures that would make things more difficult.

In an uncertain environment countries with fiscal space could also slow down the pace of fiscal adjustment to minimize downside risks to growth.

Second, a clear and credible medium-term fiscal adjustment plan is a key requirement for sustainable growth. Fiscal institutions can help through this process. There has been significant progress in strengthening fiscal institutions, as you know, in the euro area, with the Fiscal Compact. Further steps will have to be taken over the medium term toward a stronger form of fiscal federalism, better risk-sharing tools, progress on the issue of Eurobonds—these have been discussed a lot, but no decision has yet been taken. Eventually, also, there should be a stronger role for the EU budget. These are things that have to happen over the medium term. But the important element is that there is a plan and a shared consensus on what to do in these areas.

Further reforms in fiscal institutions are also needed in other parts of the world, including in the United States, where as you know the budgetary process is far from perfect. Although I did not illustrate it in the slides the process of reform in spending for pensions and health care is also crucial for long-term fiscal sustainability.

Finally, growth-enhancing measures are very important for the fiscal accounts. Here, I am talking about measures to boost potential growth, growth over the medium term. And, I want to end my presentation with a note of optimism.

Bringing down public debt to the level where it was before the crisis seems now almost impossible. But, the task will be greatly facilitated if countries grow faster over the longer run. We have calculated that an increase in potential growth of just a quarter of a percentage point could set in place a virtuous circle that would lead, after ten years, to a decline in the public debt-to-GDP ratio by 6 percentage points. This is because higher potential growth makes it easier to run a primary surplus, it lowers the public debt-to-GDP ratio directly. This in turn lowers the interest rate, which in turn boosts economic growth. If this virtuous circle between growth and reduction of public debt is activated, what many regard now as an almost impossible task, lowering public debt to where it was before the crisis, will look considerably easier.

So, with this, I would like to thank you for your attention, and we are ready to take your questions.

QUESTION: I want to elaborate on a couple things here. What struck me in reading the Fiscal Monitor was that that there seems to be, at some level, a pretty fundamental rethinking, or new research or a new understanding about fiscal multipliers, about the buffering effects of central bank bond purchases, about the degree to which you should be looking at gross debt versus net debt, and you seem to almost be saying: we didn't quite understand what we were getting into with the austerity plans, they may all be self-defeating and debt may not matter as much as we thought it did.

Mr. Cottarelli - I don't think there has been any fundamental rethinking. We have new evidence in support of what we have been saying for a while, namely that for countries that do not need to adjust, that are not under pressure from markets, the best thing to do is to adjust at a gradual pace. This was mentioned by Mr. Blanchard earlier today. We have been saying this for about two years now. The pace of adjustment needs to be appropriate, not too fast, not too slow. What we have added to the analysis is empirical evidence that confirms our a priori, namely that the fiscal multipliers, the loss of growth when you tighten fiscal policy, is larger if you start from a situation like the current one, when the output gap and unemployment are large. These are refinements of what we have been arguing over the last two years.

There is not really any rethinking about our policy recommendations.

QUESTION: I just would like to ask you a couple of questions about the reference to Spain here. The Fiscal Monitor says, I quote, “although slightly more moderate adjustment that better accommodated cyclical developments would have been preferable”. That raises a whole series of questions. The first one is, would you have supported the Spanish government's original plan to target a higher deficit? And secondly, putting them into the language I would use as a journalist, does that mean more harm is being inflicted on the Spanish people than is necessary?

Mr. Cottarelli - I don't think there is a fundamental difference on what is the appropriate fiscal target for Spain. Spain is one of the countries that is subject to market pressures. We think that the target is broadly appropriate. Yes, it could have been perhaps a bit less ambitious, but we're not talking about a fundamental difference.

What is critical now is that the fiscal target be achieved. At the moment we project a deficit that is somewhat larger than the official target, 6 percent against 5.3 percent. This is primarily due to the difficulty that we see in controlling the position of regions in Spain. I think it would be important to continue the effort to have a better control on the fiscal positions of the regions, but this doesn’t mean that we have a fundamental issue with the fiscal policy targets in Spain this year.

QUESTION: Is there fiscal space in Spain to proceed at a slower rate, basically?

Mr. Cottarelli – As I said, I don't think there is a major difference with respect to the targets. The Fiscal Monitor says it could have been a bit smaller, but there is no fundamental difference. In other words, there is not much fiscal space.

QUESTION: What would you counsel the German government to do? If I look at your figures, it looks like, there is no need for any further adjustment at a broad space, but still the German government imposes the Fiscal Compact on the other euro countries. Not only when it comes to the actual debt in the new budget, but also in the overhanging debt from the old years. What do you think should be done about that? Is what they are doing appropriate?

Mr. Gerson - I'll respond to the question about policy in Germany. As Carlo showed in the opening slides, the adjustment planned in Germany in both 2012 and 2013 is relatively small. In fact, in both years it is slower than we had initially expected. This is fine because it reflects to some extent the over performance that occurred in previous years. Carlo talked about how countries with fiscal space could choose to go a little bit slower in their adjustment plans to address downside risks, and certainly Germany is in a relatively strong fiscal position where it would have the opportunity do that. At the same time, we should recognize that there is not much adjustment in 2012 to begin with, and under the terms of Germany's fiscal rule, there is limited scope to go more slowly in adjustment in any case.

Germany is certainly a country that should allow the automatic stabilizers to operate in the event that growth turns out to be slower than we expected. So in that case we think Germany should tolerate a slightly higher deficit because of the impact of the slower growth. In the event that there is a much sharper decline in growth, there would clearly be scope for the authorities to reassess their overall policy stance, including the fiscal stance.

ONLINE QUESTION - How do we view the fiscal problems in low-income countries which are now facing the problem of reduced earnings from less commodity exports, because of weak external demand?
Ms. Guerguil - There are two ways, basically, in which the fluctuation in commodity prices can affect low-income countries. First, for commodity exporters, on the revenue side, because of the changes in commodity price and demand affect their revenues, and restricts the amount they can spend when prices are low. The solution, as we have often advised, is to define a smoothing path in the spending of these revenues and not to spend too much when prices are high, so as to allow higher spending when the prices are low. A number of economies in Africa are considering this option.

The other way commodity prices can affect the fiscal accounts is on the spending side. Many low-income economies subsidize oil prices and food prices. And, when prices are extremely high, as has been the case recently, the cost of the subsidies increases, squeezing out spending on other worthy items such as public investment and social program. The solution is to reform subsidies, which generally benefit mostly the better-off segments of the population, and replace them with targeted transfers that would help the poorest segments that are hurt by the increases in food and fuel prices.

QUESTION: I have a couple of questions about Italy. One is about one of the slides you showed about the fiscal adjustment needed for 2012 and 2013. Also the table on page 61 of the Fiscal Monitor shows that Italy is going to its the balanced budget target next year, and in the next few years. Can you explain this, and what kind of reforms does Italy need?

` Mr. Cottarelli - On the balanced budget, we do project a deficit for next year of about 1.5 percent of GDP for Italy. This is entirely due to the fact that we have a lower growth projection. However, this deficit would still be the third lowest deficit in the euro area. Only Germany and Finland would have a lower deficit. I would also underscore that net of cyclical effects, it would actually be a surplus, I think of about 0.5 or 0.6 percent of GDP. That is important because more and more in the euro area the fiscal rules are targeting deficits net of the cyclical effects. So the fact that Italy would be running a primary surplus net of the cycle next year is a very important achievement.

QUESTION: Elections are expected in Greece on May 6th, and this time the anti-austerity parties are expected to do quite well. Do you think that this kind of political turmoil in Greece can have an impact on the implementation of the so-called growth competitiveness pact in the whole area?

Mr. Cottarelli - One has to keep in mind that the fiscal adjustment measures that are part of the program are needed because the Greek economy needs it. I don't think it is a matter of political choices at this point. The program that the Greek authorities are implementing is not based only on fiscal adjustment. There was a lot of fiscal adjustment in 2010 and 2011. Looking forward, some will be needed further adjustment, but not as strong as in the past. What is now critical are measures to set strong basis for economic growth, including improved competitiveness, which is critical for growth. These are things which have to happen regardless of who is in power, so regardless of the outcome of the elections.

ONLINE QUESTIONS: What is the expected trend for emerging markets, specifically the Philippines, with regard to fiscal policy. The total financing need of 10.2 percent of GDP for this country is troubling, what should be the focus of the country with respect to fiscal policy?

Ms. Guerguil -Some emerging markets like the Philippines have relatively high debt levels, and they will have to reduce it to come to a more sustainable situation over the medium term. When this high level of debt is combined with large deficits or widening deficits, it restricts a country’s capacity to use fiscal policy to respond to changes in the global economy that may affect them adversely. So, it is particularly important for these countries to design a medium-term strategy to put their public finances on a sustainable foot. That is particularly relevant for emerging economies because of the demographic dynamics that will increase the average age of their population, therefore increase the need to spend on pension and age-related health care.

QUESTION: I am wondering if you can give us some estimation of Italy's and Spain's financing costs for the next two years.

Mr. Cottarelli – This information is in the Fiscal Monitor. If you take the difference between the overall deficit and the primary deficit, it will give you the burden of interest payments with respect to GDP.

An important point to make is that thanks to the measures that have been implemented, there will be a gradual decline in spreads, and thus s reduction in financing costs, for both countries.

QUESTION: How do those refinancing costs for Spain and Italy compare to the firewall that Europe has put together?

Mr. Cottarelli - The question, as I understand it, is what is the role of firewalls in bringing down interest rates. I think it is a very important role. We argue that a successful fiscal adjustment in Europe, as well as in other countries, requires not only fiscal measures, but also the availability of resources to support fiscal adjustment. So we welcome the increase in the European firewalls. This is only part of the story, however. What we now need, in addition to the European firewalls, is a global firewall, and that is why the IMF asked for an increase in the resources available to support countries that are undertaking macroeconomic adjustment. We hope we will make progress during this week on this issue as well.

QUESTION: There are a few countries like Uganda in the East African Community (EAC) [which have used] fiscal policy a lot to counter inflation, despite pressures for higher wages. I would like to know how much more can they expand fiscal policy in order to attain higher growth next year as per your new forecasts?
Ms. Guerguil - The main issue for the EAC economies now, as I understand, is on the inflation side, as inflation is relatively high. So the first priority, both for growth and for confidence to be restored, is to control inflation.

On the fiscal side, the most important question how can fiscal policy support growth. Because, as you said, growth is a challenge for economies that have relatively high birth rates. Growth in the EAC has been satisfactory, but insufficient so far to reduce poverty markedly. Fiscal policy should have two main objectives. One is to increase revenues. Revenue mobilization is relatively low in most of East Africa and should be raised through proper tax reforms that ensure that everybody, and especially the better-off segments, pay a fair share of tax revenue. The other objective is to redirect spending toward growth enhancing expenditures, in particular infrastructure spending. There are significant gaps in the availability of power and roads in east Africa. It would be particularly important to find ways to free resources so that this investment can be executed, and also define ways in which this investment can be well selected and well implemented so that to contribute effectively to higher growth.

QUESTION: In your presentation you specifically named the USA as a country that needs further improvement on its fiscal adjustment. I would like to know if there is a scale among all countries in terms of their achievements so far regarding fiscal adjustment-- how much would the U.S. score on that scale? Secondly, it has been three years since the Fiscal Monitor has been introduced . Could you tell me how influential this document is, especially for policy makers?

Mr. Cottarelli - I will take the second question first. I think the Fiscal Monitor is very influential, but we will really have succeeded when we will be able to change the color of the Fiscal Monitor, -- , which is now red, because the fiscal accounts are in red  -- that will be a sign of success.

Now, on fiscal policy in the United States, I think that quite a lot of adjustment has taken place. As I showed you in a slide, adjustment took place in 2011 and we are projecting further adjustment to take place in 2012. As I mentioned, without any additional policy action, there will be a major tightening in 2013 (three and a half percentage points of GDP in one single year) which we would regard as excessive. What is needed in the United States is a clear political consensus on a medium-term fiscal consolidation plan, That is, not just a target, but the tools to meet the target. You know, there is a lot of disagreement on the tools, whether they should be more on the spending than on the revenue side. As I mentioned more than once, adjustment in a country like the United States can be at a moderate pace, but it needs to be a steady pace over the next few years.

One big issue to keep in mind is the major challenge of health care reform, in terms of the imbalances that would arise from health care spending over the next 20 years.

QUESTION: You said that the Italian government will not reach the target of a balanced budget [in 2013] because growth is slower than expected. According to the statistical table No. 1, if I understand it well, this balanced budget will not be reached until 2017. Is this correct?

Mr. Cottarelli - The numbers are there. Now regarding what happens beyond, say, 2013/14, there is much more uncertainty. It all hinges on growth, on whether Italy will be able to increase its growth rate over time. We know that we have relatively conservative growth projections vis-à-vis other agencies. What is in the Fiscal Monitor is our best projection at the moment. But I'm the first one to acknowledge that there is a huge uncertainty about future growth. I think more than thinking about growth, it is important to think about the measures that are needed to support growth, and the Italian government has really done a great deal to implement the measures needed to revive economic growth in Italy over the medium term.

QUESTION: (In Spanish -- no interpretation provided).

Mr. Gerson - The question was about growth prospects for Latin America with a particular focus on the Dominican Republic, where growth is not projected to take off in the next year or two. I think that in general, in the short term, the financial and fiscal situation in emerging market economies, including in Latin America, is relatively strong. For the most part, as Carlo and Martine pointed out, most emerging market economies have relatively lower debt stocks than advanced economies and relatively stronger overall balance positions, which have allowed them to adopt a more moderate approach toward fiscal tightening. This is particularly appropriate, given the risks to the outlook.

From a longer term perspective, virtually all the countries in the region face issues related to population aging. Some will reach those issues sooner rather than later, but all are facing an issue of population aging. Therefore, there is a need in all these countries for continued strengthening of the fiscal position over the medium term to make space for age-related spending, to prevent a large increase in debt, and allow the fiscal accounts to remain in a relatively healthy state.

QUESTION: The Brazilian government has been putting money in the Brazilian development bank below-the-line operations. And people say there is too much creativity in the fiscal accounts in Brazil. I would like to know how comfortable are you with the Brazilian fiscal data?

Secondly, the Brazilian president has been asking for more fiscal stimulus in developed economies instead of relying only on monetary policy. Do you see space for fiscal stimulus in countries like Germany and the United States, for example?

Mr. Cottarelli – Regarding your second question, as I said earlier, at the moment we see the pace of fiscal adjustment in 2012 as broadly appropriate for advanced countries, as a whole. When it comes to 2013, however, I noted that in the United States, without additional policy action, there will be a major contraction in the fiscal deficit, which would be excessive given the still fragile economic recovery. So, I think that some countries (you mentioned Germany and the United States) definitely have fiscal room to respond to negative economic shocks. As we underscored some countries perhaps could consider using this room now to slow down the pace of adjustment. But in the case of Germany, as Phil already noted, the fiscal adjustment this year is relatively modest. I think the decline in the deficit this year for Germany is only 0.2 percent of GDP. These countries have the scope, so in case there are shocks, they should let the automatic stabilizers operate and they can support economic activity by slowing down the pace of fiscal adjustment.

Mr. Gerson - The first part of the question was about the development bank in Brazil. We have noted in previous issues of the Fiscal Monitor the importance of getting a sense, not only in Brazil but in general, about the overall impact of fiscal policy. The government budget is one aspect of that, but there are other elements of the public sector that also affect demand. In a previous issue of the Monitor we pointed out the importance of transparency, that governments make data available that allow one to come to an understanding of what is the overall impact of the public sector on domestic demand, and of the risks associated with some of those forms of spending. One of the concerns we flagged in previous issues of the Monitor is that governments may be facing pressure, because of difficult market conditions, to move to more of what we term as creative approaches, toward increasing the role of the public sector in a way that doesn't affect the headline fiscal numbers like the general government deficit or the general government debt stock.

In Brazil BNDES has taken on an increasing role, particularly over the last couple of years, in terms of stimulating demand in the economy. And so for us the important thing is transparency on that. As long as that information is available, people are able to make their assessments of what the overall impact of the public sector is. So again the main concern is one of making sure that there is adequate transparency in these sorts of operations.

QUESTION: In your presentation you pointed out that the debt levels of the advanced economies is second only to that which prevailed during World War II. As we all know, post World War II the U.S. emerged as the richest economy in the world. With the steps taken by the USA to basically consolidate their fiscal position, do you also think that this would also lead to a consolidation of the USA as the world's richest nation even in the near future? From a micro perspective, my question is related to the fact that Sri Lanka's single largest biggest export market is the USA.

Mr. Cottarelli - You raise an important point. Some people argue that high public debt is accompanied with lower growth over the medium term. We also have studies indicating this. So the question is whether high-debt countries like the United States will be able to continue to grow over the medium term in spite of their very high debt.

When it comes to specific countries there is a lot of uncertainty. Interest rates are very low in the United States, so you don't see the impact of the very high public debt on economic activity or on private sector demand. But over the medium term, it will become an issue. That is why we have argued that countries with high debt like the United States should not just aim at stabilizing public debt at the current very high levels. They also need to bring down public debt over the medium term. However, I would emphasize what I call the virtuous circle, by which an increase in potential growth triggers an increase in primary balances, which in turn triggers a decline interest rates, and therefore higher growth. So, one also has to look at this possible interaction between growth and fiscal adjustment in a positive sense in the medium term. But it is definitely an important issue. There is a need to lower public debt in the United States over the medium term, as well as in other advanced economies. What the United States is yet missing is a medium-term fiscal adjustment plan. And I also noted that if nothing is done next year, there will be a major tightening as the measures introduced in the past years would come to an end. But that amount of tightening in a single year would be too much. There is a need to establish a plan to bring down public debt gradually over time, together with measures to implement that plan. And that should also include reforms in entitlement, particularly health care spending.

QUESTION: So far, Cambodia has very high public debt, and recently the government approved increasing the debt level. They need to borrow more for expansion because the income is very low compared to their expenses. And, my country already has some problems like [a high] current account deficit. So, what will the threat be for the economy in the future if the government tries to increase their public debt?

Ms. Guerguil - I would refer to what Carlo said, that a high level of debt has a detrimental effect on long-term growth. Therefore, although in some cases countries may need to increase their debt to respond to a large crisis and support demand, they should also plan to lower this debt level, so as to allow higher growth. But to support growth one also needs to look beyond the debt level. What is, for example, the tax regime and the composition of public spending also have to be conducive to growth over the medium term. And structural reforms may also be needed. The fiscal policy is not the only factor that influences growth, although it help encourage it.

QUESTION: My question is a follow-up and a clarification on Italy and Spain. Your projections show that they will both miss their deficit targets this year, and in the coming year as well. If I understand you correctly, you are suggesting to the rest of Europe, particularly Berlin and Brussels, to close their eyes in case the deficit targets are missed because you think it would be bad for those economies to pursue additional fiscal belt tightening. Do I understand you correctly? Because basically, if they miss their targets, they will also break the rules of the upcoming Fiscal Compact.

Mr. Cottarelli - As I underscored, there is a risk in focusing too much on the nominal balances, the fiscal balance that is not adjusted for the cycle. We have to keep in mind that the balanced budget rule that, according to the Fiscal Compact, has to be implemented in euro area countries, is defined in structural terms. So more and more countries in Europe should focus on achieving their targets on a structural basis, and that it is well acknowledged in the European Union.

Regarding the specific target for Italy and Spain, let me remind you of the strong uncertainty around the actual rate of GDP growth in these countries. So particularly for 2013, focusing a nominal target rather than on a cyclically adjusted balance would involve some risks, definitely.

Ms. Nardin - Thank you very much. I'm afraid we have to end it here. Thank you all for coming and for all the colleagues who followed us online.



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