Assessing Fiscal Space - An Initial Consistent Set of Considerations
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Summary:
Fiscal space is a multi-dimensional concept reflecting whether a government
can raise spending or lower taxes without endangering market access and
debt sustainability. Making such a determination requires a comprehensive
approach considering, among other things, initial economic and structural
conditions, market access, the level and trajectory of public debt, present
and future financing needs, and dynamic analysis of the liquidity and
solvency of the fiscal position under alternative policies. Balancing these
considerations involves careful analysis and judgment.
Fund staff has over the years developed a variety of indicators to inform
assessments of fiscal space in bilateral and multilateral surveillance. The
Fund’s core operational framework for such analysis is the debt
sustainability framework, which includes a number of indicators, while
allowing room for staff judgment. Surveillance also relies importantly on
indicators developed by the Fiscal Affairs Department (FAD)––including
those that have been used in the internal Vulnerability Exercise and Fiscal
Monitors––while more recent methods based on fiscal stress tests and
probabilistic approaches proposed in IMF (2016) are also promising. In
addition, teams have used scenario analysis and general equilibrium
modeling approaches to evaluate fiscal policy choices and their
implications for sustainability. When applied to fiscal space, each
indicator and approach has pros and cons and none covers all the relevant
factors. Ultimately, therefore, assessing fiscal space requires judgment,
informed by a broad range of tools.
This note seeks to bring together various approaches developed by Fund
staff to outline a consistent set of considerations and indicators to help
inform assessments of fiscal space, especially for advanced and emerging
markets. The intent is to facilitate continued consistency between country
team assessments by providing some common considerations and approaches to
inform their judgment. The proposed framework will support Fund
surveillance and policy advice going forward, informing discussions of the
appropriate fiscal stance at all stages of the economic cycle.
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Series:
Policy Papers
English
Publication Date:
June 23, 2016
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