Taking Stock - A Progress Report on Fiscal Adjustment

115 Pages·2012·6.97 MB·English

OCT
World Economic and Financial Sur veys
12
F
i
s
c
a
l

M
o
n
i
t
o
r

Fiscal Monitor
Taking Stock
A Progress Report on Fiscal Adjustment

12
T
C
O
I
M
Fiscal Monitor, October 2012
F
I N T E R N A T I O N A L M O N E T A R Y F U N D
W o r l d E c o n o m i c a n d F i n a n c i a l S u r v e y s
FISCAL MONITOR
October 2012
Taking Stock
A Progress Report on Fiscal Adjustment
International Monetary Fund
©2012 International Monetary Fund
Third printing (revised), December 2012
Cover: IMF Multimedia Services Division
Composition: Maryland Composition, Inc.
Cataloging-in-Publication Data
Fiscal monitor—Washington, D.C. : International Monetary Fund, 2009–
v. ; cm. — (World economic and financial surveys, 0258-7440)
Twice a year.
Some issues have also thematic titles.
1. Finance, Public—Periodicals. 2. Finance, Public—Forecasting—Periodicals. 3.
Fiscal policy—Periodicals. 4. Fiscal policy—Forecasting—Periodicals. 5. Financial crises—
Periodicals. 6. Global Financial Crisis, 2008–2009—Periodicals. I. International Monetary
Fund. II. Series: World economic and financial surveys.
HJ101.F57
ISBN 978-1-61635-391-9
Publication orders may be placed online, by fax, or through the mail:
International Monetary Fund, Publication Services
P.O. Box 92780, Washington, DC 20090, U.S.A.
Telephone: [phone] Fax: [phone]
E-mail: [email protected]
www.imfbookstore.org
www.elibrary.imf.org
COnTEnTS
Preface vii
Executive Summary ix
1. The Fiscal Outlook 1
2. Taking Stock: A Progress Report on Fiscal Adjustment 7
3. Moving Forward 24
Appendixes
1. Distributional Consequences of Alternative Fiscal Consolidation Measures:
Readings from the Data 50
2. Fiscal Policies to Address Weak Employment 59
Methodological and Statistical Appendix 65
Acronyms 95
Country Abbreviations 96
Glossary 98
References 100
Boxes
1. Commonly Used Definitions of the Fiscal Balance 37
2. Lessons from Sweden 39
3. Long-Run and Short-Run Determinants of Sovereign Bond Yields in Advanced Economies 40
4. Financial Sector Support 42
5. Do Pensioners Get Special Treatment on Taxes? 44
6. The “Two-Pack”: Further Reforms to Fiscal Governance in the Euro Area 45
7. General Government Nonfinancial Assets: What Do We Know? 46
8. Ireland: The Impact of Crisis and Fiscal Policies on Inequality 48
Figures
1. Revisions to Overall Balance and Debt-to-GDP Forecasts since the Last Fiscal Monitor 3
2. Number of Countries with 2013 Cyclically Adjusted Balance above/below the 2007 Level 7
3. Advanced Economies: Fiscal Adjustment, Market Conditions, and Fiscal Positions 10
4. Phasing of Fiscal Adjustment 10
5. Cumulative Change in Gross Debt to GDP since the Start of Recessions 11
6. Advanced Economies: Gross Debt to GDP, Level and Change 12
7. Number of Countries with Increasing/Decreasing Gross Debt to GDP 12
8. Interest Rate–Growth Differential, 2012 13
International Monetary Fund | October 2012 iii
Fiscal Monitor: taking stock—a Progress rePort on Fiscal adjust Ment
9. Decomposition of Gross Debt Accumulation, 2011–13 14
10. Selected Advanced Economies: Actual and Model-Based Sovereign Bond Yield Spreads 15
11. Selected Advanced Economies: Real Sovereign Bond Yields 15
12. Advanced Economies: Interest Expenditure 15
13. Advanced Economies and Emerging Markets: Change in Revenue, Expenditure, and the Cyclically
Adjusted Primary Balance, 2009–13 19
14. Selected Advanced Economies: Present Discounted Value of Projected Pension Spending
Reductions from Pension Reforms, 2010–50 20
15. Selected G-20 and EU Economies: Change in Revenue and Expenditure Items, 2009–12 21
16. Changes in Revenue and Expenditure, 2009–13 22
17. Advanced Economies: Revenue and Expenditure Components Ranked According to Their
Expected Long-Term Impact on Output 23
18. Number of Countries with Budget Balance Rules Accounting for the Cycle 24
19. Fiscal Indicators Index by Region, 2002–12 27
20. Advanced Economies: Sovereign Bond Yields and Average Bond Maturity 30
21. Low-Income Countries: Concessional Financing 32
22. Selected Countries: Financial Sector Support Measures 32
23. Eurosystem: Other Claims on Banks 32
24. Advanced Economies: Model-Based Primary Balance and CAPB Needed to Reduce Debt 32
25. Postrestructuring Losses and Domestic Investors 33
26. Initial Fiscal Position and Output Recovery Rate 33
27. Time to Recovery and Initial Conditions 34
28. Selected European Countries: Change in Unemployment, Cyclically Adjusted Balance,
and the Gini Coefficient, 2007–10 34
Tables
1. Fiscal Balances, 2008–13 2
2. Progress in Fiscal Consolidation through 2013 8
3. General Government Debt, 2008–13 17
4. Revenue and Expenditure Measures since 2009 18
5. Fiscal Institutions 25
6. Assessment of Fiscal Vulnerabilities over Time 26
7. Assessment of Fiscal Vulnerabilities, October 2012 28
8. Selected Advanced Economies: Gross Financing Needs, 2012–14 29
9. Selected Emerging Markets: Gross Financing Needs, 2012–13 31
10. Fiscal Policy Measures to Increase Employment 35
Statistical Tables
1. Advanced Economies: General Government Overall Balance and Primary Balance 77
2. Advanced Economies: General Government Cyclically Adjusted Balance and Cyclically
Adjusted Primary Balance 78
3. Advanced Economies: General Government Revenue and Expenditure 79
4. Advanced Economies: General Government Gross Debt and Net Debt 80
5. Emerging Markets: General Government Overall Balance and Primary Balance 81
6. Emerging Markets: General Government Cyclically Adjusted Balance and Cyclically
Adjusted Primary Balance 82
7. Emerging Markets: General Government Revenue and Expenditure 83
iv International Monetary Fund | October 2012
contents
8. Emerging Markets: General Government Gross Debt and Net Debt 84
9. Low-Income Countries: General Government Overall Balance and Primary Balance 85
10. Low-Income Countries: General Government Revenue and Expenditure 86
11. Low-Income Countries: General Government Gross Debt and Net Debt 87
12a. Advanced Economies: Structural Fiscal Indicators 88
12b. Emerging Markets: Structural Fiscal Indicators 89
13a. Advanced Economies: Illustrative Adjustment Needs 90
13b. Emerging Markets: Illustrative Adjustment Needs 91
14. General Government Nonfinancial Assets 92
15a. Advanced Economies: Taxation of Public Pension Benefits 93
15b. Emerging Markets: Taxation of Public Pension Benefits 94
Editor’s notes

(December 11, 2012) Table A1.2, page 55, has been altered to restore a number of minus signs that had
been inadvertently omitted.
International Monetary Fund | October 2012 v

PREFACE
The projections included in this issue of the Fiscal Monitor are based on the same database used for the
October 2012 World Economic Outlook and Global Financial Stability Report (and are referred to as “IMF
staff projections”). Fiscal projections refer to the general government unless otherwise indicated. Short-term
projections are based on officially announced budgets, adjusted for differences between the national authori-
ties and the IMF staff regarding macroeconomic assumptions. The medium-term fiscal projections incorporate
policy measures that are judged by the IMF staff as likely to be implemented. For countries supported by an
IMF arrangement, the medium-term projections are those under the arrangement. In cases in which the IMF
staff has insufficient information to assess the authorities’ budget intentions and prospects for policy imple-
mentation, an unchanged cyclically adjusted primary balance is assumed, unless indicated otherwise. Country-
specific assumptions are detailed in the Methodological and Statistical Appendix, which precedes the Statistical
Tables.
The Fiscal Monitor is prepared by the IMF Fiscal Affairs Department under the supervision of Carlo
Cottarelli, Director of the Department, and Philip Gerson, Deputy Director. This issue is coordinated by
Martine Guerguil. Principal contributors include Laura Jaramillo Mayor, Tigran Poghosyan, Anna Shabunina,
and Yuanyan Sophia Zhang. Nathalie Carcenac, Petra Dacheva, and Raquel Gomez Sirera provided outstand-
ing research assistance. In addition, contributions were provided by Ali Abbas, Elva Bova, Ben Clements,
Ruud de Mooij, Lorenzo Forni, Tidiane Kinda, Andrea Lemgruber, Jeta Menkulasi, Jimmy McHugh, M arialuz
Moreno-Badia, Marcos Poplawski-Ribeiro, Iva Petrova, Andrea Schaechter, Abdelhak Senhadji, Baoping
Shang, Mauricio Soto, Jaejoon Woo, and Li Zeng. Maria Delariarte, Nadia Malikyar, and Liza Prado provided
excellent administrative and editorial assistance. From the IMF External Relations Department, Gregg Forte
and Michael Harrup edited the issue, and Michael Harrup managed its production.
Inputs, comments, and suggestions were received from other departments in the IMF, including area
departments—namely, the African Department, Asia and Pacific Department, European Department, Middle
East and Central Asia Department, and Western Hemisphere Department—as well as the Institute for Capac-
ity Development, Monetary and Capital Markets Department, Research Department, Statistics Department,
and Strategy, Policy, and Review Department. Both projections and policy considerations are those of the IMF
staff and should not be attributed to Executive Directors or to their national authorities.
International Monetary Fund | October 2012 vii

ExECuTivE SuMMARy
ith growth weakening in many for instance, property levies. Overall, the com-
W
parts of the world and downside position of fiscal adjustment as envisaged should
risks on the rise, fiscal consolidation result in public finances that are more growth
remains challenging. However, con- friendly and efficient after the consolidation
siderable progress has been made over the last two phase, though some countries—especially those
years in strengthening the fiscal accounts following with large fiscal adjustment plans—have needed
their sharp deterioration in 2008–09, and more is to include measures like investment cuts and
planned. This issue of the Fiscal Monitor takes stock broader tax increases that may weigh on long-
of this progress, focusing on its size, composition, term growth.
and implications for employment and social equity. • Both spending and revenue measures have impor-
Several conclusions emerge: tant implications for employment and social
• Most countries have made significant headway equity, which need to be taken into account if
in rolling back fiscal deficits. In about half of the large consolidation efforts underway are to
the countries covered in this Monitor, deficits are be sustainable. An appropriate degree of progres-
expected to be at or lower than their precrisis lev- sivity in taxation and access to social benefits is
els next year. The improvement in fiscal balances imperative for limiting the negative social effects
is most pronounced in advanced economies, of adjustment packages. Better-designed tax and
where the fiscal shock was larger, followed by social benefit policies, accompanied by active
emerging market economies and to a lesser extent labor market programs, can help boost labor
by low-income countries. supply and demand. However, structural reforms
• Efforts at controlling debt stocks are taking lon- remain the key to better growth and employment
ger to yield results. Debt ratios peaked early in prospects.
emerging market economies but are not expected Despite substantial progress in restoring the
to stabilize before 2014–15 in many advanced sustainability of public finances, fiscal vulnerabili-
economies. The slower progress in advanced ties remain elevated. Public debt rollover require-
economies is due to the magnitude of the shock ments are still very high and expose countries to
and the sluggishness of the recovery thereafter, the vagaries of financial markets. Partly because of
but in some cases also to high interest rates, the ample liquidity provided by central banks in
which are negatively affected by policy uncertain- support of economic activity, markets have in most
ties and banking fragilities. In many advanced cases taken large increases in public debt in stride,
economies, consolidation efforts will need to with solvency concerns remaining elevated only for
persist for many years if debt ratios are to be a subset of euro area countries. But these benign
restored to precrisis levels. market responses are premised on continued fiscal
• Countries with sizable fiscal consolidation needs adjustment and a favorable growth environment.
have typically relied on a mix of revenue and With downside risks to the global economy
expenditure policies. However, advanced econo- mounting, policymakers must once again tread
mies have in general relied more than emerging the narrow path that will permit them to continue
markets and low-income countries on spend- strengthening the public finances while avoid-
ing retrenchment. Most countries have tried to ing an excessive withdrawal of fiscal support for
focus on measures that would have the smallest a still-fragile economic recovery. Whereas most
negative impact on growth, such as entitle ment emerging markets and low-income countries can
reforms and increases in less distortionary taxes, afford to pause their adjustment efforts to await a
International Monetary Fund | October 2012 ix