Russian
Fiscal Monitor Update
Strengthening Fiscal Credibility /
January 27, 2011
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Despite the improving global outlook, the pace of fiscal
consolidation this year is slowing in some key countries. The
United States and Japan are adopting new stimulus measures and
delaying consolidation relative to the pace envisaged in the
November 2010 Fiscal Monitor. The underlying fiscal outlook
has also weakened in some emerging markets—among them are
several that need to build larger fiscal buffers, particularly
in the face of surging capital inflows, overheating, and
possible contagion from advanced countries. By contrast,
advanced economies in Europe are projected to continue
tightening policies amid heightened market scrutiny in several
countries. Altogether, sovereign risks remain elevated and in
some cases have increased since November, underlining the need
for more robust and specific medium-term consolidation plans.
Fiscal outturns in 2010 were slightly better than projected, but
some large emerging economies underperformed
While advanced economies maintained expansionary fiscal
policies on average in 2010, outturns were generally slightly
better than projected in the November 2010
Fiscal Monitor. Revenue collection exceeded
expectations across most major economies—both output growth and,
in some countries, the responsiveness of revenues to output were
larger than expected—and spending was lower
(Table 1). Overall, the average deficit of advanced
economies fell compared with 2009 by about 1 percentage point,
to about 8 percent of GDP (0.3 percent better than projected).
Excluding the impact of growth and financial sector support, the
cyclically adjusted balance widened slightly. Deficits in
Germany and the United States were lower than in the November
Monitor, reflecting good revenue performance and lower
spending—due in Germany to the strong labor market and in the
United States to some legislative delays in approving spending
and lower financial sector support. Euro-area countries that had
targeted large fiscal consolidations generally succeeded in
posting marked deficit reductions. Meanwhile, advanced economy
gross general government debt continued to rise rapidly in 2010,
topping 96 percent of GDP.
Overall emerging economy fiscal deficits were broadly in line
with November forecasts, but there were some significant
deviations at the country level. Their average headline deficit
in 2010 is projected at about 4 percent of GDP, ¾ percentage
point lower than in 2009, leaving the average gross general
government debt broadly stable at about 37 percent of GDP. The
average cyclically adjusted deficit in 2010 was almost unchanged
from the previous year. As in advanced economies, revenue
collection exceeded expectations, reflecting mainly stronger
growth and higher commodity prices, and in some cases sizable
one-off receipts (notably the sale of oil concessions in Brazil
and auction of telecommunication licenses in India). Higher
revenues, however, were generally used to finance higher
spending. In part reflecting this, fiscal balances in several
key economies (most notably Brazil, China, and India) turned out
weaker than projected in the November Monitor
(Table 1). Offsetting this, a few countries are expected to
realize lower headline and cyclically adjusted deficits than
earlier projected, due primarily to higher commodity prices
(Russia, Saudi Arabia) and delays in implementing capital
expenditure projects (Turkey).
|
|
Table 1. Fiscal Indicators,
2008-12 |
(Percent of GDP) |
|
|
|
|
Est. |
Projections |
|
Difference from November 2010
Fiscal Monitor |
|
|
|
|
|
2008 |
2009 |
2010 |
2011 |
2012 |
|
2010 |
2011 |
2012 |
|
|
|
Overall Fiscal Balance |
|
|
|
|
|
|
|
|
|
|
Advanced
economies |
-3.6 |
-8.8 |
-7.9 |
-7.1 |
-5.2 |
|
0.3 |
-0.4 |
-0.1 |
United States |
-6.5 |
-12.7 |
-10.6 |
-10.8 |
-7.2 |
|
0.5 |
-1.1 |
-0.5 |
Euro Area |
-2.1 |
-6.4 |
-6.4 |
-4.6 |
-4.0 |
|
0.3 |
0.4 |
0.3 |
France |
-3.3 |
-7.6 |
-7.7 |
-6.0 |
-4.9 |
|
0.3 |
0.0 |
-0.2 |
Germany |
0.0 |
-3.0 |
-3.5 |
-2.6 |
-2.3 |
|
1.0 |
1.1 |
0.7 |
Italy |
-2.7 |
-5.2 |
-5.0 |
-4.3 |
-3.5 |
|
0.1 |
0.0 |
0.1 |
Spain |
-4.1 |
-11.1 |
-9.3 |
-6.6 |
-6.0 |
|
0.0 |
0.4 |
0.3 |
Japan |
-4.1 |
-10.1 |
-9.4 |
-9.1 |
-8.0 |
|
0.2 |
-0.2 |
0.1 |
United Kingdom |
-4.9 |
-10.3 |
-10.3 |
-8.1 |
-6.1 |
|
-0.1 |
0.0 |
0.3 |
Canada |
0.1 |
-5.5 |
-5.9 |
-4.7 |
-3.3 |
|
-1.0 |
-1.8 |
-1.2 |
|
|
|
|
|
|
|
|
|
|
Emerging
economies |
-0.7 |
-4.8 |
-4.1 |
-3.2 |
-2.8 |
|
0.1 |
0.0 |
0.0 |
China |
-0.4 |
-3.1 |
-3.1 |
-2.1 |
-1.5 |
|
-0.2 |
-0.2 |
-0.2 |
India |
-7.9 |
-10.2 |
-9.8 |
-9.2 |
-8.4 |
|
-0.2 |
-0.4 |
0.1 |
Russia |
4.3 |
-6.2 |
-4.2 |
-2.9 |
-3.0 |
|
0.6 |
0.7 |
-0.1 |
Brazil1 |
-1.4 |
-3.1 |
-2.6 |
-3.1 |
-3.2 |
|
-0.9 |
-1.9 |
-1.5 |
Mexico |
-1.4 |
-4.8 |
-3.5 |
-2.4 |
-2.5 |
|
0.2 |
0.7 |
0.2 |
South Africa |
-0.5 |
-5.3 |
-5.8 |
-5.3 |
-4.4 |
|
0.1 |
-0.6 |
-1.3 |
|
|
|
|
|
|
|
|
|
|
G-20 advanced |
-4.2 |
-9.4 |
-8.3 |
-7.8 |
-5.6 |
|
0.3 |
-0.5 |
-0.2 |
G-20 emerging |
-0.4 |
-4.8 |
-3.9 |
-3.2 |
-2.8 |
|
0.1 |
0.0 |
-0.1 |
|
|
|
|
|
|
|
|
|
|
General Government Cyclically
Adjusted Balance
(Percent of Potential GDP) |
|
|
|
|
|
|
|
|
|
|
Advanced economies |
-3.3 |
-5.5 |
-5.9 |
-5.6 |
-4.1 |
|
0.2 |
-0.4 |
-0.1 |
United States2 |
-4.6 |
-6.7 |
-7.5 |
-8.2 |
-5.4 |
|
0.4 |
-1.1 |
-0.5 |
Euro Area |
-2.8 |
-4.6 |
-4.7 |
-3.5 |
-3.1 |
|
0.1 |
0.3 |
0.2 |
France |
-3.2 |
-5.6 |
-6.0 |
-4.6 |
-3.8 |
|
0.3 |
0.0 |
-0.1 |
Germany |
-1.0 |
-1.0 |
-2.8 |
-2.3 |
-2.2 |
|
0.5 |
0.6 |
0.3 |
Italy |
-2.4 |
-3.3 |
-3.4 |
-2.8 |
-2.3 |
|
0.1 |
0.1 |
0.3 |
Spain |
-5.2 |
-9.7 |
-7.5 |
-5.0 |
-5.0 |
|
0.0 |
0.3 |
0.3 |
Japan |
-3.6 |
-6.8 |
-7.6 |
-7.6 |
-7.0 |
|
-0.1 |
-0.4 |
-0.1 |
United Kingdom |
-5.6 |
-8.3 |
-8.1 |
-6.3 |
-4.5 |
|
-0.1 |
-0.1 |
0.2 |
Canada |
0.0 |
-3.2 |
-4.3 |
-3.4 |
-2.5 |
|
-0.9 |
-1.5 |
-0.9 |
|
|
|
|
|
|
|
|
|
|
Emerging economies |
-2.4 |
-4.6 |
-4.3 |
-3.6 |
-3.3 |
|
-0.2 |
-0.2 |
-0.3 |
China |
-0.8 |
-3.4 |
-3.4 |
-2.3 |
-1.5 |
|
-0.2 |
-0.1 |
0.0 |
India |
-10.0 |
-10.9 |
-10.3 |
-9.7 |
-8.9 |
|
-0.8 |
-0.6 |
-0.6 |
Russia |
3.0 |
-3.4 |
-2.4 |
-1.9 |
-2.4 |
|
0.5 |
0.6 |
-0.1 |
Brazil1 |
-2.1 |
-2.0 |
-2.8 |
-3.3 |
-3.3 |
|
-1.0 |
-2.1 |
-1.7 |
Mexico |
-1.0 |
-2.7 |
-2.7 |
-1.9 |
-2.1 |
|
0.1 |
0.4 |
0.0 |
South Africa |
-2.1 |
-4.9 |
-5.1 |
-4.5 |
-3.9 |
|
0.1 |
-0.6 |
-1.2 |
|
|
|
|
|
|
|
|
|
|
G-20 advanced |
-3.4 |
-5.5 |
-6.1 |
-6.1 |
-4.4 |
|
0.2 |
-0.6 |
-0.2 |
G-20 emerging |
-2.3 |
-4.5 |
-4.3 |
-3.6 |
-3.2 |
|
-0.3 |
-0.6 |
-0.8 |
|
|
|
|
|
|
|
|
|
|
General Government Gross Debt |
|
|
|
|
|
|
|
|
|
|
Advanced
economies |
79.2 |
91.4 |
96.5 |
101.0 |
103.6 |
|
-0.9 |
-1.0 |
-0.8 |
United States |
71.2 |
84.6 |
91.2 |
97.9 |
102.0 |
|
-1.6 |
-1.4 |
-1.0 |
Euro Area |
69.6 |
78.9 |
84.3 |
87.1 |
88.7 |
|
0.4 |
0.2 |
-0.1 |
France |
67.5 |
78.1 |
84.0 |
87.4 |
89.4 |
|
-0.2 |
-0.2 |
-0.1 |
Germany |
66.3 |
73.5 |
76.6 |
77.1 |
77.1 |
|
1.2 |
0.6 |
0.1 |
Italy |
106.3 |
116.0 |
118.7 |
120.1 |
120.1 |
|
0.3 |
0.4 |
0.4 |
Spain |
39.8 |
53.2 |
63.1 |
68.4 |
72.6 |
|
-0.4 |
-1.8 |
-2.4 |
Japan |
195.0 |
217.4 |
220.7 |
227.5 |
232.8 |
|
-5.1 |
-6.6 |
-5.8 |
United Kingdom |
52.0 |
68.3 |
77.2 |
82.1 |
84.5 |
|
0.6 |
0.2 |
-0.6 |
Canada |
71.3 |
82.5 |
83.9 |
85.4 |
84.8 |
|
2.2 |
4.9 |
6.0 |
|
Emerging
economies |
35.4 |
37.2 |
36.9 |
36.8 |
36.4 |
|
-0.5 |
-0.5 |
-0.5 |
China |
17.0 |
17.7 |
18.4 |
18.1 |
17.6 |
|
-0.8 |
-0.7 |
-0.5 |
India |
74.0 |
77.8 |
75.7 |
75.2 |
74.8 |
|
0.6 |
1.1 |
1.2 |
Russia |
7.8 |
10.9 |
10.4 |
10.8 |
12.1 |
|
-0.6 |
-2.0 |
-2.4 |
Brazil |
70.7 |
67.9 |
65.7 |
67.5 |
66.9 |
|
-1.1 |
0.9 |
0.5 |
Mexico |
43.0 |
44.6 |
44.5 |
45.0 |
43.9 |
|
-0.5 |
-0.7 |
-1.0 |
South Africa |
27.3 |
31.5 |
35.9 |
39.5 |
41.6 |
|
0.9 |
1.4 |
1.9 |
G-20 advanced |
84.5 |
97.6 |
102.7 |
107.4 |
110.2 |
|
-1.1 |
-1.2 |
-1.0 |
G-20 emerging |
35.2 |
36.4 |
35.6 |
35.3 |
34.9 |
|
-0.7 |
-0.7 |
-0.8 |
|
|
Sources:
January 2011 WEO; and IMF staff calculations. All
country averages are PPP-GDP weighted using 2009
weights.
1 Fiscal balances do not include policy
lending to the Brazil's development bank exceeding 3
percent of GDP in both 2009 and 2010.
2 Excluding financial sector support
recorded above the line.
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The pace of fiscal consolidation in 2011 is now projected to
be slower on average, and more varied across countries
The overall pace of deficit reduction in advanced economies
in 2011 will be below earlier estimates. On average, fiscal
consolidation among the advanced G20, measured in cyclically
adjusted terms, is now projected to equal less than ¼ percent of
GDP compared to the 1 percent of GDP projected in November.
Their debt ratio is anticipated to rise by almost 5 percentage
points, to exceed 107 percent of GDP.
- The U.S. Congress approved a stimulus package in
December featuring income and payroll tax cuts and extended
unemployment benefits
(Table 2). While some targeted measures to address the
weak state of labor and housing markets are justifiable, the
package’s composition means that its stimulative impact will
be small, relative to its fiscal cost (see
January 2011 WEO Update). Combined with the
better-than-expected 2010 outturn, the new measures mean
that the deficit is expected to increase slightly this year,
compared to the decline of 1½ percent of GDP forecast in
November. The United States will be the only major advanced
economy implementing procyclical fiscal policies this year,
albeit in the face of a still-sizable output gap
(Figure 1). Moreover, getting on track to achieve the
Toronto Declaration commitment to halve the deficit by 2013
will require a significant adjustment next year. In this
respect, the 2012 deficit forecast is consistent with the
targets spelled out in the recent mid-session budget review.
Furthermore, progress on developing a medium-term
consolidation plan has been slow: the final report of the
President’s Fiscal Commission succeeded in laying out a
comprehensive strategy of discretionary spending cuts and
tax and entitlement reforms but failed to garner the
supermajority support needed to formally submit its report
to Congress.
- In Japan, the already-modest narrowing of the overall
deficit planned for 2011 has been reduced after the Diet
approved expenditure increases. A proposed corporate tax cut
is expected to be offset by other revenue measures
(Table 2). A deficit reduction of about 1 percent of GDP
is projected for 2012.
- The largest European countries, in contrast, will all
consolidate in 2011, broadly in line with earlier plans.
Withdrawal of fiscal stimulus in Germany and France,
combined with discretionary measures and higher growth, will
contribute to a notably lower deficit. Spain’s deficit
reduction will be the most pronounced among the large
European countries, and will rely heavily on expenditure
measures, including cuts in wages, pensions, and public
investment. In the United Kingdom, in addition to
significant fiscal tightening in 2011, the government
announced detailed plans to reduce public expenditure over
the next four years. All these countries are projected to
further improve their fiscal positions in 2012.
- Greece, Ireland, and Portugal will continue with sizable
frontloaded consolidation. These efforts should translate
into large improvements of both the headline and cyclically
adjusted balances (averaging 2 and 2¾ percentage points of
GDP, respectively), reflecting mainly expenditure cuts
(including public payrolls, pensions, and/or transfers).
Further progress in deficit reduction is also projected in
these countries in 2012.
|
Table 2.
Selected Advanced Economies: Policy Measures Adopted
or Announced since the November
(Announced impact on 2011 general government balance
in percent of GDP) |
|
Country |
Revenue and other
receipts |
Expenditure |
Total |
Fiscal tightening |
Greece |
Various measures to speed up tax
arrears and tax penalty collection, measures against
fuel smuggling, improved collection efficiency,
renewal of Telecom licenses, extension of airport
concessions (1.0 percent of GDP) |
Wage cuts and tariff increases in
public enterprises, cost savings and increases in
co-pay for hospitals, means-testing of family
benefits. Reductions in: transfers and operational
expenditures; short-term contracts in the public
sector; military deliveries (1.2 percent of GDP). |
2.2 |
Ireland |
Revisions to PIT bands and
credits; integration of health and income levies
into universal social charge; tightening of various
tax reliefs on private pensions contributions; and
reduction in tax expenditures (0.9 percent of GDP) |
Reduction in public payroll and
discretionary expenditure, non-progressive social
welfare benefits and capital spending (2.4 percent
of GDP) |
3.5 |
Portugal 1 |
Increase in VAT by additional 2
percentage points, and cuts in tax expenditures (0.8
percent of GDP) |
Reduction in public wages,
pensions and social transfers (2.2 percent of GDP) |
3.0 |
Spain
2 |
Increase in the tobacco excise
tax and the partial privatization of the National
Lottery and the airport management company
|
Reduction in subsidies to
wind-power producers and reduction in unemployment
benefit transfers |
… |
Fiscal stimulus |
Japan
3 |
Reduction of effective corporate
tax by 5 pps to 35 percent offset by reducing
deductions for income and inheritance taxes, and
raising fuel levies (0.1 percent of GDP). |
Increase in capital spending to
local economies and transfers to SME, employment
support programs, childcare and healthcare (1.0
percent of GDP) |
1.1 |
United States
4 |
Two-year extension of the 2001
and 2003 tax cuts; one-year 2 pps reduction in
employee payroll tax, extension of the 2009 estate
tax regime and accelerated depreciation (0.8 percent
of GDP) |
13-month renewal of emergency
unemployment benefits (0.1 percent of GDP) |
0.9 |
|
1
Despite the adoption of these new measures, the
total deficit target for 2011 (4.6 percent of GDP)
is unchanged.
2 Estimated impact of these measures on
the fiscal balance is not available.
3 Due to better-than-expected revenue
performance, the deficit is expected to increase
only by 0.2 percent of GDP in 2011 relative to
November 2010 forecast
4 Impact on fiscal-year federal deficit
relative to previous IMF staff policy assumptions.
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Consolidation in emerging G20 economies is expected to
continue, but cross-country differences within this group are
becoming more pronounced, as well. The average deficit in 2011
is expected to decline by about ¾ percent of GDP, enough to keep
the average gross general government debt ratio constant. While
this is roughly unchanged from the November Monitor, variation
across countries has increased considerably. Some commodity
exporters (Russia, Saudi Arabia) are likely to perform better
than initially expected, owing to sizable revenue windfalls.
However, fiscal deficits in some key emerging economies are
expected to be higher than in the November Monitor, due to the
carryover of spending committed in the second half of 2010
(Brazil and, to a lesser extent, China) or the non-recurrence of
certain receipts from last year (Brazil, India). The
deterioration in Brazil’s fiscal accounts is particularly
pronounced, and the government is now expected to miss its
fiscal target (a primary balance of about 3 percent of GDP) by a
wide margin.
Progress in fostering institutions aimed at supporting fiscal
sustainability has been mixed, and existing frameworks have in
some cases been weakened. The newly elected U.S. House of
Representatives adopted procedural rules that constrain
expenditure growth but leave the door open to deficit-financed
tax cuts and tax expenditures. Conversely, the strengthening of
the euro area fiscal framework continues apace, with the
procedures leading to an improved Stability and Growth Pact, and
the implementation of the European semester, advancing as
planned. The European Council has cleared the way for the
creation of a permanent crisis management and resolution
arrangement: the European Stability Mechanism (ESM). By June
2013, the ESM will combine a liquidity-provision arm similar to
the European Financial Stability Facility (EFSF) with a crisis
resolution procedure that will mandate bondholder bail-in for
any country deemed insolvent. In Hungary, the non-partisan
fiscal watchdog was closed, undermining transparency and
weakening checks and balances.
Despite rising sovereign bond yields and eroding fiscal
frameworks in some countries, severe market pressures have
remained limited to some euro area countries
Government bond yields in all major advanced economies have
increased. Since early November, nominal yields on United States
government paper have jumped 80 basis points at 10-year
maturities, followed by similar increases elsewhere (except
Japan, where a large and stable domestic investor base, and
continued sluggish growth and deflation, have likely contributed
to what has been a more moderate move)
(Figure 2, panel 1). These upticks in yields occurred at a
time of rising government bond purchases by major central banks
(Figure 2, panel 2;
(Figure 3, panel 2). In the United States, a gradual
normalization of real interest rates
(Figure 2, panel 3) in the wake of stronger growth prospects
and rising equity prices is likely a key driver of these
developments. Indeed, inflation expectations remained broadly
well-anchored and CDS spreads stayed essentially flat in the
United States
(Figure 2, panel 4). The situation in Germany and France is
similar, although some uptick in sovereign CDS spreads in these
countries may signal increased market concerns about the fiscal
price tag of additional banking sector support and contingent
liabilities that these countries could be taking on in the
context of the EFSF. In the meantime, intensified market
pressure has so far remained limited to a small number of euro
area member states
(Figure 3, panel 1).
In emerging markets, large capital inflows and
correspondingly easy credit conditions risk discouraging the
accumulation of sufficient fiscal buffers. As discussed in the
WEO and
GFSR Updates, the intensity and nature of these inflows
carries risks. On the fiscal side, persistently loose credit
conditions and the emergence of asset market exuberance are
known to encourage procyclical increases in public expenditure,
as booming tax revenues and lower interest payments create
transitory fiscal space.
Large rollover needs for public and private sector debt are
projected for 2011. Pressures will be especially high during the
first half of the year, with euro-area countries competing with
about $5 trillion in sovereign rollover needs in other advanced
economies
(Figure 4). This will be compounded by large funding
requirements from financial groups in many countries (see
January 2011 GFSR Update).
Heightened market scrutiny and delayed consolidation make it
even more essential for governments to signal a clear commitment
to long-term sustainability
Attempts to soften supporting institutional arrangements need
to be resisted. Strong and transparent fiscal and budgetary
institutions will be critical for sustaining the needed
medium-term adjustment and enhancing policy credibility.
- Renewed market pressures in some advanced economies
demand that these countries underline their commitment to
their deficit targets and devise contingency plans to ensure
that adjustment goals are met. In the euro area, a more
comprehensive approach to crisis management is needed that
could break the fiscal-financial spiral and reduce the risk
of cross-border contagion. In advanced economies where
fiscal sustainability has not been a market concern,
credible plans going well beyond 2011 need to be put in
place urgently to lock in benevolent market sentiment. The
United States and Japan where fiscal adjustment has now been
delayed relative to the pace envisaged in the
November 2010 Fiscal Monitor, need in
particular to strengthen their adjustment credentials by
detailing the measures they intend to adopt to honor their
commitments to reduce deficits and debt.
- Many emerging economies need to rebuild fiscal
buffers more rapidly to address overheating concerns; create
scope to respond to any growth slowdown; or avoid relapsing
into procyclical policies that would undermine credibility.
Spending pressures should be resisted, and revenue
overperformance saved in full.
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