Russian
Fiscal Monitor Update
Staying the Course on Fiscal Adjustment
June 17, 2011
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Consolidation is proceeding at a broadly appropriate pace in
many advanced economies —notably in most of Europe and in
Canada—helped by recovering activity and revenues. In the United
States, the 2011 deficit will be lower than previously forecast
and similar to 2010 in cyclically adjusted terms, thereby making
the planned fiscal adjustment in 2012 less abrupt. Consensus on
a credible medium-term fiscal adjustment plan is urgently
needed. Similarly, defining a more detailed medium-term
adjustment plan is essential in Japan. Rising risk perceptions
in Greece, Ireland, and Portugal underscore the need to
implement their adjustment programs and to develop a
comprehensive and consistent approach to crisis management in
the euro area. In many emerging economies, fiscal consolidation
is proceeding at an appropriate pace. In others, fiscal policy
needs to be tightened faster than currently envisaged, to reduce
overheating risks.
Key revisions in this Update
compared with
the April 2011 Fiscal Monitor
Revenues better than expected…
- Greater tax buoyancy—partly reflecting a
stronger recovery in equity markets—leading to
sizable downward deficit revisions for the United
States in 2011
- Higher growth (Belgium, France, Germany, Turkey)
… except in countries affected by natural
disasters or
political shocks.
- Natural disasters (Australia, Japan)
- Political instability (Middle East and North
Africa)
Some countries may cut spending faster in
2011…
- More rapid implementation of consolidation plans
(Canada, Italy, Poland)
- Spending somewhat below expectation in the
United States
… while others face new pressures.
- Reconstruction efforts (Japan)
- Spending in response to political turmoil in the
region (Middle East and North Africa)
|
The pace of fiscal adjustment is uneven among advanced economies, with
many making steady progress, others needing to redouble efforts,
and some yet to begin
In many advanced economies, fiscal adjustment is well
underway, helping to gradually stem the rise of government debt
to GDP ratios (Figure 1).
Figure 1. General Government Overall Balance, and Gross Debt
(Percent of GDP)
|
This is especially the case in Europe and
Canada. Indeed, with slight upward revisions in growth for
2011 and 2012 in some core Western European economies (see June
2011 World Economic Outlook Update), stronger revenue
growth is leading to lower budget deficits than projected in the
April 2011 Fiscal Monitor (for example, in Germany;
Table 1). For Canada, deficit projections for 2011 have
also been revised downward, reflecting lower-than-expected
spending at the provincial level. Following the May elections,
the authorities released a new 2011 federal budget in which they
reiterated the commitment to return the federal budget to
balance by FY2014. In line with this proposal, IMF staff project
that the general government would return to fiscal balance by
2016. In Italy and Spain, expenditure
projections have also been revised downward, in view of recent
outturns and the announcement of more detailed expenditure
control measures, respectively. In the United Kingdom,
fiscal consolidation remains on track. Less positive news comes
from below-the-line operations in a few countries, with some
significant, upward revisions to debt-to-GDP ratios owing to the
impact on public debt of financial sector support in Germany
(reflecting operations that took place in 2010) and Spain
(debt issuance from the Fund for Orderly Bank Restructuring and
on behalf of the electricity system). Amid evidence that the
recovery has strengthened, countries in Europe need to persevere
with adjustment efforts while working cooperatively to reach
final agreement on a comprehensive and consistent pan-European
approach to crisis management.
However, in prominent adjustment cases in Europe—notably,
Greece and Portugal—downward revisions to growth
(and, in the case of Portugal, revisions to the fiscal accounts
to include state-owned enterprises) have, in the presence of
financing constraints, implied the need for further fiscal
adjustment measures. (Recently undertaken measures in these and
a few other European economies with IMF-supported programs are
summarized in Table 2.) Nevertheless, the Portuguese
authorities’ program now envisages attaining a deficit of
3 percent of GDP only in 2013, a year later than under the
authorities’ original stability program, thus avoiding an
excessively sharp fiscal contraction. In addition, a notable
objective of the Portuguese program is to improve international
competitiveness and employment by shifting the weight of
taxation from labor to domestic consumption (the so-called
“fiscal devaluation”). (Recently released data from the
Organization for Economic Cooperation and Development (OECD)
confirm a strong cross-country association between the labor tax
wedge and hours worked per person of working age—Figure 2.) In
Greece, further fiscal adjustment is planned to reduce the
general government deficit from 10.4 percent of GDP in 2010 to
7.5 percent in 2011, thereby maintaining the government’s fiscal
targets for 2011 and the medium term.
|
|
Table 1. Fiscal Indicators,
2008-12 |
(Percent of GDP) |
|
|
|
|
Est. |
Projections |
|
Difference from November 2010
Fiscal Monitor
1 |
|
|
|
|
|
2008 |
2009 |
2010 |
2011 |
2012 |
|
2010 |
2011 |
2012 |
|
Overall Fiscal Balance |
World |
-1.9 |
-6.7 |
-5.5 |
-4.6 |
-3.7 |
|
0.1 |
0.1 |
-0.2 |
|
|
|
|
|
|
|
|
|
|
Advanced
economies |
-3.6 |
-8.8 |
-7.5 |
-6.8 |
-5.3 |
|
0.1 |
0.3 |
-0.1 |
United States |
-6.5 |
-12.7 |
-10.3 |
-9.9 |
-7.8 |
|
0.3 |
0.9 |
-0.3 |
Euro Area |
-2.1 |
-6.4 |
-6.1 |
-4.3 |
-3.4 |
|
-0.1 |
0.2 |
0.3 |
France |
-3.4 |
-7.6 |
-7.1 |
-5.8 |
-4.9 |
|
-0.1 |
0.0 |
0.0 |
Germany |
0.1 |
-3.0 |
-3.3 |
-1.9 |
-1.1 |
|
0.0 |
0.5 |
0.4 |
Italy |
-2.7 |
-5.3 |
-4.5 |
-4.1 |
-3.2 |
|
0.0 |
0.2 |
0.3 |
Spain |
-4.2 |
-11.1 |
-9.2 |
-6.2 |
-5.1 |
|
0.0 |
0.0 |
0.6 |
Japan |
-4.2 |
-10.3 |
-9.6 |
-10.5 |
-9.1 |
|
-0.1 |
-0.5 |
-0.7 |
United Kingdom |
-4.9 |
-10.3 |
-10.2 |
-8.5 |
-7.0 |
|
0.3 |
0.0 |
0.0 |
Canada |
0.1 |
-4.9 |
-5.6 |
-3.9 |
-2.6 |
|
-0.1 |
0.7 |
0.2 |
|
|
|
|
|
|
|
|
|
|
Emerging
economies |
-0.4 |
-4.8 |
-3.7 |
-2.7 |
-2.2 |
|
0.1 |
-0.1 |
-0.1 |
China |
-0.4 |
-3.1 |
-2.6 |
-1.6 |
-0.7 |
|
0.0 |
0.0 |
0.2 |
India |
-7.2 |
-9.7 |
-9.2 |
-8.5 |
-8.1 |
|
0.2 |
-0.2 |
-0.6 |
Russia |
4.9 |
-6.3 |
-3.5 |
-1.4 |
-1.6 |
|
0.0 |
0.2 |
0.1 |
Brazil |
-1.4 |
-3.1 |
-2.9 |
-2.8 |
-2.9 |
|
0.0 |
-0.4 |
-0.4 |
Mexico |
-1.3 |
-4.8 |
-4.1 |
-2.7 |
-2.6 |
|
0.0 |
-0.9 |
-0.2 |
South Africa |
-0.5 |
-5.2 |
-5.8 |
-5.7 |
-5.0 |
|
0.0 |
0.0 |
0.0 |
|
|
|
|
|
|
|
|
|
|
Low-income economies |
-1.4 |
-4.2 |
-3.1 |
-2.9 |
-2.6 |
|
-0.2 |
-0.3 |
-0.2 |
|
|
|
|
|
|
|
|
|
|
G-20
advanced |
-4.2 |
-9.4 |
-8.1 |
-7.6 |
-6.0 |
|
0.1 |
0.4 |
-0.2 |
G-20
emerging |
-0.3 |
-4.8 |
-3.6 |
-2.7 |
-2.3 |
|
0.0 |
-0.2 |
-0.2 |
|
|
|
|
|
|
|
|
|
|
General Government Cyclically
Adjusted Balance
(Percent of Potential GDP) |
World |
-2.4 |
-4.1 |
-4.4 |
-4.0 |
-3.2 |
|
0.0 |
0.0 |
-0.1 |
|
|
|
|
|
|
|
|
|
|
Advanced economies |
-3.3 |
-5.5 |
-5.6 |
-5.1 |
-4.2 |
|
0.1 |
0.4 |
0.0 |
United States 2 |
-4.6 |
-6.8 |
-7.2 |
-7.2 |
-5.8 |
|
0.3 |
0.9 |
-0.1 |
Euro Area |
-2.8 |
-4.6 |
-4.3 |
-3.2 |
-2.6 |
|
0.0 |
0.1 |
0.2 |
France |
-2.9 |
-5.2 |
-4.9 |
-4.2 |
-3.6 |
|
0.4 |
0.2 |
0.1 |
Germany |
-0.9 |
-1.1 |
-2.4 |
-1.9 |
-1.3 |
|
0.0 |
0.2 |
0.2 |
Italy |
-2.4 |
-3.2 |
-2.8 |
-2.5 |
-1.8 |
|
0.0 |
0.2 |
0.3 |
Spain |
-5.3 |
-9.7 |
-7.5 |
-4.7 |
-4.1 |
|
0.0 |
0.0 |
0.6 |
Japan |
-3.7 |
-7.0 |
-7.7 |
-8.1 |
-7.7 |
|
-0.2 |
0.2 |
-0.3 |
United Kingdom |
-5.9 |
-8.5 |
-8.0 |
-6.5 |
-5.1 |
|
0.3 |
0.1 |
0.1 |
Canada |
0.0 |
-3.2 |
-4.0 |
-2.9 |
-2.2 |
|
0.0 |
0.7 |
0.0 |
|
|
|
|
|
|
|
|
|
|
Emerging economies |
-2.2 |
-4.5 |
-4.0 |
-3.3 |
-3.0 |
|
0.0 |
-0.2 |
-0.2 |
China |
-0.9 |
-3.4 |
-2.9 |
-1.8 |
-1.0 |
|
0.0 |
0.0 |
0.0 |
India |
-9.3 |
-10.7 |
-9.6 |
-8.9 |
-8.6 |
|
0.4 |
-0.1 |
-0.9 |
Russia |
3.7 |
-3.4 |
-1.7 |
-0.6 |
-1.3 |
|
0.1 |
0.1 |
0.0 |
Brazil |
-2.1 |
-2.0 |
-3.1 |
-3.0 |
-2.9 |
|
-0.1 |
-0.4 |
-0.3 |
Mexico |
-1.8 |
-4.5 |
-4.1 |
-3.0 |
-3.0 |
|
0.0 |
-0.9 |
-0.3 |
South Africa |
-2.1 |
-4.8 |
-5.0 |
-4.9 |
-4.4 |
|
0.0 |
0.0 |
0.0 |
|
|
|
|
|
|
|
|
|
|
G-20
advanced |
-3.4 |
-5.5 |
-5.8 |
-5.6 |
-4.5 |
|
0.2 |
0.5 |
0.0 |
G-20
emerging |
-2.1 |
-4.6 |
-4.0 |
-3.3 |
-2.9 |
|
0.0 |
-0.2 |
-0.2 |
|
|
|
|
|
|
|
|
|
|
General Government Gross Debt |
World |
57.6 |
64.7 |
67.0 |
69.3 |
70.3 |
|
-0.2 |
-0.1 |
0.1 |
|
|
|
|
|
|
|
|
|
|
Advanced
economies |
79.4 |
91.5 |
96.8 |
101.9 |
104.1 |
|
0.3 |
0.4 |
0.4 |
United States |
71.2 |
84.5 |
91.2 |
98.3 |
102.3 |
|
-0.3 |
-1.2 |
-0.6 |
Euro
Area |
69.7 |
79.1 |
85.4 |
87.9 |
88.7 |
|
1.3 |
1.3 |
1.0 |
France |
68.3 |
79.0 |
82.4 |
84.8 |
86.6 |
|
0.6 |
-0.1 |
-0.3 |
Germany |
66.3 |
73.4 |
83.2 |
82.3 |
81.0 |
|
3.2 |
2.2 |
1.5 |
Italy |
106.3 |
116.1 |
119.0 |
120.6 |
120.3 |
|
0.0 |
0.3 |
0.3 |
Spain |
39.8 |
53.3 |
60.1 |
67.5 |
69.7 |
|
0.0 |
3.5 |
2.6 |
Japan |
195.0 |
216.3 |
220.4 |
233.2 |
236.7 |
|
0.1 |
4.1 |
3.3 |
United Kingdom |
52.0 |
68.3 |
77.1 |
82.9 |
86.5 |
|
-0.2 |
-0.1 |
0.0 |
Canada |
71.1 |
83.3 |
83.9 |
82.7 |
81.6 |
|
-0.2 |
-1.5 |
-1.4 |
|
|
|
|
|
|
|
|
|
|
Emerging
economies |
35.3 |
36.7 |
35.3 |
34.6 |
34.3 |
|
-0.7 |
-0.7 |
-0.4 |
China |
17.0 |
17.7 |
17.0 |
16.5 |
15.7 |
|
-0.7 |
-0.6 |
-0.5 |
India |
74.3 |
74.0 |
68.1 |
66.2 |
65.9 |
|
-4.1 |
-4.5 |
-4.0 |
Russia |
7.9 |
11.0 |
11.7 |
11.4 |
12.1 |
|
1.9 |
2.8 |
3.3 |
Brazil |
70.7 |
67.9 |
66.1 |
65.6 |
65.2 |
|
0.0 |
-0.1 |
0.2 |
Mexico |
43.0 |
44.6 |
42.7 |
42.4 |
42.6 |
|
0.0 |
0.1 |
0.4 |
South Africa |
27.3 |
31.5 |
36.3 |
40.5 |
42.8 |
|
0.0 |
0.0 |
0.0 |
|
|
|
|
|
|
|
|
|
|
Low-income economies |
38.9 |
43.1 |
42.1 |
42.3 |
41.3 |
|
-0.2 |
-0.3 |
-0.6 |
|
|
|
|
|
|
|
|
|
|
G-20
advanced |
84.3 |
97.3 |
102.9 |
108.4 |
110.9 |
|
-0.1 |
-0.1 |
0.0 |
G-20
emerging |
35.2 |
35.8 |
33.8 |
32.8 |
32.3 |
|
-0.8 |
-0.7 |
-0.5 |
|
Sources: IMF staff estimates and projections.
Note: All country averages are PPP-GDP weighted
using 2009 weights. Projections are based on IMF
staff assessment of current policies.
1 For overall fiscal balance and
cyclically adjusted balance, + indicates a smaller
fiscal deficit; for gross debt, + indicates a larger
debt.
2 Excluding financial sector support
recorded above the line.
|
Table 2. Selected European
Countries with IMF-Supported Programs: Policy
Measures Adopted or Announced for 2011
(Announced impact on 2011
general government balance in percent of GDP)
|
Country |
Revenue and other receipts |
Expenditure |
Total |
|
Greece 1 |
Reduction in tax expenditures,
including property taxes and VAT; various measures
to speed up collection of tax arrears and penalties;
measures against fuel smuggling; renewal of Telecom
licenses; and extension of airport concessions (2.4
percent of GDP) |
Wage cuts and tariff increases in
public enterprises; restructuring of public
entities; reduction in public wage bill (e.g.
through reduction in short-term contracts and
attrition-based reductions in employment); health
reforms (drug and other cost savings and increases
in co-pay for hospitals); rationalization of
entitlements, including means-testing of family
benefits; and reductions in transfers to public
entities outside general government, operational
expenditures, and military deliveries (2.7 percent
of GDP) |
5.1 |
|
|
|
|
Ireland 2 |
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 (1.2 percent of GDP) |
Reduction in public payroll and
discretionary expenditure, non-progressive social
welfare benefits and capital spending (2.6 percent
of GDP) |
3.8 |
|
|
|
|
Latvia |
Increase in VAT rate by one
percentage point, social contribution rate, excise
duties, real estate and car tax, dividend payout
ratio of SOEs, financial stability duty, and other
nontax revenues (2 percent of GDP) |
Cuts in public employment, goods and
services, subsidies and grants, health spending and
transfers to local governments; and reform of social
benefits (0.8 percent of GDP) |
2.8 |
|
|
|
|
Portugal |
Increase in the VAT standard rate (by
2 percentage points) and PIT and CIT rates;
broadening of the SSC base; introduction of a new
tax on the banking sector; adoption of tolls; and
revision of penalties and fees (2 percent of GDP) |
Reduction in public payroll (cuts in
wages and the number of employees); pension freeze;
cuts in social transfers and improvement of
means-testing; reduction in capital expenditures and
intermediate consumption; savings in
health/pharmaceutical products; and cuts in
transfers to SOEs and local governments (3.7 percent
of GDP) |
5.7 |
|
|
|
|
Romania 3 |
Increase in VAT rate by 5 percentage
points and excise rates and broadening of the tax
base for PIT and SSC (2.1 percent of GDP) |
Public wage and employment cuts,
elimination of holiday bonus and 13th salary,
pension freeze, cuts in inefficient social benefits,
reinforced social inspections, cuts in heating
subsidies, and health reforms (2 percent of GDP) |
4.1 |
|
1
The fiscal impact estimate includes additional
measures announced as part of the medium-term fiscal
strategy but not yet finalized and approved by
Parliament.
2 The fiscally-neutral Jobs Initiative
(financed by a temporary levy on private pension
funds) reduces lower-tier VAT on some
tourism-related items, halves employer social
security contribution rate until end-2013, creates
new training positions for unemployed, and reorients
capital projects for road reconstruction, school
maintenance, and home energy efficiency.
3 The VAT rate hike and public wage cuts
were implemented in mid-2010.
|
Figure 2. Tax Wedge and Hours Worked per Working-Age Person (2010)
There has also been increased interest in privatization as a
source of financing: for example, the Greek authorities have
recently announced a plan to raise privatization revenues
equivalent to 6½ percent of GDP over two years (cumulative).
This is an ambitious goal, but not an unprecedented one:
cumulative revenues in excess of 5 percent of annual GDP in a
two-year period have been collected in about 20 past episodes in
Europe.
Fiscal adjustment in Europe is being accompanied by a
strengthening of institutions and rules. Following recent
reforms in the United Kingdom (e.g., the introduction of a
fiscal council) and Germany (a balanced-budget constitutional
rule), initiatives aimed at improving the budget process are
being debated in several countries, including France, Greece,
Ireland, Italy, and Portugal. A draft European Union
Directive under review in the European Parliament addresses
weaknesses in national budgetary institutions and procedures
that have undermined past efforts to enforce the Stability and
Growth Pact (SGP). Such weaknesses include a lack of medium-term
orientation, an optimistic bias in official forecasts, the
absence of binding national fiscal objectives consistent with
the SGP, a lack of transparency in budget data, and poor
monitoring and management of fiscal risks arising from tax
expenditures, guarantees, and other contingent liabilities. The
envisaged deadline for translating the Directive into national
legislation is end-2013.
In the United States, the deficit projection for
2011 has been revised significantly downward, as post–April 15
data on revenues have come in stronger (in part because of
sizable capital gains in 2010) and expenditures have been more
contained than initially projected. As a result, the
cyclically-adjusted fiscal deficit in 2011 is no longer seen as
imparting fiscal stimulus compared with 2010. Consistently,
achieving the previously announced fiscal targets for 2012 will
require less abrupt adjustment than earlier projected. To ensure
fiscal sustainability, it is urgent that broad political support
be forged on a comprehensive and balanced set of specific
measures to underpin a credible medium-term fiscal adjustment
plan with objectives (e.g., an explicit debt target) endorsed by
Congress. Focusing on adjustment measures that reform
entitlements, promote efficiency—such as broadening the tax base
via the elimination of tax expenditures (see the April 2011
Fiscal Monitor)—and address the growth of current spending
in a targeted way would help contain any negative short-term
growth impact of fiscal adjustment. In this respect, different
policymakers have recently unveiled their own alternative fiscal
consolidation blueprints. Both major plans—the President’s April
proposal and the House of Representatives’ Republican-sponsored
budget resolution—aim for about US$4 trillion in savings over
the next 10–12 years. There are, however, significant
differences in the proposed policy mix, macroeconomic
assumptions, and the budget baseline from which these savings
are calculated. The need to raise the debt ceiling in the near
term (by early August, according to the U.S. authorities) is
serving to focus the negotiations on an initial list of specific
consolidation measures. An increase in the debt ceiling is
neither avoidable—it would need to be lifted under all proposed
plans—nor exceptional, as it has been increased more than 70
times over the past few decades, and 10 times during the last 10
years. Nevertheless, should Congress prove unwilling to raise
the debt ceiling, there would be a risk of a major adverse
market reaction. Moreover, keeping net debt issuance at zero
would require unrealistically large spending cuts during the
remainder of this year. Thus, despite the welcome news compared
with the April Monitor, the priority remains agreement
on a medium-term fiscal adjustment plan.
In Japan, Australia, and New Zealand,
recent natural disasters are negatively affecting the fiscal
accounts. In Japan, projected deficit/GDP ratios are
higher for both 2011 and 2012, owing to weaker output growth and
revenues this year and greater reconstruction costs. In addition
to the 0.8 percent of GDP supplementary budget approved in May
(already included in the April 2011 Fiscal Monitor
projections), a further supplementary budget is expected in the
second half of 2011 that is projected to increase spending by
about 1 percentage point of GDP in 2012. This further weakening
of the fiscal accounts makes the definition of a more detailed
medium-term fiscal adjustment plan (with tax measures as its
centerpiece) even more urgent. In Australia, the budget
released in May estimates 2010/11 and 2011/12 deficit figures ½
to ¾ percent of GDP higher than foreseen in the November 2010
Mid-Year Economic and Fiscal Outlook. This reflects lower
revenues due to the softer economy (owing in part to natural
disasters) and larger than initially estimated losses
accumulated during the global financial crisis. In New
Zealand, where the damage to the existing capital stock has
been the largest as a share of national output, most of the
reconstruction costs will be covered by the national disaster
fund, offshore reinsurance, and commercial insurance, with the
remainder financed by central government borrowing (2¾ percent
of 2011 GDP). Despite the earthquakes, the government aims to
return to surpluses in 2014/15, one year ahead of its earlier
plan.
In emerging and low-income countries, key challenges are to
avoid overheating and to address pressing social needs without
compromising sustainability
In emerging and low-income economies, fiscal deficits and
debts are being reduced gradually. In several of these
economies—including commodity producers benefiting from high
export prices—the economic recovery has been faster, and the
task is to avoid overheating. In Turkey, rapid domestic
demand growth is reflected in a widening current account deficit
and booming revenues, especially from imports. To the extent
that strong revenues may prove transient, they should be saved,
also to keep inflation in check. In China, a gradual
withdrawal of stimulus is envisaged in this year’s budget. In
Poland, expenditure cuts of about 1 percent of GDP are
being implemented this year.
In many Latin American economies, the overall fiscal balance
is projected to improve in 2011 compared with 2010, but the
fiscal position is not particularly strong from an historical
perspective (Box 1). The fiscal stance is broadly in line with
medium-term-oriented fiscal rules. Other than in Chile, these
rules are for the most part not defined in cyclically-adjusted
terms. In most cases, more could be done to dampen overheating
pressures (Figure 3). In Brazil, where the debt ratio
remains high by emerging market standards, fiscal outturns
through April indicate that stimulus withdrawal is on track to
meet the 3 percent of GDP primary surplus target in 2011, while
treasury lending to Brazil’s National Development Bank is being
reduced. A slight downward revision to the overall balance
largely reflects a higher projected interest bill. In Mexico,
fiscal consolidation is underway, driven by spending restraint
and stronger revenues stemming from solid economic growth and
high oil prices; from 2012 onward, compliance with the
balanced-budget rule would ensure that the public debt/GDP ratio
is gradually reduced. In Colombia, the government is
expected to increase spending on infrastructure and
reconstruction projects after major floods last year, which will
be offset by higher tax revenues as growth remains firm.
Meanwhile, the establishment of a fiscal rule is currently under
discussion in Congress. In Peru, the fiscal deficit is
expected to stay in line with the 0.5 percent of GDP target
under the fiscal responsibility law. Overall, as revenues remain
buoyant and inflation expectations continue rising, these
countries would benefit from over-performing with respect to
their fiscal goals to help contain domestic demand pressures and
increase fiscal savings. This is especially true given that
revenue gains associated with strong capital inflows and
commodity prices could prove temporary. Consideration should be
given to redefining fiscal rules on cyclically-adjusted targets,
to discourage pro-cyclicality of fiscal policies.
Figure 3. Improvement in the Structural Primary Balance
(In percent of GDP)
For many emerging and low-income economies, the
adverse fiscal impact of high fuel and food prices is expected
to be sizable. For example, spending overruns seem likely in
India, based on rapid growth in fuel and food subsidies
during the past few quarters. Indeed, consistent with these
observations, projections for the 2012 deficit have been revised
upward compared with the April 2011 Fiscal Monitor.
India’s fiscal deficit is projected to fall gradually in the
coming years, but will remain high. Its debt ratio will decline
moderately, mainly due to rapid output growth.
Box 1. Fiscal Developments in
Historical Perspective in Latin America
While most countries in Latin America have
weathered the storm of the global financial crisis,
their fiscal position is not particularly strong from an
historical perspective nor when compared to other
emerging economies. Many countries in the region need to
reduce deficits more rapidly and to reorient spending,
in order to protect against a sudden reversal of
favorable tailwinds and to make room for priority
spending.
The fiscal position of Latin American economies is
expected to strengthen in 2011, with overall deficits
falling to an average of 2½ percent of GDP and debt to
about 50 percent of GDP. However, this debt ratio is not
much different from its 1980–2010 average; it is also
higher than in the mid-1990s, although for many
countries vulnerabilities may have declined since then,
owing to better debt structures by currency and
maturity. Similarly, relative to the position of other
emerging economies, overall balances in Latin America
are somewhat better, but debt levels are above those of
emerging Asia and emerging Europe.
A more cautious fiscal policy stance is warranted in
the face of ongoing global risks and prospective
spending challenges. Revenue performance in some cases
has been supported by favorable tailwinds, such as high
commodity prices and capital inflows, which could be
short-lived. The global low interest rate environment
has also helped to contain countries’ interest burdens.
In addition, Latin American countries must intensify
investment in infrastructure and respond to demographic
spending pressures—as health care and pension costs are
projected to rise by an estimated 3 percent of GDP on
average over the next 20 years, and 7½ percent over the
next 40 years. Furthermore, while financial market
conditions have improved, large capital inflows and easy
credit conditions pose risks to the financial system
(through rapid credit growth and excessive risk taking)
with potential implications for the budget. |
Beyond the continued impact of high fuel and
food prices, political turmoil in the Middle East and North
Africa has taken a toll on economic activity and revenues.
Governments have responded with measures such as expansion of
subsidies, civil service wage and pension increases, additional
cash transfers, and tax reductions. The scale of these measures
has ranged from near-negligible to several percentage points of
GDP, with a tendency to be larger in oil-rich countries than in
oil importers. The largest measures have been undertaken in
Saudi Arabia, where the February/March 2011 fiscal packages
(if fully implemented) are estimated to total about 19 percent
of GDP. Of this, an estimated 5½ percent of GDP would be spent
in 2011. Capital expenditures, which constitute two thirds of
the packages, are expected to spread over several years. In
Egypt, where the authorities have recently requested
financial assistance from the IMF, revenues have fallen while
subsidies and social spending have increased substantially.
Going forward, an important policy objective will be to
stabilize and gradually reduce the debt/GDP ratio, while
shifting spending toward social programs. More generally, recent
events in the region have given renewed urgency to the need to
counter joblessness, particularly among young people. Depending
on country-specific circumstances and in the context of broader
economic and labor market reforms, viable labor-intensive
infrastructure projects and means-tested transfers to protect
the most vulnerable could help in this regard. Measures to
enhance non-oil revenue mobilization will also be needed.
Government bond markets have remained broadly
stable, but pressures on some European economies have
intensified
Despite political events in the Middle East and
North Africa, natural disasters, and the announcement in April
of Standard and Poor’s negative outlook for the sovereign credit
ratings of the United States and Japan,
government bond yields in the largest advanced economies remain
at very low levels, providing little incentive to reduce
deficits (Figure 4; see also Global Financial Stability
Report Update, June 2011). The announcement of negative
outlooks for Belgium and Italy in May had a
somewhat larger impact, but credit default swap (CDS) spreads
later returned to their previous levels. Likewise, emerging
economies’ spreads have been stable.
Figure 4. Recent Developments in Sovereign
Bond Markets
In contrast, market concerns about debt
sustainability remain acute in Greece, where spreads
have risen by 600 basis points since end-2010, to almost
1,700 basis points in early June. In Ireland and
Portugal spreads have risen by 100–230 basis points to
reach more than 700 basis points. In these cases, heightened
concern regarding public debt dynamics has become more evident
as there have been no further secondary market purchases by the
European Central Bank (ECB). Meanwhile, risk perceptions have
worsened notably for Cyprus.
Figure 5. Central Bank
Purchases of Government Securities
Contagion to other Euro-area countries has been
more limited, with spreads broadly stable in Belgium,
Italy, and Spain. Despite ongoing fiscal
consolidation, however, spreads remain in the 140–260 basis
points range for these countries. In contrast, spreads for some
Baltic and eastern European countries have declined—in
Latvia, Lithuania, and Romania by
50–70 basis points since early 2011 (to about 200 basis
points)—a sign of greater market confidence as fiscal reform
advances and growth performance improves.
Some central banks in the largest advanced
economies have continued purchasing government securities as
announced, acquiring a significant share of government debt.
Purchases of government bonds by the U.S. Federal Reserve since
end-2010 have amounted to US$500 billion—with total envisaged
asset purchases of US$600 billion under the second round of
quantitative easing slated to end in June—bringing its holdings
to 15 percent of publicly-held government debt. Securities
purchases by the Bank of Japan (BOJ) are continuing. The BOJ now
holds 7½ percent of outstanding government debt. Meanwhile,
there have been no further market interventions by the ECB since
March; its holdings of government securities remain equivalent
to 11 percent of the outstanding debt of Greece, Ireland, and
Portugal. In contrast, the Bank of England essentially halted
its net purchases of government debt about a year ago, though
its stock of holdings still stands at 16 percent of outstanding
U.K. sovereign debt. Although unwinding these large portfolios
of government debt could present challenges in an environment of
still-sizable sovereign financing requirements, central banks
may well opt to hold to maturity a substantial portion of their
government debt holdings.
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