Maintain Fiscal Support, but Devise Credible Exit Strategies, Says the IMF's Fiscal Monitor

Posted by Michel Lazare.

On November 3, 2009, the IMF published the second issue of its Cross-Country Fiscal Monitor.

This Fiscal Monitor stresses that while, fiscal policy will continue to provide substantial support to aggregate demand in most countries this year, and is projected to remain supportive of economic activity in advanced countries in 2010, government debt in advanced G-20 economies is projected to reach 118 percent of GDP in 2014.

To get debt below 60 percent by 2030 will require raising the average structural primary balance by 8 percentage points of GDP over 2010-20 and then keeping it there for a further decade.

This is not a trivial amount of fiscal consolidation to say the least. The FIscal Monitor, however, considers that this could be achieved by a combination of non-renewal of stimulus measures; a freeze in real per capita spending excluding pensions and health; reforms to keep the growth of pension and health spending in line with that of GDP; and tax increases averaging about 3 percentage points of GDP for advanced G-20 countries.

Most PFM experts would probably agree that such a sizable fiscal consolidation over such a long period also requires a sound PFM system and pretty solid fiscal institutions.

The full text of the Fiscal Monitor is aceeesible here: Download Spn0925[1]

The full text of the November 3 IMF Press Release announcing the second issue of the Fiscal Monitor is as follows:

Maintain Fiscal Support, but Devise Credible Exit Strategies,
IMF’s Fiscal Monitor Says

 

Fiscal policy will continue to provide substantial support to aggregate demand in most countries this year, and is projected to remain supportive of economic activity in advanced countries in 2010, the International Monetary Fund (IMF) said in its latest edition of the Cross-Country Fiscal Monitor. Though maintenance of fiscal support remains appropriate, governments need to devise and communicate credible exit strategies now.

 

The Fiscal Monitor draws on projections from the October 2009 World Economic Outlook and shows that:

 

·    Across the G-20,[1] the average overall deficit is projected to fall from 7.9 percent of GDP in 2009 to 6.9 percent of GDP next year, both figures somewhat better than projected in the July 2009 Fiscal Monitor. However, excluding losses from financial sector support measures, deficits are projected to widen in advanced G-20 economies in 2010, with reduced stimulus measures more than offset by higher automatic stabilizers as the output gap widens, and by increases in other types of spending.

·    Government debt in advanced G-20 economies is projected to reach 118 percent of GDP in 2014. New IMF research confirms that stabilizing debt at these levels would imply increases in interest rates of up to 2 percentage points globally. Communication of exit strategies now can help contain any potential adverse market response.

·    Credible exit strategies for advanced countries will need to go well beyond the non-renewal of stimulus measures. Weak pre-crisis structural fiscal positions in many countries have been further eroded by underlying spending pressures. To get debt below 60 percent by 2030 will require raising the average structural primary balance by 8 percentage points of GDP over 2010-20 and then keeping it there for a further decade. This could be achieved by a combination of non-renewal of stimulus measures; a freeze in real per capita spending excluding pensions and health; reforms to keep the growth of pension and health spending in line with that of GDP; and tax increases averaging about 3 percentage points of GDP for advanced G-20 countries.

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[1] The G-20 countries are Argentina, Australia, Brazil, Canada, China, France, Germany, India, Indonesia, Italy, Japan, Korea, Mexico, Russia, Saudi Arabia, South Africa, Turkey, United Kingdom, and United States. Of these, the emerging economies comprise Argentina, Brazil, China, India, Indonesia, Korea, Mexico, Russia, Saudi Arabia, South Africa, and Turkey.

Comments

[Alexandre Chailloux]

Too late ! the fiscal genie is out of the bottle now !! and as Trichet once said " une fois que la pate dentifrice est sortie du tube, c'est difficile de la faire re-entrer"... :) . Treve de plaisanteries, bravo pour votre blog qui est superbe, autant dans la forme que sur le fonds.
Amities
Alex