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.

Disclose Your Fiscal Risks and Avoid Bad Surprises

Posted by Manal Fouad[1]

It is estimated that, as a result of revenue losses related to the present economic crisis, declining commodity prices, fiscal stimulus measures, and financial sector support packages, the fiscal balances of the G-20 countries will weaken by about 7 percentage points of GDP on average over 2008–09. Government debt is projected to rise by 13 percentage points of GDP over the same period, with most of the deterioration occurring in 2009. Collapsing asset prices have also had adverse effects on funded components of pension systems, leading to potentially significant further upward risks for public accounts over the next few years (see Fiscal Implications of the Global Economic and Financial Crisis and its companion paper). This sharp deterioration, totally unexpected at the beginning of 2008, will have significant long-term effects on the sustainability of public finances and require new policies to restore fiscal solvency. Had some of these risks been somehow considered in assessing the fiscal stance, some countries could have exercised more fiscal prudence to prepare for bad times.

Conducting fiscal policy in an uncertain environment is always a challenge for policymakers. At the same time, ignoring sources of fiscal risks—i.e., those causing unexpected deviations of fiscal outcomes from original projections—can be potentially very damaging to the sustainability of public finances. Proper identification of fiscal risks, appropriate reporting, including of off-balance sheet operations, leads to a better understanding of the true magnitude of a country’s fiscal deficit. Adequate disclosure also allows policymakers to better prepare against unexpected shocks and manage fiscal risks before they have serious repercussions. Identification, disclosure and management are all needed to ensure that fiscal policy is geared toward macroeconomic stability and long-term solvency. The present economic crisis has shown that many countries can still make substantial institutional improvements in both areas. A recent IMF staff position note outlines a set of principles to properly account for and disclose fiscal risks, with a special focus on those resulting from the recent (and still ongoing) public intervention in the financial sector.

Carlo Cottarelli, Director of the IMF's Fiscal Affairs Department (FAD) on NPR's Program "Will Overstimulating Economy Bring Inflation?"

Posted by Michel Lazare.

On June 26, 2009, Carlo Cottarelli, Director of the IMF's Fiscal Affairs Department (FAD) was interviewed by David Kestenbaum on National Public Radio's (NPR) program "Morning Edition." The general theme of this NPR segment was on the impact of fiscal stimulus and government spending on inflation and hyperinflation. Carlo Cottarelli made the point that while fiscal stimulus may be necessary at this juncture, central banks and governments should have an exit strategy and "start thinking now about how to exit when the moment comes."

Here is an excerpt from the NPR webpage summarizing this story, which also contains a shortcut to the audio:

"So are we at risk of catching a nasty case of inflation down the road? I took our U.S. economy in for a kind of doctor's office visit to a place that gives this advice out to countries all the time — the International Monetary Fund.

"What we have been telling ... not this country, but all our members, is that there is a need in the short run for macroeconomic policies to support economic activity. But there is a need for every central bank, for every government to have a strategy, to start thinking now about how to exit when the moment comes," says Carlo Cottarelli, the IMF's director of fiscal affairs.

There could be difficulties, he says.

Raising interest rates and pulling money back out of the economy is often unpopular. It's been said the role of a central bank is to "pull away the punch bowl, just as the party gets going." That time is arguably still in the future. As we all know, it's still a pretty lousy party."

 

Fiscal Implications of the Global Economic and Financial Crisis -- First Elements for an Exit Strategy

Posted by Michel Lazare

In virtually all countries, the global financial crisis has resulted in a significant deterioration of the fiscal position owing in part to a decline in fiscal revenues. How necessary they are to cushion the effect of the crisis and jumpstart recovery, fiscal stimulus packages have also contributed to a further deterioration in fiscal position and an accumulation of public debt. All this points to a possible fiscal solvency issue over time. Fiscal positions needs therefore to be monitored and the further accumulation of public liabilities needs to be carefully considered as the crisis unfolds, through the formulation and implementation of an exit strategy.

Against this background and "amid signs that global economic crisis is stabilizing, the Group of Eight (G-8) advanced economies has asked the International Monetary Fund (IMF) to do the necessary analytical work to help governments prepare “exit strategies” to unwind the huge stimulus packages that have been deployed to combat the crisis."

The IMF published a few days ago, a Staff Position Note on the "Fiscal Implications of the Global Economic and Financial Crisis" (Download Spn0913[1] ) which already contains some first elements of reflection on exit strategies. For instance the introduction and overview of the note (see full text below) indicates that four components are particularly important in formulating the exit strategies:

Therefore, there is an urgent need for governments to clarify their exit strategy to ensure that solvency is not at risk. In formulating such a strategy, four components are particularly important: (1) fiscal stimulus packages, where these are appropriate, should not have permanent effects on deficits; (2) medium-term frameworks, buttressed by clearly identified policies and supportive institutional arrangements, should provide a commitment to fiscal correction, once economic conditions improve; (3) structural reforms should be implemented to enhance growth; and (4) countries facing demographic pressures should firmly commit to clear strategies for health and pension reforms. While these prescriptions are not new, the weaker state of public finances has dramatically raised the cost of inaction.

First Issue of the IMF Fiscal Affairs Department's e-Newsletter

Posted by Michel Lazare

In April 2009, the IMF's Fiscal Affairs Department (FAD) published the first issue of its e-newsletter. As explained in the presentation letter (full text below) of FAD's Director, Carlo Cottarelli (see picture above), the aim of FAD's e-newsletter is to "reach out to a broad and diverse group of people who may be interested in FAD's activities.

This first issue focuses on FAD's activities on key fiscal topics:

• Fiscal policy and the global financial crisis;
• Fiscal policy in low-income countries;
• Fiscal risks; and
• Fiscal structural reforms.

In addition, the e-newsletter includes links to three categories of publications on fiscal issues:

1. IMF publications;
2. IMF working papers; and
3. External publications

And guess what? Surprise, surprise ! The e-newsletter includes a link to PFM blog!

The e-newletter is accessible on the www. imf.org website.

Long live the FAD's e-newsletter!

Fiscal Risks: Sources, Disclosure and Management

Posted by Eivind Tandberg

A recent FAD paper (Download FAD fiscal risks paper) summarizes work FAD staff have been doing on fiscal risks over the last few years. Some of this work has already been reported on this blog, but this is the most recent comprehensive publication on the topic. The paper, by Aliona Cebotari, Jeffrey Davis, Lusine Lusinyan, Amine Mati, Paulo Mauro, Murray Petrie and Ricardo Velloso, discusses sources of fiscal risk and international experiences in disclosure and management of such risks, and draws lessons on the basis of these experiences and FAD analysis.

IMF Conference on “Fiscal Risks: Sources, Disclosure, and Management” (Paris, October 28–29, 2008)

Posted by Ricardo Velloso

The IMF’s Fiscal Affairs Department and the Offices in Europe organized a conference on “Fiscal Risks: Sources, Disclosure, and Management,” at the IMF’s Paris Office on October 28 and 29, 2008. The conference was attended by high-level officials from ministries of finance representing twenty European countries as well as representatives from international institutions, rating agencies, think tanks, and academia. The opening address was delivered by Mr. Saleh M. Nsouli, Director of the Offices in Europe, followed by former FAD Director, Mrs. Teresa Ter-Minassian's keynote speech.

Norway’s Government Pension Fund–Global

Posted by Thomas Ekeli

A recent post by Mauricio Villafuerte and Jon Shields described newly established guidelines for sovereign wealth funds (SWFs). One of the best known SWFs is the Norwegian Government Pension Fund–Global, formerly known as the Government Petroleum Fund. The Petroleum Fund was established in 1990 as a fiscal policy tool to support a long-term management of the petroleum revenues. Renaming the Fund the Government Pension Fund–Global in 2006 was part of a broader pension reform, highlighting also the Fund’s role in facilitating government savings necessary to meet the rapid rise in public pension expenditures in the coming years. However, the Fund is not earmarked for pension expenditures.

Allen Schick and Paulo Mauro Discuss Budgeting for Fiscal Risks

On September 17, at a well-attended FAD seminar, Professor Allen Schick and FAD Division Chief Paulo Mauro presented their views on "Budgeting for Fiscal Risks". Professor Schick is an acknowledged expert on the subject and, in 2002, wrote a path-breaking book with Hana Polackova Brixi and Sweder van Wijnbergen — "Government at Risk: Contingent Liabilities and Fiscal Risk"—published by the World Bank and Oxford University Press. This seminar was timely, given the fact that FAD has recently produced an IMF Board Paper on the subject "Fiscal Risks—Sources, Disclosure, and Management".

Professor Schick was quite complementary on the recent FAD paper and agrees with many of the recommendations contained in the Paper. Pr. Schick suggested that a clearer distinction between "fiscal risks" and "fiscal uncertainties" could be made:

- In the FAD paper fiscal risk is defined as the "possible deviation of fiscal outcomes from budget estimates or other projections";

- Pr. Schick provides an alternative definition which focuses on the "contingency of future revenues or expenditures on uncertain events";