Posted by Annalisa Fedelino, Deputy Division Chief, IMF Fiscal Affairs Department
The decline in growth and demand triggered by the financial crisis has affected public finances in a number of ways. Countries have generally seen a significant drop in their revenue intake, and some have faced pressures to increase spending—in support of vulnerable groups or sectors affected by the crisis. All these factors have resulted in a general deterioration of fiscal positions, in some cases quite sizeable. For example, while the budget deficit of the world was estimated to be only -0.5 percent of GDP (PPP weighted) in 2007 (the pre-crisis year), this is projected to widen to almost 7 percent of GDP in 2009; advanced countries drive this deterioration, as their deficit is projected to increase from 1.2 percent of GDP in 2007 to almost 9 percent of GDP in 2009 (see, for example, : November 2009; see also our November 4 PFM Blog post on the ).
In this environment, it is important to assess to what extent changes in fiscal positions are driven by “automatic” factors, induced by changes in the macroeconomic environment (typically, but not solely, cyclical changes in output); and to what extent they reflect “discretionary” policy interventions. For example, taxes may be cut or expenditure increased—examples of discretionary policy actions—resulting in a worse fiscal balance. But at the same time, when economic activity slows down, revenues are negatively affected and spending may increase automatically (for example unemployment benefits)—again, resulting in a deterioration of the fiscal balance. Looking solely at changes in the fiscal balance can thus be misleading: these movements may give an impression of expansionary (or contractionary) discretionary policy actions, even though the changes are driven by cyclical factors. This is why cyclical adjustment is applied, to filter the impact of cyclical movements on fiscal variables and asses the “underlying” fiscal stance.
Computing and analyzing cyclically adjusted indicators has become critical in the context of the global crisis. In this connection, the new technical note published on December 3 by the IMF’s Fiscal Affairs Department (issue no. 5 in its Technical Notes and Manuals series) documents the methodology used by the IMF Fiscal Affairs Department, also applied in the Fiscal Monitor mentioned above, to compute cyclically adjusted balances and automatic stabilizers.
The full text of the new technical note can be accessed below.
