Latest Fiscal Monitor

The May 2010 issue of the Fiscal Monitor was the first to be published as part of the World Economic and Financial Surveys. One of its key messages is that fiscal risks have risen, especially in advanced economies, as a result of three factors: underlying trends have further deteriorated since the November 2009 Monitor; financial markets have increased their focus on fiscal weaknesses; and progress in defining fiscal exit strategies has been slow. The Monitor argues that fiscal strategies should aim at gradually reducing public debt ratios, rather than just stabilizing them at their elevated post-crisis levels. Without progress in addressing fiscal sustainability concerns, high levels of public indebtedness could weigh down long-term economic growth.

In a working paper entitled “Automatic Stabilizers and the Size of Government: Correcting a Common Misunderstanding,” Carlo Cottarelli and Annalisa Fedelino argue that the ratio of government spending to GDP—often used in the literature on the stabilizing effects of fiscal policy—is not the right proxy for the size of the automatic stabilizers. A more appropriate measure is the revenue to GDP ratio.

In “Public Debt and Growth” M.S. Kumar and J. Woo explore the impact of high public debt on potential economic growth. The empirical results suggest an inverse relationship between initial debt and subsequent growth, controlling for other determinants of growth: on average, a 10 percentage point increase in the initial debt-to-GDP ratio is associated with a slowdown in annual real per capita GDP growth of around 0.2 percentage points per year, with the impact being somewhat smaller in advanced economies. There is some evidence of nonlinearity with higher levels of initial debt having a proportionately larger negative effect on subsequent growth.

Two other recent working papers by Fiscal Affairs Department staff analyzed the effects of fiscal policy on, first, macroeconomic activity: “Public Investment as a Fiscal Stimulus: Evidence from Japan’s Regional Spending During the 1990s,” by Markus Bruckner and Anita Tuladhar; and, second, on the external current account :“Fiscal Policy and the Current Account,” by A. Abbas, J. Bouhga-Hagbe, A. Fatas, P. Mauro, and R. Velloso.

One working paper focused on health policy issues: “Subnational Health Spending and Soft Budget Constraints in OECD Countries,” by E. Crivelli, A. Leive, and T. Stratmann; another on tax issues: “Tax Revenue Downturns: Anatomy and Links to Imports,” by Kun Li and P. Lopez Murphy; and a third addressed a recurring theme in public financial management: “Treasury Single Account: Concept, Design, and Implementation Issues,” by S. Pattanayak and I. Fainboim.

New Technical Notes and Manuals

New additions to the series of Technical Notes and Manuals prepared by the staff of the Fiscal Affairs Department include:

• on public financial management, R. Allen and D. Radev, “Extrabudgetary Funds”; A. Khan and M. Pessoa, “Conceptual Design: A Critical Element of a Successful Government Financial Management Information System Project”; and I. Lienert, “Role of the Legislature in Budget Processes.”
• on revenue administration, two papers by E. Biber: “Revenue Administration: Taxpayer Audit—Use of Indirect Methods” and “Revenue Administration—Development of Effective Plans”; two papers by M. Kidd: “Revenue Administration: Tax Administration in Small Economies” and “Revenue Administration: Functionally Organized Tax Administration”; W. Crandall: “Autonomy in Tax Administration and the Revenue Authority Model”; and W. Crandall and M. Kidd: “Revenue Administration: A Toolkit for Implementing a Revenue Authority.”

Technical Assistance Activities

Between April and June 2010 FAD provided technical assistance to 50 countries on a broad range of fiscal issues. FAD technical assistance typically comprises missions led by IMF staff with the participation of international experts in specialized fields. Examples of recent FAD activities include: four missions to Greece, including one on revenue administration, two on public financial management, and one on expenditure rationalization, in support of the country’s fiscal consolidation program; one mission to China on VAT reform; three missions to Mongolia on decentralization and intergovernmental relations, the fiscal regime of mining, and strengthening large taxpayer administration; one mission to Pakistan on its financial accounting and budgeting system; and two missions to Togo on the petroleum product pricing mechanism and the modernization of revenue administration.