Taxing the Financial Sector: A Report to the G-20 Leaders and Conference in Paris

One controversial issue addressed by the IMF over the past months has been the "fair and substantial contribution" of the financial sector to meet the costs of the crisis. Working with the Monetary and Capital Markets and Research Departments, FAD prepared a report for the G-20 Leaders (the final report), which attracted wide media and public interest.

The report and other European proposals were discussed at a high-level conference on financial sector taxation held in Paris on September 16. It was attended by senior officials from 35 European central banks and ministries of finance. IMF Deputy Managing Director, Mr. Portugal opened the conference.

FAD, the IMF Strategy, Policy, and Review Department, and the Natural Resource Charter organized a seminar during the IMF's 2010 Annual Meetings on "How Societies Can Best Manage Wealth from Natural Resources." The panel discussion included Timor-Leste Minister of Finance Emilia Pires; Andres Velasco, former finance minister of Chile; and Guillermo Ortiz, former central bank governor of Mexico as moderator. World Bank Iraq Senior Advisor, Yahia Said and FAD Assistant Director, Michael Keen also joined the discussion.

"Long-Term Trends in Public Finances in the G-7 Economies", by C. Cottarelli and A. Schaechter reviews the generalized rise of public debt levels in the G-7 economies in the decades since the 1970s, when debt became the ultimate shock absorber: rising in bad times and not coming down in good times. It discusses the unsustainability of these trends going forward and offers policy options to address this problem.

"Default in Today's Advanced Economies: Unnecessary, Undesirable, and Unlikely," by C. Cottarelli, L. Forni, J. Gottschalk, and P. Mauro examines the likelihood that worsening public finances lead to a debt default in certain advanced countries. It argues that debt defaults in preceding decades have been triggered primarily by spiraling debt service costs, while the current challenges in some European advanced economies stem from large primary deficits. The paper concludes that default would make little sense for these countries: the problem is not the debt servicing burden, but the primary deficit.

In "Fiscal Deficits, Public Debt, and Sovereign Bond Yields," E. Baldacci and M. S. Kumar explore the impact that fiscal deficits and government debt had on long-term sovereign bond yields during the last 30 years in 31 advanced and emerging market economies. It finds that increases of one percentage point of GDP in deficit and government debt lead to an increase in real interest rates of around 20 bps and 5 bps, respectively.

In "Restoring Debt Sustainability after Crises: Implications for the Fiscal Mix," E. Baldacci, S. Gupta, and C. Mulas-Granados analyze the experience of 99 advanced and developing economies in restoring fiscal sustainability after crises. They confirm earlier findings on the key importance of current expenditure cuts, but they also find that revenue-raising measures play an important role in large fiscal consolidations.

"Evaluating Government Employment and Compensation" by B. Clements, S. Gupta, I. Karpowicz, and S. Tareq discusses criteria for evaluating government employment and compensation, and options for reducing government's wage costs.

"Health Care Spending Issues in Advanced Economies" by E. Jenkner and A. Leive. Both public and total health spending have increased substantially in the past decades—a trend expected to continue, driven by ageing, rising incomes, and technological change. The note offers guidance for analyzing the evolution of public health expenditure and evaluating policy options in advanced and emerging market economies.

"Revenue Administration: Performance Measurement in Tax Administration" by W. Crandall explains performance management and its measurement, how tax administrations apply it, key tasks in implementing a performance management system, and country experiences.

"Revenue Administration: Managing the Shadow Economy" by B. Russell discusses the shadow economy and its measurement, as well as actions which revenue agencies can take to manage it.

"Government Cash Management: Its Interaction with Other Financial Policies" by M. Williams offers guidance on policy, institutional and practical issues for governments looking to develop a cash management function. It discusses the implications of active cash management for other functions such as debt management, monetary policy, and financial market development.

During July–September 2010, FAD provided technical assistance to 37 IMF member countries and multi-country organizations through 42 projects.

The Fiscal Affairs Department (FAD) seeks talented and dedicated professionals with a background in different areas of public finance, to work on macro-fiscal policy issues and to provide technical assistance advice to IMF member countries on public financial management, tax policy reform, revenue administration, and different expenditure policy issues. Vacancies in FAD for staff and long-term expert positions are posted on http://www.imf.org/jobs. FAD also seeks experts who are interested in occasional short-term (2-3 week) assignments; interested candidates may send their CVs to FADexperts@imf.org.