Fiscal Monitor

Acting Now, Acting Together

April 2016

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Fiscal Monitor



The global economy remains fragile at this time. While the recovery in advanced economies is softening, many emerging market and developing economies have experienced a significant economic slowdown, and some large countries show signs of distress. Global risk aversion has risen, and commodity prices have continued to fall since the April 2015 Fiscal Monitor. The weaker outlook and concerns about the ability of policymakers to provide an adequate and swift policy response have amplified downward risks and clouded global prospects. According to this issue of the Fiscal Monitor, the challenging environment calls for a comprehensive policy response to boost growth and reduce vulnerabilities. In particular, it is critical to identify policies that could lift productivity growth by promoting innovation. Fiscal policy can play an important role in stimulating innovation through its effects on research and development, entrepreneurship, and technology transfer.

Contents

Front Matter

Chapter 1: Navigating a Risky World
Fiscal positions have worsened significantly in the past year, with public debt ratios being revised upward in most countries. The revisions have been largest in emerging market and middle-income economies, where fiscal deficit ratios in 2015–16 are now expected to exceed the levels observed at the beginning of the global financial crisis. In advanced economies, the projected peak in public debt has been postponed once again by one year. The main forces driving the deterioration of debt dynamics are ongoing adjustments in the global economy. These lasting transformations include continued weakness in global activity, the decline in commodity prices, the slowdown in trade, and tighter financial conditions in emerging market and developing economies. All countries need to adapt to these new realities, but Chapter 1 shows that there is no one-size-fits-all solution. The appropriate policy response varies across countries and depends on the nature of the fiscal challenge they face.

  • Worsening Fiscal Trends
  • Advanced Economies: Growing Divergences in Fiscal Policy
  • Emerging Market and Middle-Income Economies: Tough Policy Adjustments Ahead
  • Low-Income Developing Countries: Riding Out the Turning Tide
  • Fiscal Risks on the Rise
  • Responding to New Realities
  • References
Boxes
1.1 The Fiscal Implications of Slowing Global Trade for Emerging Market and Developing Economies
1.2 The Fiscal Response to the Refugee Influx in Europe
1.3 Skeletons in the Closet? Shedding Light on Contingent Liabilities
1.4 Developing a Fiscal Risk Management Framework
Figures
1.1 Revisions to General Government Gross Debt-to-GDP Ratio, 2007–21
1.2 Major Realignments in the Global Economy
1.3 Fiscal Trends in Advanced Economies
1.4 Fiscal Trends in Emerging Market and Middle-Income Economies
1.5 Fiscal Trends in Low-Income Developing Countries
1.6 Indicators of Fiscal Space in Advanced Economies and Emerging Market and Middle-Income Economies
1.7 Additional Real Growth in 2016–25 Needed to Bring the Debt Ratio Back to the 2007 Level
1.8 Difference in EMBI Spreads: Oil Exporters Minus Non-Commodity Exporters
1.1.1 Share of Trade-Related Taxes to Total Taxes, 1996–2015
1.1.2 Impact of Trade Slowdown on Tax Revenues since 2009
1.2.1 Monthly Asylum Applications to the EU-28, 2010–15
1.3.1 Fiscal Costs of Contingent Liabilities: By Subcategory and Year, 1990–2014
1.4.1 Four-Step Framework
Tables
1.1a Fiscal Balances, 2009–17: Overall Balance
1.1b Fiscal Balances, 2009–17: Cyclically Adjusted Primary Balance
1.2 General Government Debt, 2009–17
1.3 Selected Advanced Economies: Gross Financing Need, 2016–18
1.4 Selected Emerging Market and Middle-Income Economies: Gross Financing Need, 2016 and 2017
1.5 General Government Revenue Shortfall between 2014 and 2016

Chapter 2: Fiscal Policies for Innovation and Growth
Productivity has moved to the top of the global policy agenda. The analysis in Chapter 2 shows that fiscal policy is a potent instrument for productivity growth through innovation. The analysis focuses on three channels of innovation: research and development (R&D), technology transfer, and entrepreneurship. The key policy messages are the following:
    • Governments in many countries should do more to promote R&D, for example, by     providing well-designed subsidies and tax incentives. If R&D were lifted by
    40 percent, GDP could rise by 5 percent in the long term.
    • In emerging market and developing economies, governments should invest in     education, infrastructure, and institutions to facilitate absorption of technologies     from advanced economies.
    • Fiscal policies to foster innovative entrepreneurship should be targeted to new     firms rather than small firms.

  • Using Fiscal Policies to Spur Innovation
  • Supporting Research and Development
  • Fostering Technology Transfer
  • Promoting Entrepreneurship
  • Conclusion
  • Annex 2.1 Fiscal Policy, Research and Development, and Total Factor Productivity Growth
  • Annex 2.2 Corrective Fiscal Incentives for Research and Development
  • Annex 2.3 Taxation and Foreign Direct Investment
  • Annex 2.4 Taxation and Entrepreneurship
  • References
Boxes
2.1 The Role of Patents for Innovation
2.2 Fiscal Policy and Green Innovation
2.3 Does Preferential Tax Treatment of Income from Intellectual Property Promote Innovation?
2.4 Innovation in Brazil, Russia, India, China, and South Africa
2.5 Programs for Young Innovators and Start-Ups
Figures
2.1 Quantitative Indicators of Innovation, 2000 and 2013
2.2 Total Research and Development Spending, 2011–15
2.3 Research and Development (R&D) Expenditures, 1998–2012
2.4 Public and Private Research and Development (R&D), 2012
2.5 Fiscal Support to Private Research and Development (R&D), 2013
2.6 Fiscal Support to Private Research and Development, 2007 and 2013
2.7 Research and Development Tax Incentives for Small and Large Firms, 2013
2.8 Trends in Foreign Direct Investment (FDI) Inflows by Country Group, 1980–2014
2.9 Prevalence of Tax Incentives
2.10 Importance of Investment Factors for Africa, 2011
2.11 Business Entry Rates in Europe before and after the Financial Crisis
2.12 Business Entry Rates in the United States, 1977−2013
2.13 Types of Entrepreneurship and GDP per Capita
2.14 Entrepreneurial Entry and Business Taxation
2.15 Standard and Small Business Corporate Income Tax Rates, 2015
2.16 Bunching at a Kink: Evidence for Costa Rica, 2006−13
2.17 Business Entry and Compliance Burden, 2012–14
2.18 Business Entry and Value-Added Tax (VAT) Registration Threshold, 2010–13
Annex Figure 2.2.1 Underinvestment in Research and Development (R&D) and the Efficient Corrective Incentive
2.2.1 Major Subsidizers of Renewable Electricity, 2013
2.3.1 Synthetic Control Estimation Results: Intellectual Property Box Regimes and Private Research and Development
2.4.1 Quantitative Indicators of Innovation in BRICS, 2000 and 2013
Tables
Annex Table 2.1.1 Impact of Fiscal Research and Development (R&D) Support on Firms’ Total Factor Productivity
Annex Table 2.1.2 Impact of Fiscal Stabilization and Fiscal Research and Development (R&D) Support on Industry Total Factor Productivity Growth
Annex Table 2.1.3 Impact of Fiscal Stabilization on Private Research and Development
Annex Table 2.3.1 Impact of Taxes and Institutional Quality on Foreign Direct Investment (FDI)
Annex Table 2.4.1 Impact of Taxes on Business Entry
Table 2.1.1 Benefits and Costs of Patents

Methodological and Statistical Appendix

  • Data and Conventions
  • Fiscal Policy Assumptions
  • Definition and Coverage of Fiscal Data
  •     Table A. Economy Groupings
  •     Table B. Advanced Economies: Definition and Coverage of
        Fiscal Monitor  Data
  •     Table C. Emerging Market and Middle-Income Economies: Definition     and Coverage of Fiscal Monitor  Data
  •     Table D. Low-Income Developing Countries: Definition and Coverage     of Fiscal Monitor  Data
  • List of Tables
    •     Advanced Economies (A1–A8)
    •     Emerging Market and Middle-Income Economies (A9–A16)
    •     Low-Income Developing Countries (A17–A22)
    •     Structural Fiscal Indicators (A23–A25)
Tables
A. Economy Groupings
B. Advanced Economies: Definition and Coverage of Fiscal Monitor Data
C. Emerging Market and Middle-Income Economies: Definition and Coverage of Fiscal Monitor Data
D. Low-Income Developing Countries: Definition and Coverage of Fiscal Monitor Data
A1. Advanced Economies: General Government Overall Balance, 2007–21
A2. Advanced Economies: General Government Primary Balance, 2007–21
A3. Advanced Economies: General Government Cyclically Adjusted Balance, 2007–21
A4. Advanced Economies: General Government Cyclically Adjusted Primary Balance, 2007–21
A5. Advanced Economies: General Government Revenue, 2007–21
A6. Advanced Economies: General Government Expenditure, 2007–21
A7. Advanced Economies: General Government Gross Debt, 2007–21
A8. Advanced Economies: General Government Net Debt, 2007–21
A9. Emerging Market and Middle-Income Economies: General Government Overall Balance, 2007–21
A10. Emerging Market and Middle-Income Economies: General Government Primary Balance, 2007–21
A11. Emerging Market and Middle-Income Economies: General Government Cyclically Adjusted Balance, 2007–21
A12. Emerging Market and Middle-Income Economies: General Government Cyclically Adjusted Primary Balance, 2007–21
A13. Emerging Market and Middle-Income Economies: General Government Revenue, 2007–21
A14. Emerging Market and Middle-Income Economies: General Government Expenditure, 2007–21
A15. Emerging Market and Middle-Income Economies: General Government Gross Debt, 2007–21
A16. Emerging Market and Middle-Income Economies: General Government Net Debt, 2007–21
A17. Low-Income Developing Countries: General Government Overall Balance, 2007–21
A18. Low-Income Developing Countries: General Government Primary Balance, 2007–21
A19. Low-Income Developing Countries: General Government Revenue, 2007–21
A20. Low-Income Developing Countries: General Government Expenditure, 2007–21
A21. Low-Income Developing Countries: General Government Gross Debt, 2007–21
A22. Low-Income Developing Countries: General Government Net Debt, 2007–21
A23. Advanced Economies: Structural Fiscal Indicators
A24. Emerging Market and Middle-Income Economies: Structural Fiscal Indicators
A25. Low-Income Developing Countries: Structural Fiscal Indicators

Back Matter