Transcript

Transcript of a Conference Call on the Fiscal Monitor Analytical Chapter: “Can Fiscal Policy Stabilize Output?”

April 8, 2015

Xavier Debrun, Deputy Division Chief, IMF Fiscal Affairs Department (FAD)
Sampawende Jules Tapsoba, Economist, FAD
Wafa Amr, Senior Communications Officer, Communications Department

MS. AMR: Thank you all for joining us this morning. This is Wafa Amr, from the IMF’s Communications Department. This is the conference call on the Fiscal Monitor -- Analytical Chapter.

I’d like to present Xavier Debrun, Deputy Division Chief in the Fiscal Affairs Department. And with us, as well, is Jules Tapsoba, economist in FAD and one of the co-authors of the chapter. Mr. Xavier will make a short presentation, and then we will take your questions. Everything is under embargo until noon today.

MR. DEBRUN: Well, good morning, everyone, and thank you very much for joining us for this discussion of the main results and policy implications of the April 2015 Fiscal Monitor -- Analytical Chapter.

As you know, the chapter is entitled “Can Fiscal Policy Stabilize Output?” The chapter, of course, focuses on a key policy objective, and fiscal policy certainly is a main lever to contribute to output stability.

But why do we focus on stability? In fact, by making sure that output and employment do not fluctuate widely over time, fiscal policy can directly contribute to individual well-being. Clearly people feel better if they do not have to live under a constant threat of losing their job. And with greater safety also, you have greater confidence in the future. So, one might feel less reluctant to invest, and individuals might be more willing to study. In other words, you actually build a capital in some way.Overall, stability does not only feel good, it can ultimately favor investment and therefore growth. And this is one of the key issues we’re trying to tackle in this chapter.

But why focus on stability and why now? Well, the task of securing output stability usually falls on monetary policy. But monetary instruments are quite stretched these days, with interest rates at rock-bottom levels in many economies. So many are wondering whether fiscal policy could and should do more to contribute to stability and growth? Our analysis suggests that the answer is yes and yes.

Looking at the data for a large number of countries over the last 30 years, it is clear that governments have used fiscal policy—and some increasingly so—to reduce output volatility. And this can raise medium-term economic growth by non-trivial amounts. In advanced economies, the growth dividend of more stabilizing fiscal policies could easily reach 0.3 percentage point annually. Not small compared to current growth rates in many countries and it’s quite significant if you think 10 years down the road.

So, how does fiscal stabilization work in practice? There are two ways to do fiscal stabilization. The first is deliberate actions by governments, for instance to cut taxes and increase public spending when recessions hit. The second is simply to do nothing and let the so-called automatic stabilizers do their job. Automatic stabilizers reflect the simple fact that falling incomes during recessions also mean lower tax bills for taxpayers and lower revenues for the government. Public spending can also automatically increase during a recession, for instance through social transfers and safety nets such as unemployment benefits. In any case, the response of fiscal policy to a recession is higher deficits, and this means putting more money in people’s pocket at a time they need it most. The result is that national income and expenditure fall by less than they would have in the absence of the fiscal policy response.

Of course there is a catch. You need healthy public accounts that can take hard hits during severe storms. But most importantly when sunshine returns, policymakers must repair the damage to public accounts in preparation for future storms. And if you do so, you should not have too much trouble financing even large deficits when they are needed. That’s how stability, growth, and sustainability go hand in hand.

The policy main implications are straightforward:

• Using the budget to stabilize output is as easy as doing nothing, thanks to automatic stabilizers. And we show that they contribute a good deal to output stability. In today’s uncertain world, that means that countries not under pressure to reduce deficits should not panic when lower-than-expected growth leads to lower-than-expected revenues. Just let the deficit accommodate the shock.



• But of course, and this is essential, governments should let good surprises translate into lower deficits. This sounds trivial, but it is not. The study indeed documents an unfortunate tendency to spend the revenue windfalls from above-average growth episodes, and that should be avoided.



• For governments willing to increase the size of automatic stabilizers, they should do so in a growth-friendly way. That means avoiding undue increases in tax rates or making social transfers unreasonably generous. The study discusses growth-friendly options such as making certain deductions less destabilizing.



• Finally, subjecting the conduct of fiscal policy to a formal fiscal framework with good fiscal rules and a medium-term orientation can help keep public accounts healthy enough to deliver fiscal stabilization.

I am now available to answer the questions.

QUESTIONER: Good morning. Is this study just more evidence against the austerity method of dealing with countries in trouble?

MR. DEBRUN: No, it’s not evidence against austerity; it’s evidence in favor of having healthy public accounts. If your public accounts are solid, if you face a recession with a solid fiscal position, then you’re better able to respond appropriately to a recession and to a bad shock by letting the fiscals go, which is what you should do if you want to stabilize output.

But, of course -- and we insist very much in the study -- that behavior, that response of fiscal policy to output, must be symmetric. If you face good times, if growth is above average, and if you have higher-than-expected revenues, you should resist the temptation to spend, which is something that, unfortunately, many countries have not done.

So, this is not a blanket, you know, call against austerity, of course.