Fiscal Monitor

Now Is the Time

April 2015

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Fiscal Monitor

Fiscal Policies for Sustainable Growth

 

 

Fiscal risks remain significant in both advanced and emerging market and developing economies. Fiscal policy continues to play an essential role in building confidence and, where appropriate, sustaining aggregate demand. According to this issue of the Fiscal Monitor, strengthening fiscal frameworks—particularly to manage public finance risks and ensure debt sustainability—must be part of the fiscal policy response. Countries should seize the moment created by lower oil prices to start the process of energy taxation and energy subsidy reform. Finally, fiscal policy can contribute substantially to macroeconomic stability, through the workings of automatic stabilizers. By doing so, fiscal policy can also unlock significant growth dividends.

Content

Front Matter

Chapter 1: Recent Fiscal Developments and Outlook
A moderate recovery continues in advanced economies, due to lower oil prices, continued accommodative monetary policy, and more moderate fiscal adjustment. However, high public and private debt levels continue to pose headwinds to growth and debt sustainability in some advanced economies. In addition, inflation is below target by a large margin in many countries, making the task of reducing high public debt levels more difficult. Growth in emerging economies is softening and financial and exchange rate volatility has increased public financing costs for some of them. Meanwhile, sharply lower oil and commodity revenues have created challenges for exporting countries. In this challenging environment, fiscal policy continues to play an essential role in building confidence and, where appropriate, sustaining aggregate demand. This chapter of the Fiscal Monitor emphasizes that strengthening fiscal frameworks—particularly to manage public finance risks and ensure debt sustainability—must be part of the fiscal policy response. Countries should seize the moment created by lower oil prices to start the process of energy taxation and energy subsidy reform.

  • The Fiscal Impact of Lower Oil Prices
  • Advanced Economies: Low Growth and Low Inflation Complicate Debt Reduction
  • Emerging Market and Middle-Income Economies: Financial Volatility and Lower Export Prices Stretch Already Thin Fiscal Buffers
  • Low-Income Developing Countries: Resisting Headwinds from Lower Growth and Lower Commodity Prices
  • Fiscal Risks
  • A Supportive Role for Fiscal Policy
  • References
Boxes
1.1 Past, Present, and Future Patterns in Revenues
1.2 Reforming Energy Subsidies
1.3 The Pressure of Age-Related Spending on Public Debt in Advanced Economies
Figures
1.1 Fiscal Impact of Lower Oil Prices
1.2 Fiscal Trends in Advanced Economies
1.3 Fiscal Trends in Emerging Market and Middle-Income Economies
1.4 Fiscal Trends in Low-Income Developing Countries
1.1.1 Advanced Economies: Total Revenue and Corporate Income Tax
1.1.2 OECD Countries: Corporate Income Tax versus Gross Operating Surplus
1.1.3 Emerging Market and Developing Economies: Total Revenue
1.2.1 Six Elements of Successful Energy Reforms
1.3.1 Age-Related Spending Increases and Gross Debt
Tables
1.1a Fiscal Balances, 2008−16: Overall Balance
1.1b Fiscal Balances, 2008−16: Cyclically Adjusted Balance
1.2 General Government Debt, 2008–16
1.3 Selected Advanced Economies: Gross Financing Need, 2015–17
1.4 Selected Emerging Market and Middle-Income Economies: Gross Financing Need, 2015–16

Chapter 2: Can Fiscal Policy Stabilize Output?
As interest rates close to their lower bound limit the ability of monetary policy to smooth fluctuations in economic activity, this chapter of the Fiscal Monitor looks into how fiscal policy can do so. The two main findings are that fiscal policy is often used to reduce output volatility, especially in advanced economies, and that the more stable macroeconomic environment that results is in turn conducive to higher average growth. Automatic stabilizers alone (mainly tax payments and social transfers) can contribute substantially to output stabilization. Yet policymakers rarely let them operate freely as revenue windfalls due to stronger growth tend to be spent, raising deficits and public debts. Stability and growth would both benefit greatly if procyclical fiscal measures were avoided. The chapter also explores options to enhance automatic stabilizers without unduly raising marginal income tax rates or the generosity of social transfers.

  • How Fiscal Policy Influences Economic Activity?
  • What Shapes Fiscal Stabilization?
  • Potential Payoffs from Fiscal Stabilization
  • Conclusion
  • Annex 2.1 Empirical Methodology
  • References
Boxes
2.1 Fiscal Stabilization under Alternative Estimates of the Output Gap
2.2 Boosting the Effectiveness of Automatic Stabilizers
Figures
2.1 Distribution of Fiscal Stabilization Coefficients
2.2 Selected Fiscal Stabilization Coefficients
2.3 Advanced Economies: Government Size and Automatic Stabilizers
2.4 Selected Countries: Fiscal Stabilization and Automatic Stabilizers
2.5 Automatic Stabilizers and Fiscal Stabilization: Cross-Country Correlations
2.6 Advanced Economies: Determinants of Fiscal Stabilization
2.7 Advanced Economies: Fiscal Stabilization Coefficients and General Government Expenditure over Time
2.8 Fiscal Stabilization over the Cycle
2.9 Advanced Economies: Fiscal Stabilization and Demand Shocks
2.10 Asymmetric Stabilization: Unpleasant Public Debt Arithmetic
2.11 Fiscal Stabilization and Output Volatility: Cross-Country Correlations, 1980–2013
2.12 Impact of Fiscal Stabilization and Government Size on Output Volatility
2.13 Emerging Market and Developing Economies: Government Size and Output Volatility
2.14 Advanced Economies: Factors that Boost the Effectiveness of Automatic Stabilizers
2.15 Budget Balance Rules: Contingent on the Economic Cycle?
2.16 Fiscal Stabilization and Medium-Term Growth
Annex Figure 2.1.1 Impact of the Output Gap on the Fiscal Balance
2.1.1 Impact of the Output Gap on the Overall Fiscal Balance
Annex Tables
2.1.1a Advanced Economies: Country-Specific Estimations
2.1.1b Emerging Market and Developing Economies: Country-Specific Estimations
2.1.2 Advanced Economies: Time-Varying Coefficients of Fiscal Stabilization, Selected Years
2.1.3 Determinants of Fiscal Stabilization
2.1.4 Fiscal Stabilization, Government Size, and Output Volatility
2.1.5 Advanced Economies: Factors Driving the Effectiveness of Automatic Stabilizers
2.1.6 Fiscal Stabilization and Medium-Term Growth

Methodological and Statistical Appendix

  • Data and Conventions
  • Fiscal Policy Assumptions
  • Definition and Coverage of Fiscal Data
  • Table A. Advanced Economies: Definition and Coverage of Fiscal Monitor Data
  • Table B. Emerging Market and Middle-Income Economies: Definition And Coverage of Fiscal Monitor Data
  • Table C. 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)
    •     Financial Sector Support (A26)
Tables
A1. Advanced Economies: General Government Overall Balance, 2006–20
A2. Advanced Economies: General Government Primary Balance, 2006–20
A3. Advanced Economies: General Government Cyclically Adjusted Balance, 2006–20
A4. Advanced Economies: General Government Cyclically Adjusted Primary Balance, 2006–20
A5. Advanced Economies: General Government Revenue, 2006–20
A6. Advanced Economies: General Government Expenditure, 2006–20
A7. Advanced Economies: General Government Gross Debt, 2006–20
A8. Advanced Economies: General Government Net Debt, 2006–20
A9. Emerging Market and Middle-Income Economies: General Government Overall Balance, 2006–20
A10. Emerging Market and Middle-Income Economies: General Government Primary Balance, 2006–20
A11. Emerging Market and Middle-Income Economies: General Government Cyclically Adjusted Balance, 2006–20
A12. Emerging Market and Middle-Income Economies: General Government Cyclically Adjusted Primary Balance, 2006–20
A13. Emerging Market and Middle-Income Economies: General Government Revenue, 2006–20
A14. Emerging Market and Middle-Income Economies: General Government Expenditure, 2006–20
A15. Emerging Market and Middle-Income Economies: General Government Gross Debt, 2006–20
A16. Emerging Market and Middle-Income Economies: General Government Net Debt, 2006–20
A17. Low-Income Developing Countries: General Government Overall Balance, 2006–20
A18. Low-Income Developing Countries: General Government Primary Balance, 2006–20
A19. Low-Income Developing Countries: General Government Revenue, 2006–20
A20. Low-Income Developing Countries: General Government Expenditure, 2006–20
A21. Low-Income Developing Countries: General Government Gross Debt, 2006–20
A22. Low-Income Developing Countries: General Government Net Debt, 2006–20
A23. Advanced Economies: Structural Fiscal Indicators
A24. Emerging Market and Middle-Income Economies: Structural Fiscal Indicators
A25. Low-Income Developing Countries: Structural Fiscal Indicators
A26. Selected Advanced Economies: Financial Sector Support

Back Matter