Fiscal Monitor

Chapter 1 explores how strong and broad-based growth provides an opportunity to rebuild fiscal buffers now, improve government balances, and anchor public debt. One concern is the surge in global debt, which reached the record peak of US$164 trillion in 2016. Chapter 1 discusses how public debt plays an important role in the surge in global debt, which is at historic highs among advanced and emerging market economies. Rapidly rising debt among low income developing countries means that interest payments are taking up an increasingly large share of taxes and expenditure.

The chapter argues that countries with elevated government debt are vulnerable to a sudden tightening of global financing conditions, which could disrupt market access and jeopardize economic activity. Importantly, large debt and deficits hinder governments’ ability to implement a strong fiscal policy response to support the economy in the event of a downturn.

Chapter 1 recommends putting deficits and debt firmly on a downward path toward their medium-term targets. The size and pace of adjustment need to be calibrated to each country’s cyclical conditions and available fiscal space. Several low-income countries need to mobilize revenues, rationalize spending, and improve spending efficiency.

Chapter 1 urges countries to implement policies to support medium-term growth by promoting human and physical capital, and by increasing productivity. Advanced economies should focus on seeking efficiency gains in spending, rationalizing entitlements, broadening tax bases, and upgrading the design of their tax systems. Emerging market and developing economies need to raise revenue to finance critical spending on physical and human capital and social spending. The chapter recommends that all countries promote inclusive growth to avoid excessive inequality that can impede social mobility, erode social cohesion, and hurt growth.

Digitalization presents both opportunities and risks for fiscal policy. It has the potential to improve the design and implementation of fiscal policy, but it also creates new challenges. Chapter 2 discusses how digitalization can change the way governments design and implement current policies, including by improving tax policy and administration, increasing spending efficiency and enhancing fiscal management.

The chapter also discusses the design of future policy, focusing on the implications of the rapid expansion of digital firms whose business model—for example, sales with little physical presence and reliance on online customers to generate commercially valuable information—raises new questions about the allocation of international taxing rights. Finally, while digitalization offers many potential benefits, the chapter examines how it can create new risks, including a disproportionate burden on small businesses and vulnerable households with limited access to technology; opportunities for fraud, and disruption of government functions. With the increase of massive data breaches and intrusions of privacy, the chapter highlights the vulnerabilities of public digital systems.

Digitalization calls for a proactive, forward-looking, and comprehensive reform agenda. The chapter conveys that governments must address multiple political, social, and institutional weaknesses and manage digital risks. Digitalization is already an overwhelming trend that will accelerate further. Governments should embrace it, foresee it, and shape it.