U.S. Fiscal Policy: A Tough Balancing Act


Deniz IganBy Deniz Igan

(Version in Español)

Much has changed on the fiscal front since we started worrying about U.S. fiscal sustainability. The federal government budget deficit has fallen sharply in recent years―from almost 12 percent of GDP in 2009 to less than 7 percent in 2012. And recent budget reports show that the deficit is shrinking faster than expected only a few months ago, to a projected 4½ percent of GDP for the current fiscal year, which ends September 30. Plus, health care cost growth has slowed down dramatically since the Great Recession, alleviating the pressure on public health care programs at least temporarily.

Does this mean we can stop worrying? Not quite. Recent developments certainly mean that things are better than we thought just a few years ago and the fiscal adjustment needed to restore sustainability is smaller. But if the choice and timing of policy measures is not right, the deficit reduction may turn out to be too much in the short run—stunting the economic recovery—and not enough in the long run.

So, in our recent annual check-up of the U.S. economy, our advice is to slow the pace of fiscal adjustment this year—which would help sustain growth and job creation—but to speed up putting in place a medium-term road map to restore long-run fiscal sustainability.

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Mind The Gap: Policies To Jump Start Growth in the U.K.


By Ajai Chopra

The U.K. economy has been flat for nearly two years. This stagnation has left output per capita a staggering 14 percent below its precrisis trend and 6 percent below its pre-crisis level.

Weak growth has kept unemployment high at 8.1 percent, with youth unemployment an alarming 22 percent.

The effects of a persistently weak economy and high long-term unemployment can reverberate through a country’s economy long into the future—commonly referred to by economists as hysteresis.

Our analysis of such hysteresis effects shows that the large and sustained output gap, the difference between what an economy could produce and what it is producing, raises the danger that a downturn reduces the economy’s productive capacity and permanently depresses potential GDP. 

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Signs of Fiscal Progress: Will It Be Enough?


By Carlo Cottarelli

(Versions in  عربي, 中文EspañolFrançaisРусский日本語)

We’ve just updated our latest assessment of the state of government finances, debts, and deficits in advanced and emerging economies.

Fiscal adjustment is continuing in the advanced economies at a speed that is broadly appropriate, and roughly what we projected three months ago. In emerging economies there’s a pause in fiscal adjustment this year and next, but this too is generally appropriate, given that many of these countries have low debt and deficits.

The improvement in fiscal conditions in many advanced economies is welcome, but it’s going to take more than lower deficits to get countries under market pressure out of the crosshairs.
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Global Financial Stability: What’s Still To Be Done?


By José Viñals

(Versions in Español, عربي)

The quest for lasting financial stability is still fraught with risks. The latest Global Financial Stability Report has two key messages: policy actions have brought gains to global financial stability since our September report; but current policy efforts are not enough to achieve lasting stability, both in Europe and some other advanced economies, in particular the United States and Japan.

Much has been done

In recent months, important and unprecedented policy steps have been taken to quell the crisis in the euro area. At the national level, stronger policies are being put in place in Italy and Spain; a new agreement has been reached on Greece; and Ireland and Portugal are making good progress in implementing their respective programs. Importantly, the European Central Bank’s decisive actions have supported bank liquidity and eased funding strains, while banks are reinforcing their capital positions under the guidance of the European Banking Authority. Finally, steps have been taken to enhance economic governance, promote fiscal discipline, and buttress the “firewall” at the euro area level.

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Disappearing Deficits


By Tim Irwin

Suppose a government must reduce its budget deficit. Perhaps it made a commitment to do so; perhaps investors are beginning to doubt its ability to repay debt. It could cut spending or raise taxes, but that is painful and unpopular. What can it do?

In our work at the IMF, we sometimes discover that governments choose to employ accounting devices that make the deficit smaller without actually causing any pain, and without actually improving public finances.

In ideal accounting, this would not be possible. In real accounting, it sometimes is.

How the devices work

Some governments, for example, have been able to reduce their reported deficits by taking over companies’ pensions schemes. The government’s obligation to make future pension payments has a real cost, but it doesn’t count as a liability in the accounting. So when the government receives a pension scheme’s assets from the company, it can treat the receipt of those assets as revenue that reduces its deficit.

Many other governments have been able to defer spending, without significantly reducing it in the long run, by entering into public-private partnerships. Under these contracts, a private company builds and maintains an asset like a road or a hospital. In return, the government agrees to pay the company for its costs over 20 or 30 years. In a sense, the government has bought the asset on an installment plan, but government accounting seldom counts this obligation as a liability.

In each of the above cases—and in others analyzed in my note, Accounting Devices and Fiscal Illusions—the government’s deficit is lower at first, but only at the expense of bigger future deficits.

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Christine Lagarde on Sovereign Debt, Growth and Social Instability


by iMFdirect

The IMF chief gave a speech in New York City today that sets out how the IMF can help countries tackle this troika of challenges to the global economy.

 Watch the speech

 

Postcard from São Paulo: the Latest Global Fiscal News–and Some of It’s Actually Good


By Carlo Cottarelli

(Versions in
عربي,  中文EspañolFrançaisPortuguêsРусский)

In São Paulo, Brazil last Friday we launched our latest assessment of the state of government finances, debts, and deficits.  While many countries are slogging through a tough fiscal time, there is some good news, including in the United States where the deficit will be lower this year than previously expected.  I will also give you an assessment of how the new information affects our sense of what needs to be done in the future.

Let me start by talking about the advanced economies where, as is well known, the fiscal accounts are generally weaker, reflecting large increases in deficits and debt ratios since the start of the crisis in 2008.  Continue reading

Creating Breathing Room in Low-income Countries


By Hugh Bredenkamp

In my previous postings this week, I have talked about the “double whammy” that low-income countries have faced over the past 2-3 years—the surge in food and fuel prices and global financial crisis—and how the IMF has stepped up its support to help them cope with these shocks. Without this support, and that of other agencies and rich-country donors, governments would have to slash spending as their tax revenues slumped. This, of course, is the exact opposite of what any government should be doing in a recession—it would add fuel to the fire.

But preserving or even increasing spending when revenues are declining means larger budget deficits, and more borrowing. Doesn’t the IMF always preach tight budgets? The answer is “not always.” Fiscal discipline and carefully-managed borrowing policies are essential for long-term economic health. But when economies are hit by temporary shocks—and the current recession, though severe, will surely be temporary—it makes sense for governments to use policy to limit the short-term damage.

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High-Stakes Choices In Next Stage of Crisis


By Caroline Atkinson

After averting a second Great Depression, what should policy makers do to foster recovery?

Economic policymakers are rarely popular. Central bank governors are notorious for removing the punch bowl at the party. Ministers of finance are traditionally the ones who say no to their colleagues’ pet spending projects.

In the upside-down world of recent months, finance ministers and central bank governors around the world seemed to have switched sides.  They became cheerleaders for expansionary policies. The IMF has argued strongly for this, as long as countries had room to take on more debt. Despite some hiccups, it seems clearer with every economic release that the extraordinary actions governments have taken have paid off, at least in halting the slide. Economic prospects may not be quite as bright as recent market moves would suggest. But the risk of spreading financial collapse has lessened markedly

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