The Future of the State Revisited: Reforming Public Expenditure


By: Sanjeev Gupta and Martine Guerguil

(Version in EspañolFrançaisРусский中文, and 日本語)

The global financial crisis brought to the fore the question of sustainability of public finances. But it merely exacerbated a situation that was bound to attract attention sooner or later—governments all over the world have been spending more and more in recent decades. Here at the IMF, we’ve been looking into the factors behind this increase in public spending, particularly social spending, and our latest Fiscal Monitor report discusses some of the options for spending reform.

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Public Finances Are on the Mend, but No Clean Bill of Health


By Sanjeev Gupta and Martine Guerguil

(Version in Español FrançaisРусский中文, and 日本語)

We’ve had a spate of good news on the economic front recently. Does this mean that we are finally out of the fiscal woods? According to our most recent Fiscal Monitor report, not yet, as public debt remains high and the recovery uneven.

First, the good news. The average deficit in advanced economies has halved since the 2009 peak. The average debt ratio is stabilizing. Growth is strengthening in the United States and making a comeback in the euro area, and should benefit from the slower pace of consolidation this year. Emerging markets and developing countries have maintained their resilience, in part thanks to the policy buffers accumulated in the pre-crisis period. Talks of tapering in the United States have left a few of them shaken, but not (quite) stirred.

But there is still some way to go. The average debt ratio in advanced economies, although edging down, sits at historic peaks, and we project it will still remain above 100 percent of GDP by 2019 (Chart 1). The recovery is still vulnerable to several downside risks, including those stemming from the lack of clear policy plans in some major economies. The recent bouts of financial turmoil have raised concerns that the anticipated tightening of global liquidity could expose emerging markets and low-income countries to shifts in investor sentiment and more demanding debt dynamics.

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Once And For All—Why Capital Levies Are Not The Answer


Mick Keen By Michael Keen

(Version in EspañolFrançais and  中文)

Holy grail

Last night, when you went to bed, you left $40 on the kitchen table. When you woke up this morning, you found only $30—and a note from the government saying, “Thank you very much, we took $10 as a tax payment.” This is, of course, extremely irritating. To an economist, however, it’s close to an ideal form of taxation, since there is nothing you can now do to reduce, avoid, or evade it—the holy grail of what economists call a non-distorting tax.

(This doesn’t mean that you won’t react in some way. Being worse off, you may now work a bit more, or save a bit less. But any other tax raising $1 would make you even worse off, because it would change relative prices (a tax on your earnings would make working less attractive, for instance), and so take your choices even further from those you would make in the absence of taxation.)

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Death and Taxes May be Certain—But Taxes We Can Make Better


Mick KeenBy Michael Keen

(Version in Español)

Benjamin Franklin famously said these are the only things that we can be sure will happen to us. Certainly taxation has been much to the fore of public debate in the last few years. The latest Fiscal Monitor takes a close look at where tax systems now stand, and where they might, and should be headed. Can we tax better, could we—if we wanted to—raise more revenue, and how does fairness come into it?

A better way to tax

The IMF’s broad advice on the revenue side of consolidation is straightforward.

  • Before raising rates, broaden bases by scaling back exemptions and special treatments, and thereby getting more people and entities to pay taxes;
  • Rely more on taxing consumption rather than labor;
  • Strengthen property taxes; and
  • Seize opportunities to raise revenue while correcting environmental and other distortions by, not least, carbon pricing (to address climate and other pollution challenges).

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Still Some Hurdles On The Fiscal Path


Martine GuerguilBy Martine Guerguil

(Versions in 中文, Français日本語, Русский, and Español)

Five years into the crisis, the fiscal landscape remains challenging. On the positive side, deficit-cutting efforts and the first signs of recovery reduced the fiscal stress felt in many advanced economies; but debt ratios often remain at historical peaks. At the same time, slowing growth and rising borrowing costs, combined with unabated demands for improved public services, puts pressure on government budgets in emerging market economies.

So we created  an index of ‘fiscal difficulty’ that shows the biggest challenge ahead for advanced economies is to maintain budget surpluses until debt ratios return to lower levels.  We expect this will take several years.

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The Fiscal Milestone: Achievements, Fatigue, and Prospects


Fiscal Monitor

By Carlo Cottarelli

(Versions in عربي 中文, 日本語, and Español)

The 2008–09 global economic crisis pushed public debt ratios of advanced economies to levels never seen before during peacetime. These high debt levels expose countries to a loss of market confidence and, ultimately, damage long-term growth prospects.  Since 2010 advanced economies have been on a journey: the goal is to bring their public finances back to safer territory. They are in it for the long haul, not a sprint, and, as a redress of the large fiscal imbalances created by the crisis, without derailing the still fragile economic recovery, it requires a steady and gradual pace of adjustment—at least for countries not subject to market pressures.

This year we see the process of gradual fiscal adjustment reaching two symbolic milestones. First, the average deficit of advanced economies as a share of GDP will fall to half of its 2009 level at the peak of the crisis. Second, the average debt ratio will stop rising, after increasing steadily since 2007. Indeed, it will actually decline slightly.

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Taking Stock: Public Finances Now Stronger in Many Countries


By Carlo Cottarelli

(Versions in  عربي, 中文EspañolFrançaisРусский日本語)

The slow global recovery is making fiscal adjustment more difficult around the world, but this doesn’t mean that little has been accomplished.

In fact, significant progress in many countries has been made during the past two years in strengthening their fiscal accounts after the 2008–09 deterioration.  The IMF’s latest Fiscal Monitor takes stock of this progress.

Deficits are lower, and in many cases debt is too

Let me first say something about advanced economies, which is where the most urgent fiscal problems exist.

Most advanced economies have made good progress lowering their fiscal deficits (the imbalance between spending and revenues). Deficits, adjusted for the economic cycle, fell by about ¾ of a percentage point of GDP in 2011 and 2012, and are projected to do so by about 1 percentage point of GDP in 2013.

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