Recent Fiscal Developments and Outlook: The April 214 IMF Fiscal Monitor Julio Escolano Division Chief, Fiscal Policy and Surveillance Fiscal Affairs Department, IMF Joint Vienna Institute, Vienna, June, 214
Outline Recent Fiscal Developments and Outlook Selected fiscal risks Lack of medium-term plans in key economies Tightening global liquidity conditions Reducing sovereign debt in a very low inflation environment Containing public contingent liabilities Medium-term expenditure pressures 3
Advanced economies: some progress but still some way to go Required Adjustment to Medium-Term Budgetary Objective (percent of GDP) 16 14 12 Change in structural primary balance, 29 14 Additional adjustment needed to achieve debt stabilizing primary balance, 214 Total adjustment to achieve medium-term objective 1 8 6 4 2-2 -4 DEU NZL AUT ISR NLD BEL AUS FRA ITA USA JPN SVN SVK CZE ISL PRT GBR ESP IRL 4
AEs: Fiscal Vulnerabilities Remain Elevated Evolution of Gross Debt and Cyclically Adjusted Balance, 27 18 Gross Debt Cyclically Adjusted Balance 12-1 1-2 Cyclically Adjusted Balance (percent of potential GDP) -3-4 -5-6 -7 8 6 4 2 Gross Debt (percent of GDP) -8 27 28 29 21 211 212 213 214 215 216 217 218 5
AEs: Composition of Fiscal Adjustment is Shifting Advanced Economies: Contribution to the Change in the Cyclically Adjusted Primary Balance 1 8 6 4 2 21-11 212-13 214-15 21-11 212-13 214-15 21-11 212-13 214-15 All AE USA Euro Area Expenditure Revenue 6
Improved fiscal balances somewhat eased sovereign debt risks Overall Fiscal Balance (percent of GDP) 4 2 Emerging Market & Developing Economies -2 World -4-6 -8 Advanced Economies -1-12 21 24 27 21 213 216 219 7
EMs: Current Fiscal Plans Continue to Postpone Consolidation Primary and Cyclically Adjusted Primary Balances 4 2 Cyclically adjusted primary balance (percent of potential GDP) -2 Primary balance (percent of GDP) -4 27 28 29 21 211 212 213 214 215 4
Public Debt on the Rise in Over Half of Low-Income Countries 7 Gross Government Debt (Percent of GDP) 6 21 213 219 5 4 3 2 1 COD ETH TJK BFA CMR MLI UGA MMR HTI TZA SEN GHA ZMB MOZ YEM VNM HND 6
LICs: Is This Time Different? 16 Change in Government Debt and Government Investment (Percent of GDP) 14 MOZ 12 BFA SEN Government investment, 27 13 average 1 8 6 4 TCD CMR YEM MLI UGA ZMB TZA VNM HND GHA 2 45 SDN 1 2 3 4 Change in government debt, 27 13 1
Looking forward: Selected fiscal risks Lack of medium-term plans in key economies Tightening global liquidity conditions Reducing sovereign debt in a very low inflation environment Containing public contingent liabilities Medium-term expenditure pressures 11
Fiscal risk No 1 Lack of medium-term plans in key economies Unites States Japan Tightening global liquidity conditions Reducing sovereign debt in a very low inflation environment Containing public contingent liabilities Medium-term expenditure pressures 12
The current stance is not sustainable United States and Japan: Fiscal Outlook (Percent of GDP) United States 12 Japan 3-2 1-2 25-4 -6 8-4 2-8 6-6 15-1 4-8 1-12 -14 2-1 5-16 -12 26 27 28 29 21 211 212 213 214 215 216 217 218 219 26 27 28 29 21 211 212 213 214 215 216 217 218 219 Overall balance (left scale) Primary balance (left scale) Debt (right scale) 13
Fiscal risk No 2 Lack of medium-term plans in key economies Tightening global liquidity conditions Reducing sovereign debt in a very low inflation environment Containing public contingent liabilities Medium-term expenditure pressures 14
Financing terms are becoming less favorable 5 G-2 Emerging Market Economies: Change in the 214 Interest Rate Growth Differential Relative to 28-13 Average (Percentage points) 4 3 2 1-1 -2 TUR ZAF MEX ARG IND BRA SAU CHN RUS IDN 213 15
Debt dynamics will worsen in EMs Emerging Economies: Permanent 1bp Increase in US 1-y Bond Yields 95th percentile VIX Average VIX 5 4 EM ASIA: Public Debt (percent of GDP) 5 4 EM LATIN AMERICA: Public Debt (percent of GDP) 3 3 2 2 1 1 213 214 215 216 217 218 213 214 215 216 217 218 5 EM EUROPE: Public Debt (percent of GDP) 5 EM MIDDLE EAST: Public Debt (percent of GDP) 4 4 3 3 2 2 1 1 213 214 215 216 217 218 213 214 215 216 217 218 1
And fiscal distress episodes can rise Emerging Economies: US Monetary Policy Tightening and Incidence of Sovereign Debt Crises 7 6 5 4 3 2 1 No Tightening No tightening (Above-Median Term Spread) Tigthtening Tightening (Above-Median Term Spread) 2
Non resident holdings of local currency public debt have increased 18 16 14 Local currency Foreign currency Total Currency Composition of Nonresident Government Debt Holdings (Percent of GDP) 5 45 4 Local currency Foreign currency 213 12 35 1 3 25 8 2 6 15 4 1 2 5 26 27 28 29 21 211 212 213 THA PER COL TUR IDN BRA MYS ZAF MEX POL HUN 18
Fiscal risk No 3 Lack of medium-term plans in key economies Tightening global liquidity conditions Reducing sovereign debt in a very low inflation environment Containing public contingent liabilities Medium-term expenditure pressures 19
Inflation has trended down consistently in the euro area Inflation Rate in Euro Area, Japan, Sweden, the United Kingdom, and the United States (Percent) 6 United Kingdom 5 4 3 2 Euro area 1 United States Sweden -1 Japan -2-3 211 212 213 214 2
Low inflation can severely worsen debt dynamics 125 Spain and Euro Area: Government Debt Under Three Inflation Scenarios (Percent of GDP) Spain 125 Euro Area 12 12 115 115 11 11 15 15 1 1 95 95 9 85 9 85 8 213 214 215 216 217 218 219 8 213 214 215 216 217 218 219 WEO % inflation -1% inflation 21
Fiscal risk No 4 Lack of medium-term plans in key economies Tightening global liquidity conditions Reducing sovereign debt in a very low inflation environment Containing public contingent liabilities Medium-term expenditure pressures 22
Banking crises have had a high fiscal cost 45 Selected Advanced Economies: Financial Sector Support and Recovery (percent of 213 GDP) 4 35 3 25 2 15 1 5 Ireland Greece Netherlands Germany Slovenia Cyprus United Kingdom Spain Belgium United States Impact on Gross Public Debt and Other Support Recovery to Date 23
Other contingent liabilities also matter China: Financing Sources of Infrastructure Investment (percent of GDP) 2 State Budget Off-budget borrowings Land sales 15 1 5 27 28 29 21 211 212 24
Benefits and risks of public private partnerships General Government Capital Stock (Percent of GDP) Advanced Economies Emerging Market Economies Low-Income Countries 65 11 11 55 9 9 45 7 7 35 198 1982 1984 1986 1988 199 1992 1994 1996 1998 2 22 24 26 28 21 212 5 198 1982 1984 1986 1988 199 1992 1994 1996 1998 2 22 24 26 28 21 5 198 1982 1984 1986 1988 199 1992 1994 1996 1998 2 22 24 26 28 21 Without PPPs With PPPs 25
Fiscal risk No 5 Lack of medium-term plans in key economies Tightening global liquidity conditions Reducing sovereign debt in a very low inflation environment Containing public contingent liabilities Medium-term expenditure pressures 26
Government spending has been on an upward trend for decades General Government Expenditure (Percent of GDP) 5 Select Advanced Economies, 195 213 5 Emerging Market Economies and Low- Income Countries, 1996 213 45 45 4 4 35 35 3 3 Emerging market economies 25 25 2 15 195 196 197 198 199 2 21 2 15 Low-income countries 1996 1998 2 22 24 26 28 21 212 27
Baumol effects partially drive spending Government Consumption, 196-211 (Percent of GDP) Selected Advanced Economies 2 15 1 5-5 -1-15 DNK ISL ESP FIN NLD PRT SWE FRA BEL NOR JPN NZL CAN AUS ITA AUT GRC IRL GBR CHE USA Cross effect Relative price effect Relative volume effect Change in spending 28
even if real government consumption is contained Government Consumption, 196-211 (Percent of GDP) 22 Advanced Economies Emerging Market Economies 22 2 Real government consumption (percent of real GDP) 2 18 18 16 Government consumption (percent of GDP) 16 14 14 12 Real government consumption (percent of real GDP) Government consumption (percent of GDP) 12 1 1 8 196 1962 1964 1966 1968 197 1972 1974 1976 1978 198 1982 1984 1986 1988 199 1992 1994 1996 1998 2 22 24 26 28 21 196 1962 1964 1966 1968 197 1972 1974 1976 1978 198 1982 1984 1986 1988 199 1992 1994 1996 1998 2 22 24 26 28 21 8 29
Population aging will exacerbate the trend going forward Age-Related Expenditure in Advanced and Emerging Economies (Percent of GDP) Health Pension 1.7 8.8 9.4 7.2 7.6 6.6 5.3 4.4 4.9 5.9 3.4 3.3 197 199 213 23 197 199 213 23 AE EME AE EME 3
The secular decline in public capital stocks may present additional needs General Government Capital Stock (Percent of GDP) Advanced Economies Emerging Market Economies Low-Income Countries 65 11 11 55 9 9 45 7 7 35 198 1982 1984 1986 1988 199 1992 1994 1996 1998 2 22 24 26 28 21 212 5 198 1982 1984 1986 1988 199 1992 1994 1996 1998 2 22 24 26 28 21 5 198 1982 1984 1986 1988 199 1992 1994 1996 1998 2 22 24 26 28 21 Without PPPs With PPPs 31
Spending reforms will have to tackle the largest budget items Expenditure Structure (Percent of total primary expenditure) Advanced Economies Emerging Market Economies and Low-Income Countries 4% 26% 23% 26% 52% 18% 34% 17% Compensation of employees Goods and services Social benefits and subsidies Investment 32
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