Thursday, June 5
Julio Escolano, Division Chief, Fiscal Policy and Surveillance Division, Fiscal Affairs Department, IMF
Major collateral damage of the 2008-09 global financial crisis has been the rise in public debt. But to what extent was that inevitable, welfare-enhancing, and/or sustainable? Such questions are addressed in the latest issue of the IMF Fiscal Monitor report. On June 5, 2014, Julio Escolano of the IMF Fiscal Affairs Department came to the JVI to shed some light on the controversy.
The Fiscal Monitor is the youngest of the Fund’s three flagship periodicals (the others are the World Economic Outlook and the Global Financial Stability Report). It spans all market economies, advanced and emerging as well as low-income, making it truly global. This is important because sound multilateral policy advice demands careful balancing of the pace of fiscal consolidation across the IMF membership.
Mr. Escolano first pointed out that a key factor underlying the current state of global public finances was their unbalanced state before the 2008-09 crisis: many advanced economies (AEs) entered the crisis with public debt already high, which the crisis significantly worsened. However, many emerging markets (EMs) entered with significant surpluses and are now exiting the crisis with much lower debt ratios than the AEs. This imbalance explains the significant fiscal consolidation efforts underway in AEs, which averaged 1.25% of GDP in 2013; cumulatively,AEs have cut their deficits by half since 2009. Fiscal consolidation has been particularly steep in euro-area countries with IMF programs but has also been considerable in the US and the UK, though much less so in Japan. These efforts are expected to continue in 2014, but at the much lower pace of 0.4% of GDP. Despite progress, Mr Escolano pointed out, AEs still are far from regularizing their fiscal balances: by the end of the decade many will still have debt ratios higher than 80% of GDP. This macroeconomic vulnerability is particularly crucial in the euro area, where for some countries annual refinancing needs can amount to 20% of GDP.
The latest issue of the Fiscal Monitor highlights the composition of fiscal consolidation, with emphasis on the spending side. A focus on restraining spending is particularly desirable in much of the euro area, where tax rates are already high. Far-reaching expenditure reviews are underway in Italy and Ireland; others should soon follow. AEs could also achieve revenue gains by closing tax loopholes.
For EMs, Mr. Escolano noted, the prospects are generally brighter, because of lower debt ratios, real interest rates well below real GDP growth rates, and better risk sharing because more of their debt is now denominated in domestic currency. Nevertheless, worrying risks remain in the form of contingent liabilities, low commodity prices, and synchronized electoral cycles in 2015. For less developed countries, the commodity prices are a major concern, but in general fiscal risks can be mitigated by private-public partnerships and more active participation in financial markets.
Mr. Escolano closed his presentation with a discussion of issues such as poorly defined medium-term fiscal plans in the US and Japan, and continuing positive interest-growth differentials in AEs. Another pressing issue is the threat of too low inflation in the euro area and how it might affect fiscal accounts: below-target inflation results in higher real interest payments, which in turn require more consolidation to stabilize debt ratios.
The audience had many questions, for instance about the ideal balance between domestic and external debt, the likely effect of concerted fiscal consolidation on global real interest rates, and whether the “right” level of the debt-to-GDP ratio means going back to pre-crisis levels, particularly in the US and the euro area. Commenting on the pace of fiscal consolidation, Mr. Escolano noted that not every country has the luxury of moving gradually. Mr. Escolano also noted that though reducing debt is generally believed to be good for growth, such statistical associations should be interpreted with care. The form of debt reduction also matters, he cautioned. For example, even though debt reduction through monetization has often been used in the past, it is not to be commended.