Participants at the Press Conference: Vitor Gaspar, Director of the Fiscal Affairs Department; Abdelhak Senhadji, Deputy Director of the Fiscal Affairs Department; Benedict Clements, Chief of the Fiscal Policy and Surveillance Division, Fiscal Affairs Department; Wiktor Krzyzanowski, Senior Communications Officer, Communications Department
Mr. Krzyzanowski: Good morning, everybody. Thank you very much for joining us today for the presentation of the Fiscal Monitor. My name is Wiktor Krzyzanowski; I am with the Communications Department of the Fund. Let me present to you the speakers: Vitor Gaspar, Director of the Fiscal Affairs Department, will present the main findings of the report. Abdelhak Senhadji, Deputy Director of the Fiscal Affairs Department, and Benedict Clements, Chief of the Fiscal Policy and Surveillance Division of the Fiscal Affairs Department, will be helping with answering the questions you may have.
We are also live and online. If any of our watchers want to ask questions, please do that now at IMF.org. We also have interpretation in the room in case that was necessary.
Let me invite Vitor Gaspar to present the main findings of the Fiscal Monitor—you have received the document and it is published on IMF.org now. Then we will be happy to take your questions.
Mr. Gaspar: Thanks, Wiktor.
The Fiscal Monitor is out. The title of the Fiscal Monitor is “Acting Now, Acting Together.” We start by noting that far-reaching trends are shaping today’s global outlook and a very important trend is the weakness of global growth, the weakness in global economic activity, and very low inflation in advanced economies.
Another important trend is the decline in commodity prices, especially oil prices, which have fallen by 35 percent in the last 12 months and even more considerably if one takes the fall of 2014 as the starting point.
Moreover, there is a significant slowdown in global trade. For many emerging markets and low-income countries, there is a tightening of financing conditions and there are dwindling capital flows.
Overall, risks have materialized; prospects have been marked down; and downside risks are now more pronounced than before.
The policy challenges that policymakers are facing now are restoring vigorous growth and healthy and resilient public finances.
What is the good news? Policymakers individually, and in concert, have the policy tools to adapt to these new realities. So, that explains the title of the Fiscal Monitor: Act now to build resilience and boost growth. Be prepared to act together to fend off global risks.
Let me walk you now through some fundamental facts that we have in the Fiscal Monitor. One aspect that we very much emphasize is that public debt has been rising as a percentage of GDP in every corner of the world. Deficits have increased in many countries in 2015. In a considerable number of countries, they are forecast to continue increasing in 2016.
Let us look at advanced economies. For 2016, the level of public debt that is estimated for advanced economies is 107.6 percent of GDP. This is a relatively high level from a historical viewpoint, as you see in the slide. It is actually higher than the level attained at the time of the Great Depression, and it is just below the record levels that were recorded in connection with the World War II.
Let us move on to emerging markets and low-income developing countries. What we see here is that the deficit forecast for 2016 for both groups of countries is at about 4.5 percent of GDP. Again, a time comparison is useful. This level is above the one recorded in 2009, when, as you will recall, fiscal policy was responding to the global financial crisis.
If we look at groups of countries, the group of countries where revisions have been most pronounced are the emerging markets. The slide shows the public debt-to-GDP ratio. The level which is forecast for 2016 is now 11.5 percentage points of GDP higher than what we were expecting back in 2011. If you pay attention to the various lines in the chart, you actually see that a large part of the revision took place since last year, since our forecast of April 2015.
If we look at groups of countries in a more granular way and focus on commodity exporters, we actually see that it is in the subgroup of oil exporters that changes have been most pronounced. On the right-hand side of the chart, when we compare prospects for the overall budget balance in oil exporters from the Middle East and North Africa with the five years before the global financial crisis, we see that the shift gives an accumulated amount of US$2 trillion, which shows that developments for these countries have had particularly strong consequences.
A very important bottom line is that all countries around the world will have to adapt to these new realities, but countries around the world face very different challenges. No “one size fits all.” All countries will have to follow growth-friendly fiscal policies; all countries will have to build resilient public finances; but all countries will have to pursue smart fiscal policies: fiscal policies that are well adapted to the particular circumstances of the country. So: growth-friendly, build robustness and resilience, be smart.
If we now go a little bit more granular, I would like to walk you through three examples covering three country groups. I will speak about advanced economies; I will then look at commodity exporters; and finally, I will go to low-income developing countries.
For advanced economies, the main challenge comes from the combination of very low nominal growth and very high levels of public debt. The problem here is that there is the risk of a self-fulfilling spiral where, if for whatever reason, nominal growth comes lower than expected, then the public and private debt-to-GDP ratios go up because the denominator is smaller. Governments, households, and firms will adjust their expenditures. Economic activity will fall further down so nominal GDP growth will be lower, which gives you the spiral.
How can this be broken? Under the baseline, we recommend a three-pronged approach, with expansionary monetary policy, growth-friendly fiscal policy, and productivity-enhancing structural reforms. We need this three-pronged approach. Countries can do it.
If downside risks materialize, we need the global economic community to be ready to act in a concerted way to fend off the risks. Again, that will require coordination and participation of the larger economies in the world. Clearly, no “one size fits all” and so not all countries will be able to participate in this effort. But even those who will not participate will benefit from stronger global economic activity, stronger global trade, and more stable global financial conditions. So, this is something that will work for all.
If one looks at commodity exporters now, one can focus on revenues. What the next slide tells you in yellow and red is that about two thirds of the countries in the world have seen their government revenue-to-GDP ratios fall in the period of 2014 to 2016. When the red color is used, the fall is more than 5 percentage points of GDP.
If we now look specifically at oil exporters, the loss would be 7 percent of GDP on average, which basically means that oil exporters have to adjust, in particular once we recognize that this is likely to be a lasting disturbance. But it is very important to recognize that oil exporters are also different. Some have accumulated considerable reserves in the past and they can adjust at a very gradual, measured pace. But in any case a structural change in the budget is recommendable. It is recommendable that oil exporters rely on a more diversified source of revenues and rely more on taxation, with broad bases and very low rates in many cases. They would also benefit from more efficient public expenditures, and in many cases they would benefit from reform in energy subsidies.
Let me continue on the topic of revenue mobilization and now cover low-income developing countries. Research at the Fiscal Affairs Department shows that it is very important for countries to build a minimum tax capacity, and this minimum tax capacity points to values of the tax revenue-to-GDP ratio at about 15 percent of GDP.
If one looks at the groups of countries that we cover, we see that about half of the low-income developing countries have tax-to-GDP ratios below 15. In the emerging markets, middle-income group, about one third have tax-to-GDP ratios below 15 percent. This is a very relevant point.
Why is it so relevant to have a minimum amount of tax capacity? Because is is fundamental for the state to be able to play its role in the process of growth and development. Tax capacity in these countries is part of their growth and development strategy. It is fundamental to build state capacity, to be able to conduct an efficient and effective budget process, including efficiency and effectiveness of public expenditures in general, and of public investment, health and education in particular.
These short-term priorities that I am emphasizing should not in any way detract from the challenge of building robust and resilient public finances and promoting sustainable growth. How can countries build this resilience? There are four elements in recent work done at the Fiscal Affairs Department. One key element is improve transparency and accountability, have better public finance accounts. The second is identify and quantify fiscal risks. This requires as a necessary condition to have a complete assessment of the assets and liabilities of the general government. The third element is to actively mitigate and manage risks. The fourth element is to build buffers so that the general government can fulfill its role as insurer of last resort.
How can we increase growth? How can fiscal policy contribute to growth? An IMF study that came out about a year ago does estimate that structural fiscal policies on the expenditure and on the revenue side have the promise of delivering a full 0.75 percentage points of GDP in terms of annual growth in advanced economies and an even higher growth dividend in developing economies.
Another point that I want to call your attention to is the very good work presented in Chapter 2 of the Fiscal Monitor on fiscal policy, innovation and growth, where it is shown that fiscal support to private R&D can in advanced economies, at a cost of 0.4 percentage points of GDP—less than half a percentage point—deliver 5 percent higher GDP growth in the long run.
Let me sum up. What are the challenges? The challenges are restoring vigorous growth and health and resilient public finances. What is the good news? The good news is that policymakers in individual countries, or in concert, have the policy tools that they need to adapt to these realities. What is the bottom line? Act now to build resilience and boost growth; be smart in fitting your policy to your country’s circumstances; and last, but not least, be prepared to act together to fend off global risks.
Mr. Krzyzanowski: We are now ready for questions. We are also taking questions online if those following us on IMF.org want to ask one.
Questioner: In your report, we do not read anything about the “Panama Papers.” Generally speaking, Panama is an independent country but most of the fiscal heavens belong to countries; for example, the United Kingdom. Is it a problem of balance of payments? Is it a fiscal problem for the countries?
Mr. Gaspar: On your question of whether we look at the issue, we do. We look at the issue very closely. We have been looking at the issue for a very long time. The IMF and the Fiscal Affairs Department have been actively engaged in promoting fiscal transparency and good governance for many years, be it in our surveillance exercises or in other engagement with countries. We do that in the context of our program design and we do that in the context of our technical assistance to countries.
The concern about issues of transparency and good governance cuts across everything that the Fund does. We have been pushing that for many, many years. It has been a central issue in technical assistance that the Fiscal Affairs Department has conducted for more than 50 years.
What is new coming from the “Panama Papers?” I would say two issues have become very salient. The first issue that has become very salient is that the issue of opaqueness is not an issue that is specific to a group of countries. It is a matter of global relevance. It affects advanced countries; the examples that you used in your question were from advanced economies. It affects emerging countries; it affects low-income developing countries; it affects everybody. It is an issue of universal concern.
The second aspect which I think is very important is that, at this point in time, people all around the world care deeply about these issues because these issues are perceived as fundamental issues of justice, in a situation where economic prospects are not brilliant, where in many places around the world people are asked to contribute more to public finances. It is simply unacceptable to have a perception that the well-off are not paying their fair share in the effort, that they use methods, legal or illegal, to evade or avoid taxation.
From this viewpoint, I think that we have to recognize that a lot of progress has been made. If you look at the global forum on transparency and exchange of information for tax purposes and you look at the standards and codes for the exchange of information pertaining to individual taxpayers, if you look at the efforts in the context of the OECD Base Erosion and Profit-Shifting initiative in the area of corporate taxation, you basically see that a lot has been achieved in recent years. The situation is definitely better now than it was when the documents that are covered by the “Panama Papers” were starting to come out, which are documents from 40 years ago.
But clearly, what we now perceive, and it is something that we very much welcome, is that there is a very strong call for action. One needs to act now and at a systemic level. The requirement for information exchange and transparency has to become systemic and universal. In that context, the IMF will be cooperating with the OECD, with the World Bank, with the United Nations, in order to make sure that such process is implemented and put in place as fast as possible.
In many cases, countries will have to upgrade their information systems. There may be implications for revenue administration in various countries. There are issues having to do with financial transparency that perhaps you have covered in the earlier press conference having to do with the Global Financial Stability Report.
But the main thing is that we are ready to engage with our very broad membership, helping countries to put in place systems which are called for to make sure that the necessary information on taxpayers is available so that taxpayers can be confident that each and every taxpayer is paying his or her fair share.
Questioner: My question is about China. In early March, China raised the 2016 budget deficit target to about 3 percent of GDP. A fiscal deficit of 3 percent is usually viewed as a warning or red line. However, with very limited room in monetary policy, China has no other options but to take expansionary fiscal policies and to increase government spending to boost growth. How do you understand the dilemma between the need to increase government spending and increasing budget deficit? In your opinion, what is the biggest risk facing the Chinese economy right now?
Mr. Gaspar: The Fund has a very intense engagement with the Chinese authorities. The department that I run, the Fiscal Affairs Department, is engaged in a very productive dialogue with the Chinese authorities on issues that have to do with expenditure policies, fiscal frameworks, and tax policy and revenue administration. We have a complete horizontal engagement with the Chinese authorities.
The most important challenge that China is facing is the successful transition of its growth model. China is undergoing a very important transformation. The growth model is moving from investment to consumption, from exports to domestic demand, and from manufacturing to services. This is one of the most impressive economic transitions in economic history. The size of the Chinese economy makes this an event of global relevance.
In this context, China has to upgrade its policy frameworks in general, and its fiscal framework in particular. The various elements of this upgrade are clearly recognized in the budget framework law that entered into force in January 2015. The key elements are there: A very strong effort at transparency and a very important effort at solving problems that have to do with vertical imbalances in China—the fact that provinces have used, because of the response to the 2008-09 crisis, local financing vehicles to finance public infrastructure. The 2015 law brings that into budget and we are completely for that, although, of course, we understand that there are transition periods.
We believe that in case it is justified to have macroeconomic expansionary policies in China, the way to do it is by on-budget fiscal stimulus and that this instrument is better than the continued reliance on credit growth—if you have to choose between the two, go for fiscal. We are of the view that China does have fiscal space and does have room to maneuver on the fiscal side to help manage the transition. That is the most important challenge.
Another important element in this process has to do with state-owned enterprises. Again, the Chinese authorities have identified that as a very important priority, the reform of the state-owned enterprise sector. On that, we have the announcement, the statement of the priorities. We do not have yet the details on implementation, but that is another very important process.
Questioner: You forecast a primary deficit for Brazil until 2019 and a sharp rise in gross debt until 2021. Two brief questions. Do you think this trend is sustainable? What should Brazil do to face the fiscal challenges?
Mr. Gaspar: You should not forget the context, and, of course, you do not, being Brazilian. Brazil is at this point in time suffering its most severe economic contraction in a very, very long time, and so the macroeconomic situation in Brazil is very demanding.
If you go back to the 1990s, you see that the very successful stabilization in Brazil during that period benefited from a very strong commitment to a fiscal anchor and a set of rules and procedures on the fiscal side that have served Brazil well for a prolonged period of time. In our view, Brazil would benefit from having a strong medium-term credible framework that would provide a fiscal anchor that could be a reference to the set of policies that we see working together: monetary, fiscal and structural. That applies to Brazil as well.
Clearly, Brazil is not facing a low inflation problem. On the contrary, inflation is above the target that has been set by the central bank, but it is still the case that the coherence between monetary, fiscal and structural over time is of paramount importance for Brazil. From that viewpoint, the fact that there is considerable uncertainty associated with the political situation makes the production of such a consistent set of policies over time particularly demanding for Brazil.
We would indeed recommend to Brazil that, over the medium term, a higher primary surplus would be appropriate, but the exact constellation would depend on the overall package that would be put together so as to guarantee a consistent combination of policies over time.
Questioner: Looking at the forecast that you have for low middle-income countries or low-income countries, you are looking at Ghana ending the year with public debt at about 74 percent of GDP. How will you classify countries that have this percentage in relation to GDP? Also, do you think that the government is doing enough or what can they do to contain the rise in debt?
Mr. Gaspar: I will start giving you an answer and then I will pass on the mike to Abdel, who will give you the details on the Ghanaian-specific situation.
You suggested right at the beginning that one should jump from a specific indicator for the public debt-to-GDP ratio to a conclusion on the fiscal policy stance of the country. That is what I want to warn against. Fiscal policy is very complex. There are many structural elements to fiscal policy which are crucial to have a judgment of the situation in any country, including Ghana. So, in order for one to give a specific recommendation on a country, one really has to go through the specifics of the situation. If Abdel is willing, that is precisely what I suggest Abdel would do.
Mr. Senhadji: I am very willing. Let me just perhaps start with the number that you mentioned, which is the debt level in Ghana that is quite high. Indeed, in 2015, the debt level was around 75 percent. Now, having said that, the authorities have made significant progress in bringing debt or at least the deficit down. The deficit in 2014 was at 12 something percent and it was brought down to 5 percent in 2015, which is a significant effort. Fiscal consolidation has begun and it was frontloaded.
In terms of the path for debt, indeed debt remains very high, but we project it to go down gradually if the authorities continue with the fiscal effort that they have already started.
In terms of what it implies for growth, of course, fiscal consolidation had a small drag on growth in the short term. Growth declined from around 5 percent to 4 percent, and 3.5 percent in 2015. As fiscal accounts strengthen and fiscal stabilization is successful, it is projected actually to resume going up over the medium term. That is at least the projection that we have.
Questioner: As you know, the government of Spain has missed their deficit target by a big number this year. You have included this number in your projections, but I would like to know what are going to be the consequences of missing this target, especially under the political uncertainty that we are living in right now in the country.
Mr. Gaspar: We are well aware of the latest numbers that have been just put out by the Spanish authorities. The general government deficit for 2015 reached 5 percent of GDP, and the number, as you well quoted, that is included in the World Economic Outlook, estimates 4.5. That is also above what was the target under the Excessive Deficit Procedure, which was 4.2 percent of GDP.
From a macroeconomic viewpoint, it is important to stress that this is something which is happening at the same time that the Spanish economy is performing well, in the sense that it has strong economic growth. Spain has also benefited, like many other European countries, from low interest rates, so interest costs have come below the estimates of the government itself.
The under-performance comes from the regional governments and that is a deviation which is about 1 percentage point of GDP, and from the social security accounts and that is about 0.7 percent of GDP.
If you think about these various elements, what you basically get is that Spain has to have a medium-term plan which will control the path of the public debt-to-GDP ratio and that over the medium term will require necessarily a sizable fiscal adjustment which should be done at a measured pace. When will the Spanish political system deliver such outcome is something that I will not conjecture on.
Mr. Krzyzanowski: Let us quickly turn to the online questions: Do you think Mexico has taken the correct actions to reduce the fiscal deficit based on the cuts to federal spending?
Mr. Gaspar: Yes, we think that the path that is expected for Mexico, which points to a 3.5 percent of GDP deficit in 2016 and 3 percent in 2017 and leads to a situation where the public debt peaks in 2017 at about 55 percent, is appropriate. We do support the commitment of the authorities to a gradual reduction of the fiscal deficit and we do attribute great importance to the fact that the public debt-to-GDP ratio will be coming down gradually after 2017. Mexico has been using a macroeconomic framework which aims at overall stability, and Mexico has been reasonably successful doing so and we very much welcome that progress.
Questioner: Just a follow-up question on Spain. Do you have any means by which you can calculate the extent to which Spain’s exceptional growth performance is actually related to its 5 percent deficit? If so, would that sizable fiscal adjustment that you mentioned mean that your growth projections for Spain are over-optimistic?
Mr. Gaspar: I do not have that analytical decomposition of growth effects coming from the fiscal position relative to others. You may try the regional press conferences on Friday. But something which is very important to understand in general is the following: If you have a situation where your economy is performing strongly, you should let automatic stabilizers work symmetrically. That is extremely important and it is something that we stressed about a year ago, when we were discussing the various effects of fiscal stabilization for economic performance and growth.
What we saw and what we documented a year ago was that it is precisely when countries do not let automatic stabilizers work symmetrically in the upswing that debt accumulates quite substantially and, at the same time, this behavior undermines macroeconomic stability and contributes to a deterioration in growth performance.
The bottom line is that it is very important that fiscal policy contributes to macroeconomic stability and it can only do so by reacting symmetrically to downswings and upswings. That is: it should smooth the business cycle both in the upswing and the downswing.
Questioner: Does the sizable fiscal adjustment that you mentioned mean that you will have to revise down your growth projections for Spain?
Mr. Gaspar: That is what I tried to answer when I spoke about automatic stabilizers. We are expecting strong performance of the Spanish economy. From that viewpoint, having a gradual, moderate, measured adjustment in the upswing is not only what you need to do to reduce the public debt-to-GDP ratio and bring the budget deficit close to its medium-term objective, but it is also something which is broadly compatible with the stabilization, the cyclical stabilization of the Spanish economy.
Questioner: You do not include projections in the Fiscal Monitor for Greece, but yesterday there was a report of a memorandum published by Reuters that does and it refers to an IMF projection of the primary surplus of 1.5 percent for 2016. Do you recognize this number? On a more general note, why is the IMF more conservative in its projections about Greece than the Greek government, or the Europeans, for that matter?
Mr. Gaspar: I have not seen the Reuters report that you quote and I will not comment on the report that I have not seen. On the fact that we do not have the fiscal projections for Greece in the Fiscal Monitor, that is simply because there is a process of negotiations going on which has been briefly suspended during the period of the Spring Meetings. We are fully engaged in that process of negotiation and we want to protect the integrity of that process of negotiation. We felt that the publication of the numbers would interfere with that.
On the position of the IMF in the Greek program, the general principles were set up a long time ago, very publicly, and they are very easy to communicate. There are two fundamental pillars in the approach. There are the policies that will be pursued in Greece that have elements which are fiscal, that have elements which are structural, that have elements which are financial. Given the level of public debt in Greece, those policies may also require debt relief in order to ensure debt sustainability. So, we have these two pillars and these two pillars have to go together.
Of course, things have to add up. Measures have to be realistically assessed; their yields have to be accurately estimated; and then the totals have to be reconciled. That is what “add up” means. Things must sum up to the totals at the end of the day.
Questioner: You mentioned that there could be three broad things that need to be done, given the very poor growth outlook: namely, the stimulus of monetary policy, growth-friendly fiscal policy, and then the structural policy. In the case of Europe as an aggregate, could you be more specific on how fiscal policy could be more growth-friendly given that we have this kind of a looming threat of deflation? Would it be outright stimulative using it as a fiscal impulse or would you recommend a more kind of gradual steps and let the automatic stabilizers work?
Mr. Gaspar: Under the baseline, exactly as you say, we are in favor of a three-pronged approach, which includes expansionary monetary policy, growth-friendly fiscal, and productivity-enhancing structural reforms. But when you go around Europe country by country, what this means will vary country by country. Of course, if you are part of the euro area, monetary policy is whatever the European Central Bank decides, but fiscal will be very differentiated. In some cases, some countries that have fiscal space may want to use it. If they would want to use it, it would be good that they would do it to extract a double dividend that would be associated with aggregate demand expansion in the short run, plus a positive impact on medium-term potential by favoring investment in public infrastructure and the support of appropriate structural reforms for the specific circumstances of the country.
In Europe, there are countries that do not have fiscal space, but even in those countries it is very important that structural reforms deliver productivity improvements and fiscal policy shifts composition so as to be growth-friendly. That can be done by changing the structure of taxation or the composition of expenditures in order to promote those elements of the budget that are most favorable to growth.
One really has to go granular. An example of that sort of analysis produced in these Spring Meetings is precisely Chapter 2 of the Fiscal Monitor, where we look at tax credits and subsidies to private sector R&D, and Chapter 3 of the World Economic Outlook, which provides a granular reading of the impact of various sorts of structural reforms. So, there is not a blanket recommendation for Europe, no “one size fits all.”
Questioner: Argentina and Brazil are going through fiscal adjustment. I would like to know what are the differences between the fiscal adjustments in Argentina and Brazil and to what extent both processes could have an impact on activities in Brazil and Argentina.
Mr. Gaspar: I will not compare. Argentina is at this point in time in a process of adjusting its budget. The deficit is forecast to be coming down relatively quickly from last year, where it peaked at 7.4 percent of GDP to 3 percent at the end of this decade, according to our estimates. At that point in time, there will be a coincidence between the overall balance and the cyclically-adjusted balance, which basically means that we see the output gap closing for Argentina before the end of the decade or output being at potential. This is compatible with a situation where, from the end of 2017 onwards, the public debt-to-GDP ratio comes down.
But if one looks at the recent developments in Argentina, one important development is the agreement, the progress in Argentina’s negotiations with its creditors. The resolution of that long-standing problem offers the promise of participation of the country in international capital markets and that is likely something which will be well-managed and will prove beneficial to the country. So, as this point in time, our dominant perception of what is going on in Argentina is a perception of progress, and we very much welcome progress in these various fiscal and financial dimensions.
Questioner: Mexico has now a tax reform that could raise the total fiscal revenue by 2 percentage points of GDP, but we had a slow increase in the economy. Could it affect the projected revenue, the slow increase?
Mr. Gaspar: What we see is a situation where the overall balance in Mexico is reduced gradually from 4.1 that we recorded in 2015 to 2.5 that will be recorded in accordance with our forecast in 2018. At that point in time, the output gap in Mexico will have closed—output will be at potential. At this point in time, public debt will be coming down and the economy will be growing at about 3 percent. Unemployment will be relatively low, at less than 4 percent. So, the macroeconomic conditions are definitely not a source of concern in terms of the buoyancy of the tax revenue. I would not see a problem in that dimension.
Mr. Krzyzanowski: Thank you all very much. We will have to conclude. If there are any questions online or in the room, please send them to the Press Office. We will try to get back to you as soon as possible. There is also a blog and a survey story article on IMF.org which lays down the main messages from the Fiscal Monitor.
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