Summary
Major transformations in the global economy have increased the importance of fiscal policy in fostering sustainable and inclusive growth and smoothing the economic cycle. Yet fiscal policy also must achieve more in a more constrained and riskier environment. The April 2017 issue of the Fiscal Monitor explores how the difficult task of achieving more and better might be accomplished using fewer resources.

Mr. Lledo started his presentation by reviewing recent fiscal developments in advanced, emerging market and middle-income economies as well as in low-income developing countries (LIDCs), underscoring the risks to the outlook. In the rest of the presentation, he concentrated on how the role of fiscal policy can be elevated by adopting growth-friendly, inclusive, and countercyclical measures and discussed how the resources necessary to finance such measures could be generated.

In 2016 advanced economies (AEs) marginally eased their fiscal stance, breaking a five-year trend of fiscal consolidation. The fiscal stance of AEs as a group is expected to stay fairly neutral over the medium term. By contrast, in emerging markets (EMs) deficits increased for the fourth year in a row, from about 1 percent of GDP in 2012 to about 5 percent in 2016. However, their fiscal position is expected to improve in the near term, largely driven by improvements in oil exporting countries as oil prices recover. In LIDCs, the average deficit went up for the third consecutive year, reaching 4.4 percent of GDP. However, deficits are now projected to stabilize as a percentage of GDP, halting the recent trend.

Fiscal risks remain elevated and on the downside, although some upside risks have also increased recently. In general, the fiscal outlook may differ from the baseline projections for two main reasons: (1) In the past year, uncertainties about both the scope and the design of fiscal policies have risen. Here Mr. Lledo highlighted the example of the United Kingdom after Brexit; (2) Government balance sheets continue to be vulnerable to a wide range of such risks as high levels of nonfinancial (largely private) sector debt, a growth slowdown, tighter financial conditions, weaker currencies, lower commodity prices, and the materialization of contingent liabilities.

In this challenging environment countries must make selective and difficult budgetary choices. To guide their decisions, sound fiscal policy objectives should include being countercyclical, growth-friendly, and inclusive. A countercyclical fiscal response should rely mostly on automatic stabilizers and be symmetrical, expanding in bad times and tightening in good times. Countries that have run out of policy options can turn to procyclical fiscal policies but should calibrate their pace and composition to reduce short-term drag on economic activity. Using the United States as an example, Mr. Lledo illustrated how procyclical policies in good times can be a major factor in ratchetting up debt-to-GDP ratios. While countercyclical fiscal policy is used to smooth output fluctuations around a trend, growth-friendly fiscal policies are meant to affect the trend itself. Options include direct policies in the form of structural tax or spending policies that directly boost employment, accumulation of physical and human capital, and productivity. Meanwhile, indirect policies could be used to enhance the effectiveness and progress of structural reforms in labor and product markets. The widespread perception of increasing income inequality worldwide shows that what matters is the national dimension of the problem. Here inclusive fiscal policy, in particular, can do a great deal to ensure that the poor and the middle class share in the growth dividend.