Summary
Throughout the world, economic growth is slowing and public debt remains high. Meanwhile, demographic changes and technological advances are reshaping the global economy. How should fiscal policy react to support economic growth and inclusion, while ensuring that public finances are sustainable? Ms. Elif Ture, an IMF economist, presented the major findings on this subject from the new Fiscal Monitor.
On May 10, Ms. Elif Ture, one of the authors of the April 2019 IMF Fiscal Monitor, presented some of its main findings to a JVI audience.
Ms. Ture identified the main fiscal policy issues raised by the evolving global economy. Global economic growth is expected to slow further in 2019, with projected recovery in 2020 subject to strong downside risks that may require a fiscal policy response. At the same time, after fiscal expansions during the global financial crisis and commodity price shocks, public debt has risen in many countries, raising concerns about public finance vulnerabilities. In many parts of the world, these problems are aggravated by aging populations and projected health care and pension spending increases. Meanwhile, growth in per capita income has been trending down and inequality remains a concern across country groups, even rising in advanced economies. These problems are partly driven by the changing structure of the global economy, with technological changes and global economic integration favoring high-skilled over low-skilled workers.
Ms. Ture highlighted how fiscal policy environment differs by country and country group. Most advanced economies are enjoying favorable conditions of negative growth-adjusted interest rates. While that may alleviate debt sustainability concerns and provide additional fiscal space, any shift in risk sentiment can change the situation abruptly. Thus, over the medium term most advanced economies plan to consolidate to reduce debt. Non-oil-exporting emerging market economies are now pausing with fiscal consolidation, and some are undertaking fiscal expansion, which will put upward pressure on already high debt. The risk for these countries is exacerbated by their vulnerability to financial market conditions, such as interest rate spreads and exchange rate movements. In low-income developing countries, deficits and debt are projected to stabilize (subject to high uncertainty), but the structure of their spending has worsened as more and more resources must be diverted to interest expenses.
Ms. Ture noted that, with global growth slowing and public debt elevated, fiscal policy should prepare for the next downturn, balancing growth and sustainability objectives. On the structural side, fiscal policy needs to adapt to shifting demographics, advancing technology, and rising global economic integration. For countries with limited fiscal space, this requires inclusive and growth-friendly budget recomposition. While details will vary by country, often this would include spending more on high-quality investment in physical and human capital, replacing wasteful subsidies with better-targeted social support measures, and expanding the budget envelope through reforms of public finance management and revenue mobilization measures. There is also scope to enhance international cooperation in such areas as taxation of multinational companies, climate change, and corruption. On the last, which is the subject of a special study in this issue of the Fiscal Monitor, Ms. Ture argued that fighting corruption may yield substantial benefits in terms of tax collection and public spending efficiency but requires political will to build strong and transparent institutions that promote integrity and accountability.
During the Q&A session that followed, the discussion touched upon fiscal multipliers, automatic stabilizers, and public spending issues. Ms. Ture noted that assessment of fiscal multipliers is difficult, as the values might be country specific and might depend, among other things, on impulse composition (taxes vs. spending) and cyclical conditions. However, she emphasized that fiscal multipliers are likely to be high, above one, during the bad times. This could provide justification for fiscal easing if growth prospects deteriorate and demand support is needed, even in high debt economies such as Japan, subject to medium- or long-term consolidation to ensure debt sustainability. However, Ms. Ture stressed that, in response to shocks, automatic stabilizers are the first line of defense, and one of the challenges for fiscal policy is to construct better stabilizers. In response to a question about successful country experience in growth-friendly budget recomposition, Ms. Ture highlighted some examples from India and the US.
Alexei Miksjuk, Economist, JVI
