Friday, April 17

Presenter
Xavier Debrun, Deputy Division Chief, Fiscal Affairs Department, International Monetary Fund

Discussant
Alfred Katterl, Division Chief, Division of Economic Policy Analysis, Austrian Federal Monostry of Finance

Chair
Franz Nauschnigg, Head of European Affairs and International Financial Organizations, Oesterreichische Nationalbank

Summary
On April 17, 2015, the JVI hosted a presentation and discussion of the latest Fiscal Monitor, a biannual publication by the International Monetary Fund’s (IMF) Fiscal Affairs Department, focusing on the role that fiscal policy can play in supporting sustainable growth. Mr. Xavier Debrun, Deputy Division Chief at the IMF, presented the main results; Mr. Alfred Katterl, Director for Economic Policy at the Austrian Federal Ministry of Finance (BMF), acted as discussant; and Mr. Franz Nauschnigg, Head of European Affairs and International Financial Organizations at the Oesterreichische Nationalbank (OeNB), chaired the event. Mr. Martin Schindler, JVI Deputy Director, delivered a short welcome speech and introduced the speakers. The event was also part of the course on “Integration in Europe: European Union (EU) and Eurasian Economic Union (EEU)” organized jointly by the OeNB and the BMF (see page XX of this Newsletter).

Mr. Debrun presented the main messages of the Fiscal Monitor. In reviewing recent fiscal developments (the “conjunctural” chapter), he noted that despite the economic recovery in advanced economies, fiscal risks still remained significant for both advanced and emerging markets. However, record low nominal bond yields provided some breathing space in terms of lower interest payments: in the euro area, the IMF estimates that in 2015 and 2016 quantitative easing by the ECB could lead to cumulative savings on funding costs of about 0.45 percent of GDP. With real interest rates in advanced economies expected to fall short of expected annual GDP growth through 2020 by a full percentage point, public debt-to-GDP ratios are set to decline. However, a reversal of this differential to its historical average of 1.2 percent would imply an increase in the debt-to-GDP ratio.

In emerging markets, the average deficit for the group as a whole increased, driven largely by the drop in revenue for oil exporters, mainly because of lower oil prices, but also by worsening public finances in some large oil importers, such as Brazil, Thailand, and Turkey. The IMF recommends that countries should seize the moment created by lower oil prices to reform energy taxation and eliminate costly and inefficient subsidies

Mr. Debrun then presented the findings of the “analytical” chapter, which deals with how fiscal policy can contribute to sustainable economic growth. Based on a sample of 85 countries over 1980-2013, the study finds evidence that fiscal stabilization—i.e., where fiscal policy is more strongly countercyclical—moderates output volatility and increases medium-term economic growth. The conclusion holds especially true for advanced economies, which make more use of automatic stabilizers. The chapter recommends a larger role for automatic stabilizers and letting them play out freely and symmetrically over the economic cycle, including in particular by strengthening fiscal frameworks to constrain discretionary spending in good times.   

Mr. Katterl confirmed that the fiscal situation in advanced economies is challenging and that there is considerable uncertainty about future economic growth. In his view, the IMF’s emphasis on a stabilization role for fiscal policy might be a more politically acceptable and thus easier way to support growth than the structural reforms that many countries crucially need. He also noted that various other factors influence the effectiveness of fiscal policy, including an economy’s trade openness and the size of its government.

The discussion that followed covered, among other topics, how household behavior influences the impact of fiscal policy on the economy; how fiscal policy can act as a mechanism to insure against business cycle fluctuation; the difficulty of reforming fiscal stabilizers; and how important it is to have the fiscal framework both properly designed and well-anchored in legislation.

Adam Gersl, Senior Economist, JVI