Summary
Global fiscal developments and the associated risks and policy options, as well as the relationship between fiscal policy, innovation, and economic growth were the key topics of the April 2016 Fiscal Monitor. On May 4, Mr. Victor Lledo, an IMF senior economist, presented this flagship IMF publication at the JVI.

Mr. Lledo began on a sobering note, stating that downside risks had materialized since the October 2015 issue of the Fiscal Monitor. The April issue therefore now projects a higher public debt path for all major groups of economies, with the revision being relatively mild for advanced economies but quite substantial for emerging markets and middle-income economies.

These less favorable debt dynamics reflect both policy choices and adverse external developments. On the policy side, many advanced economies are confronted with the triple threat of low inflation, slow growth, and high debt. As a result, after four years of fiscal consolidation, adjustment efforts have stalled. For example, Germany and the Baltic countries relaxed their fiscal stance and Portugal slowed the pace of consolidation. External factors included falling oil prices and decelerating growth, which have pushed down revenues in emerging markets, especially among commodity exporters. And low-income economies must deal with far less favorable financing costs.

The challenges facing countries are diverse, so that there can be no “one-size-fits-all” approach to policy recommendations. The IMF sees merit in a continuing accommodative monetary stance in advanced economies. It is also crucial that fiscal policy address the two-fold task of supporting recovery and incentivizing structural reforms that promote long-term growth. To this effect, it will be paramount to ensure a coordinated response across both countries and policies. For oil exporters, mobilizing and diversifying revenue must continue to be a priority. Fiscal sustainability in China will depend on enhancing transparency, incorporating off-budget transactions into the budget, and managing the fiscal risks of nonviable state-owned enterprises. Low-income countries need to build up their tax capacity because too little tax revenue means that public investment is not sufficient and constrains long-term growth.

Mr. Lledo said the second chapter of the Fiscal Monitor, on policies for innovation and growth, identifies three pillars of innovation that can benefit from fiscal policy support:  research and development (R&D), technology transfer, and entrepreneurship.

Both public and private investment in R&D has high returns and should be given fiscal incentives. Public investment should complement private investment and encourage closer collaboration between universities and private firms. Private R&D investment would greatly benefit from fiscal stabilization, because that would reduce the costs of external financing for firms. The Fiscal Monitor reports that allocating about 0.4 percent of GDP in R&D tax credits and subsidies could help reduce R&D costs by about 40 percent and induce a 40 percent expansion in private R&D investment. The ultimate benefit could be additional economic growth of as much as 5 percent in the long run.