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STORY: IMF / FISCAL MONITOR PRESSER
TRT:2.25
SOURCE: IMF
RESTRICTIONS: NONE
LANGUAGE: ENGLISH / NATS
DATELINE: 16 APRIL 2013, WASHINGTON DC, UNITED STATES
16 APRIL 2013, WASHINGTON DC
1. Wide shot, IMF officials at beginning of Fiscal Monitor briefing
3. Cutaway, reporters
4. SOUNDBITE (English) Carlo Cottarelli, Director of Fiscal Affairs Department:
“In a way, fiscal austerity is a bit like medicine. It should be taken in the right amount. If you do not take enough, you remain sick. If you take too much, it’s side effects can be very severe. So, our message here is not a change. Take the right amount of medicine. In general, a gradual pace of fiscal adjustment is preferable, within credible medium-term adjustment plan for countries that are not subject to market pressures.”
5. Cutaway, reporter asking question
6. SOUNDBITE (English) Carlo Cottarelli, Director of Fiscal Affairs Department:
“That, indeed, is what makes a difference to reform energy subsidies in many countries, the fact that there are interest groups. What I think is critical is that to remove subsidies because they benefit the rich more than the poor.”
7. Cutaway, reporters
8. SOUNDBITE (English) Carlo Cottarelli, Director of Fiscal Affairs Department:
“This is, in a way, the best way to do it. There are other ways to compensate the poor. But one way to do it is through cash advances, so they are compensated by the increase in prices. Of course, when you remove subsidies, there will be an increase in prices, but it is important that those who cannot afford those prices get compensation.”
9. Cutaway, reporter asking question
10. SOUNDBITE (English) Carlo Cottarelli, Director of Fiscal Affairs Department:
“There are two issues in the United States. First is the magnitude of the adjustment, which is close to two percent. Actually, in headline terms, it is about two percentage points of GDP. And, that is large – the largest adjustment in the last 30 years. And, part of this is due to the sequester. The other issue relates to the tools to achieve this fiscal adjustment. The sequester is a very simple tool, in a way. It cuts spending across the board. It does not distinguish between good spending and bad spending.”
11. Wide shot, IMF officials end briefing
A gradually improving global economy and progress toward reducing deficits in advanced economies have lowered short-term fiscal risks, yet many countries still face a long road back to fiscal health.
In the latest edition of its Fiscal Monitor, the IMF sees an improved picture across most of the world in terms of countries getting a handle on their deficits. Many countries have also taken important first steps to bring overall debt down to levels needed to ensure strong and vibrant economies.
“In a way, fiscal austerity is a bit like medicine. It should be taken in the right amount. If you do not take enough, you remain sick. If you take too much, it’s side effects can be very severe. So, our message here is not a change. Take the right amount of medicine. In general, a gradual pace of fiscal adjustment is preferable, within credible medium-term adjustment plan for countries that are not subject to market pressures,” said Carlo Cottarelli, head of the IMF’s Fiscal Affairs Department.
Deficits in advanced economies fell by ¾ percent of GDP last year. They dropped both in headline and in cyclically-adjusted terms, and are projected to fall at a faster pace in 2013. The report attributes much of the improved picture to concerted efforts by governments to bring spending under control following the peak of the crisis in 2009, as well as a gradually improving external environment. The global economic outlook continues to improve with economic growth worldwide expected to reach 3.3 percent in 2013.
Looking at the cyclically-adjusted budget deficit—that is, net of the effects of short-term fluctuations in output and income, gives a more informative snapshot of the government’s finances because it sets aside temporary ups and downs in the economy.
For instance, in times of recession, government tax revenues are generally lower and spending can be higher because of the need to make payments under unemployment insurance schemes.
By looking at the cyclically-adjusted budget deficit, economists get a better idea of what a government’s deficit is in the midst of normal economic conditions.
The IMF Fiscal Monitor is published in April and October each year to track public spending and government debt and deficits around the world.
Bringing public debt back to prudent levels poses a long-term challenge, according to the IMF report, but it is a challenge that can be succesfully met. Debt ratios are declining or stabilizing in about two thirds of advanced economies, but further adjustment efforts will be needed in the remaining third—representing 40 percent of global GDP. In some countries, particularly several European countries under market pressure, debt ratios will not peak until after 2014, as seen in the projections for France, Italy, and Spain.
In both the United States and Japan, the continued absence of a clear and credible medium- and long-term consolidation plan remains a concern. Stimulus spending and increasing social security outlays in Japan are expected to keep the deficit there at a level more than twice the advanced economy average. In the United States, an agreement on entitlement reforms and other much-needed measures to control the debt has yet to be reached.
“A number of countries will need to achieve large primary surpluses and maintain them for an extended period, which will be difficult, but there are no alternative quick fixes. Still, it can be done,” said Carlo Cottarelli, head of the IMF’s Fiscal Affairs Department.
Institutional reforms, such as fiscal rules, independent monitoring agencies, and medium-term spending frameworks, can buoy the credibility of fiscal adjustment packages and their political acceptance. Countries such as Ireland and Portugal have begun making institutional reforms by introducing limits on government spending, and ongoing reforms across Europe are calling on fiscal councils to play a strong and independent role in fostering fiscal discipline.
The overall debt situation in most emerging market economies and low-income countries remains more favorable than in advanced economies, owing in part to relatively low levels of debt and deficits combined with low interest rates and growing economies. Under these conditions, many emerging market economies have had the scope to pause their fiscal adjustment. Yet, as the IMF report notes, medium-term pressures like infrastructure and age-related spending mean that these countries need to adopt a cautious approach to budget decisions going forward.
Fiscal consolidation is also on hold in most low-income countries, and deficits in most countries are still larger than precrisis levels. Strong spending growth, due in many cases to large increases in public investment, is leading to higher debt-to-GDP ratios in countries like Ghana and Senegal.
Many emerging market and low-income countries are also seeking to strengthen their fiscal institutions. Chile, Indonesia, and Mexico now publish reports that discuss fiscal risks. Others such as Croatia, Kenya, South Africa, and Uganda are turning to the use of fiscal councils for independent oversight of their budgets.
The Fiscal Monitor also cites energy subsidy reform as another way for some countries to help get a better handle on their deficit and debt. Both rich and poor countries spend large amounts of public resources to subsidize energy, but in many emerging market economies and low-income countries reforms are needed urgently.
“That, indeed, is what makes a difference to reform energy subsidies in many countries, the fact that there are interest groups. What I think is critical is that to remove subsidies because they benefit the rich more than the poor,” said Cottarelli.
In a comprehensive study, Energy Subsidy Reform – Lessons and Implications, released last month, the IMF urged policymakers the world over to reform subsidies for products from coal to gasoline, arguing that this could translate into major gains both for economic growth and the environment. The study estimates that energy subsidies amount to a staggering $1.9 trillion worldwide—the equivalent of 2½ percent of global GDP, or 8 percent of government revenues.
IMF First Deputy Managing Director David Lipton noted in releasing that study that IMF research shows that 20 countries maintain pre-tax energy subsidies that exceed 5 percent of GDP. Energy subsidies also reinforce inequality because they mostly benefit upper-income groups, which are the biggest consumers of energy.
Cottarelli suggested that governments can take steps to soften the blow on the poor when reducing energy subsidies.
“There are other ways to compensate the poor. But one way to do it is through cash advances, so they are compensated by the increase in prices. Of course, when you remove subsidies, there will be an increase in prices, but it is important that those who cannot afford those prices get compensation,” he said.
According to the IMF, in addition to aggravating fiscal imbalances, subsidies crowd out priority spending on education and health and reinforce inequality—as they are typically captured mostly by higher-income households and exacerbate global warming and worsen local pollution by promoting overconsumption of fuel products. A recent IMF study suggests that a combination of phased price increases, targeted measures to protect the poor, and institutional reforms that depoliticize energy pricing can lead to successful reforms.
In the United States, larger-than-expected fiscal adjustment from automatic spending cuts (the so-called budget sequester) or failure to raise the debt ceiling could exert a stronger drag on growth. Cottarelli said the United States to devise strong fiscal consolidation plans.
“There are two issues in the United States. First is the magnitude of the adjustment, which is close to two percent. Actually, in headline terms, it is about two percentage points of GDP. And, that is large – the largest adjustment in the last 30 years. And, part of this is due to the sequester. The other issue relates to the tools to achieve this fiscal adjustment. The sequester is a very simple tool, in a way. It cuts spending across the board. It does not distinguish between good spending and bad spending,” he said.
