The seven principles for policy exit focused on the strategies for unwinding fiscal stimulus measures and the need for fiscal consolidation (rapid reduction of primary budget deficits from initially high levels by either cutting spending or raising taxes), reflecting concern with the worsening fiscal imbalances among G-20 countries.But the IMF’s concern with this problem dates to last July, when it launched a new and timely online publication titled “The State of Public Finances: A Cross-Country Fiscal Monitor,” to offer a global comparative analysis of the state of public finances, focusing on G-20 members. The monitor’s inaugural issue focused on how the global financial crisis prompted emergency fiscal measures to support the financial sector and the real economy, the effects of those measures on financial market indicators of fiscal risk as well as the real economy and the government actions to attain fiscal solvency in the medium term. These emergency fiscal measures, which increased budget deficits and raised public debt burdens sharply, came under scrutiny, as the global crisis began to ease, for their potential medium and long-term harmful effects.
The July monitor projected that G-20 members’ fiscal deficits, as a percentage of gross domestic product (GDP), would jump by an average of 5.5 percent in 2009 and 2010, over their pre-crisis levels in 2007. It expected that the public debt ratios, as a percentage of GDP, in the G-20 countries as a whole will stabilize at around 85 percent between 2010 and 2014, about 23 percent above the pre-crisis level. In advanced G-20 members, the public debt ratios were projected to rise by 40 percent by 2014, a rate comparable to those last experienced during World War II.
The deteriorating fiscal imbalances, caused by higher spending and lower tax revenues, were worse for advanced G-20 members, such as the US, than for emerging G-20 members, such as Turkey, due to the larger automatic fiscal stabilizers, such as unemployment benefits, of advanced members. The July monitor noted that the required fiscal consolidation was intensified by the structural deficits arising from entitlement spending for pensions and health care, especially in advanced countries with aging populations. It also underlined the tough trade-off facing governments as they tried to balance the need for continued discretionary fiscal stimulus to sustain the still fragile economic recovery with the need for a timely exit strategy from discretionary fiscal stimulus before the market perceptions of higher fiscal risk premiums began raising interest rates on government securities, which would also hurt the economic recovery.
The July monitor, after stressing that the expansionary effect of fiscal stimulus measures on output depended on the differing estimates of the fiscal (Keynesian) multipliers for different types of measures, concluded that it was still premature for exit strategies. For Turkey, the July monitor specified the stabilization of the debt-GDP ratio by 2011 as the target for ensuring fiscal sustainability and listed the following as the requisite measures: “Nonrenewal of stimulus, improved expenditure control, local government reform, introduction of fiscal rule and continuation of tax administration reforms.”
The November Fiscal Monitor, published last Tuesday, updates from the July edition the global fiscal developments and policy strategies through 2014, based on projections from the IMF’s November 2009 World Economic Outlook report. In its overall fiscal outlook, it does not differ significantly from the July edition. It supports continued fiscal stimulus because the economic recovery is still fragile. But it also underscores the need for governments to design and communicate credible exit strategies to address the rising fiscal risk perceptions in financial markets that can put upward pressure on interest rates and slow down the recovery.
The November monitor goes beyond the July monitor in four areas: (1) After examining more closely the factors behind the widening deficits, it finds that in some major countries, such as the US, spending besides the emergency fiscal stimulus, which will unwind as the global crisis ends, underlies the worsening fiscal imbalances. (2) It quantifies the effects of rising public debt on interest rates, finding that an increase of about 40 percent in the debt-GDP ratio between 2007 and 2014 could raise interest rates by about 2 percent. Higher interest rates on higher debt stocks would weaken the debt service indicators, especially in advanced G-20 countries, with net interest payments as a percentage of GDP projected to nearly double. (3) It estimates the sizeable adjustment that will be required, especially in advanced countries, to bring, by 2030, the debt-GDP ratio from the projected 118 percent in 2014 to below 60 percent, where it stood before the crisis. The primary structural balance will have to improve by 8 percent in the next 10 years and stay at a higher level for 10 more years. (The primary structural balance is the primary balance -- the budget balance minus interest payments -- adjusted for cyclical and one-off factors.) (4) Such a primary structural balance improvement would require not only the end of emergency fiscal stimulus when the crisis ends, but also freezing real per capita spending excluding pension and health. Reforms to limit pension and health spending growth to GDP growth as well as tax hikes as much as 3 percent of GDP might also be necessary.
In Table 1 and Table 2, I summarize some of the critical projections from the November monitor for Turkey in comparison to advanced and emerging G-20 countries. The conspicuous result is the worsening of Turkey’s projected fiscal problems relative to emerging G-20 countries in terms of not only the overall fiscal balance and general government debt but also all the four fiscal risk indicators. Let’s hope that the Justice and Development Party (AK Party) government, based on its Medium Term Economic Program (2010-2012), will succeed, with or without IMF support, in dealing with these problems, in a repetition of Turkey’s successful fiscal consolidation during 1999-2005, despite the initial political costs it will have to pay in the run-up to the 2011 parliamentary elections.
