1 transparent and credible strategies to achieve medium-term fiscal sustainability carlo cottarelli...
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Transparent and Credible Transparent and Credible Strategies to Achieve Medium-Strategies to Achieve Medium-
Term Fiscal SustainabilityTerm Fiscal Sustainability
Carlo CottarelliCarlo Cottarelli
XXII Regional Fiscal Policy XXII Regional Fiscal Policy Seminar, ECLAC, Santiago de Seminar, ECLAC, Santiago de
ChileChileJanuary 26, 2010January 26, 2010
2
3
Fiscal outlook in advanced G-20 countries (all variables in percent of GDP)
-12
-10
-8
-6
-4
-2
0
-7-6-5-4-3-2-10123
60
70
80
90
100
110
120
130
2000 01 02 03 04 05 06 07 08 09 10 11 12 13 14
General Government Gross Debt
2000 01 02
03 04 05 06 07 08 09 10 11 12 13 14
2000 01 02 03 04 05 06 07 08 09 10 11 12 13 14
Overall balance
Cyclically-adjusted primary balance
Primary balance
4
Fiscal balances and debt in emerging G-20 countries (in percent of GDP)
-5
-4
-3
-2
-1
0
1
2
2000 01 02 03 04 05 06 07 08 09 10 11 12 13 14
30
35
40
45
50
55General government gross debt (right scale)
Fiscal balance (left scale)
5
Fiscal balances in LAC(in percent of weighted GDP)
Some LAC economies saved during the commodity price boom
(Real percentage change, 2005-2007)
6
Commodity related revenue
Other revenue
7
Debt in LAC and G-20 economies(in percent of GDP)
8
Is living with high debt an Is living with high debt an option?option?
Three downsides:Three downsides:1.1. Less flexibility to respond to shocksLess flexibility to respond to shocks
2.2. Higher interest ratesHigher interest rates
3.3. Lower potential growth (?)Lower potential growth (?)
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AssumptionsAssumptions
Goal: debt ratios < 60% of GDP by Goal: debt ratios < 60% of GDP by 20302030
Adjustment in the primary balance Adjustment in the primary balance will start in 2011will start in 2011
Adjustment will last 10 years; Adjustment will last 10 years; constant primary balance afterwardsconstant primary balance afterwards
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General government gross debt-to-GDP ratio
0.00
20.00
40.00
60.00
80.00
100.00
120.00
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
-10.00
-8.00
-6.00
-4.00
-2.00
0.00
2.00
4.00
6.00
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
Cyclically- adjusted primary balance
Primary balance
Overall balance
Fiscal Balances in Advanced Economies (in percent of GDP)
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Fiscal action must extend Fiscal action must extend beyond pensions and beyond pensions and
health carehealth care Not renewing the stimulus Not renewing the stimulus
measuresmeasures Freezing real primary Freezing real primary
spending per capita spending per capita (excluding health and (excluding health and pension spending)pension spending)
With primary spending at With primary spending at 23% of GDP, real growth 23% of GDP, real growth rate of 2% rate of 2% the primary the primary balance ↑ 3½ % of GDPbalance ↑ 3½ % of GDP
Tax measuresTax measures Broaden the tax baseBroaden the tax base Correct externalities Correct externalities
(carbon taxes ½ % of GDP)(carbon taxes ½ % of GDP)
8% Improvement in Cyclically Adjusted Primary Balance
Fiscal Stimulus Expiring (1.5%)
Freeze in Real
Spending (3.5%)
Tax Measures (3%)
0
1
2
3
4
5
6
7
8
9
Per
cen
t of
GD
P
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ConclusionsConclusions
Too soon to tighten fiscal policiesToo soon to tighten fiscal policies NotNot too soon to: too soon to:
1.1. Communicate strategies and measures Communicate strategies and measures to ensure fiscal solvencyto ensure fiscal solvency
2.2. Implement actions without a negative Implement actions without a negative impact on demand: impact on demand:
Strengthening medium-term fiscal Strengthening medium-term fiscal frameworksframeworks
Substantive reforms of entitlementsSubstantive reforms of entitlements