Carlo CottarelliDirector, Fiscal Affairs Department

October 2011

2

Fiscal Monitor, September 2011

3

1. The state of the public finances before the 2008 crisis

2. The effect of the crisis on the fiscal accounts

3. The risks arising from the current situation

4. Policy conclusions

Overview

4

1. The state of the public finances before the 2008

crisis

General Government Gross Debt in G-7 Economies, 1950-2007

(In percent of GDP)

1950

1955

1960

1965

1970

1975

1980

1985

1990

1995

2000

2005

2010

0

20

40

60

80

100

120Canada

1950

1955

1960

1965

1970

1975

1980

1985

1990

1995

2000

2005

2010

0

20

40

60

80

France

1950

1955

1960

1965

1970

1975

1980

1985

1990

1995

2000

2005

2010

0

20

40

60

80 Germany

1950

1955

1960

1965

1970

1975

1980

1985

1990

1995

2000

2005

2010

0

20

40

60

80

100

120

140 Italy

1950

1955

1960

1965

1970

1975

1980

1985

1990

1995

2000

2005

2010

0

40

80

120

160

200

240 Japan

1950

1955

1960

1965

1970

1975

1980

1985

1990

1995

2000

2005

0

40

80

120

160

200

240United Kingdom

1950

1955

1960

1965

1970

1975

1980

1985

1990

1995

2000

2005

2010

0

40

80

120United States

0

40

80

120

Average

General Government Gross Debt in Selected Advanced Economies, 1950-2007

(In percent of GDP)

1950

1955

1960

1965

1970

1975

1980

1985

1990

1995

2000

2005

0

20

40

60

80 Spain

1950

1955

1960

1965

1970

1975

1980

1985

1990

1995

2000

2005

0

20

40

60

80 Portugal

1950

1955

1960

1965

1970

1975

1980

1985

1990

1995

2000

2005

0

20

40

60

80

100

120Greece

1950

1955

1960

1965

1970

1975

1980

1985

1990

1995

2000

2005

0

20

40

60

80

100Sweden

1950

1955

1960

1965

1970

1975

1980

1985

1990

1995

2000

2005

0

20

40

60 Australia

1950

1955

1960

1965

1970

1975

1980

1985

1990

1995

2000

2005

0

20

40

60

80

100New Zealand

1950

1955

1960

1965

1970

1975

1980

1985

1990

1995

2000

2005

0

20

40

60

80Korea

1950

1955

1960

1965

1970

1975

1980

1985

1990

1995

2000

2005

020406080

100120140160

Belgium

1950

1955

1960

1965

1970

1975

1980

1985

1990

1995

2000

2005

0

20

40

60

80

100

120Netherlands

General Government Gross Debt in Emerging Economies, 1970-2007

(In percent of GDP)

1970

1974

1978

1982

1986

1990

1994

1998

2002

2006

0

20

40

60

80

100

120 Brazil

1970

1974

1978

1982

1986

1990

1994

1998

2002

2006

020406080

100120140160180 Argentina

1970

1974

1978

1982

1986

1990

1994

1998

2002

2006

020406080

100120140160

Egypt

1970

1974

1978

1982

1986

1990

1994

1998

2002

2006

0

20

40

60

80

100India

1970

1974

1978

1982

1986

1990

1994

1998

2002

2006

0

20

40

60

80

100

120Indonesia

1970

1974

1978

1982

1986

1990

1994

1998

2002

2006

0

20

40

60

80

100Mexico

1970

1974

1978

1982

1986

1990

1994

1998

2002

2006

0

20

40

60

80

100Turkey

0

20

40

60

80

100Pakistan

1970

1974

1978

1982

1986

1990

1994

1998

2002

2006

0

20

40

60

80Thailand

1970

1974

1978

1982

1986

1990

1994

1998

2002

2006

0

20

40

60

80

100Philippines

1990

1992

1994

1996

1998

2000

2002

2004

2006

0

20

40

60

Average

8

2. The effect of the crisis on the fiscal accounts

9

Change in General Government Debt and Deficit: Advanced Economies

-4

-2

0

2

4

6

8

10

12

14

-10 10 30 50 70 90Change in debt with respect to 2007

2007

Cha

nge

in d

efic

it w

ith r

espe

ct t

o 20

07

10

Change in General Government Debt and Deficit: Advanced Economies

-4

-2

0

2

4

6

8

10

12

14

-10 10 30 50 70 90Change in debt with respect to 2007

2008-4

-2

0

2

4

6

8

10

12

14

Cha

nge

in d

efic

it w

ith r

espe

ct t

o 20

07

CanadaFrance

Germany

Greece

Italy

Japan

Portugal

Spain

United Kingdom

United States

11

Portugal

Change in General Government Debt and Deficit: Advanced Economies

-4

-2

0

2

4

6

8

10

12

14

-10 10 30 50 70 90Change in debt with respect to 2007

Canada

France

Germany

Greece

Italy

Japan

Spain

United Kingdom

United States

2009

Cha

nge

in d

efic

it w

ith r

espe

ct t

o 20

07

12

Change in General Government Debt and Deficit: Advanced Economies

-4

-2

0

2

4

6

8

10

12

14

-10 10 30 50 70 90Change in debt with respect to 2007

France

Germany GreeceItaly

Portugal

Spain

United Kingdom

United States

2010

CanadaJapan

12

Cha

nge

in d

efic

it w

ith r

espe

ct t

o 20

07

13

Change in General Government Debt and Deficit: Advanced Economies

-4

-2

0

2

4

6

8

10

12

14

-10 10 30 50 70 90Change in debt with respect to 2007

France

Canada

Greece

Italy

Japan

Portugal

United KingdomUnited States

Germany

2011

13

Cha

nge

in d

efic

it w

ith r

espe

ct t

o 20

07

Spain

14

Change in General Government Debt and Deficit: Advanced Economies

-4

-2

0

2

4

6

8

10

12

14

-10 10 30 50 70 90Change in debt with respect to 2007

Japan

United StatesCanada

FranceGermany

GreeceItalyPortugal

Spain

United Kingdom

2012

14

Cha

nge

in d

efic

it w

ith r

espe

ct t

o 20

07

15

Change in General Government Debt and Deficit: Advanced Economies

-4

-2

0

2

4

6

8

10

12

14

-10 10 30 50 70 90Change in debt with respect to 2007

Japan

United States

Canada

FranceGermany

GreeceItalyPortugal

Spain

United Kingdom

2012

15

Cha

nge

in d

efic

it w

ith r

espe

ct t

o 20

07

16

Change in General Government Debt and Deficit: Emerging Economies

-5

-3

-1

1

3

5

7

9

11

13

-25.0 -15.0 -5.0 5.0 15.0 25.0 35.0

Cha

nge

in d

efic

it w

ith r

espe

ct t

o 20

07

Change in debt with respect to 2007

2007

17

Change in General Government Debt and Deficit: Emerging Economies

Brazil

China

India

Mexico

Russia Average Advanced

-5

-3

-1

1

3

5

7

9

11

13

-25.0 -15.0 -5.0 5.0 15.0 25.0 35.0

Ch

ang

e i

n d

efic

it w

ith

res

pe

ct t

o 2

007

Change in debt with respect to 2007

2008

18

Change in General Government Debt and Deficit: Emerging Economies

Brazil

China India

Mexico

Russia

Average Advanced

-5

-3

-1

1

3

5

7

9

11

13

-25.0 -15.0 -5.0 5.0 15.0 25.0 35.0

Ch

ang

e i

n d

efic

it w

ith

res

pe

ct t

o 2

007

Change in debt with respect to 2007

2009

19

Change in General Government Debt and Deficit: Emerging Economies

BrazilChina

India

Mexico

Russia

Average Advanced

-5

-3

-1

1

3

5

7

9

11

13

-25.0 -15.0 -5.0 5.0 15.0 25.0 35.0

Ch

ang

e i

n d

efic

it w

ith

res

pe

ct t

o 2

007

Change in debt with respect to 2007

2010

20

Change in General Government Debt and Deficit: Emerging Economies

Brazil

China

India

Mexico

RussiaAverage Advanced

-5

-3

-1

1

3

5

7

9

11

13

-25.0 -15.0 -5.0 5.0 15.0 25.0 35.0

Ch

ang

e i

n d

efic

it w

ith

res

pe

ct t

o 2

007

Change in debt with respect to 2007

2011

21

Change in General Government Debt and Deficit: Emerging Economies

Brazil

India

Mexico

Russia

Average Advanced

-5

-3

-1

1

3

5

7

9

11

13

-25.0 -15.0 -5.0 5.0 15.0 25.0 35.0

Ch

ang

e i

n d

efic

it w

ith

res

pe

ct t

o 2

007

Change in debt with respect to 2007

2012

22

G-20 Advanced Economies: Increase in General Government Debt, 2008–15

(Total increase: 38.6 percentage points of GDP)

Automatic Revenue

loss, 47.7%

Fiscal stimulus, 16.5%

Financial sector

support, 8.7%

Net lending and other stock-flow

adjust-ments, 9.6%

Interest-growth

dynamics, 17.5%

23

Illustrative Scenarios for Primary Balance Adjustment and Debt, 2010-30

-10

-8

-6

-4

-2

0

2

4

6

2007 2009 2011 2013 2015 2017 2019 2021 2023 2025 2027 2029

40

50

60

70

80

90

100

110

2007 2009 2011 2013 2015 2017 2019 2021 2023 2025 2027 2029

General Government Gross Debt-to-GDP Ratio

Overall Balance

Primary Balance

Cyclically Adjusted Primary Balance

24

Cyclically Adjusted Primary Balance that Needs to Be Maintained in 2020–30 to Achieve Debt Target by 2030

0 1 2 3 4 5 6 7 80

2

4

6

8

109.8

7.0

5.65.4

4.34.3

3.1

3.4

3.1

2.0 2.01.8

1.01.3

0.8

1.0

0.40.5

Highest primary balance, 10-year rolling average

Re

qu

ired

CA

PB

in 2

02

0–

30

(In percent of GDP)

25

3. The risks arising from the current situation

26

General Government Deficit vs. Debt in Euro Area Countries, 2011

Austria Belgium

Cyprus

EstoniaFinland

France

Greece

Ireland

Italy

Luxembourg

Malta

Netherlands

Portugal

Slovak Republic

Slovenia Spain

Germany

-6.0

-4.0

-2.0

0.0

2.0

4.0

6.0

8.0

10.0

12.0

0 20 40 60 80 100 120 140 160 180Gross Debt (percent of GDP)

2011

Def

icit

(per

cent

of

GD

P)

270 20 40 60 80 100 120 140 160 180

-6.0

-4.0

-2.0

0.0

2.0

4.0

6.0

8.0

10.0

12.0

0.82.2

5.5

0.5

0.8

18.1

6.8

3.4

0.5

9.0

1.2

1.7

3.2

0.1

1.0

0.1

Gross Debt (percent of GDP)

Def

icit

(pr

ecen

t of G

DP

)

2007

General Government Deficit vs. Debt in Euro Area Countries, 2007

28

General Government Deficit vs. Debt in Euro Area Countries, 2011

Austria Belgium

Cyprus

EstoniaFinland

France

Greece

Ireland

Italy

Luxembourg

Malta

Netherlands

Portugal

Slovak Republic

Slovenia Spain

Germany

JapanUnited States

-6.0

-4.0

-2.0

0.0

2.0

4.0

6.0

8.0

10.0

12.0

0 20 40 60 80 100 120 140 160 180Gross Debt (percent of GDP)

2011

Def

icit

(per

cent

of

GD

P)

29

1. Past and future fiscal trends

Why Euro Area Countries Are Different from US and Japan?

30

General Government Deficit vs. Debt in Euro Area Countries, 2011

Austria Belgium

Cyprus

EstoniaFinland

France

Greece

Ireland

Italy

Luxembourg

Malta

Netherlands

Portugal

Slovak Republic

Slovenia Spain

Germany

JapanUnited States

-6.0

-4.0

-2.0

0.0

2.0

4.0

6.0

8.0

10.0

12.0

0 20 40 60 80 100 120 140 160 180Gross Debt (percent of GDP)

2011

Def

icit

(per

cent

of

GD

P)

2011

General Government Deficit, in percent of GDP

2009

10.1

7.7

0

2

4

6

8

10

12

14

16

31

32

Change in the Deficit in the Euro Area, US and Japan

-10

-8

-6

-4

-2

0

2

4

6 Percent of GDP change, 2009-11

32

Fall 2009 FM

Current FM

33

Fiscal Outlook: Increase in General Government Debt during 2012-14

Spain

BelgiumFrance

(Change in percent of GDP)

Germany

Italy

October 2009 Sept

2011

October 2009

Sept 2011

October 2009

Sept 2011

October 2009 Sept

2011

October 2009

Sept 2011

United States Japan

October 2009

Sept 2011

October 2009

Sept 2011

-4

0

4

8

12

16

Increase in debt, 2012-14

-4

0

4

8

12

16

Increase in debt, 2012-14-4

0

4

8

12

16

Increase in debt, 2012-14-4

0

4

8

12

16

Increase in debt, 2012-14

-4

0

4

8

12

16

Increase in debt, 2012-14-4

0

4

8

12

16

Increase in debt, 2012-14

-4

0

4

8

12

16

Increase in debt, 2012-14

34

1. Past and future fiscal trends

2. Long-term pressures on spending for health care and pensions

Why Euro Area Countries Are Different from US and Japan?

35

-50

0

50

100

150

200

250

300

350

Health care

Pension

NPV of Pension and Health care Spending Change 2010–50

(Change in percent of GDP)

36

NPV of Pension and Health care Spending Change 2010–50 vs. Yield Spreads

-5 0 5 10 15 200

20

40

60

80

100

120

140

160

180

200

130.380785148942

156.818978261438

36.4700865393029

14.4644616779693

153.093225539998

43.1264378098201

62.7655327516063

130.998733227985

54.9110721376281

31.8935742132118

34.1702449807244

157.118694935229

135.46027864855

62.9085339398284

132.561763458516

106.531818816695

188.369418821701

Yield Spreads

NP

V o

f Pe

nsi

on

an

d H

ea

lth c

are

So

en

din

g C

ha

ng

e,

20

10

-50

37

1. Past and future fiscal trends

2. Long-term pressures on spending for health care and pensions

3. Banks

4. Growth

Why Euro Area Countries Are Different from US and Japan?

-3 -2 -1 0 1 2 3 4-200

0

200

400

600

800

1000

1200

1400

1600

60.2

185.4

41.3

71.8

1395.8

736.1

302.9

39.7

850.7

180.1

302.1

3.7-122.4

Real Growth

Projected real GDP growth (percent), 2011-12

Bo

nd

yie

lds

spre

ad

s (b

asi

s p

oin

ts),

A

ug

ust

20

11

38

Sovereign Bond Yield Spreads and Projected Real GDP Growth

0 1 2 3 4 5-200

0

200

400

600

800

1000

1200

1400

1600

60.2

185.4

41.3

71.8

1395.8

736.1

302.9

39.7

850.7

180.1

302.1

3.7

-122.4

Real Growth

Real GDP growth (percent), 1997-2007

Bo

nd

yie

lds

spre

ad

s (b

asi

s p

oin

ts),

A

ug

ust

20

11

39

Sovereign Bond Yield Spreads and Real GDP Growth

40

High Public Debt is Bad for Growth

Rogoff and Reinhart:

“This Time is Different: Eight

Centuries of Financial Folly”

(2009)

Kumar and Woo:

“Public Debt and Growth”

(2010)

Steven Cecchetti: “The Real

Effects of Debt” (2011)

41

Advanced Economies: Debt Above 80 percent of GDP

AU

S

AU

T

BE

L

CA

NC

ZE

DE

N

DE

U

ES

P

FIN

FR

A

GB

R

GR

C

ICE

IRE

ISR

ITA

JPN

NE

D

NZ

L

PR

T

SLK

SLV

US

A

0

50

100

150

200

2502007

19%

42

Advanced Economies: Debt Above 80 percent of GDP

AU

S

AU

T

BE

L

CA

NC

ZE

DE

N

DE

U

ES

P

FIN

FR

A

GB

R

GR

C

ICE

IRE

ISR

ITA

JPN

NE

D

NZ

L

PR

T

SLK

SLV

US

A

0

50

100

150

200

250

19%81%

2011

43

1. Past and future fiscal trends

2. Long-term pressures on spending for health care and pensions

3. Banks

4. Growth

5. Sources of financing

Why Euro Area Countries Are Different from US and Japan?

44

32%

3%

65%

34%

18%

34%

14%

16%

84%

Sources of Financing: Holders of Public Debt

36%

1%

63%

85%

9%3%3%

55%

45%

4%

45%

51%46%54%

3%

55%

41%

Japan Central Government BondsUnited States Treasury Securities Ireland Central Government Bonds

Portugal General Government Debt

Spain Central Government SecuritiesGreece Central Government Marketable Debt

Italy General Government Securities

Belgium Gross Government Debt

France Central Government Securities

Private Residents

Central Bank

Private Non-residents

Official Non-residents

Note: For Ireland, France, Italy, Portugal, Greece and Spain: Private non-resident, includes ECB.

45

United States: Ownership of Treasury Securities

19891990

19911992

19931994

19951996

19971998

19992000

20012002

20032004

20052006

20072008

20092010

20110%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Private Residents

Private Non-residents

Central Bank

Official Non-residents China

46

Private Non-residents Holders of Debt vs. Yield Spreads

0 2 4 6 8 10 12 14 16 18 200

10

20

30

40

50

60

70

80

90

41.5

54.0

64.8

83.6

51.1

63.3

45.1

3.1

14.0

Yield spreads

Sh

are

of p

riva

te n

on

-re

sid

en

t h

old

ing

s o

f pu

blic

de

bt

47

4. Policy conclusions

48

1. United States and Japan need a clear plan

2. Europe needs:

1. Adjustment in fiscal fundamentals

2. Reforms to boost potential growth

3. Banking

4. Financing for countries that are adjusting

Policy Conclusions

49

General Government Deficit vs. Debt in Euro Area Countries, 2011-13

Spain

Malta

-1.0

1.0

3.0

5.0

7.0

9.0

0 20 40 60 80 100 120 140 160 180 200

Gross Debt (percent of GDP)

Austria Belgium

Cyprus

Estonia

Finland

France

Greece

Ireland

Italy

Luxembourg

Netherlands

Portugal

Slovak Republic

Slovenia Spain

Germany

11.0

2011

Def

icit

(pe

rcen

t of

GD

P)

50

General Government Deficit vs. Debt in Euro Area Countries, 2011-13

2013

0 20 40 60 80 100 120 140 160 180 200-1.0

1.0

3.0

5.0

7.0

9.0

11.0

0.8

2.2

5.5

0.5

0.8

18.1

6.8

3.4

0.5

9.01.2

1.7

3.2

Germany

Gross Debt (percent of GDP)

Def

icit

(pr

ecen

t of G

DP

)

51

Initial debt ratio at 100%

Increase the growth rate for 10 years by 1 p.p.

Spending constant in per capita terms, assuming a 40% tax ratio

Would lower public debt by 29% of GDP

The Role of Growth Lowering Debt Ratios

0

20

40

60

80

100

120

0 1 2 3 4 5 6 7 8 9 10

De

bt

in P

erc

en

t o

f G

DP

Year

Role of Growth in Debt Reduction

29% Difference

Baseline

With growth increased by 1

percentage points

Thank You!