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Transparent and Credible Strategies to Achieve Medium-Term Fiscal Sustainability

Discover effective strategies to achieve medium-term fiscal sustainability and maintain transparency and credibility in fiscal policies. Presented by Carlo Cottarelli at the XXII Regional Fiscal Policy Seminar, ECLAC, Santiago de Chile, January 26, 2010.

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Transparent and Credible Strategies to Achieve Medium-Term Fiscal Sustainability

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  1. Transparent and Credible Strategies to Achieve Medium-Term Fiscal Sustainability Carlo Cottarelli XXII Regional Fiscal Policy Seminar, ECLAC, Santiago de Chile January 26, 2010

  2. 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 Fiscal outlook in advanced G-20 countries (all variables in percent of GDP) 0 -2 -4 -6 Overall balance -8 -10 -12 3 2 1 0 -1 Cyclically-adjusted primary balance -2 -3 -4 Primary balance -5 -6 -7 130 120 110 100 General Government Gross Debt 90 80 70 60 2000 01 02 03 04 05 06 07 08 09 10 11 12 13 14

  3. Fiscal balances and debt in emerging G-20 countries(in percent of GDP) 2 55 General government gross debt (right scale) 1 50 0 45 -1 -2 40 -3 35 -4 Fiscal balance (left scale) -5 30 2000 01 02 03 04 05 06 07 08 09 10 11 12 13 14

  4. Fiscal balances in LAC(in percent of weighted GDP)

  5. Some LAC economies saved during the commodity price boom(Real percentage change, 2005-2007) Commodity related revenue Other revenue

  6. Debt in LAC and G-20 economies(in percent of GDP)

  7. Is living with high debt an option? • Three downsides: • Less flexibility to respond to shocks • Higher interest rates • Lower potential growth (?)

  8. Assumptions • Goal: debt ratios < 60% of GDP by 2030 • Adjustment in the primary balance will start in 2011 • Adjustment will last 10 years; constant primary balance afterwards

  9. Cyclically- adjusted primary balance 6.00 Fiscal Balances in Advanced Economies (in percent of GDP) 4.00 2.00 0.00 -2.00 -4.00 Primary balance -6.00 Overall balance -8.00 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 -10.00 120.00 General government gross debt-to-GDP ratio 100.00 80.00 60.00 40.00 20.00 0.00 2007 2009 2008 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030

  10. Tax Measures (3%) Freeze in Real Spending (3.5%) Fiscal Stimulus Expiring (1.5%) Fiscal action must extend beyond pensions and health care • Not renewing the stimulus measures • Freezing real primary spending per capita (excluding health and pension spending) • With primary spending at 23% of GDP, real growth rate of 2%  the primary balance ↑ 3½ % of GDP • Tax measures • Broaden the tax base • Correct externalities (carbon taxes ½ % of GDP) 8% Improvement in Cyclically Adjusted Primary Balance 9 8 7 6 5 Percent of GDP 4 3 2 1 0

  11. Conclusions • Too soon to tighten fiscal policies • Not too soon to: • Communicate strategies and measures to ensure fiscal solvency • Implement actions without a negative impact on demand: • Strengthening medium-term fiscal frameworks • Substantive reforms of entitlements

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