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Assessing Fiscal Vulnerability: A Framework for Assessing Fiscal Vulnerability

This framework aims to assess the fiscal vulnerability of governments, considering their capacity to respond to unexpected fiscal policy challenges. It contributes to program design and technical assistance in macroeconomic surveillance.

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Assessing Fiscal Vulnerability: A Framework for Assessing Fiscal Vulnerability

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  1. ASSESSING FISCAL VULNERABILITY

  2. A FRAMEWORK FOR ASSESSING FISCAL VULNERABILITY Outgrowth of Fund work on fiscal transparency Integral part of a new financial architecture Motivated by the need for a forward-looking approach to macroeconomic surveillance Contributes to program design and technical assistance    

  3. DEFINITION OF FISCAL VULNERABILITY Fiscal vulnerability is defined as a situation where the government is exposed to the possibility of failure to achieve its broad fiscal policy objectives It is concerned in particular with the emergence of unexpected fiscal policy challenges and the government’s capacity to respond to them  

  4. FISCAL POLICY OBJECTIVES To avoid excessive fiscal deficits and government debt To contribute to effective demand management To maintain reasonable and stable tax rates   

  5. MACRO-FISCAL VULNERABILITY Incorrect specification of the initial fiscal position Sensitivity of short-term fiscal outcomes to risks Medium- and long-term fiscal sustainability problems Structural or institutional weaknesses    

  6. THE INITIAL FISCAL POSITION The central government budget Other levels of government, extrabudgetary funds and quasi-fiscal activities Assets and liabilities, including contingent liabilities Fiscal indicators    

  7. SHORT-TERM FISCAL RISKS Macroeconomic volatility Called contingent liabilities Unclear expenditure commitments   

  8. MEDIUM- AND LONG-TERM FISCAL SUSTAINABILITY Debt dynamics Baseline projection and stress testing Long-term pressures from demographic trends, resource depletion etc.   

  9. STRUCTURAL WEAKNESSES Expenditure composition Revenue system Institutional capacity for fiscal management   

  10. VULNERABILITY INDICATORS Box 1 contains a possible set of indicators Country differences and prioritization An index of vulnerability   

  11. MICRO-STRUCTURAL VULNERABILITY The government’s socio-economic legitimacy Enabling environment for government activity Weaknesses in the fiscal management system   

  12. CONCLUDING COMMENTS Importance of managing vulnerability Experimental vulnerability assessments Debt and asset management   

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