(Version in Español)
As we said in the just-published Fiscal Monitor update, fiscal policy this year in some leading advanced economies is shaping up to be quite different from what was expected just last November.
The United States and Japan are delaying their earlier plans to reduce their public deficits, choosing instead to provide further support to their economies. The change in plans is even more remarkable if you look at the cyclically adjusted balance. You can see this in the charts. Some of the change in the fiscal stance with respect to our earlier projections is attributable to the somewhat better than projected fiscal results in 2010, a point to which I will return in a moment. Most of it, however, is due to additional stimulus measures introduced during the last two months. These two countries need to strengthen their fiscal adjustment credentials by detailing the measures they will adopt to lower deficits and debt over the medium term.
So, what happened last year?
For advanced economies, fiscal developments in 2010 were slightly better on average—by about 0.3 percent of GDP—than we had estimated in the November 2010 Fiscal Monitor, although with some more sizable differences for individual countries.
The average 2010 fiscal deficit in emerging economies was broadly unchanged from our November estimates, again with notable country differences. Yet, here the unchanged deficit number masks some important underlying developments.
- On the positive side, revenue growth has been solid, reflecting higher commodity prices and asset prices, to some extent reflecting strong capital inflows.
- But it is troubling that these revenues have in several countries been used to finance higher spending. This is happening in Latin America, for example, and is something that needs to be watched. It is likely that some of this revenue increase will prove to be transitory, but the spending it has paid for may not be so.
Different countries, different plans
No amount of deficit reduction this year, however, can be sufficient to restore countries’ fiscal accounts to robust good health. Putting the government accounts in order will require a multi-year effort.
How are countries doing in setting out their longer-term plans? Here, there is again somewhat of a mixed picture.
The fiscal commission in the United States did a wonderful job to come up with comprehensive and sound proposals on how to reduce the deficit in the medium term. We hope that their recommendations will not be lost despite their failure to achieve the supermajority needed to submit their proposal to Congress. In this respect, we welcome the emphasis in President Obama’s State of the Union address earlier this week on broad-based fiscal reforms, including discretionary spending restraint as well as revenue measures and entitlement reforms (most critically, health care spending). We look forward to reviewing the U.S. Administration’s specific proposals in the forthcoming budget.
In Europe, changes have mainly been institutional in nature. Again some have been positive and others not. The main change has been the decision by the European Council to create a permanent crisis management and resolution arrangement. At a country level, however, the Monitor notes some weakening of fiscal institutions in Hungary where a non-partisan fiscal watchdog was effectively closed.
Altogether, sovereign risks remain elevated and in some cases have increased since November 2010. This underscores the need for more robust and specific medium-term consolidation plans.