Fiscal Costs of Hidden Deficits: Beware—When It Rains, It Pours

By Elva Bova, Marta Ruiz-Arranz, Frederik Toscani, and Elif Ture

(Version in Español)

Budgets can be full of surprises. And not always good ones. Often times, debt increases significantly because an unforeseen obligation materializes. These contingent liabilities, as they are known in the economist’s jargon, can have significant economic and fiscal costs. In fact, on many occasions, large and unexpected increases in debt across the world were due to the materialization of contingent liabilities. That is why they are often called hidden deficits.

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U.S. Fiscal Policy: A Tough Balancing Act

Deniz IganBy Deniz Igan

(Version in Español)

Much has changed on the fiscal front since we started worrying about U.S. fiscal sustainability. The federal government budget deficit has fallen sharply in recent years―from almost 12 percent of GDP in 2009 to less than 7 percent in 2012. And recent budget reports show that the deficit is shrinking faster than expected only a few months ago, to a projected 4½ percent of GDP for the current fiscal year, which ends September 30. Plus, health care cost growth has slowed down dramatically since the Great Recession, alleviating the pressure on public health care programs at least temporarily.

Does this mean we can stop worrying? Not quite. Recent developments certainly mean that things are better than we thought just a few years ago and the fiscal adjustment needed to restore sustainability is smaller. But if the choice and timing of policy measures is not right, the deficit reduction may turn out to be too much in the short run—stunting the economic recovery—and not enough in the long run.

So, in our recent annual check-up of the U.S. economy, our advice is to slow the pace of fiscal adjustment this year—which would help sustain growth and job creation—but to speed up putting in place a medium-term road map to restore long-run fiscal sustainability.

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Mind The Gap: Policies To Jump Start Growth in the U.K.

The effects of a persistently weak economy and high long-term unemployment can reverberate through a country’s economy long into the future—commonly referred to by economists as hysteresis. Our analysis shows that the large and sustained output gap, the difference between what an economy could produce and what it is producing, raises the danger that a downturn reduces the economy’s productive capacity and permanently depresses potential GDP.

Signs of Fiscal Progress: Will It Be Enough?

We’ve just updated our latest assessment of the state of government finances, debts, and deficits in advanced and emerging economies. Fiscal adjustment is continuing in the advanced economies at a speed that is broadly appropriate, and roughly what we projected three months ago. In emerging economies there’s a pause in fiscal adjustment this year and next, but this too is generally appropriate, given that many of these countries have low debt and deficits.

Global Financial Stability: What’s Still To Be Done?

The quest for lasting financial stability is still fraught with risks. The latest Global Financial Stability Report has two key messages: policy actions have brought gains to global financial stability since our September report; but current policy efforts are not enough to achieve lasting stability, both in Europe and some other advanced economies, in particular the United States and Japan.

Disappearing Deficits

In our work at the IMF, we sometimes discover that governments choose to employ accounting devices—or stratagems that make the deficit smaller without actually causing any pain, and without actually improving public finances. In ideal accounting, this would not be possible. In real accounting, it sometimes is.

Postcard from São Paulo: the Latest Global Fiscal News–and Some of It’s Actually Good

In São Paulo, Brazil last Friday we launched our latest assessment of the state of government finances, debts and deficits. While many countries are slogging through a tough fiscal time, there is some good news, including in the United States ̶ the deficit will be lower this year than previously expected. I will also give you an assessment of how the new information affects our sense of what needs to be done in the future.

Creating Breathing Room in Low-income Countries

By Hugh Bredenkamp

In my previous postings this week, I have talked about the “double whammy” that low-income countries have faced over the past 2-3 years—the surge in food and fuel prices and global financial crisis—and how the IMF has stepped up its support to help them cope with these shocks. Without this support, and that of other agencies and rich-country donors, governments would have to slash spending as their tax revenues slumped. This, of course, is the exact opposite of what any government should be doing in a recession—it would add fuel to the fire.

But preserving or even increasing spending when revenues are declining means larger budget deficits, and more borrowing. Doesn’t the IMF always preach tight budgets? The answer is “not always.” Fiscal discipline and carefully-managed borrowing policies are essential for long-term economic health. But when economies are hit by temporary shocks—and the current recession, though severe, will surely be temporary—it makes sense for governments to use policy to limit the short-term damage.

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By | September 3rd, 2009|Economic Crisis, Fiscal Stimulus, IMF, LICs, Low-income countries|0 Comments

High-Stakes Choices In Next Stage of Crisis

By Caroline Atkinson

After averting a second Great Depression, what should policy makers do to foster recovery?

Economic policymakers are rarely popular. Central bank governors are notorious for removing the punch bowl at the party. Ministers of finance are traditionally the ones who say no to their colleagues’ pet spending projects.

In the upside-down world of recent months, finance ministers and central bank governors around the world seemed to have switched sides.  They became cheerleaders for expansionary policies. The IMF has argued strongly for this, as long as countries had room to take on more debt. Despite some hiccups, it seems clearer with every economic release that the extraordinary actions governments have taken have paid off, at least in halting the slide. Economic prospects may not be quite as bright as recent market moves would suggest. But the risk of spreading financial collapse has lessened markedly

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