By Don Alexander
Associate, RSD Solutions Inc.
Mr. Alexander also lectures at NYU and SunySB
The latest IMF World Economic Outlook (WEO) indicates that global growth momentum is slowing while downside risks are increasing. However, considerable progress has been made over the last two years in strengthening the fiscal accounts following their sharp deterioration over the last few years. However, the pace of debt reduction is slower than after previous recessions reflecting severity of the recession and sluggish recovery (characteristic of balance sheet recession).
The IMF noted in its latest Fiscal Monitor (October 2012) the emergence of several trends: (1.) Most countries have made significant headway in rolling back fiscal deficits with the greatest progress in advanced economies, where the fiscal shock was largest. (2.) However, the efforts at controlling debt stocks are taking longer to yield results. Debt ratios are not expected to stabilize before 2014–15 in some countries and longer elsewhere. The slow progress reflects a sluggish recovery, high interest rates and fragile nature of the financial system. (3.) Countries with sizable fiscal consolidation needs have relied on a mix of revenue and expenditure policies. These measures have the smallest negative impact on growth, but those with large fiscal adjustment plans—need to include investment cuts and tax increases that impact growth. (4.) Spending and revenue measures have implications for employment and social equity, have to be considered if the large consolidation efforts are to be sustainable. However, structural reforms remain the key to better growth and employment prospects.
The Fiscal Monitor noted that the United States and Japan need to act quickly to reduce fiscal policy uncertainty. The United States has to define a clear path to avoid the 2013 “fiscal cliff”—a very sharp increase in taxes and reductions in discretionary spending—and to raise the federal debt ceiling. Japan needs to implement a decisive debt reduction plan that includes reforms to revenues and entitlements.
In Europe, a number of peripheral countries have little choice but to press ahead with planned deficit reductions. In other countries that have more room to maneuver, policymakers should allow automatic stabilizers to operate—for example, through higher unemployment compensation and social assistance—tolerating a higher deficit if growth should slow. Long-term, Europe must move toward a fiscal union with unified supervision of the banking system. Elsewhere, a number of emerging countries must take action to reduce their dependence on revenue exposure from a single source. In other countries, there is a need to moderate ambitious investment plans to match revenues. This may include the need to reduce subsidies.
Despite progress in restoring the sustainability of public finances, fiscal vulnerabilities remain elevated. Public debt rollover requirements are high and expose countries to the vagaries of financial markets. Central banks have provided ample liquidity in support of economic activity; markets have taken large increases in public debt in stride, with solvency concerns largely in euro area countries. But these benign market responses are premised on continued fiscal adjustment and a favorable growth environment.
With global risks rising, policymakers must tread the narrow path that will permit them to strengthen the public finances while supporting a fragile recovery. Adjustment should proceed at a pace that is consistent with the state of the economy. If growth falters, the first line of defense should be monetary policy and automatic fiscal stabilizers and countries with room for maneuver should slow their pace of planned adjustment. But short-term caution should not delay efforts to put public finances on a sounder footing, as this remains a key requirement for growth. Countries with relatively comfortable fiscal positions should maintain appropriate buffers to be able to confront future shocks.
No comments:
Post a Comment