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1、L-6 Fiscal Policy and Debt SustainabilityPresenterClinton ShiellsJoint China-IMF Training ProgramCourse on Macroeconomic Management and Financial Sector IssuesCT 14.05Lecture OutlineqHow do we measure fiscal policy?qFiscal policy for short-term macroeconomic stabilityqFiscal policy to reduce vulnera
2、bilityqFiscal policy for growth and poverty reductionThis training material is the property of the International Monetary Fund(IMF)and is intended for use in IMF Institute courses.Any reuse requires the permission of the IMF Institute.”2How Do We Measure Fiscal Policy?3MMFHow do we measure fiscal po
3、licy?Fiscal policy is the use of government spending and taxation to influence the economy.Flow indicatorsOverall fiscal balance:difference between total revenue(including grants)and total expenditures plus lending minus repaymentsPrimary balance:revenue minus non-interest(primary)expenditureCurrent
4、 balance:difference between current revenue and current expendituresCyclically adjusted balance:nominal fiscal balance net of the cyclical component of the budget4MMFHow do we measure fiscal policy?Stock indicatorsNet worth:difference between assets and liabilitiesOff-balance-sheet items e.g.,contin
5、gent liabilities,public-private partnerships(PPPs)AssetsLiabilitiesFinancial(e.g.,government deposits)Nonfinancial(e.g.,public roads)Government debt5MMFWhat is fiscal policy used for?Short-term macroeconomic stabilizationReducing vulnerabilitiesGrowth and poverty reductionRelative importance of thes
6、e objectives depends on country circumstances.6MMFFiscal Policy for Short-Term Macroeconomic Stabilization7MMFFiscal policy for macroeconomic stabilizationFiscal policy can be used for:Mitigating cyclicality(recurrent booms and recessions)Taming inflationReducing external current account imbalancesM
7、anaging financial crises8MMFFiscal policy versus monetary policyFiscal policy and monetary policy should be designed in tandem to get the right mix.Which is more effective in moderating cyclicality?Monetary policy can be implemented faster but fiscal policy may affect output more immediately.In gene
8、ral,fiscal policy should play a bigger role when monetary policy is constrained(e.g.,with a fixed exchange rate,or when nominal interest rates are close to zero,or when financial systems are less developed).9MMF1.Countercyclical fiscal policyTwo channels:Automatic stabilizersDiscretionary measures(f
9、iscal stimulus)10MMF(ii)Discretionary fiscal policyKey considerations:Size of the fiscal stimulusMultiplierTimingCompositionDurationFiscal stimulus measures should be timely,targeted,and temporary(TTT)11MMFWhat determines the size of the multiplier?The size of the multiplier is larger if:“Leakages”a
10、re fewHigh marginal propensity to consume(c),low marginal propensity to import(m)No Ricardian equivalenceMonetary conditions are accommodative Small or no increase in interest rates(no crowding out)Small or no exchange rate appreciationThe countrys fiscal position after the stimulus is sustainable12
11、MMF2.Fiscal policy and inflationFiscal policy can affect inflation through many channels:In the short run,fiscal policy affects the price level through its impact on aggregate demand.Fiscal policy can lead to sustained inflation if the fiscal deficit is monetized.Fiscal adjustment can also affect in
12、flation via the demand for money,including through inflation expectations,interest rates,and confidence.13MMF3.Fiscal policy and the current account balance14MMFThe governments saving-investment balance is linked to the current account balance through the ex post income identity:Fiscal consolidation
13、 contributes to external adjustment but a one-for-one improvement in the current account balance is unlikely.In the case of expansionary fiscal consolidation the current account balance could even deteriorate.4.Fiscal policy and financial crisesWhen a capital account crisis hits,fiscal consolidation
14、 is usually unavoidable because external financing dries up.If fiscal problems are the root cause of the financial crisis(loss of confidence),fiscal consolidation is necessary to regain market access and lower the cost of borrowing.If fiscal problems are not the root cause,fiscal contraction may be
15、counterproductive;fiscal expansion may be needed instead.15MMFAchieving medium-term fiscal credibilityFiscal rules to constrain future behaviorReasonable multi-year spending ceilingsFiscal transparency;open and accountable budgetingEstablish a politically-independent fiscal agent to monitor fiscal p
16、olicy makingProvide the public with comprehensive information on the state of public financesDisciplined budget preparation and execution MMF16MMF17Fiscal policy has played a significant role in supporting demand since the crisis,with off-budget and LGFV spending becoming especially important counte
17、rcyclical toolFiscal Policy to Reduce Vulnerability18MMFFiscal policy to reduce fiscal vulnerabilityA countrys public finances may appear sound,but may be vulnerable if underlying weaknesses threaten its future fiscal position and limit the governments ability to respond to fiscal policy challenges.
18、Examples:Debt sustainabilityContingent liabilities and debt structureFiscal rigiditiesEmerging fiscal pressures,e.g.,demographic changes19MMFDebt sustainabilityPublic debt is sustainable when the government can continue servicing it without the need for an unrealistically large future correction to
19、its revenue or primary(non-interest)expenditure path.Market expectations are important toogovernments that are able to assure markets about future fiscal policies may be able to maintain larger levels of debt than otherwise.20MMFMMF21Augmented fiscal debt has risen to above 45 percent of GDP22MMF200
20、5200720092011201320153540455055606570Historical40Baseline43Baseline and historical scenarios20052007200920112013201535455565i-rate shock46Baseline43Interest rate shock(in percent)China:Public Debt Sustainability:Bound Tests(Augmented debt in percent of GDP)23MMFChina:Public Debt Sustainability:Bound
21、 Tests(Augmented debt in percent of GDP)20052007200920112013201535455565Growth shock 44Baseline43Growth shock(in percent per year)20082010201220142016201835455565PB shock 51Baseline4359Primary balance shock(in percent of GDP)andno policy change scenario(constant primary balance)No policy change24MMF
22、China:Public Debt Sustainability:Bound Tests(Augmented debt in percent of GDP)20052007200920112013201535455565Combined shock 50Baseline43Combined shock 2/2008201020122014201620183545556530%depreciationBaseline43contingent liabilities shock50Real depreciation and contingent liabilities shocks 3/Longe
23、r term fiscal pressuresDemographic changes(mainly aging populations)will pose increasing burdens on public finances of many developed and some developing countries.Source:Heller(F&D 2006)Old age dependency rate(%)25MMFFiscal Policy for Growth and Poverty Reduction26MMFFiscal policy for growth and po
24、verty reductionA sound fiscal position is key to achieving macroeconomic stability,which is critical for sustained growth and poverty reduction.Perceptions and investor confidenceHigh-quality fiscal adjustment can also mobilize domestic savings,increase the efficiency of resource allocation,and help
25、 meet development goals.Government saving“Fiscal space”27MMFMobilizing and allocating resourcesEconomic growth depends on accumulating physical and human capital,which in turn requires savings.As private sector savings are often low in developing countries,fiscal policy can play a central role in mo
26、bilizing resources by raising revenue and reducing less productive spending.But the mobilized resources must be invested productively.Public spending should be directed to areas with the highest social return and should complement,rather than compete with,the private sector(e.g.,health,education,and
27、 pensions in China).28MMF29MMFHigh social security contribution rates are an impediment to domestic rebalancing in ChinaFiscal spaceFiscal space in the immediate termNeed to find resources to finance pressing expenditures today Link to fiscal sustainabilityFiscal space in the medium termNeed to ensure that future budgetary resources are not exhausted by government expenditure commitments,in order to have scope to respond to unanticipated fiscal challenges MMF30