Transcript

Transcript of the Press Conference of the April 2019 Fiscal Monitor

April 10, 2019

Speakers:

Vitor Gaspar, Director, Fiscal Affairs Department

Catherine Pattillo, Assistant Director, Fiscal Affairs Department

Paolo Mauro, Deputy Director, Fiscal Affairs Department

Ting Yan, Communications Officer, Communications Department

Ms. YAN: Good morning, everyone. Welcome to this press conference on the Fiscal Monitor. Thank you for being with us here today and welcome also to those who are following us online. My name is Ting Yan. I am with the Communications Department.

Let me first introduce our speakers here. Sitting beside me is Mr. Vitor Gaspar, Director of the Fiscal Affairs Department at the IMF. To his right are Ms. Catherine Pattillo, Assistant Director of the Fiscal Affairs Department, and Mr. Paolo Mauro, Deputy Director of the Fiscal Affairs Department. Vitor will give his opening remarks with a short presentation today and then we are happy to take your questions after that.

With that, let me give the floor to Vitor.

Mr. GASPAR: Thank you. Good morning. Welcome. And thank you for your interest on the Fiscal Monitor, which has a brand new cover with a brand new color. We will be covering the two chapters in the Fiscal Monitor. The first on the current situation and prospects for fiscal policy. The second on how to strengthen fiscal institutions to reduce vulnerabilities to corruption.

As you have heard from the World Economic Outlook, the current economic situation is delicate, and the subsequent projected recovery is precarious. Global economic activity slowed in the second half of 2018. Risks are to the downside. In response, monetary and fiscal policies in many countries have become more expansionary, alleviating the slowdown. As you just heard in the press conference on the Global Financial Stability Report, accommodative monetary policies are welcome and have contributed to diminish short‑run risks.

On fiscal policy, our view is more nuanced. Country‑specific circumstances are crucial. Fiscal policy decision makers should be aware of elevated public debt ratios. Financial vulnerabilities and downside risks to nominal growth. For most countries, getting their fiscal houses in order means preparing for the next downturn or financial crisis. Fiscal policy also needs an upgrade. Governments would be well advised to pursue smarter and more agile fiscal policies to facilitate change in the face of fast paced technological transformation, globalization, and demographics. Sustainable and inclusive growth requires improving tax systems and more and better investment in people and infrastructure.

Public debt levels are significantly higher across all country groups than before the global financial crisis. In advanced economies, public debt levels have been stable since 2012. However, they have continued to rise in emerging market economies and low‑income developing countries. Considering the intraservice tax revenue ratios, advanced economies have benefitted from historically low interest rates. While public debt ratio is highest in advanced economies, the interest service ratio is lowest.

And let's go by country group now. Declining interest rates to extremely low levels have contributed to the fall in the interest‑to‑tax revenue ratio in advanced economies. Ten‑year bond yields are now negative in Japan and Germany. That is what you see in the slide. And at the top end of the chart, you see the U.S. and Italy with bond yields at about two and a half percent. Nonetheless, in advanced economies, given the very high level of public debt ratios, we would have preferred stronger fiscal adjustment in the past. Gradual and growth‑friendly fiscal adjustment for countries with high debt levels is our baseline policy advice. In the event of a severe or prolonged downturn, if inflation and inflation expectations ‑‑ from target, fiscal policy should complement monetary easing in the context of a comprehensive and consistent approach.

In emerging market economies public debt levels have increased substantially. Since the beginning of the global financial crisis, public debt increased by an average of 15 percentage points of GDP. Realization of exchange rate and interest rate risk caused public debt levels to rise further in 2018 in several large emerging market economies. In some of those countries, sovereign spreads fluctuate around an increasing trend in 2018. But spreads have fallen significantly since the beginning of 2019. These wide swings are a reminder of how quickly financing conditions may turn. In this environment, fiscal restraint is generally recommended. Nevertheless, there are exceptions. Notably, China, where limited temporary fiscal expansion facilitating economic rebalancing is part of an overall approach to smooth the slowing down of the economy.

And now low‑income developing countries. In low‑income developing country public debt vulnerabilities have increased. The number of countries that the IMF considers to be at high risk or in debt distress increased by half from 2012, from 16 to 24. At the same time, additional spending is required for meeting the Sustainable Development Goals by 2030. And our estimates are at 15 percent of GDP. Additional spending is even larger, at about 20 percent of GDP in sub‑Saharan Africa.

To achieve the SDGs, each country needs to have full ownership of its own development strategy. Strong, sustainable, and inclusive growth is at the center of the process. Public and private financing should contribute. To make such complementarity work, improvements in governance and business environment are desirable in most countries. The G20 Compact with Africa may act as an important catalyst, but first and foremost, it is decisive to improve tax and state capacity. This entails, for example, broadening the tax base and enhancing tax administration. But it is also necessary to improve public financial management, transparency and accountability, the composition of the budget and public spending efficiency. Lastly, it is necessary to have strong cooperation among all stakeholders, including the donor community.

And now I ask for your attention for a short summary of the chapter on curbing corruption.

You can think of the government budget as a complicated plumbing system. Corruption corrodes the pipes in the fiscal house. Precious financial resources leak out. Curbing corruption requires enduring political will and sustained reform to institutions and practices. Curbing corruption is difficult, but it brings important benefits. The chapter includes many examples. Let me focus on tax revenues.

In Georgia and Rwanda, improvements in the fight against corruption helped raise tax revenue by 13 percentage points and six percentage points of GDP respectively within just a few years of major reforms. Reducing vulnerabilities to corruption requires reforms at home but it also requires international cooperation. For example, through punishment of foreign bribery and action to curtail opportunities to hide corrupt proceeds abroad.

Before my colleagues and I answer your questions, let me just repeat the main takeaways. In setting fiscal policy, policymakers should be aware of elevated public debt ratios, financial vulnerabilities, and downside risks to nominal growth. For most countries, getting their fiscal houses in order means preparing for the next economic downturn or financial crisis. Fiscal policy also needs an upgrade. Government would be well advised to pursue smarter and more agile fiscal policies to facilitate change in the face of fast paced technological transformation, globalization, and demographics. Thank you for your attention. We now welcome your questions.

Ms. YAN: Thank you Vitor.

QUESTION: How close do you think the world is to another developing country debt crisis?

Mr. GASPAR: We do see an increase in the number of countries that we see at high risk or in debt distress. That was in one of the slides that I produced. The point to retain is that it is crucial to manage these risks in order to make an extreme scenario like the one you have referred to less likely and easier to cope with.

QUESTION: Brazilian public debt is in an upward trajectory. I wonder, what do you think about ‑‑ should be Brazilian fiscal policy? And if there is any room to improve public investment because it is in very low levels and it is always cut year after year.

Mr. GASPAR: So let me answer your question carefully.

Firstly, it is important to clarify that our projection for public debt in Brazil is predicated on the respect for the constitutional limit on spending that leads to a situation where the cyclically adjusted primary balance is projected to improve by almost half a percentage point of GDP, from 2021 onwards. Under those assumptions, in our projection, the public debt‑to‑GDP ratio will still be on an upward path for Brazil and, for 2024, the last year of our projection, would be at almost 98 percent of GDP. At that point in time, it would be stabilizing. So at that point in time, the upward path on the public debt to GDP ratio would be interrupted.

Now, in our view, given vulnerabilities of the fiscal position in Brazil, we would welcome a faster pace of adjustment. And we would welcome if the debt‑to‑GDP ratio would stabilize at an earlier date. The gains in credibility of fiscal sustainability in Brazil could be an important reward to those efforts.

At the same time, we see room for improvements in fiscal policy in Brazil, including increases in public spending efficiency and changing priorities so that one could increase the importance of public investment and make space to protect public investment over the business cycle. At the same time, we also do see room for improvements on the tax side and the possibility of improving, for example, the value‑added tax in Brazil is something that could give high returns. I could be more detailed but I think that qualitatively you have seen where we are going.

QUESTION: China rolled out recently a $300 billion tax cut, along with an increasing budget deficit. Could you comment on these measures and especially its impact on the trade‑offs between supporting growth and controlling its debt levels. Thanks.

Mr. GASPAR: So as I did say in my introductory remarks, the fiscal stimulus in China is justified to smooth the slowdown in economic activity in China, and it should help the transition of China to a different growth model that will emphasize much more the quality of growth over firm quantitative objectives on growth.

The strategy of the Chinese authorities has included in the past the reining in of credit growth and the control over the level of leverage in the Chinese economy. In 2018, that strategy has born fruit. When you look at public finances, the efforts at controlling debt dynamics in the general government of China has started longer ago. I always refer to the public finance law of 2014. And when it comes to the current package of measures, what we always say is that there are two principles that are fundamental. First, the stimulus should be fully on budget. And secondly, it is very important that the composition of the fiscal measures facilitates the transition to the new growth model. One can always make detailed comments here and there. For example, one remark that we make is that the reduction in the personal income tax, if one ‑‑ on the one hand makes sense because it supports consumption. On the other hand, the reduction in the personal income tax reduces the degree of progressivity of the overall Chinese tax system and, going forward, we see room to increase the progressivity of the Chinese tax system.

QUESTION: The former Economic Counselor of the IMF, Olivier Blanchard, recently said that new thinking was needed in fiscal policy; when you have such low interest rates, that maybe countries can withstand higher debt levels.

There has been a new color to the Fiscal Monitor, but we have not seen this sort of thinking reflected in this Fiscal Monitor. Do you agree with Mr. Blanchard? Or do you think that the Fund is right to stick to its very conservative attitude to fiscal policy?

Mr. GASPAR: So in terms of the substance, I tried in my presentation here today to call the attention to all to the fact that, despite the fact that advanced economies have levels of the public debt to GDP ratios, which are close to unprecedented in peace time, the interest payments associated with the service of that debt are historically low. That is true for the aggregate of advanced economies. And that is impressively true for many advanced economies. And I have seen stories and analyses covering countries as different as Japan, Greece, France, and the United States. So there is an issue of trying to understand the implications of low interest rates and how long can this low interest rates persist.

What we do know from historical experience and empirical analysis is that financing conditions are volatile, and they can change abruptly.

There is no scarcity of financing crisis, some involving advanced economies, some involving emerging market economies, some involving low‑income countries. So clearly, the risks associated with the rollover of high levels of public debt have not gone away. And those are the risks that we emphasize in the Fiscal Monitor, the risks that we believe that Ministries of Finance would be well advised to manage carefully.

QUESTION: Which is the cause of corruption in Latin American? And I have other questions.

Which policies Ecuador and other countries can replay? And what is your advice on the fight against corruption in Latin American? Especially in Ecuador, if you could say something.

Mr. MAURO: Sure. So in the chapter, of course, we look at corruption, which is a concern in Latin America and on all other continents, I am afraid. We highlight three results. The first one is that we observe the costs of corruption for revenue collection. Our headline result is that, if you compare countries more or less at the same level of economic development, those that are less corrupt collect 4 percentage points of GDP more revenues than those that are more corrupt. There is also a significant difference in the amount of waste in public investment. And, again, the numbers are macroeconomically relevant. And if you look at test scores of school‑aged students, again, there is a significant difference, which we document in the chapter. So this is clearly something which is macroeconomically relevant in Latin America and in other regions.

What can be done about it? We have a long list of advice in the report on how governments can renovate their plumbing and improve the situation. Just to give one example, the public investment management assessments of the IMF would be one way of having a systematic look at how the efficiency of public investment can be improved. That is a topic that comes up very often in Latin America.

QUESTION: Thank you. This is a country‑specific question now. Sri Lanka's growth has slowed down quite significantly during the last few years. So with the election ‑‑ this being an election year and the higher debt obligations and rollover risks, do you see any fiscal slippage in Sri Lanka and how feasible is, you know, aspiring higher growth?

Ms. PATTILLO: Thank you. On the growth issue, the economy is stabilizing and indicators point to some improvements in the beginning of 2019.

On the fiscal, the 2019 budget, which was actually just approved by parliament last week, in our view, strikes a very good balance between the priority of revenue‑based consolidation while also making space for critical social and capital spending and also business friendly measures that will support private investment and growth.

On the nexus ‑‑ on the structural, which is an important nexus then between fiscal and growth, SOE reforms then are critical for improving competitiveness and medium‑term growth over the longer term.

QUESTION: I want to ask in Arabic. [Through interpreter] I would like to ask about the cost of corruption. I would like to ask about the cost of corruption in the Middle East, specifically, and also, my question is about Jordan in particular. Jordan now has embarked on certain financial reforms in its law, the law regarding the new income tax law and so many reforms under the supervision of the IMF. In your opinion, the new law, how will it lessen or mitigate the tax evasion in Jordan and if there are certain forecasts regarding the mitigation of this, if there is tax evasion. And is corruption in the Middle East tends more to be administrative? Or I mean bribes and corruption in a way that is financial specifically?

Mr. MAURO: Thank you. I am afraid I did not catch the beginning of the question, but let me say a couple of things about the macro‑fiscal aspects and the tax reform that you referred to in Jordan. And then I will touch on the specific corruption question that you asked about revenue administration and tax policy.

So Jordan, of course, has a very high debt‑to‑GDP ratio, of about 95 percent at this time. And the main macro‑fiscal objective now is to bring that debt ratio down. We are also aware, of course, that Jordan is under a lot of pressure, given the hundreds of thousands of refugees that are in the country. So the challenges are very, very severe.

Again, fiscal consolidation gradually is the priority. And in the implementation of the tax reform, certainly a priority is to rationalize the tax exemptions.

The other objective would be to shift the balance of fiscal adjustment away from taxing consumption and toward taxing income, which would make the system more progressive.

Another priority would be to take a good look at the finances of the state-owned sector that should be consolidated and certainly maintain the operational balance of the electricity company. So those would be the macro‑fiscal priorities.

On the issue of corruption more generally, when tax systems are more complicated, that creates scope for discretion on the part of tax administrators. So certainly simplification of the tax system is one type of measure that facilitates better revenue administration. Another way of improving revenue administration in this perspective is to try to eliminate face‑to‑face interactions between tax administrators and taxpayers because, if you have an electronic system, that just makes things much easier in that regard. And we show in the paper that the gains from these types of reforms are substantial. We have structured exercises that countries can go through. Just to name one, our TADAT, the Tax Administration Diagnostic Assessment Tool. There are ways of being systematic in looking at, what are the priorities in simplifying the system and making it less vulnerable to corruption.

QUESTION: Hi. Thank you. In the report, you suggest that there is room for fiscal space and ‑‑ in a number of countries, China, Australia, Germany, Japan, South Korea. I am just wondering, if these countries do not take this opportunity, they will have a risk of far lower growth rates. I am wondering what the source of that risk is. Is it trade conflicts primarily? And what happens in the longer term to their fiscal picture if they do not take this opportunity and they do not enact a stimulus for the near term? Thanks.

Mr. GASPAR: So the point that we have very much emphasized in the Fiscal Monitor and in general in our fiscal policy advice is that the advice is country‑specific. The concept of fiscal space is a concept based on the idea that the country has the possibility of expanding the budget by increasing spending or reducing taxes without putting in danger fiscal sustainability or access to bond markets. So it is a faculty. Whether the countries should be using it or not depends on circumstances. And it is not a case that the recommendations would be uniform for all the countries that you have listed.

Let me look at one specific example. We have been arguing that a more expansionary fiscal policy would be welcome in Germany. And why is that? Because, from the viewpoint of Germany itself, giving priority to public investment would be, in our view, a very good bet because financing costs are very low. In the main presentation you just saw, that the 10‑year bond yield in Germany is slightly negative. The yield curve is uniformly negative up to 10 years. And there are many opportunities for productive investment in infrastructure and networks in Germany that could yield a very positive return for the German economy and thereby strengthen potential growth and competitiveness. At the same time, Germany has a very large current account surplus and an expansion of spending in Germany ‑‑ that would be directed to infrastructure ‑‑ would help in that dimension as well. And that is why we think that expansionary fiscal policy in Germany be with the limits of the fiscal space and the prevailing rules would be well advised.

QUESTION: This is the election season in India. Now a lot of political parties are making populist announcement. And this is at a time when we have missed the fiscal deficit targets a couple of times. At the same time, our borrowing is very high. States are also borrowing very ‑‑ huge amounts of moneySo what is your view on this kind of borrowing and these kinds of populist measures that will surely push up the deficit, widen the deficit even further?

Mr. MAURO: So in the case of India, of course, the priority continues to be gradual fiscal consolidation because, as you know, the gross general government to GDP ratio is at about 70 percent. So including the states, the subnationals, that is from a macro‑fiscal perspective.

You also have a very rapid growth rate. The economy is growing in excess of 7 percent, and the objective there is to make sure that that growth is inclusive and it filters down to poverty reduction.

Now, when one looks at proposals, the important thing is to look at the benefits but also look at the costs and to look at the details. Certainly, when one looks at the case of India, there is a lot of scope for reducing untargeted food and fertilizer subsidies, and for enhancing revenue administration, including for the GST, which was a transformational positive reform. But, again, even there, improved tax compliance would be a priority.

On the schemes, therefore, ultimately what matters is the combined distributional impact of the transfer policies and also of the taxes that would finance them. So one has to look at the whole package together to assess the distributional impact.

QUESTION: I have two questions. The first one, the IMF has argued that Nigeria should increase VAT to shore up revenue, but that has met resistance from the private sector and the populists. So do you have any other techniques that Nigeria may use to shore up revenue?

Secondly, on a chart in this report, the second page ‑‑ second chapter I mean, Nigeria and Qatar are ranked lowest on the use of sovereign wealth funds, if I am correct. So what do you think Nigeria can do better to improve this ranking?

Ms. PATTILLO: Thank you. As you point out, tax reform in Nigeria is a very important issue and one of our main recommendations for Nigeria is the need for a comprehensive tax reform that would sustainably increase non‑oil revenue. And the reason why that is needed is that Nigeria has one of the lowest ratios of non‑oil revenue‑to‑GDP at around 3.4 percent in the world. And total tax revenue‑to‑GDP at around 8 percent is also very low compared to peers. Because of that, then, the interest‑to‑tax ratio ‑‑ because the tax is so low ‑‑ is high. And so a lot of then the tax is crowded out that ‑‑ not being able to be spent on important development needs. And does Nigeria have those needs? Of course, big time. As you know, the needs for infrastructure and for spending on human capital are very large.

You asked about whether there are other areas beside the VAT. There is an emphasis also on improving excise taxes. And I think there have been some steps in that direction, but there is scope for expanding the coverage of excises to other goods and also higher rates on excises.

Another important area is aggressive streamlining of tax incentives and exemptions. So there has been in Nigeria an effort with the strategic revenue growth initiative, looking at a comprehensive approach to tax reform, and this is very welcome.

Mr. MAURO: Just to complement on the importance of transparency of sovereign wealth funds. Certainly to make sure that the natural resources of countries that have them are channeled appropriately to the people that need those resources and are not wasted.

Ms. YAN: Let me take one question online on Europe. So this is a question from Portuguese media. The question is: In the report, the IMF mentions the need for a synchronized fiscal response in the euro area in the scenario of a severe downturn. Is it possible without a euro area budget or fiscal capacity?

Mr. GASPAR: We have been arguing for a number of years that a central fiscal capacity for the euro area would be an important addition to the set of tools that the European policymakers could deploy, in particular in the case of a prolonged or severe downturn in economic activity. So from that viewpoint, the fact that debt is something that is still being discussed at the level of the proposals, is not something which is part of the architecture of the euro area, is a weakness. At the same time, we know from experience that the European authorities were able to act in the past in case of a severe downturn. We all remember that, in 2009, at the time of the global financial crisis, the Europeans agreed on the European economic recovery plan, and that was then implemented by the fiscal authorities of the member countries.

Ms. YAN: Thank you. I think we have time for one more question in the room.

QUESTION: Thank you. I would like to get back to the curbing of corruption.

So you have ‑‑you have done a wonderful job about showing the impact of corruption but I am wondering, how you would integrate your findings in your Article IV reports or in your programs or at Post‑Program Monitoring assessments. And I am asking this question because in Greece, for example, IMF has a 10‑year presence there. And the corruption is still an issue. Policies that have been implemented all have been advocated by the IMF did not address the problem. Thank you.

Mr. MAURO: So on corruption, as you know, the IMF has had guidelines in place since 1997. And in 2017, we assessed our implementation of those guidelines and found that we should be more candid, more operational, and more evenhanded and, hence, in 2018, the Board asked us to do that. We are already beginning the implementation of the new framework. If you look at our staff reports, we are being more candid, more vocal, more detailed, and more operational in the advice. Just to give some examples of staff reports that have that greater detail: Kosovo, Cambodia, Bolivia, Angola, Bulgaria, Guatemala, Nigeria, Panama. There is a lot more information that we are working on. That is in the surveillance aspects, of course. In program cases also we are more involved there as well.

If you look at our chapter, you will see that the experience is that improvements in corruption occasionally ‑‑ like in the cases of Rwanda or Georgia that were given before ‑‑ occasionally, it happens in a few years. But most cases, you see a very gradual improvement. It takes a long time. It takes a lot of effort, a lot of persistence. It takes political will. And it takes technical changes. I think those technical changes are being made. And, of course, that is something that we are going to continue monitoring. And that is the effort.

We also provide countries with detailed advice through our capacity development, our diagnostics. Those are listed in the report. And I hope that you will hold us accountable if we are doing that. I think we certainly will.