Fiscal Policy for the Crisis Fiscal Policy for the Crisis
Presentation at the Presentation at the
1
Presentation at the Presentation at the
Bank of Indonesia 7Bank of Indonesia 7thth International SeminarInternational Seminar
Carlo CottarelliCarlo Cottarelli
DirectorDirector
IMF Fiscal Affairs DepartmentIMF Fiscal Affairs Department
June 13, 2009June 13, 2009
Here is the ChallengeHere is the Challenge
�� To allow fiscal policy to support the economyTo allow fiscal policy to support the economy
�� While reassuring markets that this is not a Ponzi While reassuring markets that this is not a Ponzi
schemescheme
4
4
6
8
10
12
Real GDP GrowthReal GDP Growth(in percent; QoQ; saar)(in percent; QoQ; saar)
WorldWorld
Emerging and Emerging and Developing economiesDeveloping economies
Growth ProjectionsGrowth Projections
5
-8
-6
-4
-2
0
2
4
2006 2007 2008 2009 2010
Advanced Advanced economieseconomies
Unemployment Rate ProjectionsUnemployment Rate Projections
10
12
Euro areaEuro area
Unemployment RateUnemployment Rate((in percent)in percent)
6
2
4
6
8
2006 2007 2008 2009 2010
U.K.U.K.
U.S.U.S.
JapanJapan
Euro areaEuro area
Two roles forTwo roles for
supportive fiscal policiessupportive fiscal policies
�� Interventions to support the financial sectorInterventions to support the financial sector
�� Interventions to support aggregate demand Interventions to support aggregate demand
7
Support Measures with Immediate Effect Support Measures with Immediate Effect
on Government Debton Government Debt
FranceFrance
GermanyGermany
SpainSpain
United StatesUnited States
KoreaKorea
CanadaCanada
JapanJapan
United KingdomUnited Kingdom
Purchase of Assets and Purchase of Assets and
Lending by TreasuryLending by Treasury
8
00 22 44 66 88 1010 1212 1414 1616 1818
BrazilBrazil
IndonesiaIndonesia
TurkeyTurkey
ChinaChina
IndiaIndia
AustraliaAustralia
ItalyItaly
ArgentinaArgentina
RussiaRussia
Saudi ArabiaSaudi Arabia
FranceFrance
(In percent of GDP)(In percent of GDP)
Average Upfront Financing, Average Upfront Financing,
GG--20 Advanced Economies20 Advanced Economies
Lending by TreasuryLending by Treasury
Capital InjectionCapital Injection
Gross and Net Fiscal Cost of Banking CrisesGross and Net Fiscal Cost of Banking Crises(in Percent of GDP)
Philippines 1997Nicaragua 2000Bulgaria 1996
Venezuela 1994Malaysia 1997Mexico 1994Uruguay 2002Ecuador 1998
Dominican Republic 2003Côte d’Ivoire 1988
Korea 1997Turkey 2000Chile 1981
Thailand 1997Jamaica 1996
Argentina 1980Indonesia 1997
Net CostRecovery
9Source: Laeven and Valencia (2008), Japan Deposit Insurance Corporation, Hoelscher and Quintyn (2003), and IMF staff estimates.
0 10 20 30 40 50 60
Ukraine 1998Brazil 1990Estonia 1992
Argentina 1995Norway 1991Latvia 1995
Lithuania 1995Sweden 1991
United States 1988Sri Lanka 1989Colombia 1982Ghana 1982
Argentina 1989Russia 1998Bolivia 1994
Colombia 1998Czech Republic 1996
Croatia 1998Japan 1997
Argentina 2001Vietnam 1997Finland 1991Paraguay 1995Brazil 1994
Philippines 1997
Support without Immediate EffectSupport without Immediate Effect
on Government Debton Government Debt
Gross Cost Gross Cost
from from
Financial Financial
Sector Sector
Support Support
MeasuresMeasures
Guarantees
Central Bank
Support and
Liquidity
Provision
1414
1616
1818
2020
2222
2424
In percent of GDP
In percent of GDP
10
MeasuresMeasures
GG--2020
countriescountriesAdvancedAdvanced
economieseconomiesEmergingEmerging
economieseconomies
GG--2020
countriescountriesAdvancedAdvanced
economieseconomies
EmergingEmerging
economieseconomies
00
22
44
66
88
1010
1212
1414
In percent of GDP
In percent of GDP
Intervention to Support Aggregate DemandIntervention to Support Aggregate Demand(2008(2008--2010)2010)
Automatic Stabilizers, Other Nondiscretionary FactorsAutomatic Stabilizers, Other Nondiscretionary Factors,
and Discretionary MeasuresDiscretionary Measures
EmergingEmerging
GG--20 countries20 countries
Discretionary MeasuresDiscretionary Measures
Automatic StabilizersAutomatic StabilizersOther NondiscretionaryOther Nondiscretionary
FactorsFactors
115.05.04.54.54.04.03.53.53.03.02.52.52.02.01.51.51.01.00.50.50.00.0
GG--20 countries20 countries
Advanced Advanced
GG--20 countries20 countries
Discretionary MeasuresDiscretionary Measures
Intervention to Support Aggregate DemandIntervention to Support Aggregate Demand
GG--20 Countries: Discretionary Measures, 200920 Countries: Discretionary Measures, 2009
MexicoMexico
RussiaRussia
Saudi ArabiaSaudi Arabia
South AfricaSouth Africa
TurkeyTurkey
United KingdomUnited Kingdom
United StatesUnited States
120.00.0 0.50.5 1.01.0 1.51.5 2.02.0 2.52.5 3.03.0 3.53.5 4.04.0 4.54.5
Indonesia Indonesia Annual average,Annual average,GG--20 countries:20 countries:
ArgentinaArgentina
AustraliaAustralia
BrazilBrazil
CanadaCanada
ChinaChina
FranceFrance
GermanyGermany
IndiaIndia
ItalyItaly
JapanJapan
KoreaKorea
MexicoMexico
2 percent of GDP2 percent of GDP
Outlook for Public Finances in Outlook for Public Finances in
Advanced GAdvanced G--20 Countries20 Countries(In percent of GDP)(In percent of GDP)
88
1010
1212
100100
110110
120120
13
00
22
44
66
88
20002000 0101 0202 0303 0404 0505 0606 0707 0808 0909 1010 1111 1212 1313 1414
6060
7070
8080
9090
100100
Fiscal deficitFiscal deficit
(left scale)(left scale)
Government debtGovernment debt
(right scale)(right scale)
Outlook for Public Finances in Outlook for Public Finances in
Emerging Market GEmerging Market G--20 Countries20 Countries(In percent of GDP)(In percent of GDP)
55
66
77
5050
5555
6060
14
--11
00
11
22
33
44
20002000 0101 0202 0303 0404 0505 0606 0707 0808 0909 1010 1111 1212 1313 1414
3030
3535
4040
4545
5050
Fiscal deficit Fiscal deficit
(left scale)(left scale)
Government debt (right scale)Government debt (right scale)
How Far Are Countries Away From a How Far Are Countries Away From a
“Sustainable” Primary Balance?“Sustainable” Primary Balance?Difference between the projected primary balance and the required primary Difference between the projected primary balance and the required primary
balance to bring debt to a sustainable level (balance to bring debt to a sustainable level (G20 countries in redG20 countries in red ))
00
55
1010
Percent of GDP
15
Australia
Australia
Austria
Austria
Belgium
Belgium
Canada
Canada
Denmark
Denmark
Finland
Finland
France
France
Germany
Germany
Greece
Greece
Iceland
Iceland
Ireland
Ireland
Italy
Italy
Japan
Japan
Netherlands
Netherlands
New Zealand
New Zealand
Norway
Norway
Portugal
Portugal
Spain
Spain
Sweden
Sweden UK
UK
US
US
Argentina
Argentina
Brazil
Brazil
Bulgaria
Bulgaria
Chile
Chile
China
China
Hungary
Hungary
India
India
Indonesia
Indonesia
Korea
Korea
Malaysia
Malaysia
Mexico
Mexico
Nigeria
Nigeria
Pakistan
Pakistan
Philippines
Philippines
Poland
Poland
Russia
Russia
Saudi Arabia
Saudi Arabia
South Africa
South Africa
Turkey
Turkey
Ukraine
Ukraine
--2020
--1515
--1010
--55Percent of GDP
20092014
Prolonged Slowdown/Higher Interest Prolonged Slowdown/Higher Interest
Rate/Contingent Liability ShockRate/Contingent Liability ShockGovernment Debt (In percent of GDP) 1/Government Debt (In percent of GDP) 1/
130130
140140
150150
160160
Advanced GAdvanced G--20 Countries20 Countries
Alternative scenarioAlternative scenario
5555
6060
6565
7070
Emerging Market GEmerging Market G--20 Countries 20 Countries
16
Source: IMF staff estimates.
1/ Figure reports results of a 2 percentage point decline in growth, and a 200 basis point increase in real interest rates relative to the baseline starting in 2009; as well as a
contingent liability shock corresponding to expected cost of guarantees (column A in Table A4.1 in Appendix IV). Averages based on PPP GDP weights.
7070
8080
9090
100100
110110
120120
20072007 0808 0909 1010 1111 1212 1313 1414
3030
3535
4040
4545
5050
20072007 0808 0909 1010 1111 1212 1313 1414
Base caseBase case
Alternative scenarioAlternative scenario
Base caseBase case
How worried should we be?How worried should we be?
17
How worried should we be?How worried should we be?
55--year Sovereign Credit Default Swap (CDS) year Sovereign Credit Default Swap (CDS)
Spreads in Selected Advanced GSpreads in Selected Advanced G--20 Countries20 Countries
150150
200200
250250(In basis points)(In basis points)
18
00
5050
100100
7/1/08
7/1/08
7/31/08
7/31/08
8/30/08
8/30/08
9/29/08
9/29/08
10/29/08
10/29/08
11/28/08
11/28/08
12/28/08
12/28/08
1/27/09
1/27/09
2/26/09
2/26/09
3/28/09
3/28/09
4/27/09
4/27/09
5/28/09
5/28/09
FranceFrance
GermanyGermany
ItalyItaly
JapanJapan
UKUK
USUS
Nominal YieldsNominal Yields
10 Year Government Bond Yields in Selected G20 Countries10 Year Government Bond Yields in Selected G20 Countries
44
4.54.5
55
5.55.5
66
FranceFrance
ItalyItaly
UKUK
(In percentage points)(In percentage points)
19
11
1.51.5
22
2.52.5
33
3.53.5
9/1/089/1/08 10/1/0810/1/08 10/31/0810/31/08 11/30/0811/30/08 12/30/0812/30/08 1/29/091/29/09 2/28/092/28/09 3/30/093/30/09 4/29/094/29/09
GermanyGermany
JapanJapan
UKUKUSUS
5/28/095/28/09
Fiscal SolvencyFiscal Solvency
�� Confidence in governments’ solvency has been a Confidence in governments’ solvency has been a
source of stabilitysource of stability
�� Critical to ensure that challenging fiscal outlook Critical to ensure that challenging fiscal outlook
does not raise doubts about solvencydoes not raise doubts about solvency
20
does not raise doubts about solvencydoes not raise doubts about solvency
FourFour--Pillar StrategyPillar Strategy1. Fiscal stimulus1. Fiscal stimulus
�� Temporary measuresTemporary measures
2. Medium2. Medium--term fiscal frameworksterm fiscal frameworks�� Budgetary proceduresBudgetary procedures
�� Fiscal rulesFiscal rules
�� Introduce fiscal councilsIntroduce fiscal councils
�� Manage and ultimately dispose of financial sector assets acquiredManage and ultimately dispose of financial sector assets acquired
23
�� Manage and ultimately dispose of financial sector assets acquiredManage and ultimately dispose of financial sector assets acquired
3. Structural reforms to enhance growth 3. Structural reforms to enhance growth
4. Tackle long4. Tackle long--run pressures from population agingrun pressures from population aging
Net Present Value of Impact on Net Present Value of Impact on
Fiscal Deficit of CrisisFiscal Deficit of Crisis
and Agingand Aging--Related Spending Related Spending
00 5050 100100 150150 200200 250250 300300 350350 400400 450450
CrisisCrisis
AgingAging
(In percent of GDP)(In percent of GDP)