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

John Maynard KeynesJohn Maynard Keynes

2

Charles PonziCharles Ponzi???

3

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

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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?

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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

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does not raise doubts about solvencydoes not raise doubts about solvency

What should be done?What should be done?

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What should be done?What should be done?

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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

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�� 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)

Thank you!Thank you!

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Thank you!Thank you!