Fiscal Implications of the Global Economic and Financial Crisis

International Monetary Fund (IMF), September 2009, Pages: 85

The economic and financial crisis is affecting the fiscal accounts of virtually every country. Public sector support for the financial system, fiscal stimulus and the automatic stabilizers, as well as the revenue decline from the downturn in commodity and asset prices, are leading to sharp increases in deficits and debt stocks around the world.

Expansionary fiscal policy continues to be necessary in the short term to stimulate economic recovery. But it is now essential that governments reassess the state of their public finances in light of the global crisis and adopt strategies that will ensure medium- and long-term fiscal sustainability. Many of the advanced economies most affected by the crisis are also those where age-related spending will increase markedly in the coming years, adding particular urgency to the need to identify medium-term consolidation strategies.

This new paper, which focuses mainly on advanced and emerging market economies, employs projections based on the April 2009 World Economic Outlook to quantify the fiscal implications of the crisis for a cross-section of countries. The authors assess the post-shock fiscal balances and debt outlook, and suggest ways for governments to clarify their strategies for maintaining fiscal solvency.

Preface vii

Abbreviations ix

I Overview

II FiscalImplicationsoftheCrisis:DirectCosts
Headline Support to Financial Sectors
Net Cost over the Medium Term
Potential Total Cost of Implicit and Explicit Guarantees

III FiscalImplicationsoftheCrisis:TheCostoftheRecession
Automatic Stabilizers
Other Nondiscretionary Effects
Discretionary Responses to the Crisis

IV Fiscal Implications of the Crisis: Effects Through the Funded
ComponentofthePensionSystem
Losses of Funded Pension Schemes
Risks for Fiscal Accounts

V TheOutlookforPublicFinancesinLightoftheCrisis
Short-Term Outlook
The Medium-Term Outlook and Risk Assessment

VI TheRiskforFiscalSolvencyandtheAppropriatePolicyResponse
The Level of Government Debt
The Dynamics of Government Debt: Current and Future Deficits
The Way Forward

Appendixes

I.Reporting the Fiscal Impact of Financial Sector Support

II.Financial Sector Support Measures

III.Outlook for Recovery Rates

IV.Measuring Government Contingent Liabilities to the Banking Sector

V.Estimation of Nondiscretionary Impacts

VI.Fiscal Stimulus Packages in the G-20 Countries

VII.Effect of Larger Debts on Interest Rates

VIII.Japan: High Public Debt and Low Interest Rates
Bibliography

Boxes

2.1. FiscalAccountingTreatmentofSupporttotheFinancialSector
6.1. Debt/GDPStabilizingPrimaryBalance
6.2. Post-Banking-CrisisFiscalConsolidation:FinlandandSweden Duringthe1990s
A3.1. Japan’s1997BankingCrisis:FiscalCostandRecoveryRates

Figures

3.1. CompositionofDiscretionaryFiscalMeasuresinG-20Countries,2008–10
4.1. PensionFundAssetsinOECDCountries
4.2. PensionPlanAssetsbyEconomy,End-2007
5.1. G-20Countries:OutlookforPublicFinances
5.2. ImpactoftheCrisisonPublicFinances:ContributingFactors
5.3. G-20AdvancedCountries:EvolutionofGovernmentDebt
5.4. LowerGrowthScenario
5.5. ProlongedSlowdownScenario
5.6. Government Debt in Case of Prolonged Slowdown, Higher Interest Rate, andContingentLiabilityShock
6.1. Long-TermGovernmentBondYieldsandSpreads
6.2. SelectedCountries:PublicDebt-to-GDPRatio
6.3. PopulationAginginEmergingMarketCountries,2005and2050
6.4. AdvancedG-20Countries:GovernmentDebt
6.5. EU-5Countries:OutlookforFiscalBalanceVersus2006StabilityProgram
A3.1. RecoveryRates:SelectedBankingCrises
A3.2. GrossandNetFiscalCostofBankingCrises
A8.1. Japan:DebtandInterestRates

Tables

2.1. HeadlineSupportforFinancialandOtherSectorsandUpfront FinancingNeed
3.1. G-20Countries:ContributionofAutomaticStabilizers
3.2. LossofFiscalRevenueDuetoCommodityPriceMovements
3.3. G-20Countries:OtherNondiscretionaryFactors
3.4. G-20Countries:EstimatedCostofDiscretionaryMeasures
3.5. G-20StimulusMeasures,2008–10
5.1. G-20Countries:ChangeinFiscalBalancesandGovernmentDebt
5.2. PublicFinances
6.1. Historical Episodes of Major Accumulations and Decumulations of GovernmentDebt
6.2. DebtandPrimaryBalance
6.3. FiscalCostsofAging
6.4. EmergingEconomies:SelectedDebtReductionEpisodes
6.5. NetPresentValueofImpactonFiscalDeficitofCrisisandAging

RelatedSpending

A1.1. StatisticalTreatmentofGovernmentIntervention(UnderGFSM1986)
A1.2. StatisticalTreatmentofGovernmentIntervention(UnderGFSM 2001)
A2.1. UpfrontGrossFiscalCostandEstimatedRecoveryRate
A2.2. HypotheticalNetCostfromFinancialSectorSupportMeasures:

IllustrativeScenarios

A2.3. FinancialSectorSupportOperationsinSelectedCountries
A3.1. EstimationResults
A3.2. In-SampleRecoveryRatePredictions
A4.1. Banking Sector: Expected Cost of Financial Guarantees Based on

CCACalculations

A4.2. Banking Sector: Expected Cost of Financial Guarantees Based on

CCACalculationsAnnualCostoverFiveYears

A4.3. BankingSector:ExpectedCostsofFinancialGuaranteesBasedonThree AlternativeCreditSpreadMeasuresandTotalBankingLiabilities
A5.1. EstimatedImpactofAutomaticStabilizersonG-20FiscalBalances
A5.2. ResponsivenessofCyclicallyAdjustedRevenuetoAssetPriceChanges
A6.1. SummaryoftheFiscalStimulusPackagesintheG-20Countries
A7.1. StudiesontheEffectsofDebtandDeficitsonInterestRates

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