Transcript OECD/IMF/World Bank Meeting in Paris

Fiscal Policies and Growth: Constraints and
Opportunities
Carlo Cottarelli and Michael Keen
“Ascent after Decline”: Workshop
World Bank, November 19, 2010
1
THE MACROECONOMIC DIMENSION
2
The state of the world’s public finances
3
Advanced economies entered crisis with worst
(non-war) fiscal outlook
General Government Gross Debt for G-7 Economies, 1950-2007
(In percent of GDP)
90
80
70
60
50
40
30
Gross Debt
20
Net Debt
10
2005
2000
1995
1990
1985
1980
1975
1970
1965
1960
1955
1950
0
4
With pressures from aging on top of that
Old Age Dependency Ratio
60
50
40
2009
2030
2050
• Pension reforms contain cost
to 1 percent of GDP
30
• Health care costs increase by
average 3.5 points by 2030
20
10
0
Emerging
Advanced
5
Pre-crisis outlook for emerging economies better
General Government Debt in Emerging Economies, 1998-2007
(In percent of GDP)
80
70
60
50
40
30
20
All Emerging
Latin America
Asia
Europe
10
0
1998
2000
2002
2004
2006
6
Fiscal legacy of crisis most marked in advanced
economies---reflecting lasting impact on GDP
1
0
-1
-2
-3
-4
-5
-6
-7
-8
-9
-10
General Government Balance
Advanced
2007
2009
2011
2013
Emerging
2015
120
General Government Debt
100
80
60
40
20
Advanced
Emerging
0
2007
2009
2011
2013
2015
7
Deficits, debt and growth
8
In advanced economies, fiscal positions are unsustainable
10
Advanced Economies
8
6
4
CAPB
2
0
-2
-4
-6
-8
-10
0
50
100
150
200
250
Debt ratio
9
What debt target for stabilization?
Higher public debt associated with:

Higher real interest rates—perhaps 1.75
percentage points over 2008-15 for advanced
economies

Lower growth (through reduced investment and
labor productivity)—perhaps 0.5 points per year
10
So need to do more than return to pre-crisis
6
4
2
0
Cyclically Adjusted
Primary Balance
-2
Primary
Balance
-4
-6
Overall Balance
-8
-10
2007
2009
2011
2013
2015
2017
2019
2021
2023
2025
2027
2029
2030
Required adjustment is roughly:
• 8.5 percent GDP in advanced economies
• 3 percent in emerging
11
Impact of fiscal adjustment on growth

Prospects for expansionary contractions limited:
•
•
Recent WEO work
Low interest rates

Evidence that adjustment on spending side is:
•
Associated with more durable consolidation
Less contractionary
•
12
THE MICROECONOMIC DIMENSION
13
Spending better
14
Welfare reform

Pensions—Argue for raising retirement age by 2
years: stabilizes spending at 2010; best for growth

Health care—supply and demand side measures

‘Better targeting’?
•
Incentive effects of means-testing
Wage subsidies
Tagging by correlates with participation responsiveness;
increase UK workforce by 1 percent.
•
•
15
Infrastructure and innovation

Literature gives good reason to suppose strong
positive output effect from public capital....

...but little guidance on specifics

Institutions matter

Likely needs:
•
Climate change—adaptation not costly in most advanced,
but likely to be in some emerging
Fundamental R&D—energy research, geoengineering?
•
16
Eliminating wasteful subsidies

Petroleum subsidies—cost around 0.3 percent
global GDP in 2010

Exemptions and special treatment—importance
of tax expenditure analysis

Subsidies to renewables—don’t let spending
substitute for proper carbon pricing
17
Taxing smarter
18
In search of immobile tax bases

VAT:
•
Potential in Japan (and US?)
Large scope in most advanced economies to eliminate
exemptions and reduced rates—could raise £11 bn in UK
even after compensation
•

Property tax
19
Green taxes

Revenue potential is:
•
•
Significant but not transformational in advanced—about
$100 bn per year in U.S
More in some emerging—If internationally traded
But requires that permits not be given away

Not much money in other environmental taxes
•
Though potential in congestion pricing
•
20
Investment and finance

Giving an allowance for notional cost of equity (an
‘ACE’) would


Eliminate corporate-level disincentives to invest
Reduce debt bias

Financial sector
•
•
Pre-financing resolution/Corrective tax
‘Financial Activities Tax’—a fix for the VAT

Gains from enhanced international cooperation
21