Transcript Comments on Dos and Dont`s in Fiscal Packages - Inter

Discussion
Antonio Spilimbergo
(IMF and CEPR)
Inter-American Development Bank
April 23, 2009
The opinions expressed in these comments are the responsibility of the author
and do not necessarily represent the view of the IMF or its Board of Directors
1
Outline
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Context
Sources of the shocks
Policy responses
Design of fiscal policy
Global Growth
2
Global Growth
(Percent change from a year ago)
Real GDP
10
Emerging
8
World
6
4
2
Advanced
1970
75
80
85
90
95
2000
05
0
10
-2
Advanced Countries
Causes of the collapse of output: Continued financial crisis.

Direct effect of credit crunch
Trade
Investment

Indirect effects
Lower wealth
Collapsing confidence
Wait and see
3
Industrial Activity and Global Trade
Have Fallen Very Sharply
Industrial Production
Merchandise Exports
(Annualized percent change of 3mma
over previous 3mma)
15
10
4
(Annualized percent change of 3mma
over previous 3mma)
60
65
Global IP
50
Emerging
60
World
5
55
0
50
40
30
20
10
-5
-10
45
Advanced
40
Global Manf. PMI
(sa, RHS)
-15
-20
Jan-00
0
-10
-20
35
-30
Dec.08
Nov.08
30
Jan-02
Jan-04
Jan-06
Jan-08
Jan-00
Jan-02
Jan-04
Jan-06
Jan-08
-40
5
Fall in Stock Markets and Consumer Confidence
Consumer Confidence
Equities
(Jan. 2005=100)
(1/1/2007=100; FTSE)
120
180
Lehman
Brothers
110
160
140
100
120
90
100
80
70
60
U.S.
80
Japan
Euro area
Japan
U.K.
U.K.
1/23
Jul-07
40
Euro area
50
40
Jan-07
60
U.S.
Jan-08
Jul-08
Jan-09
Jan-05
Jan-06
20
Dec.08
Jan-07
Jan-08
0
Emerging Economies – Latin America
Three Major Shocks:
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Drop in External Demand;
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Tighter Credit (External Financing); and
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Lower Commodity Prices.
6
Emerging Economies Growth Slowed By
Falling Exports and Industrial Production
Industrial Production
7
Merchandise Exports
(in percent change from a year earlier)
(in percent change from a year earlier)
20
Emg. Asia
Emg. Asia
60
Emg.
Europe
15
40
10
20
5
Latin
America
Latin
America
0
0
-20
Emg.
Europe
-5
Nov.08
Nov.08
-10
03
04
05
06
07
08
-40
09
03
04
05
06
07
08
09
Which Macroeconomic Policies (do
not) work?
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Export-led is not an option open to the world as
a whole.
The financial nature of the crisis weakens the
traditional monetary transmission mechanism.
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Role of Fiscal Policy During the
Crisis
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Fixing the financial system.
Supporting aggregate demand.
Attenuating the effects on most vulnerable
sectors.
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10
Fiscal Policy
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Public Spending on Goods and Services
Fiscal Stimulus Aimed at Consumers
Fiscal Stimulus Aimed at Firms
Public Spending on Goods and Services
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First, make sure that existing programs are not
cut for lack of resources.
Second, spending programs, from repair and
maintenance, to investment projects delayed, can
be (re-)started quickly.
Third, a few high profile programs, with good
long-run justification and strong externalities,
can also help, directly and through expectations.
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12
To avoid
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Public sector wage increases should be avoided
not well targeted;
 difficult to reverse; and
 similar to transfers in their effectiveness.
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Fiscal Stimulus Aimed at Consumers
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Three specific factors affect consumption at this
juncture:
decrease in wealth;
 tighter credit constraints; and
 high uncertainty.
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Fiscal Stimulus Aimed at Consumers
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Broad based tax cuts?
marginal propensity to consume out of such tax cuts
may be quite low.
 if the termination date is credible, the intertemporal
incentives implied by such a measure are attractive.
 the degree of pass-through to consumers is
uncertain.
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15
Fiscal Stimulus Aimed at Firms
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Subsidies or measures to lower the tax-adjusted
user cost of capital (such as reductions in capital
gains and corporate tax rates) are unlikely to
have much effect.
Restructuring procedures with government
guarantees on new credit.
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Sustainability Concerns
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Very important
Not credible policies undermine the scope of
fiscal stimulus.
External Financial Pressures
Emg. Sovereign CDS Spreads
(index: 7/1/2007=100)
3600
3200
Current account deficit larger
than 5% of 2007 GDP
2800
2400
2000
1600
Current account surplus
or small deficit
1200
800
400
1/23
0
Jul-07
Nov-07
Mar-08
Jul-08
Nov-08
17
Rising Concerns Over Fiscal Sustainability
Industrial Economies
(5yr Sovereign CDS; in basis points)
18
Selected Europe
(5yr Sovereign CDS; in basis points)
200
200
180
France
United States
180
Germany
160
United Kingdom
140
Japan
160
Italy
140
Spain
120
120
100
100
80
80
60
60
40
40
20
20
1/23
0
Jun-07 Oct-07
Feb-08
Source: Bloomberg, L.P.
Jun-08 Oct-08
1/23
Jun-07 Oct-07
Feb-08
Jun-08 Oct-08
0
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Sustainability Concerns
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measures that are reversible or that have clear sunset clauses
(e.g., future increases in upper income tax rates);
implementing policies that eliminate distortions (e.g., financial
transaction taxes);
increasing the scope of automatic stabilizers that, by their
nature, are countercyclical and temporary;
providing more robust medium-term fiscal frameworks;
strengthening fiscal governance through independent fiscal
councils; and
improving expenditure procedures to ensure that stepped-up
public works spending is well directed to raise long-term
growth (and tax-raising) potential.