Fiscal Policy in. Current Readiness. Eduardo Fernández-Arias. (Personal views) Seminario CEPAL de Pol itica Fiscal Santiago de Chile, enero 2012

Transcription

1 Fiscal Policy in Downturns: Recent Experience and Current Readiness Eduardo Fernández-Arias Research Department (Personal views) Seminario CEPAL de Pol itica Fiscal Santiago de Chile, enero 2012

2 OUTLINE (Work in progress) I. FISCAL PERFORMANCE IN GOOD TIMES II. (Better than I thought) COUNTERCYCLICAL FISCAL POLICY IN DOWNTURNS 1. Recent Experience (Good but ) 2. Current Readiness (Not as good) 3. Policy Opportunities

3 I. FISCAL PERFORMANCE IN GOOD TIMES Between 2002 and 2007, temporary fiscal revenues grew constantly. Temporary revenue is the sum of temporary: GDP-linked revenue (tax on output gap) and Commodity-linked revenue (temporary price effect) Analysis for: Typical LAC country (average of sample of 18) Typical LAC7 country LAC region (aggregate) g

4 Estimation methods for structural and temporary GDP-linked based on: Trend or Structural GDP (HP quarterly data) Unit marginal tax revenue elasticity Commodity-linked based on: HP-filtered commodity revenues mimicking Chilean method Trend or Structural Prices (5-year real-time forecast prices) (MORE LATER)

5 Assessing fiscal discipline in normal times Temporary Revenues (TR) are the difference of Observed Primary Balance (B) and Structural Primary Balance (SB) Key question: Are changes in TR (positive in this period) saved or spent? If saved, SB constant and B increasing If spent, SB decreasing and B constant (Oversaving and overspending would result from behaviour wrt use of structural revenues)

6 Typical country: Oversaving first Full Saving later 4 Observed and Structural Primary Balance Typical LAC Country 3,5 3 2,5 2 1,5 1 0,5 2002q4 2003q1 2003q2 2003q3 2003q4 2004q1 2004q2 2004q3 2004q4 2005q1 2005q2 2005q3 2005q4 2006q1 2006q2 2006q3 2006q4 2007q1 2007q2 2007q3 2007q4 Pi Primary Balance Structural t Primary Balance

7 Typical LAC7: Oversave first Partial saving later 4,5 Observed and Structural Primary Balance Typical LAC-7 Country 4 3, ,5 2 1, q4 2003q1 2003q2 2003q3 2003q4 2004q1 2004q2 2004q3 2004q4 2005q1 2005q2 2005q3 2005q4 2006q1 2006q2 2006q3 2006q4 2007q1 2007q2 2007q3 2007q4 Pi Primary Balance Structural t Primary Balance

8 Region Aggregate: Oversave first Full spending later 4,5 Observed and Structural Primary Balance Aggregate LAC 4 3,5 3 2,5 2 1,5 2007q1 2002q4 2003q1 2003q2 2003q3 2003q4 2004q1 2004q2 2004q3 2004q4 2005q1 2005q2 2005q3 2005q4 2006q1 2006q2 2006q3 2006q4 2007q2 2007q3 2007q4 Pi Primary Balance Structural t Primary Balance

9 Commodity exporters did not spend their temporary price bonanza! 5,5 Observed and Structural Primary Balance Typical LAC Commodity Exporter 5 4,5 4 3,5 3 2,5 2 1,5 1 0,5 2002q4 2003q1 2003q2 2003q3 2003q4 2004q1 2004q2 2004q3 2004q4 2005q1 2005q2 2005q3 2005q4 2006q1 2006q2 2006q3 2006q4 2007q1 2007q2 2007q3 2007q4 Pi Primary Balance Structural t Primary Balance

10 II. COUNTERCYCLICAL FISCAL POLICY IN DOWNTURNS 1. Recent Experience (2008 onwards) 2. Current Readiness (to confront another downturn with countercyclical fiscal policy) 3. Policy Opportunities (to make the best of it)

11 RECENT EXPERIENCE (2008 onwards) A successful expansive fiscal response to the Great Recession (2008/09) but slow fiscal retrenchment afterwards

12 In 2008/09, growth slowed, revenues fell even as %GDP and dbalance plummeted d4 points Revenue es (% of GDP) GDP Growth, Revenues, and Primary Balance Typical LAC Country nce (% of GDP P) and GDP Gr rowth (%) Bala 2007q4 2008q1 2008q2 2008q3 2008q4 2009q1 2009q2 Revenues Growth Pi Primary Balance 2009q3 2009q4 2010q1 2010q2 2010q3 2010q4 2011q1 2011q2 Source: LMW, Author's calculations.

13 and then recover to some extent starting in 2010 ( st. Semester preliminary) i GDP Growth, Revenues, and Primary Balance Typical LAC Country Revenues (% of GDP) q4 2008q1 2008q2 2008q3 2008q4 2009q1 2009q2 Revenues Growth Primary Balance 2009q3 2009q4 2010q1 Source: LMW, Author's calculations. 2010q2 2010q3 2010q4 2011q1 2011q nd GDP Grow wth (%) Balance (% of GDP) a

14 However fiscal policy analysis requires structural fiscal measures (as % of structural t GDP) Structural measures reveal fiscal stance and fiscal sustainability; temporary fiscal effects even out over time Acyclical fiscal policy means that the structural primary balance is constant (delinked from TR) Countercyclical fiscal policy means the SB more than offsets the effect of TR (in a downturn, even more spending than normal)

15 Two estimation methods for structural commodity revenues are similar; il we take the average 11 Structural Commodity-linked Revenues Typical LAC Commodity Exporter 10 9 Revenu ues (% of GDP P) q4 2008q1 2008q2 2008q3 2008q4 2009q1 2009q2 2009q3 2009q4 Structural Revenues- Revenue Method Structural Revenues - Price Method 2010q1 2010q2 2010q3 2010q4 2011q1 Source: LMW, Author's calculations.

16 In our region, commodity revenues are large and volatile; structural t raises and then flattens To tal and Struct ural Revenues (% of Structu ural GDP) q4 2008q1 2008q2 2008q3 Commodity Linked Revenues Typical LAC Commodity Exporter 2008q4 2009q1 2009q2 Structural Total Temporary 2009q3 2009q4 2010q1 Source: LMW, Author's calculations. 2010q2 2010q3 2010q4 2011q1 2011q2 3 2,5 2 1,5 1 0,5 0-0,5-1 -1,5-2

17 By contrast, structural GDP-linked revenue falls and dthen recovers GDP-linked Revenues Typical LAC Country (% of Structu ural GDP) ,6 0,4 0,2 0 Tota al and Structu ural Revenues q4 2008q1 2008q2 2008q3 2008q4 2009q1 2009q2 Total Structural Temporary 2009q3 2009q4 2010q1 Source: LMW, Author's calculations. 2010q2 2010q3 2010q4 2011q1 2011q2-0,2-0,4-0,6

18 Countercyclical fiscal policy of 1.5 pp included a 2 pp spending stimulus; it was widespread d 25 Primary Spending and Structural Balance Typical LAC Country 2,5 Prim ary Spendig (% of Strcutura al GDP) ,3 21 2,1 1,9 1,7 1,5 1,3 1,1 0,9 0,7 0,5 Structura al GDP (% of Structural GDP P) q q q q q q q q3 Primary Spending Structural Balance q q1 Source: LMW, Author's calculations q q q q q2

19 6 Structural Balance and Spending PAN al Balance (% of Structu ural GDP) Reduction in Structur DOM 4 NIC 2 BLZ CRI SLV URY PER T. LAC CHL COL T. LAC7 PRY T. LAC Cdty. BRA BHS A. LAC ARG VEN MEX BOL ECU -6 Increase in Spending (% of Structural GDP)

20 Fiscal package was actually more complex Stimulus package of 2.4 pp: Spending stimulus 2 pp Tax reduction 0.4 pp But translated into a fiscal impulse of only 1.5 pp because structural commodity revenue increased by 0.9 pp Structural increased as temporary fell Long-term forecast prices increased by 40%

21 Successful package as recommended by Fernandez-Arias Ai and dmontiel? l?yes, but Macroeconomic Space satisfied (evidence points to useful demand booster; efficiency gain) and Financing Space turned out well (ample official support and reserves) But Fiscal Space not that clear ex-post: Fiscal stimulus was not retired as recovery took hold If expansion becomes entrenched, cost of fiscal sustainability (higher borrowing costs, future fiscal adjustment or debt restructuring) may dominate macroeconomic space.

22 Spending was not retired and structural balance did not bounce back; also widespread d Primary Spending and Structural Balance Typical LAC Country 25 2,5 2,3 Structural GDP) 24 2,1 1,9 1,7 1,5 Structural GDP (% of (% of Strcutural GDP) ,3 1,1 0,9 0,7 Primary Spendig 0,5 2007q4 2008q1 2008q2 2008q3 2008q4 2009q1 2009q2 2009q3 2009q4 2010q1 2010q2 2010q3 2010q4 2011q1 2011q2 Primary Spending Structural Balance Source: LMW, Author's calculations.

23 Reduction in Structur ral Balance (% of Strucu utra GDP)l Structural Balance and Spending PAN 8 CRI ECU 6 4 PRY PER BHS CHL DOM T. LAC COL 2 SLV NIC URY T. LAC7 A. T. LAC LAC ARG Cdty. BRA MEX BLZ 0 VEN BOL Increase in Spending (% of Structural GDP)

24 CURRENT READINESS (to confront another downturn with countercyclical fiscal policy) Not as good as in 2007 and somewhat risky for many countries

25 Structural sustainability model to assess readiness Sustainability requires that the expected primary balance equal the interest rate on rolling over structural debt net of growth: b* = d (r-g) Taking current SB as a fair measure of expected balance, the required adjustment b*-sb is an indicator of fiscal space (readiness) In four years (r-g) is about the same and d is about the same on average (NEXT): evolution is driven by deteriorating SB

26 60 Structural debt (not raw) ceased to decline and actually marginally increased on average Structural Public Debt (% of Structural GDP) Typical LAC Country Source: LMW, Author's calculations.

27 Argentina Panama Paraguay Ecuador Peru Nicaragua Belize Uruguay Venezuela Typical LAC Cmdty. exporter Typical LAC-7 Typical LAC Country Brazil Costa Rica Aggr. LAC Colombia Bolivia Chile El Salvador Domrep Mexico Bahamas Change in Structural Public Debt : A Mixed Bunch

28 Almost all countries had more fiscal space in 2007 Required Adjustment for Sustainability 6 4 n 2007 Required SAdjustment i BOL 2 VEN 0 PER BLZ ARG COL DOM CRI PRY -2 ECU NIC SLV CHL -4 URY -6 Required Adjustment in 2010 BRA MEX PAN BHS

29 Almost all countries are less ready now Readiness Relative to 2007 Chile Costa Rica Panama Dominican Republic Ecuador Colombia Peru El Salvador Paraguay Mexico Bahamas Venezuela Belize e Nicaragua Brazil Uruguay Argentina Bolivia Lower Higher

30 How ready are countries as measured by required fiscal adjustment? t? It depends d Measuring readiness in this metric: Low (more than 1 pp of required adjustment) High (less than -1 pp of required adjustment, that is far from needing adjustment) Intermediate (around the threshold) But is current SB a fair indicator of fiscal stance? Optimistic: SB would have bounced back to 2007; shock is persistent and window was too brief Pessimistic: SB deterioration reveals a pattern of ratcheting ti up expansion (social spending?)

31 Degree of Readiness Scenario Optimistic Central Pessimistic Lo ower Interm mediate Higher Bahamas Brazil Mexico Venezuela Uruguay Peru Belize Colombia Dominican Republic Costa Rica Argentina Paraguay Ecuador El Salvador Nicaragua Chile Bolivia Panama Costa Rica Bahamas Colombia Panama Mexico Brazil Peru Dominican Republic Ecuador Uruguay Venezuela Chile Paraguay Belize El Salvador Argentina Nicaragua Bolivia Costa Rica Panama Colombia Bahamas Ecuador Chile Dominican Republic Peru Mexico Brazil Paraguay Uruguay El Salvador Venezuela Belize Argentina Nicaragua Bolivia

32 POLICY OPPORTUNITIES Under the new threats, too late for retrenchment At the same time, where credibility of countercyclical fiscal policy was harmed it should be repaired Fiscal space is limited. In a repeat, countries with fiscal space should implement well-designed fiscal stimulus packages that are easily reversible and retire them in due course Complementary, perfect time for considering fiscal institutional reform to facilitate efficient and credible fiscal policy in a structural t framework