Chapter

I. The Near- and Medium-Term Fiscal Outlook.

Author(s):
International Monetary Fund. Fiscal Affairs Dept.
Published Date:
May 2010
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A. Outlook for 2010.

1. While global activity is rebounding faster than projected earlier, the fiscal outlook is not improving commensurately. The overall fiscal deficit for the world is projected to decline from 6.7 percent of GDP in 2009 to 6 percent of GDP in 2010 (Table 1). However, this improvement is smaller than anticipated in November 2009 despite an upward revision in World Economic Outlook (WEO) growth projections (by 1.1 percentage points). This reflects an underlying deterioration in cyclically adjusted (CA; see Glossary) balances across all country groups.

  • In most advanced economies, fiscal developments are still dominated by the need to boost aggregate demand. Improvements in overall fiscal balances in 2010 are limited to 0.4 percent of GDP. However, this mainly reflects a decline in financial sector support in the United States. Excluding this, overall balances worsen in the United States and in advanced economies as a group, with CA primary balances deteriorating by a further 0.6 percentage points (Table 2). This compares with a projected improvement at the time of the last Monitor and reflects further discretionary stimulus (Appendix 1), as well as underlying spending increases unrelated to the crisis. The deficit increase is large in Germany, where new stimulus has been added and tax revenues are weaker than anticipated, and in the United States, reflecting new stimulus of 1.1 percent of GDP and further increases in military spending (½ percent of GDP). However, CA primary balances are projected to strengthen in some countries: this includes countries that took early action—in some cases dictated by financial market pressures—to correct large fiscal imbalances (Greece, Iceland, Ireland, Spain); Korea, where the economic recovery is proceeding at a fast pace; and the United Kingdom, where revenues are stronger than expected.1 The weakening of advanced economy overall balances with respect to projections in November carries through to 2011.
  • Headline and CA deficits are declining in emerging economies, albeit by less than expected. Lower deficits reflect the faster recovery, normalization of trade, a rebound in asset prices, and the withdrawal of stimulus. Headline balances are projected to improve by 1 percentage point (1.2 percentage points in November), with significant corrections in emerging Europe—2 percentage points of GDP—resulting from efforts to reduce vulnerabilities. Stronger fiscal positions are projected in emerging Asia (by 0.4 percentage points) and Latin America (by 1.3 percentage points of GDP). CA primary fiscal balances are projected to improve by ½ percentage point, driven by gains in Brazil, India and Russia. This said, the average improvement for emerging economies is barely half that projected in November.
  • The fiscal outlook is also improving in low-income countries, albeit again less rapidly than projected earlier. Fiscal positions will improve by ½ percentage point of GDP. Commodity producers will show the most pronounced gains, on account of a pickup in both commodity prices and export volumes. Nevertheless, projected 2010 balances are 1½ percentage points weaker than in November, due to smoother adjustment paths in large sub-Saharan African countries (Senegal, Tanzania, and Uganda).
  • Overall balances in oil-producing countries are expected to recover significantly, boosted by higher oil prices. Deficits exceeding 3 percent of GDP are still projected in 11 countries where oil production is important, however, including Algeria, Ecuador, Kazakhstan, Sudan, Vietnam, and Yemen.2
Table 1.Fiscal Balances, 2007–15(In percent of PPP-weighted GDP)
Difference from

November 2009

Projections
20072009201020112015200920102011
Overall Balance
World−0.3−6.7−6.0−4.8−3.30.20.00.0
Advanced economies−1.1−8.8−8.4−6.7−4.70.3−0.1−0.3
G-7−2.1−10.0−9.5−7.6−5.40.2−0.4−0.5
Euro Area−0.6−6.4−6.9−6.2−4.10.20.1−0.1
Emerging economies0.0−4.9−3.9−3.0−2.30.30.10.2
Asia−0.7−4.9−4.5−3.5−2.80.50.60.8
Europe2.1−6.1−4.1−3.5−3.20.30.30.2
Latin America−1.2−3.8−2.5−2.5−1.40.5−0.1−0.4
Low-income economies−2.1−4.1−3.7−3.5−2.6−0.6−1.6−1.1
Oil producers2.2−4.8−2.4−2.0−1.9−0.3−0.30.1
G-20 economies−0.9−7.5−6.8−5.4−3.90.30.00.0
Advanced G-20 economies−1.7−9.4−8.9−7.1−4.90.3−0.2−0.3
Emerging G-20 economies0.3−4.8−3.7−2.9−2.50.40.40.4
Cyclically Adjusted Primary Balance 1/
Advanced economies0.1−4.3−4.8−3.5−1.5
Emerging economies1.7−2.0−1.5−0.9−0.7
G-20 economies0.8−3.4−3.7−2.6−1.2
Advanced G-20 economies0.0−4.4−5.2−3.7−1.5
Emerging G-20 economies2.0−2.0−1.6−0.9−0.8
Memorandum Item:
Advanced economies overall balance
(excluding financial sector support)−1.1−7.9−8.2−6.7−4.6−0.1−0.2−0.3
Source: April 2010 WEO, computed using fixed 2009 PPP GDP weights.

In percent of PPP-weighted potential GDP. Cyclically adjusted primary balances corresponding to these groupings were not reported in the November Monitor.

Source: April 2010 WEO, computed using fixed 2009 PPP GDP weights.

In percent of PPP-weighted potential GDP. Cyclically adjusted primary balances corresponding to these groupings were not reported in the November Monitor.

Table 2.Changes in Cyclically Adjusted Fiscal Indicators, 2007–11(In percent of PPP-weighted potential GDP)
Change 2010–2007Change 2010–2009Change 2011–2010
Cyclically adjusted primaryCyclically adjusted primaryCyclically adjusted primary
BalanceRevenueExpenditureBalanceRevenueExpenditureBalanceRevenueExpenditure
Advanced economies−5.0−2.32.7−0.6−0.10.51.30.8−0.5
Emerging economies−3.2−0.92.30.50.2−0.30.60.3−0.3
G-20 economies−4.5−1.72.8−0.30.00.31.10.7−0.5
G-20 advanced economies−5.1−2.22.9−0.8−0.10.71.40.9−0.5
G-20 emerging economies−3.6−1.02.60.50.1−0.30.70.4−0.4
Source: IMF staff estimates based on the April 2010 WEO and using country-specific revenue and expenditure elasticities where available, and standard elasticities elsewhere.
Source: IMF staff estimates based on the April 2010 WEO and using country-specific revenue and expenditure elasticities where available, and standard elasticities elsewhere.

B. Outlook for 2011–15

2. CA primary fiscal balances are expected to begin adjusting in advanced economies in 2011, with continuing consolidation in emerging economies (Figure 1). For advanced economies, this is due primarily to the projected nonrenewal of crisis-related fiscal stimulus. As the latter accounted for less than half of the overall deterioration of CA fiscal balances during 2007–10, now estimated at about 5 percentage points of GDP, CA deficits remain sizable in 2011. Other significant policy developments expected in 2011 include a reversal of 2001 tax cuts for high-income U.S. earners, along with a scaling back of itemized deductions, and a permanent personal income tax cut of about 1 percent of GDP in Germany envisaged as part of the coalition pact. In emerging economies, CA primary balances should continue to improve as large-scale, investment-related stimulus is expected to begin to be withdrawn (e.g., in China and South Africa).

Figure 1.Evolution of Fiscal Balances in Advanced and Emerging Economies, 2005–15

(In percent of GDP)

Source: April 2010 WEO.

3. Based on announced policy plans, a further improvement of CA primary balances of 2 percent of GDP is projected in advanced economies during 2012–15, although concrete measures are still to be identified in most countries (Table 3 and the Methodological and Statistical Annex). Even with this further adjustment, however, the deterioration during 2007–10 will not be fully reversed. For the world as a whole, overall deficits will remain 3 percentage points larger on average in 2015 than in 2007, in spite of the closing of output gaps. The persistence of deficits reflects permanent revenue losses, primarily from a steep decline in potential GDP during the crisis, but also due to the impact of lower asset prices and financial sector profits. Underlying spending pressures, particularly for health and pension outlays for aging populations, military spending, and higher interest expenditures (due to higher debt levels and interest rates), also contribute to the outcome. The deterioration with respect to precrisis levels in the overall balances will be worse among advanced economies (by 3½ percentage points) than emerging economies (2¼ percentage points). The worsening of fiscal balances and debt ratios varies considerably, particularly among emerging economies, with those in Eastern Europe the most affected (Figure 2).

Table 3.Changes in Cyclically Adjusted Fiscal Indicators, 2012–15(In percent of PPP-weighted potential GDP)
Change 2015–2012
Cyclically adjusted primary
BalanceRevenueExpenditure
Advanced economies2.01.4−0.6
Emerging economies0.20.60.4
G-20 economies1.31.2−0.1
G-20 advanced economies2.21.6−0.6
G-20 emerging economies0.10.70.6
Source: IMF staff estimates based on the April 2010 WEO, using country-specific revenue and expenditure elasticities where available, and standard elasticities elsewhere.
Source: IMF staff estimates based on the April 2010 WEO, using country-specific revenue and expenditure elasticities where available, and standard elasticities elsewhere.

Figure 2.Evolution of Gross Debt and Deficit Positions in Emerging and Advanced Economies, 2007–15

(In percent of GDP)

Source: IMF staff estimates based on the April 2010 WEO projections.

4. The average gross general government debt-to-GDP ratio for advanced economies is projected to rise from almost 91 percent at end-2009 to 110 percent in 2015, bringing the increase from pre-crisis levels to 37 percentage points (Figure 3). Among the G-7, the government debt-to-GDP ratio is rising to levels exceeding those prevailing in the aftermath of the Second World War (Figure 4). Box 1, focused on G-20 advanced economies, breaks down the increase during 2008–15 into crisis-related and other factors: most of the rise is due to protracted revenue weakness and the unfavorable interest rate-growth differential in 2008–09. The debt increase is largest in the United Kingdom and the United States, two countries strongly affected by the crisis, but is also significant in countries where growth prospects are weaker, such as Japan and some advanced European economies. On average, projections for net debt move broadly in line with those for gross debt (Box 2).

Figure 3.General Government Gross Debt Ratios

(In percent of GDP, 2009 PPP-GDP weighted average)

Source: IMF staff estimates based on the April 2010 WEO projections.

Figure 4.General Government Gross Debt in G-7 Economies, 1950-2015

(In percent of GDP)

Sources: Government debt database of the IMF’s Fiscal Affairs Department. Data refer to the general government, except for Japan (central government). They are drawn mainly from the IMF’s WEO database (2010–15 are projections), supplemented by the following: Canada (1950–60) - Federal Gross Government Debt (Haver Analytics); France (1950–77) - National Debt (Goodhart, 2002); Germany (1950–75) - Credit Market Debt and Loans (Statistisches Bundesamt Deutschland); Italy (1950–78) - National Government Debt (Banca d’Italia); Japan - Central Government Debt (Ministry of Finance of Japan) until 2009; subsequently, WEO projections for changes in the debt ratio; United Kingdom (1950–79) - National Debt (Goodhart, 1999); United States - Gross Federal Debt (Office of Management and Budget; and U.S. Census Bureau).

1/ Ratio of gross debt to household financial net worth for Canada, France, Italy, Japan, and the United States.

5. Public debt in advanced economies is also rising as a ratio of household financial wealth, following decades of relative stability. This ratio has fluctuated in a narrow range over the last 30 years for the large advanced economies for which sufficiently long time-series data are available (Figure 4 dotted line in top left-hand panel). This stability contrasts with the behavior of the government debt-to-GDP ratio, which has been on the rise since the 1970s, and reflects the fact that equity prices rose faster over the last few decades than did GDP. This suggests that, at the outset of the crisis, government debt may not have been “over-weight” in the portfolio of the private sector. Over the coming years, however, growth in household financial net worth is likely to be slowed by the effects of the crisis, while public debt will surge. As a result, public obligations will represent a larger share of private sector portfolios, with possible effects on interest rate differentials between public and private debt.

6. By contrast, in emerging economies, debt-to-GDP ratios are projected to resume a gradual decline in 2011. This is predicated on sustained growth and relatively low interest rates, as country-risk premiums and bond yields have fallen rapidly since the spike in risk aversion early in the crisis. Indeed, yields are projected to remain below the growth rate of GDP, while primary balances are expected to be in a small deficit during the forecast period. Weak primary balances are an element of vulnerability should the interest rate-growth differential turn out to be less favorable, particularly given that in many emerging economies, debt ratios have increased as a result of the crisis (Figure 5).

Figure 5.Emerging Economies: Distribution of Government Debt Ratios, 2007–10 1/

Source: IMF staff estimates.

1/ The figure displays the frequency distribution of the general government gross debt (in percent of GDP) for 41 emerging markets, in 2007 and 2010.

Box 1.Debt Dynamics in G-20 Economies: An Update

In advanced G-20 economies, the debt surge is driven mostly by the output collapse and the related revenue loss. Of the almost 39 percentage points of GDP increase in the debt ratio, about two-thirds is explained by revenue weakness and the fall in GDP during 2008-09 (which led to an unfavorable interest rate-growth differential during that period, in spite of falling interest rates; see pie chart below). The revenue weakness reflected the opening of the output gap, but also revenue losses from lower asset prices and financial sector profits. Fiscal stimulus—assuming it is withdrawn as expected—would account for only about one-tenth of the overall debt increase. This is somewhat more than the contribution of direct support to the financial sector. Finally, a fairly sizable component arises from lending operations in some countries—Canada, Korea, the United States—involving student loans, loans for consumer purchases of vehicles, and support to small and medium enterprises—arguably in response to the crisis. While structural spending pressures unrelated to the crisis are also projected to continue in the medium term, including for health and pensions, these are projected to be increasingly offset by measures from 2011 onwards.

In emerging G-20 economies, more favorable debt dynamics reflect stronger growth and lower deficits. Public debt in 2015 is projected to be almost 5 percentage points of GDP lower than before the crisis. Lower initial debt stocks will keep interest expenditures down, despite interest rates that are projected to be higher than in advanced economies throughout the period. Projected improvements in structural fiscal balances, reflecting unwinding of stimulus measures and structural fiscal consolidation, combined with the more contained impact of the crisis and smaller automatic stabilizers, account for the decline in the debt-to-GDP ratio until 2015, notwithstanding the contribution of other debt creating flows (e.g., valuation changes).

G-20 Advanced Economies: Increase in Public Debt, 2008–15

(Total increase: 39.1 percentage points of GDP; 2009 PPP weighted GDP)

Source: IMF staff estimates based on the April 2010 WEO.

Box 2.Gross versus Net Debt

Both net and gross debt are important indicators for fiscal analysis. It is generally agreed that gross debt is a better indicator of rollover risk. For assessing solvency risk or for examining, say, the impact of debt on growth or interest rates, however, the superiority of gross over net debt is less clear cut.

One advantage of focusing on gross debt for cross-country comparisons is that the definition of this variable is fairly consistent across countries. The definition of net debt is less uniform, due to different treatment of assets. Some countries do not report net debt; some (e.g., United Kingdom) report net debt regularly, netting out relatively liquid assets; and others use net debt as equivalent to (financial) net worth—netting out highly illiquid assets or assets for which divestment would require changes in key policies (e.g., equity in public enterprises) and are thus not effectively available to redeem debt. This said, gross debt also suffers from some reporting problems. For example, while most countries net out intra-governmental debt holdings, a few (such as Japan) do not.

Estimates of 2010 gross and net debt suggest that financial assets netted out against gross debt amount to about 20 percent of GDP on average for a broad sample of advanced economies, although with large cross-country variation.1 Looking ahead, projections of net debt levels over the medium term in this Monitor move broadly in line with gross debt projections on average, but with significant differences across countries.

1Excluding Japan because, as noted, assets include unconsolidated claims on government, as well as Norway because the large size of its oil-related assets is atypical for advanced economies.

7. In low-income economies, debt levels are also projected to begin declining by 2011–12. Low-income country debt fell to 36 percent of GDP, on average, prior to the crisis, reflecting both debt relief initiatives and sustained economic performance. Debt was mostly owed to external creditors with a high degree of concessionality. The debt-to-GDP ratio is projected to be about 4 percentage points higher in 2010 than before the crisis reflecting increased use of domestic sources to finance larger deficits. However, this deterioration is expected to taper off as growth resumes and budgetary conditions improve both in oil-producing countries (e.g., Bolivia) and in other low-income economies with low or medium debt distress risk (e.g., Cambodia, Ethiopia, Georgia, and Senegal). As such, debt vulnerabilities are likely to remain manageable if deficit reduction plans are successfully implemented (IMF, 2010e). However, risk of debt distress has increased or remains elevated in a few low-income countries (e.g., Eritrea, Guinea-Bissau, Myanmar, Sudan, and Zimbabwe).

C. Financial Sector Support and Recovery of Outlays3

8. The above projections assume no major additional outlays to support the financial sector and some recovery of previous disbursements. As economic and financial conditions continue to normalize, support to the financial sectors is being unwound. As of end-December 2009, advanced G-20 economies had pledged direct financial sector support for capital injections and purchase of assets with a potential cost of 6.2 percent of GDP (Table 4). However, the average amounts utilized remain well below pledged amounts, at an estimated 3.5 percent of GDP (Table 5). Similarly, the uptake of guarantees has been markedly lower than the amount offered. The amount of financial sector support pledged and used has been considerably lower in emerging economies than in advanced ones, as has the share of pledged support taken up. In both country groups, the low amount of support used reflects the precautionary nature of the initial pledges, overlaps in coverage of some measures, and the authorities’ success in stabilizing market conditions. Some programs are now expiring: in Canada, the Canadian Lenders Assurance Facility and the Canadian Life Insurers Facilities expired end-December 2009. In the United States, Citigroup terminated a loss-sharing agreement with the treasury, the Federal Deposit Insurance Corporation (FDIC), and the Federal Reserve in December 2009.

Table 4.Amounts Pledged or Utilized for Financial Sector Support

(In percent of 2009 GDP unless otherwise noted)1/

Capital InjectionPurchase of Assets and

Lending by Treasury 2/
Direct Support 3/Guarantees 4/Asset Swap and Purchase

of Financial Assets,

including Treasuries, by

Central Bank
(A)(B)(A+B)(C)(D)
PledgedUtilizedPledgedUtilizedPledgedPledgedPledged
Advanced Economies
Australia0.00.00.00.00.013.20.0
Canada0.00.09.14.49.10.00.0
France1.31.10.20.01.516.90.0
Germany3.41.20.03.73.417.20.0
Italy1.30.30.00.01.30.02.7
Japan2.50.14.10.16.67.20.0
Korea1.20.41.50.12.711.60.0
United Kingdom8.26.43.70.111.940.028.2
United States5.12.92.31.97.47.512.1
Emerging Economies
Argentina0.00.00.00.00.00.00.0
Brazil0.00.00.80.30.80.50.0
China0.00.00.00.00.00.00.0
India0.00.00.00.00.00.00.0
Indonesia0.00.00.00.00.00.00.0
Mexico0.00.00.00.00.00.00.0
Russia7.13.10.50.07.70.00.0
Saudi Arabia0.00.00.00.00.00.00.0
South Africa0.00.00.00.00.00.00.0
Turkey0.00.00.00.00.00.00.0
G-20 Average2.61.31.40.94.06.44.6
Advanced Economies3.82.02.41.46.210.97.7
In billions of US$1,2206397564611,9763,5302,400
Emerging Economies0.70.30.10.00.80.040.0
In billions of US$9038.4185.010870
Source: IMF staff estimates based on G-20 Survey.Note: GDP ratios are calculated in US$ converted at an average exchange rate during July 2008–December 2009.

Columns A, B, C, and D indicate announced or pledged amounts, and not actual uptake.

Excludes treasury funds provided in support of central bank operations.

Includes some elements that do not require upfront government financing.

Excludes deposit insurance provided by deposit insurance agencies.

Source: IMF staff estimates based on G-20 Survey.Note: GDP ratios are calculated in US$ converted at an average exchange rate during July 2008–December 2009.

Columns A, B, C, and D indicate announced or pledged amounts, and not actual uptake.

Excludes treasury funds provided in support of central bank operations.

Includes some elements that do not require upfront government financing.

Excludes deposit insurance provided by deposit insurance agencies.

9. Some asset recovery has begun. Estimates suggest a recovery of outlays so far in advanced economies amounting to 0.8 percent of GDP, implying a recovery rate to date of 22 percent (Table 5). While this is significantly lower than the average recovery rate in past crises in advanced economies (55 percent), historically most of the recovery has occurred over a period of five to seven years postcrisis. Recovery in 2009–10 has occurred mainly through the repurchase of shares and warrants, and via dividends, with the bulk accounted for by France, the United Kingdom, and the United States.4

Table 5.Recovery of Outlays and Net Cost of Financial Sector Support(as of end-December 2009; in percent of 2009 GDP unless otherwise noted)
Direct Support 1/RecoveryNet Direct Cost
PledgedUtilized
Advanced Economies
Australia0.00.00.1−0.1
Canada9.14.40.04.4
France1.51.10.80.3
Germany3.44.90.04.8
Italy1.30.30.00.3
Japan6.60.10.00.1
Korea2.70.50.40.1
United Kingdom11.96.61.15.4
United States7.44.91.33.6
G-20 Average4.02.20.41.7
Advanced Economies6.23.50.82.7
In billions of US$1,9761,100237862
Emerging Economies0.80.30.3
In billions of US$1084343
Source: IMF staff estimates based on G-20 Survey.

Capital injection and purchase of assets and lending by Treasury.

Source: IMF staff estimates based on G-20 Survey.

Capital injection and purchase of assets and lending by Treasury.

10. Altogether, the direct budgetary cost of financial sector support (in percent of GDP) may turn out to be below historical norms for previous systemic crises. Taking into account asset recovery through end-2009, the net cost of direct support in advanced G-20 economies is estimated at 2.7 percent of GDP. Given the gradual cost recovery in past crises, the medium-term net cost is likely to be even lower, including in countries at the center of the financial crisis, and well below historical norms of 8 percent of GDP.

11. To further reduce the final costs of direct support and possibly recover some of the indirect costs of the crisis, some countries have adopted or proposed special levies on the financial sector. Examples include a “financial crisis responsibility fee” proposed in the United States, and temporary taxes on bonuses adopted in France and the United Kingdom (both pure tax instruments). In addition, some countries are setting in place mechanisms to pre-fund the cost of possible future crises. These include a bank levy proposed in Germany, a dissolution fund in the United States, and a “financial stability fund” introduced in Sweden (all linked to financial-sector resolution schemes) (Box 3). In this context, the IMF was asked by the G-20 heads of state to prepare a report for their June 2010 meeting regarding the range of options countries have adopted or are considering as to how the financial sector could make a fair and substantial contribution toward paying for any burden sharing associated with governmental intervention to repair the banking system. A preliminary version of this report was forwarded to the G-20 ministers of finance in April 2010.5

Box 3.Measures to Finance the Cost of Financial Sector Support

Actual and proposed steps to recover the costs of the current crisis include:

The United States Financial Crisis Responsibility Fee (FCRF). In January 2010, the United States government announced that it would seek to impose a 0.15 percent tax on the uninsured liabilities—defined as total assets net of tier I capital and insured deposits—of large financial institutions. The government estimates that the FCRF will raise additional revenue of US$90 billion during 2011–20, and it intends to impose the FCRF until the Troubled Asset Relief Program is fully paid off. U.S corporations will be taxed on their worldwide consolidated assets, while foreign entities in the U.S market will be taxed based only on their U.S. assets.

The United Kingdom Bank Payroll Tax (BPT). The United Kingdom government introduced a tax on bonuses paid to bank employees, effective from December 9, 2009 to April 5, 2010, to address “remuneration practices that contributed to excessive risk-taking by the United Kingdom banking industry” and “encourage banks to consider their capital position and to make appropriate risk-adjustments when settling the level of bonus payments.” The BPT applies to all bonus payments in excess of £25,000 made by banks and building societies to their employees. The BPT expired on April 5, 2010. The U.K. Treasury originally forecast that the BPT would raise £550 million in revenue, but more recent information indicates that the tax could bring in around £2.5 billion.

The Bonus Tax in France. The French government has implemented a temporary tax on bonuses granted in 2009 by banks and other financial institutions (excluding insurance and portfolio management companies). Employers in France will be liable for the tax in respect of relevant employees whose activities may significantly affect the risk exposure of their companies and those who have control over the enterprises. The tax is levied at 50 percent on bonuses in excess of €27,500, and is deductible against corporate income tax. The tax was projected to yield €362.5 million.

Steps to prefund the cost of support that may be provided in future crises include:

The United States Systemic Dissolution Fund (SDF). The United States House Financial Services Committee approved a measure that would set up the SDF within the treasury (managed by the FDIC) to finance the orderly dissolution of a given financial company as needed. Financial firms with more than US$50 billion in assets and hedge funds with more than US$10 billion in assets will be covered by the SDF. Covered institutions will be subject to a periodic assessment, which they will pay on a continuous basis. The fee will be accumulated in the SDF up to a certain level (the target has yet to be determined within the legislative maximum of US$150 billion), and once the target is reached, the fee will be paid to general revenues.

The Bank Levy in Germany. In March 2010, the German government announced plans to introduce a systemic risk-adjusted bank levy to mitigate the negative externalities associated with systemic risks. Systemic risk will be determined, among other considerations, on the basis of the size of bank’s liabilities excluding capital and deposits and its interconnectedness with other financial market participants. The levy is to be paid into a stability fund that will be used to finance a special resolution regime for systemically relevant banks. The fund and the special resolution regime will be entrusted to the Federal Agency for Financial Market Stabilization. The size of the fund is yet to be determined.

The Swedish Financial Stability Fund (SFSF). The SFSF was introduced as the financing vehicle of four instruments available to the Swedish government to protect financial stability: bank guarantees, capital injections, emergency support, and deposit insurance. The SFSF covers deposit-taking institutions incorporated in Sweden, with a target size of 2.5 percent of GDP in 15 years. The SFSF is supported by an unlimited government back stop, and it is expected to merge with the deposit insurance fund in 2011. Covered institutions pay a flat-rate fee levied on a portion of their balance sheets: total assets net of equity capital, junior debt securities included in the capital base, debt transactions between companies paying stability fees, and an average of the guaranteed liabilities. The fee rate is 0.036 percent, payable annually, but transition rules allowed banks to pay only 50 percent of the prescribed rate for 2009–2010. The fee will be risk-based from 2011, but no details are available about how risk weighting will be implemented and how it will be merged with the deposit insurance fee.

D. Risks to the Fiscal Outlook

12. There are significant downside and upside risks around the fiscal projections:6

  • For advanced economies, one key downside risk is that the build-up of public debt leads to a less favorable interest rate-growth differential than assumed in the baseline. That differential averaged about 1 percentage point for advanced economies in the last two decades, although it was significantly lower in the run-up to the crisis (Escolano, 2010). During 2010–15, however, the differential is expected to average close to zero for the advanced economies, primarily for cyclical reasons.7 A clear risk is upward pressure on interest rates triggered, for example, by insufficiently credible adjustment plans. This could have a significant impact on debt developments, both directly and indirectly, as higher interest rates could weigh on growth (Section III). On the upside, revenues could recover faster than expected over the medium term: a large part of the deterioration of CA fiscal balances over the medium term reflects the expectation that the crisis caused a steep and sizable decline in potential output (on the order of 7 to 8 percent). Over the medium term, the revenue shortfall may be smaller, however, if the estimated loss in potential output proves overstated. There are also policy implementation risks: as noted, the above baseline already includes some fiscal adjustment, particularly in 2011–12. On the one hand, implementation of these policies may lag. On the other, countries may choose to implement additional measures beyond what is assumed in the baseline.
  • A less favorable interest rate-growth differential is also a key source of risk for emerging economies. As noted, the projected decline in debt ratios in the latter assumes a negative interest rate-growth differential, which offsets the continued primary deficit. Should developments be less accommodating—including because deteriorating public finances in advanced economies could lead to higher global interest rates and a lower growth rate—public debt ratios in emerging economies could start rising again.
  • Low-income economies face risks of spillovers from weaker fiscal outlooks in advanced economies, as in the case of emerging economies. In addition, the weaker fiscal outlook in donor countries could lead to lower donor support than assumed in the projections. More generally, the scaling-up of resources agreed in Gleneagles may not fully materialize, given the fiscal deterioration in advanced economies.
1On May 10, Portugal and Spain announced that they would undertake additional deficit reduction measures. The impact of these measures is not reflected in the Monitor’s fiscal projections.
2Five of these 11 countries—Algeria, Ecuador, Gabon, Kazakhstan, and Russia—ran surpluses in 2007.
3This section revises estimates of pledged and actual outlays in support of the financial sector included in the previous Monitors, following a survey of the G-20 economies. Among other things, the classification of some support measures was revised to better reflect their effect on the government balance sheet (e.g., subordinated loans that raise bank capital are now classified as recapitalization, rather than lending or liquidity support).
4Support arrangements were structured so that at least part of the direct cost of financial sector support could be recouped over time. For example, recoveries related to recapitalization also reflect dividends, and the sale of warrants; and fees were received for the provision of guarantees and for deposit insurance funds.
6The focus of this paragraph is on risks relating directly to the fiscal projections. Of course, any risk surrounding the macroeconomic WEO projections, as well as risks arising from the financial sector, would have implications for the fiscal accounts.
7The interest rate considered here is the implicit interest rate on government debt, computed as interest payments over the average debt stock.

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