Download Fiscal Policy During and After the Crisis

Fiscal Policy
During and After the Crisis
Tiff Macklem
Associate Deputy Minister
G-7 Deputy for Canada
Finance Canada
Outline of Talk
• Role of fiscal policy in stabilizing the economy
• Impact of stimulus in Canada
• Aftermath – need for consolidation
• Canadian experience of mid-1990s
• Canada
Canada’s
s exit strategy
2
Role of Fiscal Policy in
Stabilizing the Economy
3
In addition to automatic stabilizers, large discretionary
stimulus measures were implemented in response to
the largest global recession since the 1930s
Discretionary Measures in 2009 and 2010, G7 countries
P centt off GDP
Per
5.0
4.0
3.0
2.0
10
1.0
0.0
Canada
Japan
USA
Germany
UK
France
Italy
Sources: IMF, The State of Public Finances Cross-country Fiscal Monitor, November 2009.
IMF estimates exclude loans, including those to the auto sector, for all countries. Figure for Canada includes provincial-territorial stimulus in
addition to that assumed in the Economic Action Plan as estimated by the Department of Finance Canada.
4
The effectiveness of fiscal policy in stabilizing the
economy
y depends
p
on several factors
Response of monetary authority
• Accommodation
• Zero-bound
Zero bound constraint
Degree of leakage (imports and savings)
Degree to which consumers are forward looking
Perceived fiscal position (sustainability)
Speed of implementation
5
Canada’s stimulus plan is “well-diversified and
structured for maximum effectiveness” IMF, May
y 2009
13%
Reducing
the Tax
Burden
15%
Employment
Insurance and
Training
Support for
R&D
9%
Infrastructure
and Housing
33%
Support for
Industries and
Communities
30%
A additional
An
dditi
l $200 billi
billion tto iimprove access tto fifinancing
i
Note: Figures do not include provincial, territorial or municipal leverage. Measures to support research and development include infrastructure
improvements to colleges and universities. Measures to support industries and communities include targeted reductions to corporate income tax
announced as part of the Economic Action Plan in Budget 2009.
Source: Budget 2010 – Canada’s Economic Action Plan, Year 2
Prudent fiscal multipliers were used in assessing the
impact
p
of the stimulus
Dollar impact (after 8 quarters) on the level of real GDP of a
one-dollar increase in fiscal measures
2.0
16
1.6
1.2
0.8
0.4
0.0
Measures for lowincome households and
the unemployed
Infrastructure/housing
investment
Personal income tax
measures
7
Design
g and situation suggest
gg
high
g effectiveness
• The sustainable fiscal situation,
situation the
composition of the stimulus and its rapid
implementation contributed to its effectiveness
• Widespread global actions limited import
leakages
• Fiscal policy should have led to crowding-in
effects with the policy interest rate essentially
at zero and with forward-looking agents
• See NBER Working Paper “When is the Government
S
Spending
di M
Multiplier
lti li L
Large?”
?” b
by Ch
Christiano,
i ti
Ei
Eichenbaum
h b
and Rebelo, October, 2009
8
Impacts of Fiscal
Stimulus in Canada
9
Areas targeted by the Economic Action Plan rebounded
strongly
g y following
g its implementation
p
Real Government Fixed Capital
Formation Growth
Real Final Domestic Demand
Growth
per cent, period to period at annual rates
per cent, period to period at annual rates
30
6
25
4
2
20
Average since 2000
0
15
-2
10
-4
5
-6
0
-8
2008 2008 2009 2009 2009 2009
Q3
Q4 Q1
Q2 Q3 Q4
Source: Statistics Canada.
2008 2008 2009 2009 2009 2009
Q3
Q4
Q1
Q2
Q3
Q4
Source: Statistics Canada.
10
Consumer and business confidence improved
p
markedly
y
Consumer Confidence
Business Confidence
index, 2002 = 100
index, 2002 = 100
110
105
100
95
90
85
80
75
70
65
60
55
50
110
105
100
95
90
85
80
Historical Average
Jan
Jan Jan Jan
Jan Jan
2005 2006 2007 2008 2009 2010
Source: The Conference Board of Canada.
75
Historical Average
70
65
2005 2006 2007 2008 2009 2010
Q1
Q1
Q1
Q1
Q1
Q1
Source: The Conference Board of Canada.
11
Model-based estimates suggest that the Action Plan has
had a significant
g
impact
p
on g
growth …
Real GDP Growth and the Economic Action Plan
per cent, period to period at annual rates
6
Actual Real GDP Growth
4
Real GDP Growth without EAP
2
0
-2
-4
-6
-8
2008
Q3
2008
Q4
2009
Q1
2009
Q2
2009
Q3
2009
Q4
Source: Budget 2010.
12
… and employment
p y
Employment Growth and the Economic Action Plan
per cent, period to period at annual rates
2
0
2
-2
-4
Actual Employment Growth
Employment Growth without EAP
-6
2008
Q3
2008
Q4
2009
Q1
2009
Q2
2009
Q3
2009
Q4
Source: Budget 2010.
13
Private demand has rebounded in Canada but remains
fragile
g
in most other G7 countries
Evolution of Real Private Final Domestic Demand1
Index, 2009Q1 = 100
103
102
US
JAP
UK
FRA
ITA*
CAN
GER
101
100
99
98
97
09Q1
1
09Q2
09Q3
09Q4
10Q1
Private consumption expenditures and private fixed investment.
* Italy does not publish separate estimates for private and public fixed investment. As a result, Italy’s private final domestic demand includes government fixed
investment.
Sources: Statistics Canada; U.S. Bureau of Economic Analysis; Cabinet Office; Office for National Statistics; Deutsche Bundesbank; Institut National de la Statistique et
des Études Economiques; Istituto Nazionale di Statistica; Department of Finance calculations.
14
Aftermath:
te at
The Need for Fiscal
C
Consolidation
lid i
15
Stimulus was appropriate and necessary, but there has
been a rapid
p deterioration in the fiscal situation
Total Government Net Debt, G7 Countries
per cent of GDP
160
2007
2010
2014
140
120
100
80
60
40
20
0
Canada
Germany
France
United States
United Kingdom
Italy
Japan
Source: IMF, World Economic Outlook (October 2009).
16
Gross debt in the G-7 now as high as in the early
1950s
G-7 Gross Government Debt, PPP weighted
per cent of GDP
120
100
80
60
40
20
0
1950
1960
1970
1980
1990
2000
2010
Source: IMF Calculations
17
Sharp rise in public debt is exposing governments with
weakest fiscal p
positions to rapidly
p y rising
g risk premia
p
General Government Gross
Financial Liabilities
Per cent of GDP
10-Year Spreads to Germany
basis points
700
160
140
120
600
Portugal
Italy
500
Ireland
Greece
Spain
100
400
80
300
60
Portugal
Italy
Ireland
Greece
Spain
40
20
200
100
0
1995
1998
2001
2004
2007
2010
0
Oct-09
Nov-09
Dec-09
Jan-10
Mar-10
Apr-10
Source: OECD
18
Most countries facing additional pressure from
population
p
p
aging
g g
Elderly (age 65+) as a Proportion of the 15-64 Population:
Expected
p
Changes
g from 2010 to 2030
percentage points
25
20
15
10
5
0
Europe
China
Italy
U.S.
France
Canada
Germany
Japan
Source: United Nations World Population Prospects 2008
19
Canadian Consolidation
Experience of the mid-1990s
20
Debt burden rose steadily
y for more than two decades
Net Debt
per cent of GDP
120
Federal
Provincial/Territorial
100
80
60
40
20
0
1970-71
1973-74
1976-77
1979-80
1982-83
1985-86
1988–89
1991–92
1994–95
Source: Canada and Provincial Public Accounts
21
Growing sense of crisis by mid-1990s provided the
impetus
p
for significant
g
action
1994 Mexican peso crisis
- Rapid depreciation of the Canadian dollar
- Demonstrated the vulnerability of high-debt nations
to international financial markets
WSJ Editorial: “Bankrupt
p Canada?” (January,
(
y
1995)
- “Honorary member of the third world”
- “Canada could hit the debt wall and have to call the
IMF”
22
The policy actions were very difficult and painful, but
led to the elimination of a large deficit in just four
years
Total Government
Program Spending
Total Government
Fiscal Balance
per cent of GDP
per cent of GDP
42
Peak to trough:
Total government
program spending
-9.6 p.p. of GDP
40
8
Budgetary Balance
6
Primaryy Balance
4
2
38
0
2
-2
36
-4
34
Peak to trough:
Total government
budgetary balance
+12.0 p.p. of GDP
-6
8
-8
32
-10
-12
30
1980
1984
1988
1992
1996
2000
2004
2008
1980
1984
1988
1992
1996
2000
2004
2008
Source: Statistics Canada.
23
Major 1998 reform to CPP/QPP also put the systems on
a sustainable p
path over the long
g run
CPP and QPP Contributions and Benefits
per cent of GDP
per cent of GDP
4
14
Cumulative Balance (right)
Contributions
Benefits
1998 Reform
raised contribution
rates by 70%
Actuarial
forecasts
12
3
10
8
2
6
4
1
2
0
0
1980
1983
1986
1989
1992
1995
1998
2001
2004
2007
2010
2013
Sources: Statistics Canada, OSFI Actuarial Report on Canada Pension Plan (2009); L'analyse actuarielle du
Régime de rentes du Québec (2007).
2016
2019
24
Large fiscal consolidation lowered growth temporarily in 1996,
but g
growth bounced back as credibility
y and confidence built up
p
Real GDP Growth in Canada and the United States
per cent
5
Canada
U.S.
4
3
2
1
0
1993
1994
1995
1996
1997
1998
Source: Statistics Canada, U.S. Bureau of Economic Analysis.
25
Lower debt service costs led to significant debt and tax
reductions
Per cent of GDP
Total Goverment Net Debt and Revenues
100%
46%
90%
44%
80%
70%
42%
60%
40%
50%
40%
38%
30%
20%
Net Debt ((left axis))
10%
Revenues (right axis)
0%
36%
34%
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008
Source: National Balance Sheet – Book Value
26
Lessons Learned from Canada’s Fiscal Consolidation of
the mid-1990s
1. Credible plans must be developed and communicated early
–
Measures well identified
–
Prudent economic assumptions
–
Under-promise/over-achieve
p
2. Initiate consolidation as soon as possible - don’t be too
gradual and allow monetary policy to play its
macrostabilization role
3. Focus on spending reductions and measures that will
increase potential growth
Wh t does
What
d
this
thi mean for
f the
th currentt situation?
it ti ?
27
Canada’s
Canada
s Exit Strategy
28
Budget 2009 implemented temporary stimulus and
early
y actions to secure sound long-run
g
fiscal p
position
Temporary Action Plan stimulus, concentrated in
2009 and 2010
Permanentt actions
P
ti
to
t maintain
i t i sound
d structural
t
t
l
finances:
• Reforms to Equalization to ensure sustainability
• Better managed federal compensation regime
• Reviews of departmental spending and
corporate assets
29
Budget 2010 builds on Budget 2009 early actions by
setting
g out a 3-point
p
plan to return to budget
p
g balance
• Follow through on the “exit”
exit strategy in the
Economic Action Plan by ensuring that
temporary stimulus is wound down by the
end
d off this
thi fiscal
fi
l year
• Targeted measures to restrain direct program
spending
di growth
th that
th t build
b ild over the
th medium
di
term
• C
Comprehensive
h
i review
i
off government
administrative functions and overhead costs
30
Budget
g 2010 track to return to balance
Projected Federal Budgetary Deficit
billions of dollars
60
Withdrawal of stimulus
y half
reduces deficit by
Impact of Budget 2010 Measures
50
40
30
20
10
0
2008-09
2009-10
2010-11
2011-12
2012-13
2013-14
2014-15
Source: Budget 2010.
31
Conclusion
ƒ
Fiscall policy
Fi
li has
h very different
diff
t impacts
i
t in
i normall and
d
exceptional economic circumstances
ƒ
Discretionary
Di
ti
stimulus
ti l actions
ti
taken
t k were necessary,
appropriate and worked
ƒ
Consolidating
C
lid ti in
i aftermath
ft
th off crisis
i i as important
i
t t as
stimulus actions
ƒ
Markets already demanding commitment to reduced
public debt and improve fiscal sustainability
ƒ
Lessons from Canadian experience
32
Fiscal Policy
During and After the Crisis
Tiff Macklem
Associate Deputy Minister
G-7 Deputy for Canada
Finance Canada