Download Fernández Arias

Grading Fiscal Policy
in the Last Decade
Eduardo Fernández-Arias
Research Department
Regional Seminar on Fiscal Policy
ECLAC
Santiago de Chile, March 2013
http://www.iadb.org
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GRADING FISCAL POLICY OVER THE DECADE
OUTLINE
I.
OVERALL, SATISFACTORY FISCAL
REVENUE MANAGEMENT OVER THE
DECADE…
II. ….BUT HEALTHY FISCAL SPENDING
STANCE DETERIORATED AFTER GLOBAL
CRISIS
III. HOW TO IMPROVE THE CURRENT “B”
GRADE TO AN “A” GRADE INSTEAD OF
RISKING IT FALLING TO AN “F” GRADE?
I. SATISFACTORY FISCAL REVENUE
MANAGEMENT OVER THE DECADE
Estimation methods for structural and temporary
fiscal revenues
• Temporary revenue is the sum of temporary:
GDP-linked revenue (tax on output gap) and
Commodity-linked revenue (temporary price effect)
• GDP-linked based on:
– Trend or Structural GDP (HP filter, real time)
• Commodity-linked based on:
– HP-filtered commodity revenues (like Chile)
– Trend or Structural Prices (5-year real-time
forecast prices) (MORE LATER)
Assessing prudent fiscal revenue management
(1)
• KEY QUESTION FOR CYCLICAL REVENUE: To
what extent are temporary revenues saved or
spent?
• More specifically, to what degree does spending
move with temporary revenues:
– In good times (TR>0)
– In bad times (TR<0)
• KEY QUESTION FOR STRUCTURAL REVENUE:
To what extent are structural revenues spent?
Assessing prudent fiscal revenue management
(2)
• Prudent/sustainable management of cyclical
revenue requires symmetry: spending out of
TR equal (or lower) in good times.
• Efficient management would further require
zero spending out of TR (cyclically stable
spending).
• Prudent/sustainable management of
(increasing) structural revenue requires unitary
(or fractional) marginal spending impact.
Revenues and Spending over a decade:
comovements difficult to assess visually
1) For TR, favorable symmetry and low
spending leakage; 2) For SR, some savings
margin
The special case of commodity exporting countries
experiencing massive changes in structural and
temporary revenues is also satisfactory
Commodity revenues are large and volatile;
structural rose by 40% while temporary fell!
Commodity Linked Revenues
12
3
11
2.5
10
2
9
1.5
8
7
1
6
0.5
5
0
4
-0.5
3
-1
2
Structural
Total
Temporary
Source: LMW, Author's calculations.
2011q2
2011q1
2010q4
2010q3
2010q2
2010q1
2009q4
2009q3
2009q2
2009q1
2008q4
-2
2008q3
0
2008q2
-1.5
2008q1
1
2007q4
Total and Structural Revenues (% of Structural GDP)
Typical LAC Commodity Exporter
Spending reaction difficult to assess visually…
…but regression confirms overall satisfactory
findings for this grouping (LAC-CM)
II. HEALTHY FISCAL SPENDING STANCE
DETERIORATED AFTER THE GLOBAL CRISIS
Prudent/sustainable fiscal policy also depends
on prudent autonomous spending policy
• Increasing underlying autonomous spending
trends (unrelated to revenues) may over time
lead to fiscal unsustainability
• Even if trends are not dynamically unfavorable,
underlying autonomous spending levels may be
already too high for fiscal sustainability
• Basic measure: level and trend of structural
balance (leaving out temporary revenues from
observed balance).
Split regression suggests a substantial regime
change in autonomous spending after 2007
(jump in intercepts)
Time series show improving structural balance
and then a strong countercylical response to
Global Crisis that lingers on
Better sustainability measure: Neutral structural
balance (adjusting for temporary revenue impact
to estimate structural balance at zero TR)
Interestingly, commodity exporters exhibit
better structural balance trends…
…but similarly worrisome neutral structural
balance trends
Current level of spending may be unsustainable
• Fiscal sustainability analysis based on observed
and required structural primary balance
presented last year indicated that:
• Current sustainability uniformly lower than prior
to Global Crisis
• Many countries with measurable unsustainability
risk (required structural adjustment gap above 1
% of GDP)
III. HOW TO IMPROVE THE CURRENT “B”
GRADE TO AN “A” GRADE INSTEAD OF
RISKING IT FALLING TO AN “F” GRADE
Spending expansion holds and continues today
Primary Expenditure (% of Potential GDP)
31.00%
29.00%
27.00%
25.00%
23.00%
21.00%
Typical LAC
Typical Commodity Exporter
Source: LMW, IMF (WEO), Ministries of Finance and Authors' Calculations.
Incomplete retirement of successful
countercyclical package in Global Recession as
recovery took hold may lead to an “F” grade
• Low sustainability assessment based on current
SB is optimistic in that it implicitly assumes that
negative regime change is a one-off shock
• It may be more realistic for markets to infer that
recent SB deterioration reveals a pattern of
ratcheting up expansion, dynamically
unsustainable
• Extraordinary low levels of world interest rates
and consequently low spreads and yields may be
hiding it for now.
For commodity exporters, current trends and
future uncertainties entail special risks:
• Commodity prices are highly volatile and fiscal
revenues are dependent on them; no room for
error
• Commodity prices expected to fall over the next
5 years according to WEO (20% real terms)
• Decade average is some 25% below current
price (prudent structural forecast in the spirit of
Chile’s)
• Estimation of structural prices is unreliable, a
strong reason for caution
• Non-renewability is another reason for structural
revenue risk
2002-Dec
2003-Mar
2003-Jun
2003-Sep
2003-Dec
2004-Mar
2004-Jun
2004-Sep
2004-Dec
2005-Mar
2005-Jun
2005-Sep
2005-Dec
2006-Mar
2006-Jun
2006-Sep
2006-Dec
2007-Mar
2007-Jun
2007-Sep
2007-Dec
2008-Mar
2008-Jun
2008-Sep
2008-Dec
2009-Mar
2009-Jun
2009-Sep
2009-Dec
2010-Mar
2010-Jun
2010-Sep
2010-Dec
2011-Mar
2011-Jun
2011-Sep
2011-Dec
2012-Mar
2012-Jun
2012-Sep
2012-Dec
Comm Price Index (2005=100)
150
29.00%
130
27.00%
110
25.00%
90
23.00%
70
50
21.00%
Comm Price Index
Source: LMW, IMF (WEO), Ministries of Finance and Authors' Calculations.
Fiscal Revenues
Fiscal Revenues (% of Potential GDP)
Real Commodity Prices and Fiscal Revenues
Typical Commodity Exporter
190
31.00%
170
Real Commodity Price Index (2005=100)
For Typical Commodity Exporter
180
170
160
150
140
130
120
2012
2013
Source: IMF (WEO Projections) and Authors' Calculations.
2014
2015
2016
2017
2000-Mar
2000-Jun
2000-Sep
2000-Dec
2001-Mar
2001-Jun
2001-Sep
2001-Dec
2002-Mar
2002-Jun
2002-Sep
2002-Dec
2003-Mar
2003-Jun
2003-Sep
2003-Dec
2004-Mar
2004-Jun
2004-Sep
2004-Dec
2005-Mar
2005-Jun
2005-Sep
2005-Dec
2006-Mar
2006-Jun
2006-Sep
2006-Dec
2007-Mar
2007-Jun
2007-Sep
2007-Dec
2008-Mar
2008-Jun
2008-Sep
2008-Dec
2009-Mar
2009-Jun
2009-Sep
2009-Dec
2010-Mar
2010-Jun
2010-Sep
2010-Dec
2011-Mar
2011-Jun
2011-Sep
2011-Dec
2012-Mar
2012-Jun
2012-Sep
2012-Dec
Real Commodity Prices Index (2005=100) - Fiscal Shares
For Typical Commodity Exporter
190
170
150
130
110
90
70
50
30
Comm Price Index
Source: IMF and Author's Calculations
10-year MA
Estimated Impact in Total Revenues as % of Potential GDP as result of a 25%
decline in Real Commodity Prices
Ecuador
Bolivia
Trinidad and Tobago
Venezuela
Mexico
Chile
Peru
Argentina
Colombia
-4.50%
-4.00%
-3.50%
-3.00%
-2.50%
Source: Ministries of Finance and Authors' Calculations.
-2.00%
-1.50%
-1.00%
-0.50%
0.00%
A fiscal agenda towards an “A” grade (while
preparing for action given low growth prospects
and global downside risks):
• First and foremost, normalize fiscal structural
balance where needed as soon as practical
• Credibly establish fiscal framework under
principles of sound structural budget objectives
and the use of (self-reversed) automatic
stabilizers
• Prepare fiscal measures and projects that are
fast to launch, have high multiplier effect, are
temporary or easily reversible, economize in
fiscal space. Infrastructure maintenance and
investment may fill these requirements.