Marco Cangiano, Assistant Director, Head of the Public Financial Management Division International Monetary Fund - IFAC Sovereign Debt Seminar Presentation
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Marco Cangiano, Assistant Director, Head of the Public Financial Management Division International Monetary Fund - IFAC Sovereign Debt Seminar Presentation
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Marco Cangiano, Assistant Director, Head of the Public Financial Management Division International Monetary Fund - IFAC Sovereign Debt Seminar Presentation
- 1. Fiscal Sustainability Marco Cangiano Fiscal Affairs Department International Monetary Fund The Sovereign Debt Crisis, a Matter of Urgency From Lessons to Reform IFAC Vienna, March 19-20, 2012 1
- 2. Outline • Fiscal Sustainability • Solvency versus Sustainability • Required Fiscal Adjustment • Moves to a broader assessment of sustainability • Institutional needs to deliver sustainable fiscal policy 2
- 3. Fiscal and Debt Sustainability • Two inter-related concepts whose analysis is a complex and multifaceted exercise. • Elements to assess fiscal sustainability: – Level, composition and rollover of public debt – Size of primary balance: now and into the future – Cost of future policy commitments • Fiscal policy can be regarded as unsustainable if in the absence of realistic adjustment, the government would not be able to service its debt in the future. • Assessing what is a realistic adjustment – both economically and politically – requires a broad 3 assessment.
- 4. Solvency vs Liquidity vs Sustainability • Often confused and confusing concepts • Solvency: Are assets (including future income streams) sufficient to cover liabilities (including future expenditure commitments)? • Liquidity: Are liquid assets and available financing sufficient to rollover debt falling due? – Market perceptions matter • Long-term Sustainability: Does the long-term current fiscal path meet the solvency and liquidity conditions? 4
- 5. Debt Sustainability Analysis • Medium-term economic and fiscal projections, with standardized shocks to assess trajectory of public debt. • Key identity: what is needed to stabilize debt (i.e. rule out explosive growth): Debt stabilizing primary balance = (real interest rate – real GDP growth)*current debt level • The higher the debt, all else equal, the larger the primary surplus needed to sustain it. • But GDP growth is key: the higher the growth, the lower need be the primary surplus. – Given the same interest rates and debt levels, a higher growth economy can run a lower primary surplus. 5
- 6. Adjustment needs – is solvency politically sustainable? Primary Balance required to meet debt targets HK Korea Switzerland Sweden NZ Finland Estonia Australia Canada Slovak Czech Israel Denmark Slovenia Netherlands Austria Spain Germany Iceland France Belgium UK Portugal Italy US Ireland Japan Norway Greece -10 -5 0 5 10 15 6 Source: Fiscal Monitor CAPB required for2010-20 2011 CAPB
- 7. Broadening of the DSA concept Based on recent IMF work to improve debt sustainability assessments: • The realism of baseline assumptions. • Level of public debt • Broadening the coverage of fiscal balance and public debt • Analysis of fiscal risks: particularly contingent liabilities • Vulnerabilities of the debt profile 7
- 8. Proposed IPSAS definition adds an important dimension • Long-Term Fiscal Sustainability: the ability of an entity to meet service delivery and financial commitments both now and in the future • Service capacity: – the extent to which the entity can maintain services at the volume and quantity to current recipients, and meet obligations of entitlement programs for current and future beneficiaries • In line with the IMF’s recent work on entitlements and other social obligations 8
- 9. Maintaining service levels will be costly Projected increase in pension and healthcare expenditure 2010-2030 (Percent of GDP) 8.0 Pensions Healthcare 6.0 4.0 2.0 0.0 -2.0 -4.0 DEU DEN GBR KOR JPN FIN BEL AUT NZL PRT GRC NOR SWE FRA CZE ESP NED CAN SLV SLK USA AUS IRL ICL LUX CHE ITA 9 Source: Fiscal Monitor
- 10. Long-Term Adjustment needs Primary Balance required to meet debt targets, including pension and health costs HK (Percent of GDP) Korea Switzerland Sweden NZ Finland Estonia Australia Canada Slovak Czech Israel Denmark Slovenia Netherlands Austria Spain Germany Iceland France Belgium UK Portugal Italy US Ireland Japan Norway Greece -10 -5 0 5 10 15 10 CAPB required for2010-20 2011 CAPB
- 11. Long-Term Adjustment needs Primary Balance required to meet debt targets, including pension and health costs HK Korea Switzerland Sweden NZ Finland Estonia Australia Canada Slovak Czech Israel Denmark Slovenia Netherlands Austria Spain Germany Iceland France Belgium UK Portugal Italy US Ireland Japan Norway Greece -10 -5 0 5 10 15 11 Source: Staff calculations CAPB required for2030 2011 CAPB
- 12. Institutional Requirements to Assist Adjustment • Increase the quality and coverage of fiscal reporting • Ensure budget execution systems are up to the job • Understand long-term implications of government policy— existing and proposed—such as entitlements • Report, analyze and prepare contingency arrangements for fiscal risks, i.e., deviations of fiscal outcomes from what was expected at the time of the budget or other forecast • Use medium-term frameworks to design and implement adjustment policy, as well as periodic long-term fiscal projections and reports 12
- 13. Budget Institutions for Fiscal Consolidation: Stylized Phases of Consolidation Process a. Understanding the Fiscal Challenge c. Implementing b. Developing a through the Consolidation Budget Process Strategy 13
- 14. Budget Institutions for Fiscal Consolidation: 10 Key Institutions a. Understanding the Fiscal Challenge b. Developing a Consolidation Strategy c. Implementing through the Budget Process 14
- 15. Full Coverage of Public Sector Problems built up over the past 2 decades from outside the general government are now inside Portugal Gross General Government Debt (Percent of GDP) 120 120 Arrears General Government Gross Debt 100 100 SOE & PPP reclassifications SOE & PPP debt outside the General Government sector* 80 80 Non-SOE & PPP General Government debt 60 60 40 40 15 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 *Only includes Central Government SOE debt pre 2007
- 16. Budget execution In crisis countries, arrears have emerged from outside the budget perimeter Greece Portugal Arrears ≈ 4.3% of GDP Arrears ≈ 3% of GDP 91% from outside the CG budget 95% from outside the CG budget Budgetary Central Govt Budgetary Central Govt Local Govt Social Security Others Hospitals Local Govt Hospitals Regional Govt 16 Others
- 17. Fiscal Risk Statements: Iceland’s recent report 17
- 18. Long-Term Fiscal Projections • Relatively few countries preparing annual projections • In addition to impact of ageing population, should also provide information on issues that pose serious risk to fiscal sustainability, such as – cost pressures in health care, – global climate change, and – contingent liabilities • Should present information on impact of new policies and changed assumptions • Should be closely linked to budgets 18
- 19. Example of Long-Term Fiscal Projections Australian Intergenerational Report Fiscal Gap – comparison of changes Net worth – both financial and overall net worth 19
- 20. Issues Complex issue that require multipronged approach • Requires a broad assessment • Temporary/future factors • Required adjustments are large, particularly with age and pension costs • Focus on institutions—accounting not sufficient – Coverage, both transactions and institutional – Risk and boundary issues – Long term focus 20
- 21. Selected IMF References IMF Fiscal Monitor, various issues, in particular September 2011 IMF (2011), Modernizing the Framework for Fiscal Policy and Public Debt Sustainability Analysis, August 8, 2011, SM/11/211 IMF (2011), The Challenge of Public Pension Reform in Advanced and Emerging Economies, December 28, 2011 Cangiano, M. (2011), Developing a Sovereign Balance Sheet: Outstanding Issues, PPT presented at 1st CIPFA’s International Conference “Trust and Accountability in Public Financial Management,” London, March 15-17, 2011 IMF (2010), Macro-Fiscal Implications of Health Care Reform in Advanced and Emerging Economies, December 28, 2010 Escolano, J. (2010), A Practical Guide to Public Debt Dynamics, Fiscal Sustainability, and Cyclical Adjustment of Budgetary Aggregates, Fiscal Affairs Department, IMF Technical Notes and Manuals IMF, 2009, Crisis-Related Measures in the Financial System and Sovereign Balance Sheet Risks, July 31, 2009 21 IMF PFM blog: http://blog-pfm.imf.org/
Notas del editor
- The debt stabilizing primary balance is often used to assess fiscal policy by judging whether the existing fiscal balance is consistent with a stable debt to GDP ratio.2 cases:Current level of primary balance may not stabilize debt, but adjustment is realistic. While fiscal policy is unsustainable, public debt is regarded as sustainable.If stabilizing primary surplus is politically or economically infeasible, both fiscal policy and public debt are unsustainable.The higher the debt, the more likely fiscal policy and public debt are unsustainable, as a higher debt requires a higher primary surplus to sustain it.
- A more technical definition:A policy path is deemed sustainable if it satisfies the intertemporal budget constraint (existing liabilities equal the NPV of future primary balances).This is more restrictive than the pure solvency (positive net worth) condition because the IBC does not presume the possibility to liquidate assets. Assuming that the interest rate on public debt exceeds the growth rate of the economy, the government’s intertemporal budget constraint is met when the debt-to-GDP ratio is stable.
- The risk of a rollover crisis depends on the size of borrowing requirements and hence on the level of the fiscaldeficit (which depends in part on the level of the debt, through the size of the interest bill) and thecomposition of the debt (e.g., short maturities) and investor base (e.g., a high share of externally-held debt).
- The debt stabilizing primary balance is often used to assess fiscal policy by judging whether the existing fiscal balance is consistent with a stable debt to GDP ratio. In other words, assuming that the interest rate on public debt exceeds the growth rate of the economy, the government’s intertemporal budget constraint is met when the debt-to-GDP ratio is stable.2 cases:Current level of primary balance may not stabilize debt, but adjustment is realistic. While fiscal policy is unsustainable, public debt is regarded as sustainable.If stabilizing primary surplus is politically or economically infeasible, both fiscal policy and public debt are unsustainable.The higher the debt, the more likely fiscal policy and public debt are unsustainable, as a higher debt requires a higher primary surplus to sustain it.
- But what does this imply?In the absence of growth, how does a country continue to run a primary surplus of the size required, while still providing politically acceptable levels of services and transfers?Consider Norway – is running primary balance of the magnitude required by a number of countries to meet their debt targets, but this is with the aid of x percent of GDP of oil revenues, which are by design saved in a sovereign wealth fund.
- Realism of baseline assumptions. Close scrutiny of assumptions underlying thebaseline scenario (primary fiscal balance, interest rate, and growth rate) would beexpected particularly if a large fiscal adjustment is required to ensure sustainability.This analysis should be based on a combination of country-specific information andcross-country experience. Level of public debt as one of the triggers for further analysis. Although a DSA is amultifaceted exercise, the paper emphasizes that not only the trend but also the levelof the debt-to-GDP ratio is a key indicator in this framework. The paper does not finda sound basis for integrating specific sustainability thresholds into the DSAframework. However, based on recent empirical evidence, it suggests that a referencepoint for public debt of 60 percent of GDP be used flexibly to trigger deeper analysisfor market-access countries: the presence of other vulnerabilities (see below) wouldcall for in-depth analysis even for countries where debt is below the reference point. Analysis of fiscal risks. Sensitivity analysis in DSAs should be primarily based oncountry-specific risks and vulnerabilities. The assessment of the impact of shockscould be improved by developing full-fledged alternative scenarios, allowing forinteraction among key variables, and more regular use of fan charts. Different toolsand analyses (e.g., FSAP and vulnerability exercises) could be used as inputs toidentify and quantify macroeconomic risks and contingent liabilities risks. Vulnerabilities associated with the debt profile. The paper proposes to integrate theassessment of debt structure and liquidity issues into the DSA. Indicative benchmarksare proposed to facilitate staff analysis in this regard. Coverage of fiscal balance and public debt. It should be as broad as possible, withparticular attention to entities that present significant fiscal risks, including stateowned enterprises, public-private partnerships, and pension and health care programs.
- In Portugal, many of the problems that we are seeing today are coming from the sectors that were previously excluded from the general government under the EAS 95 framework: particularly the State Owned Enterprises and the PPPs.General Government debt in Portugal has increased from 68 percent of GDP before the crisis, to more than 100 per cent this year.(Click) Only about two thirds of that increase has been due to fiscal deficits and normal debt dynamics.(Click) The other third of that increase has been due to reclassifications of entities that were previously outside of the General Government. This includes, state owned enterprises – primarily rail and transportation companies, as well as various PPPs.(Click) Here you can see the size of SOE debts that were excluded from the general government debt statistics. Of course, at the time, this information was not collected as part of the government statistics, was not considered within the budget process, and were not thought of as contingent liabilities to the budget. Indeed – these data are particularly hard to come by now, and to our knowledge, unavailable prior to 2001.You can also see that despite the reclassifications done to date, there remains a further 10 percent of GDP worth of debt outside the GG sector: much of which is coming from the hospital sector. We see this as a major risk to the outlook, and problems refinancing this debt – the responsibility of which is falling to the government – are creating serious challenges to the program.(Click) Finally, in orange, you can see that the arrears – again coming largely from outside the central government budget – add a further 2 percentage points to debt – even if they are not explicitly included in the EDP measures.These issues: and the problems that have been shifted onto the balance sheet of the government are the reason why we consider that looking at the public sector as a whole: in both reporting, projections and decision making is essential.
- Another issue, stemming from both budget executions and fiscal reporting problems is the size of arrears.Another key aspect of the programs in Greece and Portugal has been to control, identify and quantify arrears, across all levels of government.These have been significant: three to four percent of GDP in both of the two countries. Importantly, these figures went largely unreported.Thus: building systems that account for arrears, monitor and verifying them is key – second only to creating commitment control systems that prevent them in the first place.Another key issue is that almost all arrears have emerged from outside the central government budget. Hospitals (often classified outside the general government as well), and local and regional governments are the main source of arrears. This underlies the fact that fiscal authorities need to look beyond their immediate areas of responsibility, and have an understanding of the full fiscal picture.
- Requires a broad assessment – refer to recent work by the IMF on broadening the DSA analysisTemporary/future factors – refer to presentation FrtizZurbrugg (Switzerland)Required adjustments are large – refer to work on age pension and health by the IMF.Long-term Focus – refer to US presentation, which will provide more detail on elements of long-term fiscal projections from the US