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Paolo Mauro Fiscal Affairs Department International Monetary Fund. Chipping Away at Public Debt Sources of Failure and Keys to Success in Fiscal Adjustment. The views expressed herein are those of the authors and should not be attributed to the IMF, its Executive Board, or its management.

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Paolo mauro fiscal affairs department international monetary fund

Paolo Mauro

Fiscal Affairs Department

International Monetary Fund

Chipping Away at Public Debt

Sources of Failure and Keys to Success

in Fiscal Adjustment

The views expressed herein are those of the authors and should not be attributed to the IMF, its Executive Board, or its management.


Motivation background

Motivation/Background

  • The state of the public finances in advanced economies: taking stock of where we are now and where we need to go.


Fiscal outlook in advanced economies in percent of gdp

Fiscal Outlook in Advanced Economies(in percent of GDP)

2.0

0.0

-

2.0

-

4.0

-

6.0

Overall Balance

-

8.0

-

10.0

2000

2002

2004

2006

2008

2010

2012

2014

2016

120

Gross Government Debt

110

100

90

80

70

60

2000

2002

2004

2006

2008

2010

2012

2014

2016


Fiscal challenge stylized facts

Fiscal Challenge: Stylized Facts

The scale of the debt problem is unprecedented

G-7 PPP-Weighted Public Debt, 1950-2016, percent of GDP

Source: IMF FiscalMonitor April 2011


Paolo mauro fiscal affairs department international monetary fund

Germany

Italy

Netherlands

CAPB 2010 (percent of GDP)

France

Req. CAPB by 2020 to reach 60% debt in 2030

Spain

Req. CAPB to stabilize 2010 debt levels

United Kingdom

Portugal

United States

Ireland

Greece

Japan

-

8

-

6

-

4

-

2

0

2

4

6

8

10

IMF Staff Calculations.

Calculations for Japan based on net debt.


What we do in the book

What we do in the book


Analytical framework

Analytical Framework

  • Previous empirical studies identified fiscal adjustment episodes on the basis of ex post outcomes.

  • Instead, we approach fiscal adjustment plans on the basis of large envisaged reductions in debts and deficits.

    • One learns from successes but also failures.

    • Compare ex post outcomes with ex ante plans

    • Avoids sample selection / survivorship bias


What we do two methods

What we do: two methods

Individual Country Case Studies for each of the G7 countries

Cross-Country Statistical Analysis for the three-year plans of all EU Countries, 1991-2007.


G 7 fiscal adjustment plans

G-7 Fiscal Adjustment Plans


Paolo mauro fiscal affairs department international monetary fund

G-7 Fiscal Adjustment Plans


G 7 fiscal adjustment plans1

G-7 Fiscal Adjustment Plans

Source: IMF staff compilations.


Public sector new borrowing and debt in the u k in percent of gdp

Public Sector New Borrowing and Debt in the U.K. (In percent of GDP)


Key findings

Key Findings

Findings in Three Dimensions:

  • Rationale for and design of the envisaged fiscal adjustment

  • Degree of implementation and underlying macroeconomic factors

  • Political and institutional determinants of the implementation record


Rationale for and design of fiscal adjustment plans

Rationale for and Design of Fiscal Adjustment Plans

  • Envisaged composition of fiscal adjustment:

    • Most plans focused on spending cuts, consistent with the relatively large initial size of government, particularly in Europe.

  • Macroeconomic assumptions:

    • Macroeconomic assumptions were mostly in line with those of independent observers


Paolo mauro fiscal affairs department international monetary fund

Revenue and Expenditure Composition of 66 Plans

(In Percent)

Expenditure

Revenue

Increase

Decrease

Total

Increase

10

27

37

Decrease

0

63

63

10

90

100


Rationale for and design of fiscal adjustment plans1

Rationale for and Design of Fiscal Adjustment Plans

  • Envisaged composition of fiscal adjustment:

    • Most plans focused on spending cuts, consistent with the relatively large initial size of government, particularly in Europe.

  • Macroeconomic assumptions:

    • Macroeconomic assumptions were mostly in line with those of independent observers


Implementation record and underlying macroeconomic factors

Implementation Record and Underlying Macroeconomic Factors

  • Implementation record and degree of ambition:

    • Evidence from study of 66 large adjustment plans in the EU sample: it is “OK to plan big.”

    • Ambitious plans do tend to produce more adjustment than do more modest plans, by a factor of one.

  • Revenue-expenditure mix in outcomes versus plans:

    • Expenditure cuts did not materialize to the extent envisaged. Revenues compensated in part.

  • Key role of economic growth:

    • Deviations of economic growth from initial expectations were a major factor underlying success or failure.


European union planned and actual adjustments 1991 2007 percent of potential gdp

European Union: Planned and Actual Adjustments, 1991-2007(Percent of Potential GDP)


Implementation record and underlying macroeconomic factors1

Implementation Record and Underlying Macroeconomic Factors

  • Implementation record and degree of ambition:

    • Evidence from study of 66 large adjustment plans in the EU sample: it is “OK to plan big.”

    • Ambitious plans do tend to produce more adjustment than do more modest plans, by a factor of one.

  • Revenue-expenditure mix in outcomes versus plans:

    • Expenditure cuts did not materialize to the extent envisaged. Revenues compensated in part.

  • Key role of economic growth:

    • Deviations of economic growth from initial expectations were a major factor underlying success or failure.


Paolo mauro fiscal affairs department international monetary fund

EU sample: Actual versus Planned Structural Fiscal Adjustment(Percent of potential GDP; means reported, except for implementation ratios, which are medians)


Implementation record and underlying macroeconomic factors2

Implementation Record and Underlying Macroeconomic Factors

  • Implementation record and degree of ambition:

    • Evidence from study of 66 large adjustment plans in the EU sample: it is “OK to plan big.”

    • Ambitious plans do tend to produce more adjustment than do more modest plans, by a factor of one.

  • Revenue-expenditure mix in outcomes versus plans:

    • Expenditure cuts did not materialize to the extent envisaged. Revenues compensated in part.

  • Key role of economic growth:

    • Deviations of economic growth from initial expectations were a major factor underlying success or failure.


Paolo mauro fiscal affairs department international monetary fund

Baseline Regressions With Core Variables

Dependent Variable: Implementation error = actual minus planned adjustment

Fixed Effects

FE Instrumental Variables

(1)

(2)

(3)

(4)

(5)

(6)

VARIABLES

Overall balance base effect

-0.61***

-0.61***

-0.53**

-0.82***

-0.85***

-0.53***

(0.17)

(0.16)

(0.19)

(0.22)

(0.24)

(0.13)

Initial fiscal balance

-0.26

-0.38

-0.27*

-0.39**

(0.22)

(0.24)

(0.16)

(0.18)

Real GDP growth surprise

0.34***

0.34***

0.12

0.52***

0.53***

-0.029

(0.059)

(0.059)

(0.13)

(0.088)

(0.094)

(0.079)

Plan ambition

-0.37

-0.19

-0.29

-0.29

-0.14

-0.29

(0.47)

(0.32)

(0.47)

(0.33)

(0.29)

(0.33)

Deviation of initial deficit from 3% of

0.18

0.24

GDP level

(0.18)

(0.19)

Time dummies

Yes

Yes

Observations

66

66

66

66

66

66

R-squared

0.456

0.422

0.662

0.367

0.320

0.177

Robust standard errors in parentheses

*** p<0.01, ** p<0.05, * p<0.1


Fiscal institutions and political factors

Fiscal Institutions and Political Factors

  • Features influencing degree of implementation:

    • Monitoring of fiscal outturns and policy response to data revisions

    • Binding medium-term limits

    • Contingency reserves

    • Coordination across levels of government

    • Fiscal rules

  • Political Factors and Public Support for Fiscal Adjustment:

    • Lower fractionalization in the legislative body and perceptions of greater political stability are to some extent associated with better implementation of plans.

    • Public support is crucial for implementation success.


Implications for planned adjustments

Implications for Planned Adjustments

  • Spelling out how policies will respond to shocks.

  • Monitoring and accountability: Implementation of plans should be supported by reliable and timely information.

  • The revenue-expenditure mix of fiscal consolidation plans needs to reflect country-specific societal preferences and structural fiscal characteristics.

  • Structural reforms underpin successful implementation of large fiscal adjustment plans.

  • Build public support—public support for fiscal adjustment, rather than a comfortable legislative majority, is what matters.


Paolo mauro fiscal affairs department international monetary fund

Thank you!

To find out more: Chipping Away at Public Debt—Sources of Failure and Keys to Success in Fiscal Adjustment, Wiley.


Paolo mauro fiscal affairs department international monetary fund

Background Slides


Paolo mauro fiscal affairs department international monetary fund

Additional Regressions With Political Variables and Asymmetries

Dependent Variable: Implementation error = actual minus planned adjustment

FE Instrumental Variables

VARIABLES

(1)

(2)

(3)

(4)

(5)

(6)

Overall balance base effect

-0.82***

-0.83***

-0.84***

-0.68***

-0.87***

(0.22)

(0.22)

(0.21)

(0.21)

(0.22)

Initial fiscal balance

-0.27*

-0.27*

-0.31

-0.39**

-0.30**

-0.30*

(0.16)

(0.16)

(0.19)

(0.16)

(0.13)

(0.17)

Real GDP growth surprise

0.52***

0.50***

0.49***

0.45***

0.50***

(0.088)

(0.089)

(0.080)

(0.088)

(0.087)

Plan ambition

-0.29

-0.26

-0.33

-0.40

-0.46

-0.29

(0.33)

(0.32)

(0.33)

(0.32)

(0.28)

(0.34)

Positive overall balance base effect

-0.92***

(0.34)

Negative overall balance base effect

-0.71**

(0.31)

Positive growth surprise

0.37

(0.29)

Negative growth surprise

0.58***

(0.16)

Fiscal rule strength

0.61**

(0.30)

Change in government stability

3.07***

(1.12)

Parliamentary fractionalization

-3.62*

(2.09)

Observations

66

66

66

66

66

65

R-squared

0.367

0.380

0.375

0.426

0.493

0.382

Robust standard errors in parentheses

*** p<0.01, ** p<0.05, * p<0.1


Paolo mauro fiscal affairs department international monetary fund

Regressions with Outliers Removed

Dependent Variable: Implementation error = actual minus planned adjustment

Fixed Effects

FE Instrumental Variables

VARIABLES

(1)

(2)

(3)

(4)

(5)

(6)

(7)

(8)

Overall balance base effect

-0.70***

-0.82***

-0.72***

-0.87***

-1.22***

-0.85***

(0.20)

(0.21)

(0.20)

(0.20)

(0.34)

(0.18)

Initial fiscal balance

-0.14

-0.13

-0.19

-0.30**

-0.15*

-0.14

-0.30**

-0.30***

(0.11)

(0.12)

(0.11)

(0.13)

(0.091)

(0.097)

(0.12)

(0.10)

Real GDP growth surprise

0.38***

0.37***

0.34***

0.54***

0.52***

0.45***

(0.056)

(0.049)

(0.048)

(0.092)

(0.090)

(0.064)

Plan ambition

-0.0044

0.033

-0.076

-0.26

0.11

0.14

-0.16

-0.15

(0.19)

(0.21)

(0.19)

(0.18)

(0.16)

(0.16)

(0.20)

(0.15)

Positive overall balance base effect

-1.64***

-1.69***

(0.47)

(0.47)

Negative overall balance base effect

-0.46**

-0.64**

(0.18)

(0.25)

Positive growth surprise

0.21**

-0.087

(0.090)

(0.30)

Negative growth surprise

0.48***

0.82***

(0.066)

(0.23)

Fiscal rule strength

0.41*

0.38**

(0.23)

(0.16)

Change in government stability

2.68***

2.25***

(0.82)

(0.70)

Parliamentary fractionalization

-0.47

-1.18

(2.64)

(1.67)

Observations

58

58

58

57

58

58

58

57

R-squared

0.582

0.611

0.602

0.713

0.496

0.534

0.437

0.665

Robust standard errors in parentheses

*** p<0.01, ** p<0.05, * p<0.1


Paolo mauro fiscal affairs department international monetary fund

Advanced economies: Illustrative scenarios for primary balance adjustment and debt

6

4

2

0

-

2

Cyclically Adjusted Primary Balance

-

4

Primary Balance

-

6

-

8

2007

2009

2011

2013

2015

2017

2019

2021

2023

2025

2027

2029

100

90

80

70

60

50

General Government Gross Debt – to – GDP ratio

40

30

2007

2009

2011

2013

2015

2017

2019

2021

2023

2025

2027

2029


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