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A New Fiscal Framework for Resource-Rich Countries
This paper revisits the debate on the design of fiscal rules in resource-rich countries. Its main objective is to assess alternative systems of rules against their policy objectives, while taking into account country characteristics. One of the contributions of the paper is to propose fiscal frameworks that are centered around the principle of insurance against shocks and less reliant on estimating precisely resource wealth, which tends to be highly volatile.
The Return to Fiscal Rules
Governments face difficult policy trade-offs with record debt levels, tightening monetary policies, and urgent demands, including food and energy crises, the climate agenda, and population aging. Governments need to communicate fiscal plans to reduce debt sustainability risks and promote consistent macroeconomic policies. Many envisage a return to fiscal rules that had been suspended during the pandemic to strengthen credibility. This situation offers an opportunity to rethink fiscal rules and determine how governments can make fiscal policy more agile, including in responding to crises, without undermining fiscal sustainability. A risk-based medium-term fiscal framework that combines standards, rules, and strengthened institutions would strike a better balance between flexibility and credibility.
How to Assess Fiscal Risks from State-Owned Enterprises
The size and operation of state-owned enterprises (SOEs) can imply significant risks for governments. SOEs are present in virtually every country in the world and are major players in domestic economies and in global markets. In some countries, they number in the thousands and are owned by national or subnational governments. SOEs are among the largest corporations in some advanced economies and comprise a third or more of the largest firms in several emerging markets. Many operate with systematic losses and carry significant liabilities. If SOEs face adverse shocks and financial distress they can impact the government budget or balance sheet through numerous transmission channels. This How ...
Wage Moderation in Crises
The paper studies the impacts of wage moderation in the euro area. Simulation results show that if a single euro area crisis-hit economy undertakes wage moderation, the impact on output is positive for that economy and for the entire euro area. If all crisis-hit economies undertake wage moderation together, their output still expands, albeit to a lesser degree. If the wage moderation is accompanied by cuts in policy interest rates by the central bank—and by quantitative easing once interest rates hit the zero lower bound—then output for the entire euro area expands as well.
Reforming the EU Fiscal Framework
The EU’s fiscal framework needs reform. While existing fiscal rules have had some impact in constraining deficits, they did not prevent deficits and debt ratios that have threatened the stability of the monetary union in the past and that continue to create vulnerabilities today. The framework also has a poor track record at managing trade-offs between containing fiscal risks and stabilizing output. Finally, the framework does not provide sufficient tools for EU-wide stabilization. This was most visible during the decade following the euro area sovereign debt crisis, when structurally low real interest rates stretched the policy tools of the European Central Bank (ECB), leading to a persis...
Economic Growth After Debt Surges
Debt levels, both private and public, were already at record highs before the Covid-19 pandemic, and surged further in 2020. The high indebteness raises concerns whether it will undermine future growth prospects. This paper contributes to the ongoing debate by examining what happens to economic growth after debt surges. We apply a local projection method to a new dataset of debt surges in 190 countries between 1970 and 2020. Our results show that the relationship between debt surges and economic growth are complex. Debt surges tend to be followed by weaker economic growth and persistently lower output. However, this negative relationship does not always hold. Surges in public debt tend to ha...
Upgrading Fiscal Frameworks in Asia-Pacific
This paper seeks to guide the reform of fiscal frameworks in Asia-Pacific in the context of calls for a more active fiscal policy in a shock-prone world. It highlights that the cost of fiscal support is large and that fiscal frameworks, including fiscal rules, are being put to the test given the sharp increase in debt, high interest and weaker growth prospects. The stress is only compounded by long-term challenges like aging populations, climate change and the need to deliver on the sustainable development goals. In this context, it is timely to review the effectiveness of fiscal policy in Asia-Pacific and seek for ways to strengthen fiscal frameworks. After the global financial crisis, fisc...
Global Implications of Lower Oil Prices
The sharp drop in oil prices is one of the most important global economic developments over the past year. The SDN finds that (i) supply factors have played a somewhat larger role than demand factors in driving the oil price drop, (ii) a substantial part of the price decline is expected to persist into the medium term, although there is large uncertainty, (iii) lower oil prices will support global growth, (iv) the sharp oil price drop could still trigger financial strains, and (v) policy responses should depend on the terms-of-trade impact, fiscal and external vulnerabilities, and domestic cyclical position.
Green Fiscal Rules? Challenges and Policy Alternatives
This paper studies the impact of green fiscal rules – designed to protect climate-related spending –on debt dynamics. Simulations of green rules that exempt green spending from the rule limits for an emergingmarket economy illustrate that they can lead to unsustainable debt dynamics when the net zero emissions goal is pursued mostly using spending-based instruments (e.g., investment and subsidies). Or the rule would need to implicitly assume a large fiscal adjustment in the non-green budget, which would undermine its credibility. It will be needed to build broad public consensus for a more comprehensive fiscal strategy that tackles the difficult policy tradeoffs that will be required and takes into account long-term effects. A more appropriate mix of climate policies, including actively employing carbon pricing, should be pursued within the overall setting of fiscal and debt objectives. Developing ‘green’ medium-term fiscal frameworks would help to integrate climate change considerations into fiscal policy design in a more comprehensive manner.
How to Adjust to a Large Fall in Commodity Prices
Resource-rich countries have to manage highly volatile commodity revenues. In periods of revenue booms there is a tendency for large spending scale-ups. When facing large and persistent reductions in commodity prices, some of these countries will need to adjust their budgets to the new reality. In many cases, overall surpluses turn into large fiscal deficits and borrowing costs tend to rise with the fall in commodity prices. This note discusses how to undertake large fiscal adjustments, which often tend to be protracted and with long-lasting impacts on growth. Consequently, the note also highlights how to better prepare for future booms and busts in commodity prices.
