Fiscal Sustainability

Some weighty contributions from the BIS, IMF and ECB:

The Stability and Growth pact: Crisis and Reform, ECB Occasional Paper, September 2011

The sovereign debt crisis in the euro area is a symptom of policy failures and defi ciencies in – among other things – fi scal policy coordination. The first nine years of the euro were not used effectively in order to improve public finances, while the Stability and Growth Pact was watered down. Spillovers from the financial and economic crisis compounded fiscal difficulties in the euro area, especially in certain member countries. This paper looks back at the history of fiscal policies and rules in Economic and Monetary Union (EMU). It makes proposals to strengthen fi scal policy governance that go well beyond the legislation set to be adopted in autumn 2011.

Addressing Fiscal Challenges to Reduce Economic Risks, IMF Fiscal Monitor, September 2011

Despite progress in addressing key fiscal weaknesses in many countries, significant policy challenges remain in advanced, emerging, and low-income economies, and must be faced in an environment where downside risks to growth have increased.

The future of public debt: prospects and implications, BIS Working Paper, March 2010

The financial crisis that erupted in mid-2008 led to an explosion of public debt in many advanced economies. As bad as these fiscal problems may appear, the BIS warns that relying solely on these official figures is almost certainly very misleading. “Rapidly ageing populations present a number of countries with the prospect of enormous future costs that are not wholly recognised in current budget projections. The size of these future obligations is anybody’s guess. As far as we know, there is no definite and comprehensive account of the unfunded, contingent liabilities that governments currently have accumulated.”

Assessing Fiscal Stress, IMF Working Paper, May 2011

This paper develops a new index which provides early warning signals of fiscal sustainability problems for advanced and emerging economies. Unlike previous studies, the index assesses the determinants of fiscal stress periods, covering public debt default as well as near-default events. Fiscal stress has increased recently to record-high levels in advanced countries, reflecting raising solvency risks and financing needs. In emerging economies, risks are lower than in mature economies owing to sounder fiscal fundamentals, but fiscal stress remains higher than before the crisis.

IMF Fiscal Monitor, April 2011

The IMF projects the pace at which advanced economies reduce their deficits and accumulated debt will be slower on average in 2011 than projected earlier, as the United States and Japan delay their plans.

The latest edition of the IMF’s Fiscal Monitor said many countries’ deficits will fall in 2011, reflecting fiscal tightening, particularly in Europe, and improved economic conditions. The average deficit for advanced economies is expected to fall by ¾ percent of GDP to 7 percent, which represents a slower pace than projected in the November 2010 report.

Collection of ECB articles from April, June and July 2011 Monthly Bulletins on fiscal sustainability.

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