global growth slowing and uncertainty rising

With global growth slowing and uncertainty rising, fiscal
policy should prepare for potential downturns—balancing
stabilization and sustainability objectives—and put more
emphasis on reforms to foster long-term inclusive growth
in a fast-changing global economy. Shifting demographics,
rapid technological progress, and deepening international
economic integration bring challenges. To remain effective,
fiscal policy needs to adapt to these key trends reshaping
the global economy. Where there is limited budgetary room, such adaptation will have to occur through
inclusive and growth-friendly budget recomposition.
International cooperation to improve the taxation of multinational companies, and to tackle climate change and
corruption could amplify and spread the reform gains.
Introduction
Over the past decade, fscal policies have focused
on economic stabilization, whereas less attention has
been given to reforms to foster long-term inclusive
growth. Major fscal expansions across the globe after
the 2007–08 global fnancial crisis helped address
demand-side weaknesses, including through support for
fnancial systems in some cases (Figure 1.1). Emerging market and developing economies returned to
expansionary fscal policies during 2012–15, notably
in commodity exporters to cushion the blow from
persistently lower commodity prices. In most countries,
however, subsequent fscal adjustment remains incomplete. Advanced economies, on average, have reverted
to a neutral fscal stance rather than gradually restoring
depleted fscal buffers, and in emerging market and
developing economies defcits have remained high or
risen further. As a result, public debt ratios are now signifcantly higher than before the global fnancial crisis in
all country groups; and emerging market and developing
economies face notably higher interest burdens whereas
low interest rates have reduced the interest bill in
advanced economies (Figure 1.2). Meanwhile, per capita
income growth has trended downward in advanced
economies since the mid-1970s and in emerging market
and developing economies during the past decade;
moreover, income inequality has risen in many advanced
economies and remains pervasive in most emerging
market and developing economies (Figure 1.3).
Getting fscal policy right at this juncture requires
more attention to growth-friendly and inclusive
reforms. Demographic shifts, technological advances,
and international economic integration have left fscal
policy, in some cases, unsustainable or outdated.
Structural primary balance
(percent of potential GDP)
Output gap (percent)
Primary balance
(percent of GDP)
GDP growth rate
(percent, right scale)
Primary balance
(percent of GDP)
GDP growth rate
(percent, right scale)
Source: IMF, World Economic Outlook database.
Note: The averages are weighted by PPP-adjusted nominal GDP in US dollars. GFC = global financial crisis; PPP = purchasing power parity.
2007 08 09 10 11 12 13 14 15 16 17 18
1. Advanced Economies
2007 08 09 10 11 12 13 14 15 16 17 18
2. Emerging Market and
Middle-Income Economies
2007 08 09 10 11 12 13 14 15 16 17 18
3. Low-Income Developing Countries
–6
3
–5
–4
–3
–2
–1
2 1 0
–6
3
–5
–4
–3
–2
–1
2 1 0
9 8 7 6 5 4 3 2 1 0
–6
3
–5
–4
–3
–2
–1
2 1 0
9 8 7 6 5 4 3 2 1 0
Fiscal expansions following the global financial crisis and commodity price shocks have yet to be reversed.
Figure 1.1. General Government Fiscal Stance and Cyclical Position, 2007–18
Primary balance in
2009 (GFC)
1 FISCAL POLICY FOR A CHANGING GLOBAL ECONOMY
CHAPTER
International Monetary Fund | April 2019 1
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International Monetary Fund | April 2019
Populations are aging in advanced and some emerging
market economies (for example, China), while they are
rapidly expanding and urbanizing in many low-income
developing countries (for example, sub-Saharan Africa)
and several emerging market economies (for example,
India). Labor-saving innovations such as automation and digitalization, combined with increasingly
integrated global production and distribution, are
having a profound impact on the relative contributions
of labor, capital, land, and productivity in generating economic activity. Tese forces also reshape the
relative contributions of skilled versus unskilled labor
and manufacturing versus services sectors to economic
output within countries. Income gains are increasingly
accruing to those at the top, and wealth is becoming
more concentrated. Fiscal policies need to adapt to
these global trends by upgrading tax, social spending,
and active labor market policies, and by providing
Source: IMF, World Economic Outlook database.
2007 09 11 13 15 17 2007 09 11 13 15 17 2007 09 11 13 15 17
1. Advanced Economies 2. Emerging Market and
Middle-Income Economies
3. Low-Income Developing Countries
0
10
8 6 4 2
40
120
50
60
70
80
90
100
110
0
15
9 6 3
12
20
60
25
30
35
40
45
50
55
20
60
25
30
35
40
45
50
55
0
25
5
10
15

20

Figure 1.2. General Government Gross-Debt-to-GDP and Interest-Bill-to-Tax-Revenue, 2007–18
(Percent)
Interest-to-tax (right scale)
Interest-to-tax (right scale) Interest-to-tax (right scale)
Public debt vulnerabilities are higher today than before the global financial crisis.
Gini index (right scale)
Real GDP per capita growth
10-year moving average
Gini index (right scale)
Real GDP per capita growth
10-year moving average
Gini index (right scale)
Real GDP per capita growth
10-year moving average
1. Advanced Economies 2. Emerging Market and
Middle-Income Economies
3. Low-Income Developing Countries
1970
73
76
79
82
85
88
91
94
97
2000
03
06
09
12
15
18
25
30
35
40
45
50
–6
–4
–2
8 6 4 2 0
1970
73
76
79
82
85
88
91
94
97
2000
03
06
09
12
15
18
25
30
35
40
45
50
–6
–4
–2
8 6 4 2 0
1970
73
76
79
82
85
88
91
94
97
2000
03
06
09
12
15
18
25
30
35
40
45
50
–6
–4
–2
8 6 4 2 0
Sources: IMF, World Economic Outlook database; Standardized World Income Inequality Database; and IMF staff estimates.
Note: The averages are weighted by PPP-adjusted nominal GDP in US dollars. PPP = purchasing power parity.
Figure 1.3. Real GDP per Capita Growth and Income Inequality, 1970–2018
(Percent)
GDP per capita has trended down and inequality remains a concern across the globe.
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International Monetary Fund | April 2019
the infrastructure needed for better service delivery.
Taking such steps will help to foster higher potential
growth—which is also key for durably reducing public
debt levels—and to ensure that gains from openness
and innovation are broadly shared within and across
countries. Moreover, it is likely that rising distrust
in public institutions and growing support for protectionism reflect, among other causes, the failure of
fscal policy choices to spread the gains from globalization and technological innovation across individuals
and localities.
Even so, the case for fscal restraint remains strong.
High debts and defcits, along with the associated
fnancing requirements, leave countries vulnerable to
interest rate and other fscal risks and may be a drag on
long-term growth.1 Gradual fscal adjustment remains
appropriate in many countries in the current environment of slowing but still respectable global growth
(see Chapter 1 of the April 2019 World Economic
Outlook) and a risk of tightening fnancial conditions
worldwide (see Chapter 1 of the April 2019 Global
Financial Stability Report). Fiscal expansions are usually
less effective (that is, fscal multipliers are lower) when
economic slack is limited, and monetary policy is
normalizing, because the impact of fscal stimulus
on inflation prospects would lead central banks to
offset it (DeLong and Summers 2012; Mineshima,
Poplawski-Ribeiro, and Weber 2014). In addition,
global policy uncertainty is elevated, particularly
surrounding trade relations among the world’s largest
economies. Uncertainty makes businesses and consumers more cautious in responding to fscal stimulus,
thereby dampening the effects of expansionary fscal
policy (Bloom and others 2018). Moreover, although
negative interest-growth rate differentials, as currently
experienced by many advanced economies, help fscal
solvency (Blanchard 2019), market confdence is often
lost abruptly resulting in sharp increases in borrowing
costs. Lowering public debt ratios would create room
for countercyclical fscal policy to operate during the
next recession.2 Fiscal restraint is important, particularly if rising public debt leads to higher sovereign
1See Chapter 1 of the April 2018 Fiscal Monitor for a review of
evidence on why high government debts and defcits are a cause
for concern.
2Countries with stronger public sector balance sheets (proxied
by higher public sector net fnancial worth) have faced shallower
recessions and returned to growth more quickly than did those with
weaker ones (see the October 2018 Fiscal Monitor). Similarly, countries entering a fnancial crisis with weak fscal positions (proxied by
bond spreads, which can increase private borrowing
costs and further reduce economic activity (Corsetti
and others 2013; Zoli 2013).
Fiscal policy also needs to remain nimble in view of
the downside risks to the global economy. At present,
these risks include further escalation in trade tensions,
a sharper slowdown in China, a deterioration in risk
sentiment amplifed by high public and private debt
(totaling $184 trillion, or 225 percent of global GDP
at the end of 2017), fnancial market volatility, and
political developments (including uncertainty about
Brexit). Previous studies show that backloading of
adjustment could be warranted if, after a signifcant
worsening in the outlook, a recession became likely.3
However, a decision to delay fscal adjustment should
be anchored in a clear and credible medium-term
adjustment plan to ensure debt sustainability (Gaspar,
Obstfeld, and Sahay 2016).
Against the current backdrop, the case for pursuing
growth-friendly and inclusive policies is even stronger. Fiscal restraint alone is unlikely to signifcantly
reduce public debts; robust economic growth is also
necessary (Baldacci, Gupta, and Mulas-Granados
2015; Best and others 2019; Cottarelli and Jaramillo
2013).4 However, the argument for fscal policy to
focus on measures that raise potential growth extends
beyond reducing the public debt burden. Te quality
of fscal spending in terms of boosting growth and
making it more inclusive has deteriorated in member countries of the Organisation for Economic
Co-operation and Development (OECD) in the
aftermath of the global fnancial crisis (Bloch and
Fournier 2018). For their part, emerging market and
developing economies face signifcant infrastructure
and social spending needs, as well as revenue gaps to
meet their Sustainable Development Goals (SDGs)
(Gaspar and others 2019).
To remain effective, policies to enhance long-term
growth also need to evolve with the key trends reshaping the global economy, including demographic shifts,
technological advances, and global integration.
high public debt) have experienced deeper and longer recessions than
did those with stronger ones (see the October 2016 Fiscal Monitor).
3See Blanchard and Leigh (2013) for an overview of studies on the
appropriate speed of fscal adjustment.
4Beyond fscal restraint, fscal policy could also remove incentives
for debt fnancing over equity fnancing that have contributed to the
buildup of public and private corporate debt (IMF 2016b).
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Demographic Shifts
Aging populations will strain public fnances in many
advanced and emerging market economies as fewer
workers will need to fnance more retirees. Age-related
government expenditures on public pensions and healthcare already account for 17 percent of GDP in advanced
economies and 7 percent of GDP in emerging market
economies and are projected to rise to 23 percent and
14 percent of GDP, respectively, by 2050. Tese spending profles add considerably to the current government
obligations when portrayed in net present value terms
(Figure 1.4). At the same time, the projected decline in
working age populations will reduce payroll tax revenues
and social security contributions. To ensure the sustainability of such spending while providing adequate social
insurance, further parametric pension and healthcare
reforms are necessary in many countries (Clements and
others 2015; IMF 2019a). Migration can also help ease
fscal pressures in aging economies (Clements and others
2015). Rapid labor market integration of migrants
would help maximize the public fnancial benefts (Aiyar
and others 2016).
In contrast, rapidly growing and urbanizing populations in low-income developing countries present
signifcant development spending needs. Te population of sub-Saharan Africa is projected to increase by
70 percent over the next 30 years, accounting for more
than half of the anticipated global population growth
(United Nations 2017). Tis increase will require creating 20 million jobs a year in the region over the next
two decades (Abdychev and others 2018). In addition,
urban populations are projected to double in many
African and Asian countries by 2050 (United Nations
2018). Fiscal policies will need to support the ensu

Pension
Healthcare
Total net
1. Advanced Economies 2. Emerging Market and Middle-Income Economies
MLT
SWE
LVA
EST
DNK
SVK
CYP
SGP
LTU
FRA
JPN
ISR
CZE
HKG
GBR
CAN
AUT
FIN
IRL
AUS
ESP
DEU
ITA
SVN
BEL
PRT
NOR
ISL
NLD
NZL
LUX
CHE
USA
KOR
0 50 100 150 200
IND
HRV
PAK
COL
PHL
ROM
HUN
IDN
AGO
CHL
POL
ZAF
DOM
URY
PER
TUR
MEX
ARE
LKA
EGY
KAZ
OMN
QAT
ECU
ARG
MAR
MYS
CHN
RUS
UKR
SAU
BLR
IRN
THA
AZE
DZA
BRA
KWT
–50 –50 0 50 100 150 200 250 300 350 400
Source: IMF staff estimates.
Note: Data labels in the figure use International Organization for Standardization (ISO) country codes.
Figure 1.4. Implicit Liabilities of Pension and Healthcare Spending, 2015–50
(Percent of GDP in present value terms)
Pension and healthcare spending for aging populations will add significantly to government obligations.
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ing need for infrastructure (housing, transportation,
energy) and services (education, healthcare), including
by encouraging private sector development and participation (Hellebrandt and Mauro 2016). Delivering high
performance on core infrastructure and services SDGs
will require additional spending in 2030 of $2.6 trillion (2.5 percent of 2030 world GDP) in emerging
market and developing economies (Gaspar and others
2019) (Figure 1.5).
Technological Advances
Existing social spending programs may become
inadequate as technological advances reshape employment modalities. Te digital economy has given
rise to more part-time, short-term, on-demand, and
self-employment jobs. Automation has replaced
positions that entail routine or repetitive work (see
Chapter 3 of the April 2017 World Economic Outlook).
While boosting productivity and per capita incomes,
technological progress has contributed to the decline
in labor income shares and favored high-skilled over
low-skilled workforces (IMF 2018) (Figure 1.6). Tese
changes have increased income uncertainty and created
a need to continuously upgrade skills. Adapting to
these new realities through social spending reforms
would support labor mobility and facilitate a more
equitable distribution of income.
Global Integration
Global integration of production and distribution
has altered labor, capital, and goods market dynamics,
aiding some and leaving out others, and creating a need
to reform tax and spending policies to share its benefts.
International economic integration has supported an
unprecedented reduction in worldwide poverty in recent
decades. However, this welcome development has been
accompanied by growing income and wealth inequality
within many countries, particularly advanced economies
(see the October 2017 Fiscal Monitor and Dabla-Norris
and others 2015). At the same time, private capital can
move easily around the globe. Although this can allow
for a more efcient allocation of capital, some of the
flows are driven by efforts to avoid national taxes,5 wors-
5Damgaard and Elkjaer (2017) fnd that almost 40 percent of
all foreign direct investment positions globally ($12 trillion) pass
through empty corporate shells in low-tax jurisdictions with no real
activity. Similarly, Tørsløv, Wier, and Zucman (2018) estimate that
close to 40 percent of multinational profts are shifted to low-tax
jurisdictions each year globally.
2030
2016 2016
2030
Figure 1.5. Additional Spending Required to Achieve High Performance in Selected Sustainable Development
Goals in 2030
(Percent of GDP)
Upgrading public services and infrastructure for growing populations requires substantial additional spending.
Source: Gaspar and others 2019.
Note: The data for 2030 refer to the spending in that year as a share of GDP that would be consistent with high performance in the selected Sustainable
Development Goal areas reported in the figure. For education and healthcare, additional spending corresponds to the difference between spending as a
share of GDP consistent with high performance in 2030 and the 2016 level of spending as a share of GDP. For physical capital, additional spending
corresponds to the annualized spending required to close infrastructure gaps between 2019 and 2030.
1Increase reflects only additional spending need for electricity.
2Increase reflects only additional spending need for roads.
1. Emerging Market and Middle-Income Economies 2. Low-Income Developing Countries
7 6 5 4 3 2 1 0
Health Education Energy1 Transport2 Water Health Education Energy1 Transport2 Water
7 6 5 4 3 2 1 0
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FISCAL MONITOR: CuRbINg CORRupTION
International Monetary Fund | April 2019
ening inequalities and undermining trust in government
(Zucman 2015). With rising protectionism, policies
urgently need to be adapted to better distribute the benefts of global economic integration and to ensure that
capital movements are driven by economic efciency
considerations rather than by tax avoidance.
Adapting to Global Trends
Te pivot to structural reforms that take global
economic trends into account will require inclusive
and growth-friendly fscal adjustments or budget
recomposition in countries without fscal space. With
elevated debt levels, fnancing fscal reforms to support
medium-term growth and adapt to the changing
global economy will require savings or budget-neutral
policy shifts. Tis puts a premium on (1) expenditure
reprioritization, including cost savings from cutting
wasteful spending such as energy subsidies and curbing
corruption (see Chapter 2); (2) reforms to achieve
efciency gains; and (3) revenue generation, particularly in emerging market and developing economies
where tax intake remains relatively low. Tese reforms
can involve difcult tradeoffs and can be politically
challenging. To be sustainable, they must be accompanied by efforts to protect vulnerable populations.
Synergies across reforms should also be used. For
example, reform of education and training policies
to align skills with rapid technological change could
encourage people to lengthen their productive work
lives and move across regions within a country for
better opportunities. Tese developments would boost
growth and could ease fnancial pressures on public
pensions. Budget-neutral tax reforms aimed at enhancing the efciency of the tax system and recomposition
toward infrastructure investment have been shown to
yield signifcant growth dividends (Bussière and others
2017; IMF 2015a). Moreover, making tax systems
more progressive would help distribute the benefts of
technology and trade more evenly.
International cooperation will be critical to manage transnational concerns with a bearing on national
fscal policies. Corporate taxation, climate change,
and corruption (see Chapter 2) are prime candidates
to be addressed through a multilateral approach. For
instance, multilateral cooperation would provide a
more effective and efcient approach to taxing the
rents of multinational frms, including those that
are highly digitalized (IMF 2019b). Similarly, it can
mitigate the negative consequences of international
corporate tax competition, which can lead to global tax
inefciencies. A multilateral approach also remains the
best framework for national fscal policies to mitigate
and manage climate change, including through carbon
taxes (IMF 2019c; Krogstrup and Obstfeld 2018).
Moreover, coordinated international support and
AEs EMMIEs LIDCs AEs EMDEs
High skill
Middle/Low skill
Source: World Input-Output Database Socio-Economic Accounts.
Note: Labor income share refers to the portion of gross domestic product allocated to labor compensation. AEs = advanced economies;
EMDEs = emerging market and developing economies; EMMIEs = emerging market and middle-income economies; LIDCs = low-income developing
countries.
1. By Country, 1995 versus 2014 2. By Skill Level, 1995–2009
20
80
30
40
50
60
70
20 30 40 50 60 70 80
2014
0
50
5
10
15
20
25
30
35
40
45
1995
96
97
98
99
2000
01
02
03
04
05
06
07
08
09
1995
Figure 1.6. Evolution of Labor Income Shares since 1995
(Percent of GDP)
The income share of labor has declined globally, in particular for low- and middle-skilled labor.
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fnancing could help low-income developing countries
achieve their SDGs (Gaspar and others 2019).
Te rest of this chapter reviews country-specifc
fscal trends, as well as policies to adapt to a rapidly
changing global economy. Te next section presents
recent fscal developments and the outlook. A key takeaway is that little fscal room exists in many countries
to respond if risks discussed in the subsequent section
materialize. Given the limited progress with rebuilding
buffers, the fnal section reemphasizes the need for
fscal restraint tailored to country-specifc circumstances. It also proposes that greater attention be paid
to designing and implementing fscal policies that are
responsive to evolving demographics, advancing technology, and deepening economic integration to foster
inclusive growth.
Recent Fiscal Developments and Outlook
Tis section examines recent fscal developments in
the three main country groups (advanced economies,
emerging market and middle-income economies, and
low-income developing countries) and provides an
overview of the fscal outlook (Tables 1.1–1.4).
Table 1.1. General Government Fiscal Balance, 2012–24: Overall Balance
(Percent of GDP)
2012 2013 2014 2015 2016 2017 2018
Projections
2019 2020 2021 2022 2023 2024

–2.8

–2.9 –2.8 –3.3 –3.1 –3.1 –3.1 –3.0 –2.9
–3.6 –2.1 –2.1 –2.4 –2.3 –2.2 –2.2 –2.1 –2.0
–4.1 –3.8 –4.3 –4.6 –4.4 –4.4 –4.4 –4.0 –3.7
–3.1 –1.0 –0.6 –1.0 –0.9 –1.0 –1.1 –1.1 –1.1
–4.1 –2.7 –2.6 –3.3 –2.4 –2.5 –2.5 –2.6 –2.6
–0.1 1.0 1.7 1.1 1.1 0.8 0.8 0.7 0.7
–2.9 –2.4 –2.1 –2.7 –3.4 –3.5 –3.7 –3.7 –3.8
–7.0 –3.1 –2.7 –2.3 –2.3 –2.4 –2.5 –2.7 –2.8
–7.9 –3.2 –3.2 –2.8 –2.1 –1.9 –1.8 –1.9 –2.1
–5.3 –1.8 –1.4 –1.3 –1.2 –1.1 –0.8 –0.6 –0.6
–1.5 0.2 –0.1 –0.4 –0.3 –0.4 –0.6 –0.6 –0.6 –0.7 –0.6 –0.6
0.2 0.2 0.1 0.8 1.4 1.3 1.0 0.9 0.9 0.8 0.8 0.8
–1.4

–4.3 –4.0 –4.8 –4.4 –4.4 –4.4 –4.3 –4.3
–2.3 –4.2 –4.1 –4.9 –4.5 –4.5 –4.5 –4.4 –4.3
–1.8 –4.1 –4.7 –5.6 –5.2 –5.1 –5.1 –5.0 –5.0
–0.8 –3.9 –4.8 –6.1 –5.5 –5.4 –5.4 –5.3 –5.3
–7.0 –7.0 –6.7 –6.9 –6.6 –6.4 –6.3 –6.2 –6.1
–1.5 –1.9 0.2 –0.8 –1.2 –1.4 –1.6 –1.6 –1.6
–1.2 –1.5 2.8 1.0 0.8 0.4 0.0 –0.2 –0.4
–3.1 –5.6 –4.9 –4.8 –4.2 –4.1 –3.8 –3.6 –3.4
–3.0 –7.9 –6.8 –7.3 –7.0 –6.9 –6.6 –6.2 –5.8
–3.7 –1.1 –2.3 –2.5 –2.4 –2.3 –2.3 –2.3 –2.3
3.9 –5.7 –3.4 –4.4 –3.7 –3.8 –3.7 –3.6 –3.7
5.6 –9.2 –4.6 –7.9 –5.7 –7.2 –6.8 –6.5 –6.4
–4.3 –4.4 –4.4 –5.1 –5.1 –4.9 –5.0 –5.0 –4.9
–3.5 –4.2 –4.0 –4.0 –3.8 –3.6 –3.5 –3.4 –3.4
–2.3 –5.4 –4.5 –5.1 –4.6 –4.5 –4.5 –4.5 –4.4
0.4 –2.7 –0.8 –1.7 –1.3 –1.4 –1.5 –1.5 –1.6
3.5 3.6 3.4 3.4 3.8 3.6 3.3 3.6 3.6 3.6 3.6 3.7
Source: IMF staff estimates and projections.
Note: All country averages are weighted by nominal GDP converted to US dollars (adjusted by purchasing power parity only for world output) at average market
exchange rates in the years indicated and based on data availability. Projections are based on IMF staff assessments of current policies. In many countries, 2018
data are still preliminary. For country-specifc details, see “Data and Conventions” and Tables A, B, C, and D in the Methodological and Statistical Appendix.
MENAP = Middle East, North Africa, and Pakistan.
1 For cross-country comparability, expenditure and fscal balances of the United States are adjusted to exclude the imputed interest on unfunded pension
liabilities and the imputed compensation of employees, which are counted as expenditures under the 2008 System of National Accounts (2008 SNA) adopted by
the United States, but not in countries that have not yet adopted the 2008 SNA. Data for the United States in this table may thus differ from data published by the
US Bureau of Economic Analysis.
2 Including fnancial sector support.
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FISCAL MONITOR: CuRbINg CORRupTION
International Monetary Fund | April 2019
Advanced Economies: Shifting Gears to Fiscal Easing
Te aggregate fscal stance for advanced economies eased slightly in 2018, after remaining broadly
neutral during 2014–17 (Figure 1.7).6 Te average
structural primary defcit edged up to 1⅓ percent of
GDP in 2018 from 1 percent a year earlier. Te easing
was driven, to a large extent, by strong procyclical
fscal policy in the United States, mainly through
higher discretionary spending and the reduction in
effective tax rates under the 2017 Tax Cuts and Jobs
Act (TCJA).
In contrast, fscal policy was tightened in Korea by
3 percentage point of GDP, partly because of higher
marginal tax rates on the top two income tax brackets.
In Australia, Canada, Japan, and the United Kingdom,
fscal policy remained broadly neutral in 2018. The
aggregate euro area fiscal stance also remained broadly
neutral in 2018, with heterogeneity across member
countries. The stance was broadly neutral in France,
Italy, Portugal, and Spain. It tightened slightly in
Germany, reflecting underspending partly because of a
6A neutral fscal stance is defned as a change in the structural
primary balance between –¼ and ¼ of a percentage point of potential
GDP in a year. Any change above ¼ (below –¼) of a percentage point
is defned as fscal tightening/contraction (loosening/expansion).
delay in forming the coalition government, and eased
in the Netherlands by close to 1 percentage point of
GDP, reflecting public investment increases. Interest
expenditures, reflecting the European Central Bank’s
loose monetary policy, continued to fall relative to
GDP in most euro area countries. In Italy, spreads rose
in the second half of 2018, although spillovers to other
euro area economies with high debt levels were limited
(Figure 1.8).
Nevertheless, gross public debt as a share of GDP
fell in advanced economies in 2018, on average, for a
second year in a row. General government debt eased
from a recent peak of almost 107 percent of GDP in
2016 to 103½ percent of GDP in 2018. Tis mainly
reflected a decline in nominal interest rates, and, in
some cases, a cyclical recovery in primary balances
(euro area) (Figure 1.9).7 Total government expenditures have declined by almost 5 percentage points of
GDP since reaching a peak in 2009 but remain higher
than precrisis levels (Figure 1.10). Over the same
period, investment as a share of GDP has remained
low and below 2007 levels in many countries. Total
7A decline in the GDP shares of highly indebted economies (for
example, Japan) also contributed to the decline in the weighted
average debt ratio for advanced economies.
Greece Italy Portugal Spain France
Mar. 2018

Apr. 18
May 18
Jun. 18
Jul. 18
Aug. 18
Sep. 18
Oct. 18
Nov. 18
Dec. 18
Jan. 19
Mar. 19
Feb. 19
5 4 3 2 1 0
Figure 1.8. Advanced Economies: Spread over 10-Year
German Bond Yield, 2018–19
(Percentage points)
Italian spreads widened over the past year, but spillover to other
euro area countries was limited.
Source: Bloomberg Finance L.P.
Note: Spread data through March 29, 2019.
AEs 25th percentile
AEs 75th percentile
Italy Euro area AEs
United Kingdom United States Japan
2012 13 14 15 16 17 18 19 20 21 22 23 24
Figure 1.7. Advanced Economies: General Government
Structural Primary Balance, 2012–24
(Percent of potential GDP)
The fiscal stance is easing across major advanced economies.
–7
–5
–3
–1
5 3 1
Source: IMF, World Economic Outlook database.
Note: AEs = advanced economies.
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revenues, on the other hand, remained broadly
unchanged as a share of GDP.
Te fscal stance in advanced economies is expected
to ease further in 2019, mainly driven by expansionary budget plans in major euro area countries, Korea,
and the United States, and—to a lesser extent—in
Australia. Te projected fscal stimulus in Germany
is ⅔ percentage point of GDP in 2019, and includes
personal income tax relief and higher spending on
public investment, childcare, and education, as well
as targeted transfers to reduce poverty risks. Te
Netherlands plans a stimulus of ½ percentage point
of GDP, including higher public investment in both
physical and human capital. In Italy, the fscal stance
will loosen by ⅓ percentage point of GDP, reflecting current spending increases with a new minimum
income program and a partial reversal of past pension
reforms, including easing of early retirement rules for
a trial period of three years. Korea is also projected
to ease fscal policy by ⅔ percentage point of GDP
in 2019, with an increase in welfare spending. In
the United States, the structural primary defcit is
projected to widen by ⅓ percentage point of GDP in
2019 because of higher mandatory spending, and in
Australia by ¼ percentage point of GDP because of
increased infrastructure investment.
Fiscal policy in other large advanced economies is
expected to be broadly neutral in 2019 (Canada, France,
Japan, and the United Kingdom—albeit with large
uncertainty surrounding Brexit). In Japan, the planned
measures to mitigate the impact of the forthcoming hike
in the consumption tax rate—including reduced taxes
on car ownership, an extension of tax breaks on housing, rebates on cashless purchases, and infrastructure
investment—will keep the fscal stance neutral in 2019.
Te medium-term outlook foresees fscal adjustment across several large economies outside the euro
area (Figure 1.11). Te structural primary balance is
projected to improve by more than 1 percentage point
of GDP in Australia and the United States, and more
than ½ percentage point of GDP in Japan between
2019 and 2024. Te improvement reflects higher tax
revenues from stronger terms of trade and suspended
corporate tax cuts (Australia), expiration of some provisions in the TCJA after 2022 (United States), and the
increase in the consumption tax rate in 2019 (Japan),
respectively. Conversely, the fscal stance is projected
to further ease in Italy with a rise in spending on
pensions, social assistance, and infrastructure investment, as well as in Korea with a medium-term plan to
strengthen the social safety net and create jobs.
General government gross debt in advanced economies is projected to remain broadly unchanged over
the medium term, at more than 103 percent of GDP.
While public debt is projected to decline in all euro
area countries except Italy, it will increase in the United
States, and—to a lesser extent—in Japan and Korea
(Figure 1.12). Gross public debt in the United States
Total expenditures
Non-interest expense
Interest expense (right scale)
Investment (right scale)
Total revenue
Tax revenue
2007 08 09 10 11 12 13 14 15 16 17 18
9 6 3 0
12
15
0
10
20
30
40
50
Source: IMF, World Economic Outlook database.
Figure 1.10. Advanced Economies: General Government
Expenditures and Revenue, 2007–18
(Percent of GDP)
Spending restraint has driven the recent increase in the primary
balances.
Nominal exchange rate Real GDP

2007–12 2012–16 2016–18
–40
–30
–20
–10
0
10
20
30
40
50
Sources: IMF, World Economic Outlook database; and IMF staff estimates.
Figure 1.9. Advanced Economies: Drivers of Change in
General Government Debt, 2007–18
(Percent of GDP)
The contribution of primary balances to debt accumulation has
diminished since the financial crisis.
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FISCAL MONITOR: CuRbINg CORRupTION
International Monetary Fund | April 2019
is expected to exceed 110 percent of GDP by 2024,
as headline fscal defcits remain above 4 percent of
GDP until 2024. In several advanced economies, the
debt-to-GDP ratio is projected to increase further after
2024, reflecting rising age-related expenditures (Italy,
Japan). With high debt burdens and tightening fnancial
conditions, interest payments as a share of GDP are
expected to rise in the medium term for some advanced
economies (for example, Canada, Italy, Spain, and the
United States) (Figure 1.12). Tese countries, as well as
Belgium, France, Japan, and Portugal, all face annual
fnancing requirements ranging from 10 to 40 percent
of GDP over the next three years (Table 1.3).
Emerging Market and Middle-Income Economies: Fiscal
Consolidation on Hold
Overall fscal defcits in 2018 declined in emerging
market and middle-income economies for a second
year in a row, driven primarily by fscal adjustment
in oil exporters (Figure 1.13). Te average overall
defcit declined from 4⅓ percent of GDP in 2017 to 4
percent of GDP in 2018, with diverging fscal developments across countries.
Headline fscal balances improved for most oil
exporters, supported by a pickup of oil prices in the
frst half of 2018 and continued adjustments to adapt
to lower medium-term oil prices (Angola, Azerbaijan,
Gulf countries, Kazakhstan, Russia). In Saudi Arabia,
the overall defcit declined by half to 4½ percent of
GDP as higher oil and non-oil revenues more than
offset additional spending on capital and social benefts, including compensatory payments to households to help ease the impact of energy price and
value-added tax (VAT) reforms, and new allowances
for public sector workers, retirees, and students. In
Russia, the overall budget turned from a defcit of 1½
percent of GDP to a surplus of 23 percent of GDP,
owing to higher oil revenues and expenditure restraint
on social benefts and subsidies. In Mexico, however,
the overall defcit increased in 2018—after benefting from a signifcant one-off central bank transfer
in 2017—but remained ½ percentage point of GDP
below its 2016 level.
Headline defcits for non-oil exporters deteriorated on
average, with some offsetting outturns across countries.
General government overall defcits widened in China
and Turkey by around 1 percentage point of GDP in
2018 because of demand support in response to slowing
growth. Te measures included cuts in personal income
and value-added taxes, and additional public investment
in China; and increases in employment incentives, civil

–2.0
–1.5
2.5
–1.0
–0.5
0.0
0.5
1.0
1.5
2.0
DEU
JPN
ESP
GBR
Change in structural primary balance,
2019–24
Change in structural primary balance, 2018–19
–1.5 –1.0 –0.5 0.0 0.5 1.0 1.5
Source: IMF, World Economic Outlook database.
Note: Data labels in the figure use International Organization for
Standardization (ISO) country codes. MT = medium term; ST = short term.
Figure 1.11. Advanced Economies: Change in General
Government Structural Primary Balance, 2018–24
(Percent of GDP)
Medium-term fiscal adjustment is projected for most advanced
economies outside the euro area.

–1.0
0.8
–0.8
–0.6
–0.4
–0.2
0.0
0.2
0.4
0.6
Change in interest bill
Change in debt
–40 –30 –20 –10 0 10
Source: IMF, World Economic Outlook database.
Note: Data labels in the figure use International Organization for
Standardization (ISO) country codes. AEs = advanced economies;
G20+ = Group of Twenty plus Spain.
Figure 1.12. Advanced Economies: Change in General
Government Gross Debt and Interest Bill, 2018–24
(Percent of GDP)
The debt-to-GDP ratio is projected to rise materially only in the
United States over the medium term.

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Table 1.2. General Government Debt, 2012–24
(Percent of GDP)
Projections
2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024
Gross Debt

82.9 83.0 83.2 83.4 83.4 83.5
104.0 103.7 103.7 103.6 103.3 103.0
106.7 107.5 108.4 109.4 110.0 110.3
83.6 81.8 80.2 78.6 77.2 75.7
99.2 98.7 98.2 97.6 97.0 96.2
56.9 53.8 51.1 48.5 46.0 43.7
133.4 134.1 135.3 136.4 137.5 138.5
96.0 94.9 94.1 93.3 92.7 92.3
237.5 237.0 237.4 237.8 238.0 238.3
85.7 84.4 83.6 82.6 81.5 80.3
88.0 84.7 81.3 78.0 74.9 72.0
53.4 55.1 56.8 58.4 59.8 61.2
55.2 57.0 58.7 60.4 61.8 63.1
55.5 58.2 60.7 63.1 65.0 66.8
55.4 59.5 63.2 66.7 69.7 72.4
69.0 67.8 66.5 65.3 64.2 63.1
29.6 29.4 29.6 30.0 30.5 30.8
13.8 13.9 14.1 14.7 15.9 16.9
70.0 70.0 70.0 70.0 69.7 69.5
90.4 92.4 94.1 95.6 96.5 97.6
54.1 54.5 54.5 54.5 54.4 54.3
41.2 41.4 41.6 41.5 42.2 43.2
23.7 25.4 27.6 28.1 32.4 37.5
57.8 59.8 61.8 63.5 65.1 66.5
45.1 44.5 44.1 43.6 43.2 42.8
30.1 31.4 32.7 33.8 34.9 35.9
44.1 43.2 42.6 41.9 41.6 41.3
69.3 69.9 70.3 71.1 71.3 71.4
76.4 77.2 77.7 78.6 78.9 79.0
83.4 86.2 88.2 91.3 93.0 94.3
67.9 66.7 65.5 64.4 63.4 62.3
88.2 87.7 87.3 86.7 86.0 85.2
38.6 36.2 34.1 32.1 30.2 28.4
121.5 122.5 123.8 125.2 126.6 127.8
83.5 82.9 82.4 82.1 81.9 81.8
153.6 153.2 153.6 153.9 154.1 154.5
76.2 75.0 74.2 73.2 72.1 70.9
26.6 25.8 25.0 24.3 23.6 23.0

30.9 30.4 30.5 30.9 31.0 30.9
45.3 46.6 47.6 48.4 48.9 49.4
36.2 38.9 41.2 43.5 45.6 47.5
. . . . . . . . . . . . . . . . . .
Source: IMF staff estimates and projections.
Note: All country averages are weighted by nominal GDP converted to US dollars (adjusted by purchasing power parity only for world output) at average market
exchange rates in the years indicated and based on data availability. Projections are based on IMF staff assessments of current policies. In many countries, 2018
data are still preliminary. For country-specifc details, see “Data and Conventions” and Tables A, B, C, and D in the Methodological and Statistical Appendix.
MENAP = Middle East, North Africa, and Pakistan.
1 For cross-country comparability, gross and net debt levels reported by national statistical agencies for countries that have adopted the 2008 System of National Accounts
(Australia, Canada, Hong Kong SAR, United States) are adjusted to exclude unfunded pension liabilities of government employees’ defned-beneft pension plans.
2 Gross debt refers to the nonfnancial public sector, excluding Eletrobras and Petrobras, and includes sovereign debt held on the balance sheet of the central bank.
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FISCAL MONITOR: CuRbINg CORRupTION
International Monetary Fund | April 2019
servant salaries, and pensions in Turkey. In Pakistan, the
overall defcit was 2½ percentage points of GDP looser
than budgeted, owing to underperforming revenues
and expenditure overruns related to the political cycle.
In contrast, overall defcits declined in Argentina and
Egypt by 1½ and 1 percentage point of GDP, respectively, largely from higher VAT collection and increased
export taxes. In Brazil, the overall defcit also declined
by 1 percentage point of GDP as a result of a reduction in net interest payments, while the primary defcit
remained broadly unchanged at 13 percent of GDP. In
India, the general government defcit declined by ⅓ percentage point of GDP in fscal year 2018/19, although
a recently announced farm-income-support program
alongside weaker-than-expected goods and services tax
revenues led to a deterioration relative to the previous
central government budget outturn.
Te general government debt-to-GDP ratio for the
group rose by 2⅓ percentage points in 2018 to almost
51 percent of GDP on average, a level not seen since
the early 1980s. More than half of those countries saw
debt rising in 2018, and almost a ffth had debt ratios
exceeding 70 percent of GDP—the threshold beyond
which debt sustainability is considered at high risk
for emerging market economies. Te rise in debt was
mainly driven by currency depreciations against the
US dollar and the increase in government borrowing
costs. Te sharp depreciation against the US dollar
Table 1.3. Selected Advanced Economies: Gross Financing Needs, 2019–21
(Percent of GDP)
2019 2020 2021
Maturing
Debt
Budget
Deficit
Total
Financing
Need
Maturing
Debt1
Budget
Deficit
Total
Financing
Need
Maturing
Debt1
Budget
Deficit
Total
Financing
Need
Australia 1.6 1.5 3.0 2.6 0.7 3.3 2.4 0.0 2.3
Austria 7.6 0.1 7.7 5.8 0.3 6.0 4.8 0.3 5.1
Belgium 15.8 1.2 17.0 15.6 1.4 17.0 15.3 1.4 16.7
Canada 8.9 0.6 9.6 10.4 0.6 11.1 8.2 0.6 8.8
Czech Republic 4.4 –1.1 3.3 3.2 –0.8 2.3 2.6 –0.6 2.0
Denmark 4.0 0.4 4.4 3.4 0.4 3.8 4.3 0.3 4.6
Finland 5.7 0.3 6.0 7.7 0.0 7.8 4.1 –0.1 4.0
France 10.2 3.3 13.5 11.4 2.4 13.8 10.6 2.5 13.1
Germany 4.7 –1.1 3.5 4.8 –1.1 3.8 2.9 –0.8 2.1
Iceland 2.2 –0.7 1.5 4.1 –0.5 3.7 1.9 –0.5 1.3
Ireland 7.2 0.0 7.2 8.2 –0.2 8.0 3.4 –0.3 3.1
Italy 21.0 2.7 23.7 20.6 3.4 24.0 21.2 3.5 24.7
Japan 36.7 2.8 39.5 36.3 2.1 38.5 31.2 1.9 33.0
Korea 2.0 –2.1 –0.1 2.9 –1.5 1.4 2.9 –1.1 1.9
Lithuania 3.2 –0.4 2.8 5.2 –0.3 4.9 5.1 –0.3 4.8
Malta 5.7 –0.6 5.1 5.5 –0.6 4.9 5.2 –0.7 4.5
Netherlands 6.2 –1.0 5.1 6.0 –0.8 5.3 4.2 –0.8 3.5
New Zealand 4.5 –0.1 4.4 3.6 –0.7 3.0 4.6 –1.0 3.6
Portugal 13.7 0.6 14.4 12.9 0.1 13.1 15.8 –0.4 15.4
Slovak Republic 2.9 0.0 2.9 4.0 –0.3 3.7 2.0 –0.3 1.6
Slovenia 6.2 –0.5 5.7 4.3 –0.2 4.1 5.9 –0.4 5.5
Spain2 14.4 2.3 16.7 14.2 2.3 16.5 14.1 2.4 16.5
Sweden 4.3 –0.5 3.7 3.7 –0.3 3.4 1.2 –0.3 0.9
Switzerland 1.6 –0.3 1.4 1.4 –0.2 1.2 1.3 –0.2 1.1
United Kingdom 8.2 1.3 9.5 7.4 1.1 8.5 6.6 1.1 7.7
United States3 20.5 4.6 25.1 20.5 4.4 24.9 17.6 4.4 21.9
Average 16.5 2.6 19.1 16.5 2.4 19.0 14.3 2.4 16.7
Sources: Bloomberg Finance L.P.; and IMF staff estimates and projections.
Note: For most countries, data on maturing debt refer to central government securities. For some countries, general government defcits are reported on an
accrual basis. For country-specifc details, see “Data and Conventions,” and Table B in the Methodological and Statistical Appendix.
1 Assumes that short-term debt outstanding in 2019 and 2020 will be refnanced with new short-term debt maturing in 2020 and 2021, respectively. Countries
projected to have budget defcits in 2019 or 2020 are assumed to issue new debt based on the maturity structure of debt outstanding at the end of 2018.
2 Data refer to the general government on a consolidated basis. Data are from staff estimates and not based on Ministry of Finance data for upcoming amortization.
3 For cross-country comparability, expenditure and fscal balances of the United States are adjusted to exclude the imputed interest on unfunded pension
liabilities and the imputed compensation of employees, which are counted as expenditures under the 2008 System of National Accounts (2008 SNA) adopted
by the United States, but not in countries that have not yet adopted the 2008 SNA. Data for the United States in this table may thus differ from data published
by the US Bureau of Economic Analysis.
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led to a spike in government debt in countries with
high exposure to foreign-currency-denominated debt
(Angola, Argentina) (Figure 1.14, left side). As global
fnancial conditions tightened in 2018, interest rates
on sovereign bonds denominated in US dollars rose
for several large emerging markets that rely on external
fnancing (Indonesia, Mexico, Turkey) (Figure 1.14,
right side; Figure 1.15). Risk premiums, measured by
the spreads over 10-year US Treasury yields, have risen
by 40 percent on average in selected economies since
EMMIEs Oil exporters Non–oil exporters
–7
3
–6
–5
–4
–3
–1
–2
2 1 0
2012 13 14 15 16 17 18 19 20 21 22 23 24
Source: IMF, World Economic Outlook database.
Note: EMMIEs = emerging market and middle-income economies.
Figure 1.13. Emerging Market and Middle-Income
Economies: General Government Overall Balance,
2012–24
(Percent of GDP)
After narrowing in the past three years, the average overall
deficit is projected to widen in 2019.

–60
60
–40
–20
0
20
40
–20
15
–15
–10
–5
0
20
5
10
Argentina
Angola
Turkey
Brazil
South Africa
Indonesia
Mexico
Source: IMF, World Economic Outlook database.
Figure 1.14. Emerging Market and Middle-Income
Economies: Drivers of Change in General Government
Debt, 2017–18
(Percent of GDP)
Exchange rate and interest rate shocks boosted debt ratios in
several countries with debt vulnerabilities.
G20 AEs
G20 EMMIEs
0
10
8 6 4 2
January 2018
March 2019
0 2 4 6 8 10
CAN
ITA
GBR
USA
BRA
CHN
IND
IDN MEX
RUS
ZAF
TUR
Figure 1.15. Emerging Market and Middle-Income
Economies: Sovereign 10-Year US Dollar Bond Yields,
2018–19
(Percent)
Tighter financial conditions in 2018 led to an increase in bond
yields in large emerging markets.
Source: Bloomberg Finance L.P.
Note: AEs = advanced economies; EMMIEs = emerging market and
middle-income economies; G20 = Group of Twenty.
70
100
130
160
190
220
250
Jan.
2018
Mar.
18
May
18
Jul.
18
Sep.
18
Nov.
18
Mar.
19
Jan.
19
EM
spread
(bps)1
TUR 485
ZAF 290
RUS 220
MEX 207
BRA 253
ARG 773
Figure 1.16. Emerging Market and Middle-Income
Economies: Sovereign Spreads over 10-Year US
Treasury Bond Yields, 2018–19
(Index = 100 for January 1, 2018)
Spreads have widened in many emerging markets over the past
year.
Source: Bloomberg Finance L.P.
Note: bps = basis points; EM = emerging market. Data labels in the figure
use International Organization for Standardization (ISO) country codes.
1Actual sovereign spreads as of March 29, 2019.
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FISCAL MONITOR: CuRbINg CORRupTION
International Monetary Fund | April 2019
the beginning of 2018, in part driven by deteriorating
investor confdence (Figure 1.16). For economies that
are less reliant on global market fnancing or issue debt
largely in local currency (Brazil, India, South Africa)
domestic fnancial conditions also tightened in 2018.
Tus, many economies saw rising interest burdens,
which exceeded 20 percent of total revenue in 2018 in
Egypt, Pakistan, and Sri Lanka. As a result, emerging
market economies have become vulnerable to rollover
risks if they face large fnancing needs (see Table 1.4).
Fiscal developments in 2018 did not reverse the
structural revenue and spending trends of the past
decade. Tax-to-GDP ratios remained flat on average (Figure 1.17), while spending rigidities on wage
bills and transfers continued to crowd out public
investment (Figure 1.18). Of note, nontax revenues
increased in non-oil exporters since 2012, largely
reflecting gains from improved administration of the
social security system in China. Tis was offset by a
decline in nontax revenues among oil exporters during
2012–15, partly because of lower dividends from
state-owned oil companies. Meanwhile, expenditures as
a share of GDP have declined in oil exporters, reflecting both current and capital spending cuts, but have
continued to rise across most categories for non-oil
exporters, apart from investment spending, which has
remained low over the years (Figure 1.19).
Tax revenue, EMMIEs
of which oil exporters
Nontax revenue, EMMIEs
of which oil exporters
1998 2000 02 04 06 08 10 12 14 16 18
0
40
5
10
15
20
25
30
35
Source: IMF, World Economic Outlook database.
Note: EMMIEs = emerging market and middle-income economies.
Figure 1.17. Emerging Market and Middle-Income
Economies: General Government Revenue,
1998–2018
(Percent of GDP)
Revenue has remained broadly flat since 2010, despite a drop in
nontax revenue of oil exporters.
1998 2000 02 04 06 08 10 12 14 16 18
0
20
8 6 4 2
10
12
14
16
18
5
10
15
20
25
30
0
35
Expenditures (right scale)
Other expenses
Social benefits
Employee compensation Goods and services
Interest expense
Investment
Source: IMF, World Economic Outlook database.
Figure 1.18. Emerging Market and Middle-Income
Economies: General Government Expenditures,
1998–2018
(Percent of GDP)
Total expenditure has increased following the global financial
crisis, but investment continued to fall.

Oil exporters
Non–oil exporters
Other expense
Interest expense
Compensation of
employees
Net acquisition of
nonfinancial assets
Total expenditures
Social benefits
–2.0 –1.5 –1.0 –0.5 0.0 0.5 1.0 1.5 2.0
Source: IMF, World Economic Outlook database.
Note: EMMIEs = emerging market and middle-income economies.
Figure 1.19. Emerging Market and Middle-Income
Economies: Change in General Government
Expenditures, 2012–18
(Percent of GDP)
Spending on social benefits and interest increased substantially
since 2012.
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International Monetary Fund | April 2019
Te overall defcit is expected to increase in 2019
before gradually declining over the medium term,
but debt is expected to continue trending up (see
Table 1.5 on the fscal outlook in selected emerging market and middle-income economies in 2019
and beyond).
• The increase in the 2019 general government
deficit is largely driven by the projected stimulus
in China (about 1¼ percentage point of GDP) to
mitigate the growth slowdown, and partly by the
deteriorating fiscal positions among oil exporters—
particularly Russia and Saudi Arabia—that are
expected to face lower oil revenues and plan to
increase spending. In contrast, several countries
plan fiscal adjustment through expenditure rationalization or increased tax revenue (Argentina, Egypt,
Malaysia, Turkey).
• The medium-term adjustment is expected to rely
on spending restraint (over 1 percentage point of
GDP by 2024) without mobilizing higher revenues. Countries aim to contain current spending,
including pensions and the wage bill (Brazil), while
protecting capital spending (India) or increasing it (Indonesia). Overall investment spending
is expected to edge up steadily (cumulatively by
½ percentage point of GDP by 2024), albeit
decline in oil exporters. Meanwhile, total revenues
as a share of GDP are expected to further decline
over the medium term. For oil-exporting countries, this reflects the expected moderation of oil
Table 1.4. Selected Emerging Market and Middle-Income Economies: Gross Financing Needs, 2019–20
(Percent of GDP)
2019 2020
Maturing
Debt
Budget
Deficit
Total Financing
Need
Maturing
Debt
Budget
Deficit
Total Financing
Need
Argentina 12.7 2.7 15.3 8.4 1.5 9.8
Brazil 7.7 7.3 15.0 12.6 7.0 19.5
Chile 0.6 1.8 2.4 1.2 1.5 2.7
Colombia 2.3 2.6 4.9 1.6 1.0 2.7
Croatia 8.6 0.0 8.7 8.4 –0.1 8.3
Dominican Republic 3.6 3.1 6.7 3.2 3.3 6.5
Ecuador 5.6 0.0 5.6 6.1 –3.8 2.3
Egypt 28.0 8.6 36.6 25.9 6.5 32.4
Hungary 13.6 1.9 15.5 13.2 1.9 15.1
India 3.8 6.9 10.7 3.7 6.6 10.4
Indonesia 1.9 1.8 3.8 1.7 1.8 3.5
Malaysia 7.0 3.0 10.0 6.5 2.5 9.1
Mexico 7.6 2.5 10.1 7.9 2.4 10.3
Morocco 5.5 3.7 9.1 5.5 3.3 8.7
Pakistan 35.1 7.2 42.3 37.2 8.7 46.0
Peru 2.5 1.9 4.4 2.4 1.3 3.7
Philippines 3.1 1.2 4.3 2.9 1.4 4.3
Poland 5.7 2.2 7.9 5.0 3.1 8.1
Romania 4.2 3.8 8.0 3.8 4.1 8.0
Russia 1.3 –1.0 0.4 1.2 –0.8 0.4
South Africa 9.0 5.1 14.0 8.6 5.1 13.7
Sri Lanka 13.5 4.6 18.1 12.0 3.5 15.5
Thailand 5.3 0.1 5.4 5.2 0.7 5.9
Turkey 3.9 3.1 7.1 4.7 3.5 8.1
Ukraine 5.7 2.3 8.1 6.0 2.3 8.3
Uruguay1 15.2 2.7 17.9 17.1 2.6 19.7
Average 6.1 3.8 9.9 6.5 3.6 10.2
Source: IMF staff estimates and projections.
Note: Data in the table refer to general government data. For some countries, general government defcits are reported on an accrual basis. For countryspecifc details, see “Data and Conventions,” and Table C in the Methodological and Statistical Appendix.
1 Data correspond to the consolidated public sector (as presented in the authorities’ budget documentation), which includes the nonfnancial public
sector, local governments, Banco Central del Uruguay, and Banco de Seguros del Estado.
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prices, whereas non-oil revenue is expected to pick
up in some cases (Kuwait, Russia). The projected
improvement in the overall fiscal balance of emerging market and middle-income economies will
not be sufficient to stabilize debt over the medium
term, particularly in non–oil-exporting countries
(Brazil, China).
Low-Income Developing Countries: Fiscal
Expansion Slows
Te overall fscal defcit in low-income developing
countries tightened slightly in 2018 to 4 percent of
GDP. An improvement in the average overall defcit
of commodity exporters more than offset the slight
deterioration in non–commodity exporters’ balances
(Figure 1.20). Higher commodity prices in the frst
half of 2018, particularly for oil, boosted revenue
in oil exporters. Commodity exporters used half the
increased fscal space to cover additional spending on
interest and other recurrent activities and the other
half for defcit reduction. Non–commodity exporters’
balances slipped further as overall expenditures rose
slightly faster than revenues (Figure 1.21).
In 2018, weighted-average expenditures increased by
⅓ percentage point of GDP in low-income developing
countries, including 3 percentage point of GDP in
commodity exporters. Nigeria increased spending on
Table 1.5. Selected Emerging Market and Middle-Income Economies: Fiscal Outlook in 2019 and over the
Medium Term
Argentina The authorities plan a zero-primary balance in 2019 at the federal level by raising taxes on exports, drawing down assets
of the national pension fund, scaling down energy subsidies, and reducing other non-entitlement spending. Mediumterm budget projections foresee a primary surplus of 1 percent of GDP by 2020.
Brazil To comply with the constitutional expenditure ceiling, the authorities plan to implement pension reform and contain
personnel spending. However, even complying with the constitutional spending ceiling, IMF staff projections are for
public debt to continue increasing to just below 100 percent of GDP in 2024.
China The government plans a more proactive fiscal stance for 2019 that would include reductions in the value-added, personal
income, and corporate income tax rates. General government debt is projected to rise over the medium term to over 72
percent of GDP by 2024.
India The interim federal government budget of February 2019 envisages a slower pace of adjustment than previously planned,
primarily due to the newly announced rural farm income-support scheme. IMF staff projections are that the achievement
of the federal government deficit target of 3 percent of GDP will likely be delayed and that the debt target of 40 percent of
GDP will be achieved after 2024.
Indonesia The authorities intend to keep the deficit unchanged at 1.8 percent of GDP in 2019 and increase tax revenue by at least
3 percentage points of GDP in five years through tax policy and administration reforms. Extra revenue is to be spent on
infrastructure, health, education, and structural reforms. In the medium term, public debt is projected to remain below
30 percent of GDP.
Mexico The government targets a public sector borrowing requirement of 2½ percent of GDP in 2019—corresponding to a general
government primary surplus of more than 1 percent of GDP—which would fall slightly over the medium term and stabilize
the public debt around its current level. The 2019 budget envisages significant expenditure reallocation, including public
wage cuts and higher investment in the energy sector.
Russia The government temporarily relaxed its fiscal rule, by allowing a primary deficit of ½ percent of GDP at the benchmark
oil price for the next six years. The authorities increased the main value-added tax rate in January 2019 and plan to
increase spending by about 1 percentage point of GDP per year (half to be spent on infrastructure, and half on health,
education, and other current spending).
Saudi Arabia The government’s medium-term fiscal plan envisages a balanced budget by 2023, with increased spending on infrastructure
development offset by continued non-oil revenue and energy price reforms after 2019. IMF staff projections are for
continued fiscal deficits through 2024 reflecting lower oil prices and higher spending than envisaged by the authorities.
South Africa The government’s medium-term budget envisages a widening of the overall deficit to 4.5 percent of GDP in 2019 to
accommodate financing for the public utility Eskom, before declining to 4 percent of GDP over the medium term. IMF
staff projections suggest that additional consolidation in the next few years would be needed to stabilize the public debt
well below 60 percent of GDP.
Turkey The government’s medium-term fiscal plan projects the overall deficit to remain below 2 percent of GDP through
2019–21, helped by spending cuts, including on public investment. IMF staff projections are that the overall deficit will
gradually fall below 3 percent of GDP by 2024 and that debt will remain below 30 percent of GDP over the medium term.
Sources: IMF, World Economic Outlook database; and IMF staff reports.
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capital projects while implicit fuel subsidies rose amid
higher oil prices; and Ghana increased its spending
by more than 3½ percentage points of GDP in large
part to address banking sector problems. Among non–
commodity exporters, signifcant increases in recurrent
spending (Bangladesh) or transfers (Nepal) and capital
investments (Moldova, Nepal, Rwanda, Uganda) were
partially offset by investment cuts in other countries (Ethiopia, Honduras, Kenya, Kyrgyz Republic).
Between 2012 and 2018, the expenditure composition of low-income developing countries shifted
away from public investments that could support
long-term growth to servicing existing debt burdens
(Figure 1.22). For the group, the proportion of tax revenue spent on servicing debt increased by 7 percentage
points between 2012 and 2018 to 19½ percent, and
increased particularly sharply in Bangladesh, Kenya,
Nigeria, and Zambia (Figure 1.23). In Ghana, interest
expenditures consume about 40 percent of domestic
tax revenue.
Public debt rose further in 2018 and reached
45 percent of GDP. As in prior years, debt drivers
varied considerably across countries. General government debt increased by more than 2 percentage
points of GDP in Bangladesh (defcit and exchange
rate depreciation), Ethiopia (defcit and fnancial
asset accumulation to prefnance public investment),
Ghana (defcit and exchange rate depreciation),
Kenya (defcit), and Nigeria (defcit), and by close to
10 percentage points of GDP in Zambia (defcit and
exchange rate depreciation). Te share of low-income
developing countries in debt distress or at high risk
of debt distress increased by almost a half from 2012
to 43 percent in 2018 (Figure 1.24).
Commodity exporter
Non–commodity exporter
8
10
12
14
16
18
20
22
24
Expense
Revenue
Expense
Revenue
2012 13 14 15 16 17 18 19 20 21 22 23 24
Source: IMF, World Economic Outlook database.
Figure 1.21. Low-Income Developing Countries:
General Government Revenue and Expense, 2012–24
(Percent of GDP)
In line with commodity price developments, revenues and
expenditures rose notably in commodity exporters in 2017–18.
LIDCs
Commodity exporters
Non–commodity exporters
–6
–5
–4
–3
–2
–1
0
2012 13 14 15 16 17 18 19 20 21 22 23 24
Source: IMF, World Economic Outlook database.
Note: LIDCs = low-income developing countries.
Figure 1.20. Low-Income Developing Countries:
General Government Overall Balance, 2012–24
(Percent of GDP)
The average fiscal deficit has bottomed out in low-income
developing countries.

Other expense
Interest expense
Compensation of
employees
Net acquisition of
nonfinancial assets
Total expenditures
Social benefits
–2.0 –1.5 –1.0 –0.5 0.0 0.5 1.0
Source: IMF, World Economic Outlook database.
Note: LIDCs = low-income developing countries.
Figure 1.22. Low-Income Developing Countries:
Change in General Government Expenditures, 2012–18
(Percent of GDP)
Interest expense has crowded out investment.
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Te average headline fscal defcit is projected to
remain broadly unchanged in 2019 among both commodity and non–commodity exporters. In several non–
commodity exporters headline defcits are expected to
widen owing to higher spending on social programs
(Uzbekistan) and capital investments (Kyrgyz Republic, Madagascar, Uganda). However, this widening
will be offset by fscal adjustment in other countries,
through cuts in non-investment spending (Senegal)
and income tax and revenue administration measures
(Benin, Nepal). Te headline fscal defcit in Ethiopia,
on the other hand, is expected to remain unchanged
in 2019–20 as foreign-fnanced projects are curtailed.
Among commodity exporters, the narrowing headline
defcits in Côte d’Ivoire (as current spending growth
is kept below GDP growth) and Ghana (as spending
on bank resolution diminishes) will counterbalance a
deterioration in Nigeria’s fscal balance caused by lower
projected oil revenues.
General government debt is expected to trend down
after 2019 if defcits decline as projected (Figure 1.25),
largely through expenditure control. However, given
large spending gaps to meet the SDGs, there is
some tension associated with expenditure-based debt
stabilization. At the same time, continued reliance
on non-concessional fnancing in many countries
(Côte d’Ivoire, Ethiopia, Ghana, Kenya, Senegal)
could add to their debt vulnerability if the proceeds
are not properly managed to generate growth and
repayment capacity. In Nigeria, non-interest spending growth is expected to align with revenue growth,
while expenditures in Bangladesh are expected to
contract by about 1 percentage point of GDP between
2018 and 2024, because of gradual winding down of
large infrastructure investment and current spending
restraint. Tax collections are projected to be relaLow-income developing countries
Commodity exporters
Non–commodity exporters
20
25
30
35
40
45
50
2012 13 14 15 16 17 18 19 20 21 22 23 24
Source: IMF, World Economic Outlook database.
Figure 1.25. Low-Income Developing Countries:
General Government Gross Debt, 2012–24
(Percent of GDP)
The pace of debt accumulation slowed in 2018, following three
years of rapid increase.
0
10
20
30
40
5
15
25
35
45
50
Low risk
2012 2012
2012
2018
2018
2018
Moderate risk High risk or in distress
Source: IMF staff estimates.
Figure 1.24. Low-Income Developing Countries:
Risk of Debt Distress, 2012 and 2018
(Percent of total countries)
Over 40 percent of countries face a high risk of debt distress or
are in debt distress.
0
10
20
30
2018
40
50
0 10 20
2012
GHA
ZMB NGA
KEN
MMR
BGD
SDN
NPL
30 40 50
Source: IMF, World Economic Outlook database.
Figure 1.23. Low-Income Developing Countries:
General Government Interest Expense, 2012–18
(Percent of tax revenue)
As debt levels rise, interest payments are consuming evermore
tax revenue.
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tively level in terms of GDP over the period, with an
increase in tax revenue for non–commodity producers (Kenya, Ethiopia) offsetting a fall for commodity
producers (Nigeria). Several countries plan to focus on
reforms to improve public investment management
(Kenya, Uzbekistan) as part of their medium-term
fscal adjustment planning.
Risks to the Fiscal Outlook
Many of the risks outlined in the April 2018 Fiscal
Monitor have materialized: rising tariffs and trade
policy uncertainty have weighed on global growth and
fscal prospects; reduced social and political cohesion
has delayed fscal adjustment in several advanced economies; higher borrowing costs and US dollar appreciation have contributed to deteriorating debt dynamics
in vulnerable emerging market and frontier market
economies with high external and foreign currency
debt; and oil price volatility has increased uncertainty
in revenues for oil exporters and in energy bills for
oil importers.
Looking ahead, fscal risks have intensifed amid an
increase in policy uncertainty and market volatility
(Figure 1.26). Key sources of risk include weaker global
growth because of a further escalation in trade tensions
and continued deterioration in investor sentiment, in
particular from a sharper slowdown in China; tighter
fnancial conditions resulting from stress on vulnerable
sovereigns as well as leveraged frms and households;
large swings in oil prices, which would have a differential impact on fscal outturns in oil exporters and
importers; and contingent liabilities triggered by any of
these factors.
• Weaker nominal growth: As noted in Chapter 1 of
the April 2019 World Economic Outlook, failure
to reach a negotiated resolution of existing trade
tensions between the United States and China
could sharpen the recent global slowdown, worsening fiscal accounts amid limited policy space.
Relatedly, weaker-than-expected growth in China
could negatively affect activity in trading partners
as well as global commodity prices and could also
prompt China to undertake a larger fiscal stimulus.
In the United Kingdom and, to a lesser extent, the
European Union, failure to ratify an agreement
for an orderly Brexit could disrupt the smooth
functioning of goods, labor, and financial markets,
potentially prompting a stimulus in response. With
weaker growth, policy rates would be lower, but risk
premiums could be higher as corporate earnings and
credit quality decline. If, however, trade disputes are
resolved, and market sentiment recovers, growth and
fiscal outturns could rise above the baseline forecast.
• Tighter financial conditions: Alternatively, as outlined
in Chapter 1 of the April 2019 Global Financial
Stability Report, while major central banks have
paused the process of monetary normalization,
financial conditions could tighten unexpectedly
from a sudden change in risk sentiment due to
factors other than weak growth. A sharp tightening
of financial conditions caused by risk aversion across
investors could expose high-debt emerging market
and frontier economies to debt service, refinancing,
and exchange rate risks (Box 1.1). In Italy, sustained
high sovereign spreads would weigh on growth,
fiscal, and banking prospects, while renewed stress
through a spike in borrowing costs could spill over
to other countries in the region.
• Commodity price volatility: Commodity prices are
projected to remain low relative to recent peaks
(Figure 1.27). In oil markets, slowing global demand
GPU index (left scale)
VIX (right scale)
100
150
200
250
300
350 30
25
20
15
10
5 0
Jan.
2017
Apr.
17
Jul.
17
Oct.
17
Jan.
18
Apr.
18
Jul.
18
Oct.
18
Jan.
19
Sources: Bloomberg Finance L.P.; and Baker, Bloom, and Davis 2016.
Note: Global EPU was calculated as the GDP-weighted average of
monthly EPU index values for the United States, Canada, Brazil, Chile, the
United Kingdom, Germany, Italy, Spain, France, Netherlands, Russia,
India, China, South Korea, Japan, Ireland, Sweden, and Australia, using
GDP data from the IMF’s World Economic Outlook database. National
EPU index values are from www.PolicyUncertainty.com and Baker, Bloom
and Davis 2016. Each national EPU Index is renormalized to a mean of
100 from 1997 to 2015 before calculating the Global EPU Index.
EPU = economic policy uncertainty; GPU = global policy uncertainty;
VIX = Chicago Board Options Exchange Volatility Index.
Figure 1.26. Global Economic Uncertainty Indices,
2017–19
Economic policy uncertainty and financial market volatility are at
their highest levels in two years.
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could reduce oil prices further, whereas rising
political tensions in the Middle East, or supply cuts
by the Organization of the Petroleum Exporting
Countries, pose an upward risk to prices. Lower oil
prices would worsen the fiscal position in oil exporters directly through lower commodity revenues and
indirectly through weak activity, affecting both oil
and non-oil sector growth, while improving the
fiscal position in oil importers, on average.
• Contingent liabilities: Weaker global growth, tighter
financial conditions, and a pullback in private
investment induced by policy uncertainty could lower
profitability in public and private corporations, especially those with high external and foreign currency
debt as well as non-transparent financing agreements.
Persistently lower oil prices could also lower the
profitability of state-owned energy companies in oil
exporters. In that event, recapitalizations or debt
assumption of distressed financial and nonfinancial
corporations could also weaken public balance sheets.
Te next section outlines the policy recommendations under the baseline forecasts and discusses the policy options available should downside risks materialize.
Setting the Right Course for Fiscal Policy
Preparing for the Next Downturn
Public debt remains elevated in advanced economies
and has grown in emerging market and developing
economies. Te associated vulnerabilities could limit
the ability of many advanced and emerging market and
middle-income economies to pursue countercyclical
policies in the event of a major economic downturn.
Where growth remains favorable in these countries,
growth-friendly fscal adjustment is still appropriate
to make room to manage the next downturn. Te
size, pace, and composition of adjustment will need
to be tailored to country circumstances, such as the
unemployment rate, excess capacity, and access to
fnancial markets, to balance growth and sustainability objectives. Where growth is slowing toward a
lower potential rate, policymakers should prioritize
growth-enhancing expenditures. Should the downside risks outlined earlier materialize in the form of a
major cyclical downturn, fscal stimulus could complement monetary easing where there is policy space.
For low-income developing countries, efforts to boost
revenue would help stabilize high public debt and
provide resources to aggressively pursue their development objectives.
In advanced economies, fscal restraint is appropriate
for most countries with high debt levels to provide
room for countercyclical policies during the next
downturn. In addition, pressure on expenditures from
an aging population add to the argument for fscal
prudence. Efforts to gradually rebuild buffers would
also help keep interest bills in check, thereby freeing
resources for growth-friendly uses or further debt
reduction over the medium term. Tose countries
with fscal space should draw on it wisely to accelerate growth-enhancing reforms and adapt to changing
trends in the global economy.
• High-debt economies should pursue gradual fiscal
adjustment (Canada, France, Japan, Spain, United
Kingdom, United States), especially in view of
fiscal balances remaining below long-term debt
stabilizing levels, unless there are signs of a major
economic downturn. The need for adjustment is
particularly relevant if spreads remain high and
financing needs are large (Italy). Signaling the
intention to credibly reduce debt over the medium
term and taking high-quality measures to do so
(for example, reforming pensions in Italy and social
security and healthcare programs in the United
States) will be important to address any drag on
growth from the debt overhang. In the euro area,
better compliance with and enforcement of the EU
fiscal rules would help reduce fiscal vulnerabilities
and preserve the credibility of the common fiscal
Oil price
Non–oil commodity price
0
40
80
20
60
100
120
140
160
2004 06 08 10 12 14 16 18 20 22 24
Source: IMF, World Economic Outlook database.
Figure 1.27. Commodity Price Outlook, 2004–24
(Oil: US dollar per barrel; non-oil: 2016 = 100)
Commodity prices have shown large swings, creating further
uncertainty.
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International Monetary Fund | April 2019
framework.8 In Japan, despite very high public
debt, maintaining a neutral fiscal stance during
2019–20 is advisable to support growth momentum and reflation. Japan’s public debt is, however,
unsustainable under current policies and will start
to increase again amid rapid aging and depopulation beyond the medium term. Thus, starting in
2021, an annual consolidation of ½ percentage
point of GDP in the structural primary balance
could stabilize public debt below the current level
of 235 percent of GDP by 2030.
• Where there is fiscal space, fiscal policy should
strive to boost aggregate demand if slack remains. In
Korea, besides allowing for automatic stabilizers to
operate in 2019, frontloading the planned increase
in spending is warranted to tackle sluggish growth.
In Australia, if the growth slowdown in late 2018
worsens in 2019, discretionary infrastructure spending could be used to boost growth momentum, as
well as to reduce infrastructure gaps.
• Several advanced economies operating above potential and enjoying low public debt could pursue fiscal
reforms to raise potential GDP. In Germany, the
general government fiscal buffer in relation to the
EU fiscal rules remains large. This gives room for
forceful policy action, beyond the expansion that is
already planned, especially if the current weakness
in activity persists. With a focus on investment in
physical and human capital, this could boost potential growth. In the Netherlands, more ambitious
fiscal reforms, such as further reducing labor income
taxes and increasing public spending on research
and development and lifelong learning, could raise
potential output while leaving an ample fiscal buffer
to address demographic pressures.
In emerging market and middle-income economies, debt
vulnerabilities, volatile oil prices, and the risk of tightening fnancial conditions call for fscal restraint but limited fscal support could be warranted in a few countries
where demand is weak and there is some fscal space.
• Among non-oil exporters, those with no fiscal space
(Argentina, Brazil) should continue consolidating
to put debt on a firm downward trend. Improving
fiscal sustainability is imperative in Argentina and
Brazil to contain financing risks, which prevails over
demand support. Among those with limited fiscal
8At the same time, the EU fscal rule framework should be
reformed to make the rules simpler and more enforceable (Andrle
and others 2015; Eyraud and others 2018).
space, a faster pace of consolidation is affordable in
India given an expected acceleration in growth, and
it is necessary in South Africa to stabilize debt at a
lower level than currently projected. Nevertheless,
well-designed social transfers and productive infrastructure investment should be protected.
• Where there is some fiscal space and also the risk of
a sharper growth slowdown (China, Turkey), fiscal
policy should carefully balance stabilization and sustainability objectives. China should adopt a targeted
high-quality stimulus to facilitate rebalancing, complemented by continued efforts on deleveraging and a
credible medium-term consolidation plan (Box 1.2).
In Turkey, automatic stabilizers should be allowed
to operate in the near term, while improvements in
fiscal transparency would help identify the scope for
discretionary stimulus if additional support is needed.
• Among oil exporters, consolidation is planned
and should continue at an appropriate pace, also
balancing growth, equity, and sustainability objectives. Mexico and Russia could aim for faster consolidation to better deal with demographic pressures and
raise intergenerational equity. Countries with available
fiscal space and weak non-oil growth (Kuwait, United
Arab Emirates) can afford to adjust gradually, while
saving any revenue windfalls if oil prices rise. More
broadly, oil exporters, particularly in the Gulf region,
need to support the development of the non-oil and
private sector to diversify and mobilize revenue, and
to reduce large public-sector wage bills. In addition,
energy subsidies should be eliminated (for example,
in Gulf countries and Indonesia) to make room for
social and productive spending.
In low-income developing countries, fscal policy
should focus on supporting long-term growth and
development objectives. Te estimated resources
needed to achieve high development outcomes by
2030 in developing and emerging market economies
are immense (Figure 1.5). Efforts to boost revenues,
improve spending quality, and better manage debt
burdens will be critical to meeting these objectives.
• Noncommodity exporters with high debt should
pursue gradual adjustment to reduce financing risks
and lower macroeconomic vulnerabilities. In Kenya,
an adjustment of 3 percentage points of GDP over
the next two fiscal years, including revenue measures,
is recommended to keep public debt on a downward
trajectory. In Vietnam, more ambitious revenue-based
fiscal consolidation than currently planned is required
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to ensure long-term debt sustainability. Noncommodity exporters with low to moderate debt ratios should
strive to keep debt stable while pursuing revenue and
expenditure reforms that support development. For
Bangladesh, this implies keeping spending growth
in line with the revenue increases, while carrying
through with reforms to boost tax revenue. In Myanmar and Tanzania, a low risk of debt distress allows
for a fiscal deficit of 4 percent over the medium
term to support social and infrastructure development objectives.
• In commodity exporters with high debt vulnerabilities
the focus should be on growth-friendly adjustment.
For Ghana this means running a positive primary
budget balance and building the domestic tax revenue
base. Commodity exporters not facing debt distress
can afford a more gradual adjustment. In Nigeria,
fiscal consolidation based on non-oil revenue mobilization is necessary over the medium term to make
room for priority expenditure. For Côte d’Ivoire,
streamlining the still-substantial tax exemptions as
well as containing broader fiscal risks associated with
public enterprises and public-private partnerships is
key to building the much-needed fiscal space.
Should downside risks materialize in the form of a
major slowdown in growth, countries will have less
fscal space to respond than they had during the global
fnancial crisis. Fiscal stimulus would have potency in
the presence of prolonged slack and monetary policy near the effective lower bound, though it may be
feasible only in countries without substantial public debt
vulnerabilities. Given the potential for implementation
lags in fscal policy, policymakers also need to plan
policy actions to support demand in advance of the
actual realization of a major slowdown. At a minimum,
automatic stabilizers should be allowed to work—
without discretionary measures to offset the impact on
the defcit—for those that have fscal space.9 Where
output falls substantially below potential, fscal adjustment could be back-loaded or fscal stimulus could be
pursued in tandem with monetary easing. Any discretionary fscal expansion, however, should consider the
quality of revenue and expenditure measures employed
to ensure the effectiveness of the stimulus. If a severe
9To reduce the problem of lags in providing fscal support, consideration could be given to designing better automatic stabilizers—for
example, pre-legislated support conditional on observable measures such as a decline in job creation below a given threshold (see
Blanchard, Dell’Ariccia, and Mauro 2010 for a review).
downside scenario were to materialize, in the euro area
available monetary policy tools could be complemented
with fscal easing by countries that have appropriate fscal space and fnancing conditions. A synchronized fscal
response, albeit appropriately differentiated across member countries, can strengthen the area-wide impact.10
Adapting to Global Trends
Reforms to adapt to global trends, including shifting demographics, technological advances, and global
economic integration, will require inclusive and
growth-friendly fscal adjustments or budget recomposition, as well as multilateral cooperation. Reprioritization
of expenditures, particularly in economies with public
debt vulnerabilities, will be imperative to create room
for reforms within existing budget envelopes. Tis
implies cutting wasteful spending, such as untargeted
energy subsidies, containing rigid recurrent spending,
such as wage bills, channeling resources to investment
and social spending to build infrastructure and skills ft
for the future, and providing better services and equal
opportunities for all. Public fnancial management
reforms could also improve spending efciency and
should be accompanied by efforts to mobilize revenues
in emerging market and low-income developing economies through tax policy and administration reforms. Tax
policy reforms in advanced economies should be geared
toward fostering efciency and a more equitable distribution of disposable income. International cooperation
on global public policy issues, such as corporate taxation, climate change, corruption, and more generally, on
achieving the 2030 SDGs, could amplify and spread the
gains from reforms.
Expenditure Reprioritization and Efciency
Shift Expenditures to High-Quality Investment in
Physical and Human Capital
Reprioritizing public spending toward infrastructure
investment can boost growth (see Chapter 3 of the
October 2014 World Economic Outlook) and support
inclusion through its positive impact on education
and health outcomes (Agénor 2013). Yet the stock of
public capital (a proxy for infrastructure capital) as a
share of output trended downward across advanced,
emerging market, and developing economies in the
two decades preceding the global fnancial crisis and
10Indeed, these are circumstances when a central fscal capacity
to provide euro-area-wide stimulus would be benefcial (Arnold and
others 2018).
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has plateaued following the stimulus-driven investment
spending increase during the crisis (Figure 1.28).
In emerging market and developing economies
with growing and urbanizing populations, more and
better-quality infrastructure is also critical, to support
urban transportation, energy, and water and sanitation
networks (India, Indonesia). In addition, in many of
these economies increased investment in digital infrastructure is needed to create an environment in which
the technology sector can thrive. Internet usage rates are
well below those in advanced economies (Figure 1.29).
In sub-Saharan Africa, investment needs in digital
communication are estimated at $4 billion to $7 billion
a year (0.2 to 0.4 percent of the region’s GDP) (Abdychev and others 2018). More broadly, delivering high
performance on SDGs related to core infrastructure
(that is, electricity, roads, and water) will require additional spending in 2030 of 4 and 9 percent of GDP in
emerging market economies and low-income developing
countries, respectively (Gaspar and others 2019), as well
as policy measures that facilitate private sector involvement. By inviting private participation in infrastructure
development, public-private partnerships can help
improve public services. Yet strong governance institutions are needed to manage risks and avoid unexpected
costs from these partnerships.11
11To use public-private partnerships wisely, governments should
(1) develop and implement clear rules for their use; (2) identify,
quantify, and disclose their risks and expected costs; and (3) reform
Improving the quality of infrastructure investment matters as much as increasing its size. A signifcant share of
investment—an estimated 30 percent, on average—is lost
due to inefciencies, with larger losses in emerging market
and developing economies (IMF 2015a), including from
vulnerabilities to corruption in infrastructure provision
(see Chapter 2). Te reforms necessary to improve
investment efciency frequently cover project planning,
allocation, and implementation phases. For example,
Nigeria should strengthen project appraisal and selection
processes, cash disbursement practices, and coordination
of states’ capital investment; in Vietnam, improvements
are required in spending allocation and coordination to
avoid persistent delays and project overruns. In emerging market economies such as India and Indonesia, as
infrastructure investment is scaled up the focus should
be on improving public fnancial management, including
planning coordination among agencies, within-year budget execution, and implementation capacity.
Expenditure reprioritization and efciency are also
required to support human capital development and facilitate equal opportunities for all. Creating a workforce ft
for the future requires meeting the growing demand for
advanced cognitive skills, an ability to work with others,
and adaptability (World Bank 2019). At the same time,
policies aimed at human capital formation, such as access
to quality education and healthcare, can improve the disbudget and government accounting frameworks to capture all fscal
costs comprehensively (Irwin, Mazraani, and Saxena 2018).
Public capital stock
Public investment (right scale)
Public capital stock
Public investment (right scale)
Public capital stock
Public investment (right scale)
Source: IMF, Fiscal Affairs Department Investment and Capital Stock Dataset.
Note: “Public investment” refers to gross fixed capital formation. PPP = purchasing power parity.
1. Advanced Economies 2. Emerging Market and
Middle-Income Economies
3. Low-Income Developing Countries
0.0
5.0
4.5
4.0
0.5
1.0
1.5
2.5
3.0
3.5
2.0
0
10
100
20
30
40
50
60
70
80
90
0.0
5.0
0.5
1.0
1.5
2.5
3.0
3.5
4.0
4.5
2.0
0
10
100
20
30
40
50
60
70
80
90
1995
15
99
97
03
2001
05
09
07
11
13
1995
15
99
97
03
2001
05
09
07
11
13
1995
15
99
97
03
2001
05
09
07
11
13
0.5
1.5
2.5
3.5
4.5
0.0
5.0
5.5
6.0
1.0
3.0
4.0
2.0
0
10
100
20
30
40
50
60
70
80
90
Figure 1.28. Public Capital Stock and Investment, 1995–2015
(2001 PPP adjusted, in percent of GDP)
Over the past decade, gross public investment has been insufficient to expand the public capital stock.
24
FISCAL MONITOR: CuRbINg CORRupTION
International Monetary Fund | April 2019
tribution of market income by providing equal opportunities (see the October 2017 Fiscal Monitor). In emerging
market and developing economies, delivering high
performance on SDGs related to education and healthcare services will require additional spending in 2030
of 8 and 12 percent of GDP, respectively (Gaspar and
others 2019). Similarly, more accessible and flexible social
safety nets could provide insurance against the growing
informality of work arrangements and the job churn associated with rapid technological progress. Efciency gains
can also be leveraged to obtain more value from public
investment in education and healthcare. Among emerging
market and developing economies, those in the bottom
quartile of efciency could raise healthy life expectancy
by up to fve years by addressing inefciencies in public
health spending (Grigoli and Kapsoli 2018).
• Education and training measures could move toward
pre-emptive acquisition of new skills (“lifelong learning”) (World Bank 2019). For example, Singapore
offers unconditional grants to all adults for training
throughout their working lives. Tax deductions for
training those already in the workforce, such as in
the Netherlands, and portable individual learning
accounts, as in France, could help remove barriers to
lifelong learning. Likewise, it is critical to help workers
adapt to the transition arising from new technologies
(see Chapter 3 in the April 2017 World Economic
Outlook). Chile plans to address skill mismatches by
establishing targeted scholarships and creating new
technical institutes. South Africa should improve
teacher training, strengthen their accountability, and
align training with evolving business requirements.
Colombia should further expand higher-education
coverage by supporting access for low-income students
and improve the quality of education. In Bangladesh,
Indonesia, and Uganda, initiatives that promote technical and vocational training should be strengthened
to develop skills for better job opportunities.
• Social protection could be strengthened and adapted
to evolving labor market realities in advanced economies by making social benefits more portable, as in
most Nordic countries (IMF 2018). In Korea, where
there is ample fiscal room, more generous unemployment benefits would give the temporarily unemployed
time and resources to adapt to technological changes.
In Singapore, introduction of universal, transparent,
and time-bound unemployment insurance would
complement existing policies on lifelong learning,
training, and reskilling. In emerging market and developing economies a major challenge is to expand safety
nets that offer some income security. As highlighted in
recent IMF staff reports, increasing coverage of social
safety net programs (Bangladesh, Zambia) would
expand opportunities for the more vulnerable and
encourage long-term human capital development.
Cut Wasteful Subsidies and Unsustainable Social
Spending
Cutting wasteful spending could create room for
the public investment in human and physical capital
necessary to adapt to a changing global economy. After
ensuring that appropriate protection for the most vulnerable populations is in place, untargeted energy subsidies
should be cut in many advanced economies (Finland,
Italy, Latvia, Norway), emerging markets (Egypt, Kuwait,
Saudi Arabia), and developing economies (Angola, Ethiopia, Nigeria). Effective management of the public sector
payroll through better medium-term wage forecasting
and position-based employment systems could generate
savings in many countries (IMF 2016a). Limiting public
sector job creation (for instance in sub-Saharan Africa)
and incentivizing private sector employment could also
help contain large wage bills. Expenditure reforms to
root out corruption could improve the efciency of public investment and social spending (see Chapter 2).
For advanced and emerging market economies
facing fscal pressures from aging populations, pension and healthcare reforms could also create fscal
AEs EMMIEs LIDCs
0
10
20
30
40
50
60
70
80
90
1990
92
94
96
98
2000
02
04
06
08
10
12
14
16
Source: World Bank, World Development Indicators.
Note: AEs = advanced economies; EMMIEs = emerging market and
middle-income economies; LIDCs = low-income developing countries.
Figure 1.29. Individuals Using the Internet, 1990–2016
(Percent of population)
Internet usage in developing economies lags the rest of the
world.
25
C H A P T E R 1 F I S C A L p O L I C Y F O R A C H A N g I N g g L O b A L E C O N O M Y
International Monetary Fund | April 2019
room. In the United States, raising the income ceiling
for payroll taxes and indexing benefts to chained
inflation would help shore up social security fnances
and free fscal resources for other priority spending.
Safeguarding the fnancial viability of pension systems
requires a comprehensive set of measures, including
measures to offset the implications from the recent
relaxation of pension indexation in Spain and early
retirement rules that were eased for a trial period
of three years in Italy. In Brazil, necessary measures
include increasing the retirement age, delinking
the minimum pension from the minimum wage,
and moderating the generosity of pensions (particularly for public employees). To contain healthcare
costs, Japan and the United States should adopt
efciency-improving technology and pursue greater
cost sharing with benefciaries.
Expand the Budget Envelope through Public
Financial Management Reforms, Revenue
Mobilization, and International Cooperation
Public Financial Management Reforms
Public fnancial management reforms could extend
the limited public resource envelope through efciency
gains. In emerging market and developing economies,
enhancing debt management capacity (for instance in
Gulf countries) and reducing off-budget activities (for
instance in China and Ghana) could improve the monitoring of debt levels and fscal risks, lead to more prudent debt strategies, and promote transparency. Tese
steps could serve to reduce the interest bill, unlocking
government resources for other expenditures. In all
countries, public fnancial assets can play an important
role in an economy in terms of revenue, employment,
and value added (European Commission 2019). Better
management of public sector balance sheets, in particular, nonfnancial public corporations and government
fnancial assets, could yield up to 3 percent of GDP a
year in additional revenue (see the October 2018 Fiscal
Monitor). Tis is equivalent to the average corporate
income tax revenue in advanced economies. Gains
could be even higher, as this fgure does not account
for the potential returns from better management of
government nonfnancial fxed assets.
New technologies can also be employed to improve
the efciency of government operations. Taking
advantage of the Internet, big data, and increased
connectivity, governments could improve service
delivery and strengthen governance, accountability,
and social infrastructure. For example, technology can
enable governments to reduce the cost of tax compliance, facilitate better targeting of social assistance
programs, and deliver cash transfers more efciently
(see the October 2018 Regional Economic Outlook for
Sub-Saharan Africa). India’s Direct Beneft Transfer
program uses digital technology to provide direct
subsidies to the bank accounts of the poorest members
of society. In terms of improving government accountability, Slovenia has online platforms for citizens
to inform authorities about problems and monitor
their solution.
Revenue Mobilization
In emerging market and developing economies,
sustained efforts to mobilize revenues can provide
for much needed investment in human and physical
capital. Tax revenues in these countries are low relative
to those in advanced economies (Figure 1.30). Tere is
ample scope to increase tax revenue through measures
that broaden the tax base and improve efciency (for
instance by shifting from direct to indirect taxation),
which can be accomplished with little impact on
growth over the long term (Dabla-Norris and others
2018; IMF 2015b). Tis should be predicated on
building the appropriate public fnancial management
institutions to channel the revenues toward productive expenditures. Removal of tax exemptions (in
sub-Saharan Africa and elsewhere, such as in Argentina, China, Sri Lanka, and Turkey) and improving
administrative efciency would yield more revenue
for priority initiatives. Sub-Saharan African countries
could raise from 3 to 5 percent of GDP in additional
revenue, on average, through reforms that improve the
efciency of the current tax systems (see the October 2018 Regional Economic Outlook for Sub-Saharan
Africa). Key steps include strengthening VAT systems,
streamlining exemptions, and expanding the coverage of income taxes, including by tackling informality. More broadly, adoption and implementation of
carefully crafted medium-term revenue strategies that
include a combination of policy and administrative
reforms can be a useful guide to increasing revenue.
Papua New Guinea has launched its medium-term
revenue strategy, several other countries (Egypt, Lao
P.D.R., Uganda) are working to develop theirs, and
several others plan to do so (Indonesia, Senegal,
Tailand).
In advanced economies, tax systems could be
reformed to ensure that the gains from technology
26
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International Monetary Fund | April 2019
and global integration are spread more evenly across
the population.12
Higher tax rates for upper-income groups compared
with those in the middle yield redistributive gains that
exceed efciency costs (Diamond 1998; Saez 2001).
Tax systems could also be adapted to the broad shift
in income from labor to capital. For instance, given
that wealth tends to be more unevenly distributed than
income, especially in the OECD countries, wealth
taxes could be considered. Most countries have room to
enhance revenues signifcantly from taxing inheritances,
land, and real estate (October 2017 Fiscal Monitor). As
in Korea and Lithuania, where top marginal income tax
rates have been increased in 2018 and 2019 to address
worsening income inequality, some advanced economies
(for example, Hong Kong Special Administrative Region
and Latvia) should consider increasing the top personal
income tax rate. Hong Kong Special Administrative
Region should also avoid relief on recurrent property
taxes. In Italy, wealth could be taxed through a modern
property tax on primary residences.
Pricing fuel efciently could also gradually build
room for adaptation of fscal policies to a changing
global economy in most countries. Global fuel subsidies in 2017 were estimated at $5.2 trillion, or 6.5 percent of global GDP (Coady and others forthcoming).
12Digitalization also poses challenges for tax policy and administration (Aslam and Shah 2017).
Raising fuel prices to efcient levels through taxes,13
for instance, would generate additional revenue of
$3.2 trillion (4 percent of global GDP) over the long
run (Figure 1.31). To help ease the impact of higher
fuel prices, mechanisms to compensate those households most affected should be put in place beforehand.
Countries can provide compensation by scaling up
beneft levels or expanding coverage of existing assistance programs, or by designing and implementing
new social safety nets (Abdallah and others 2018). For
example, measures to mitigate the impact of fuel subsidy reforms—particularly on the poor—and facilitate
public support for the reforms have been employed
recently in Saudi Arabia and are recommended for
other countries (for instance, Ethiopia and Nigeria).
Transparent and extensive communication and consultation with stakeholders—including information on
the size of subsidies, how they affect the government’s
budget, and how the savings will be used to improve
public services or lower taxes on households and
businesses—are also necessary to build societal support
for these desirable measures (IMF 2013).
International Cooperation
International cooperation will be critical for advancing fscal efforts to address issues related to global
13Efcient fuel prices are achieved by applying (1) the same consumption taxes as levied on other consumption goods in general and (2)
additional taxes to reflect the supply and environmental costs of fuel.
Natural gas
Coal
Petroleum
Electricity
9 8 7 6 5 4 3 2 1 0
AEs
1.7
7.7
3.7
EMMIEs LIDCs
Source: Coady and others, forthcoming.
Notes: AEs = advanced economies; EMMIEs = emerging market and
middle-income economies; LIDCs = low-income developing countries.
Figure 1.31. Energy Subsidies, 2017
(Percent of GDP)
Estimated energy subsidies are significant around the world.
LIDCs
EMMIEs
AEs
Room exists to boost tax revenues in emerging market and
developing economies.
5 0
10
15
20
25
30
35
40
45
LIDC median: 15
EMMIE median: 18
AE median: 26
0 5 10 15 20 25 30 35 40
Source: Gaspar and others 2019.
Note: AEs = advanced economies; EMMIEs = emerging market and
middle-income economies; LIDCs = low-income developing countries.
Figure 1.30. Tax Revenue, 2017
Percent of countries
Revenue-to-GDP ratio
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International Monetary Fund | April 2019
economic integration and convergence. Multilateralism
has proven a powerful driver of strong growth, poverty
reduction, and welfare gains. It is clear that coordinated fscal stimulus helped speed the recovery from
the global fnancial crisis (see Chapter 4 in the October
2017 World Economic Outlook). Multilateralism can
take on the many transnational challenges that have
a bearing on national fscal policies and that no one
government alone, or even a few governments working
together, can handle. Tese include taxation of multinational corporations, climate change, support for
SDGs, and corruption (see Chapter 2) (Lipton 2018).
• The taxation of multinational companies, including highly digitalized ones, is ripe for a multilateral
approach. Several countries (Benin, France, India,
Italy, Spain, Tanzania, Uganda, United Kingdom,
Zambia) plan to or have put in place measures to
tax digital companies and their users. Uncoordinated, ad hoc measures targeted to specific firms or
activities could lead to significant distortions such
as double taxation of cross-border digital activities.
Similarly, international corporate tax competition
can lead to global tax inefficiencies. Multilateral
cooperation would provide a more effective and efficient approach to taxing the rents of multinational
companies (Box 1.3).
• Climate change is a worldwide, macro-critical phenomenon, with a particularly severe potential impact
on low-income developing countries and small
island states (see October 2017 World Economic
Outlook Chapter 3), and large fiscal implications for
all countries. However, current mitigation pledges
submitted for the Paris Agreement are highly heterogeneous and imply considerable cross-country
dispersion in emission prices (IMF 2019c). For
mitigation, carbon taxation or similar pricing is the
most efficient tool, though other instruments may
have a role due to political economy, distributional,
or other factors. A carbon price floor arrangement
among large emitters could promote some degree
of price coordination while strengthening the Paris
Agreement and provide some reassurance against
losses in competitiveness. The international community should also help low-income developing countries build resilience to climate change, including
the development of climate-resilient infrastructure,
sustainable macro-fiscal frameworks, and transition
to cleaner energy. The commitment by advanced
economies to jointly contribute $100 billion a year
by 2020 for mitigation of and adaptation to climate
change in developing economies is an important
step to help the latter make progress on their climate
strategies.
• International financial support for low-income
developing countries is also needed to complement their efforts to meet their SDGs. The annual
spending gap to attain meaningful progress on the
SDGs related to infrastructure alone in low-income
developing countries amounts to $358 billion, even
after assuming an increase in their tax-to-GDP ratio
of 5 percentage points over the next decade (Figure 1.32) (Gaspar and others 2019).
A renewed effort to work within an improved multilateral structure would complement national policies
adapted to a fast-changing global economy.
0
100
200
300
400
500
600
Additional
spending, net
of increased
tax revenue
(0.3 percent
of global GDP)
Additional spending
528
Increased tax revenue
Source: Gaspar and others 2019.
Additional spending required to make meaningful progress toward
SDGs is more than half a trillion US dollars.
Figure 1.32. Additional Spending on the Sustainable
Development Goals, Net of Increased Tax Revenue,
2030
(Billions of 2016 US dollars)
170
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Tis box examines the effects of potential stress
in global fnancial markets on the public fnances
of large advanced and emerging market economies.
Stress in global fnancial markets could emanate from
an increase in risk premiums in reaction to a decline
in investor sentiment triggered by a deteriorating
outlook (including from trade tensions) or weak policy
frameworks amidst concerns about debt in some
euro area countries. Such shocks could lead to higher
interest rates, exchange rate volatility, corrections in
stretched asset valuations (for example, equity and
real estate), and sudden international fnancial flow
reversals. Tese developments would strain leveraged
companies, households, and sovereigns; worsen bank
balance sheets and proftability; and damage the public
fnances of advanced and emerging market economies.
Modeling Strategy
Te analysis is based on an extended version of
the Global Vector Autoregression models of Cashin
and others (2014); Cashin, Mohaddes, and Raissi
(2016, 2017a, 2017b); and Mohaddes and Raissi
(2018). Tis framework comprises 33 country-specifc
models, solved in a global setting where key macroeconomic variables of each economy interact with
corresponding foreign variables (designed to capture
the international trade pattern of each country). Te
model includes both real and fnancial variables during
1981:Q2–2018:Q2 (that is, real GDP, inflation, the
real exchange rate, short- and long-term interest rates,1
the government debt-to-GDP ratio, the primary fscal
balance, and the price of oil), as well as an index of
fnancial stress in advanced economies (capturing
pressures in banking, securities, and exchange markets,
as well as risk aversion).
Fiscal Costs of Financial Stress
Stress in global fnancial markets—measured by a
one standard deviation positive shock to the fnancial
stress index (FSI)2 in advanced economies—trans-
1Following Wu and Xia (2016), shadow interest rates are used
for time periods during which policy rates were at their effective
lower bounds to capture the impact of unconventional monetary
policies of advanced economies.
2Te FSI for advanced economies facilitates the identifcation
of large shifts in asset prices (stock and bond market returns); an
abrupt increase in risk/uncertainty (stock and foreign exchange
volatility); liquidity tightening (difference between three-month
lates into higher public debt-to-GDP ratios in most
country groups (with average effects ranging between
½ and 1¼ percentage point of GDP after one year,
and large variations across each group) (Figure 1.1.1).
Debt-to-GDP dynamics largely depend on the primary
fscal balance and the gap between inflation-adjusted
average borrowing costs and the real GDP growth rate
of the economy (the interest rate–growth differential). In response to a temporary FSI shock, real GDP
growth slows worldwide (by ¼–½ percentage point on
average) and the inflation-adjusted long-term interest
rate rises (by 10 basis points on average, and higher in
emerging market economies)—resulting in increases
in the interest rate–growth differentials. In addition,
lower revenues from weaker economic activity across
countries would lead to worse primary balances (by
0.1–0.2 percentage point of GDP on average). Tese
factors would worsen countries’ debt dynamics, albeit
with signifcant size variation across countries.
Which Countries Will Be Affected More?
Te impact on the public fnances of different
countries depends on the magnitude and duration
of the FSI shock; countries’ economic fundamentals;
the size of safe-haven flows; and the level, currency,
maturity, and residency holding structure of public
debt. For instance, model estimates show that the
impact is greater for countries with high debt ratios,
because the increase in interest rates applies to larger
debts, and for those with a shorter residual maturity
of public debt, because the pass-through of higher
spreads affects a greater share of the debt. Moreover,
emerging market economies with higher debt vulnerabilities (for example, those that have a larger share
of foreign-currency-denominated debt in total public
debt or a higher share of nonresident holdings of
public debt) experience larger debt increases through
higher spreads, asset price corrections, depreciated
exchange rates, and nonresident capital outflows.
Treasury bill and three-month London interbank offered rate
based on US dollars); and the health of the banking system (the
beta of banking sector stocks and the yield curve). A one standard deviation positive shock to FSI in advanced economies is ⅔
of the shock that occurred during the European sovereign debt
crisis and 1/10 of the global fnancial crisis shock.
Box 1.1. Fiscal Implications of Potential Stress in Global Financial Markets
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Debt-to-GDP Interest rate (r) Growth rate (g) Primary balance-to-GDP
Source: IMF estimates.
Note: The figure depicts the range of change in macroeconomic/financial variables of a given
group of countries—high-debt (HD) and low-debt (LD) advanced economies (AE) and emerging
markets (EM) after one year associated with a one-standard-deviation positive shock to FSI.
Symbols × and — denote the average and median responses across countries in each group,
respectively. The boxes show the 25th–75th percentile responses, and the whiskers show the
minimum and maximum responses. The HD-AE group consists of Austria, Belgium, Canada,
France, Italy, Japan, Spain, the United Kingdom, and the United States. The LD-AE group
consists of Australia, Finland, Germany, Korea, Netherlands, New Zealand, Norway, Sweden,
and Switzerland. The HD-EM group consists of Argentina, Brazil, China, India, Philippines, and
South Africa. The LD-EM group consists of Chile, Indonesia, Mexico, Peru, Thailand, and
Turkey. The median gross-debt-to-GDP ratio in each group (advanced and emerging market
economies) is used as the cutoff value to classify countries as high debt or low debt.
Figure 1.1.1. Responses of Key Variables to Potential Stress in Global
Financial Markets
(Percentage point of GDP difference)
HD-AE LD-AE HD-EM LD-EM
–1.5
–1.0
–0.5
0.0
2.5
0.5
1.0
1.5
2.0
Box 1.1 (continued)
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FISCAL MONITOR: CuRbINg CORRupTION
International Monetary Fund | April 2019
China’s growth has slowed over the past year and is
set to further decline in 2019, owing to trade tensions
and much-needed fnancial regulatory tightening.
Te authorities have acted to mitigate the slowdown
through various measures including tax cuts and
infrastructure spending. Should downside risks further
increase, this would bring knock-on effects from a
domestic as well as a global perspective (see the April
2019 World Economic Outlook and Global Financial
Stability Report). What would be the appropriate fscal
policy to support economic activity and rebalancing?
Tree principles should guide the choice of
fscal measures. First, the policy response should be
on budget, to ensure transparency and avoid risks
from excessive leverage incurred by borrowing entities.
Second, it should facilitate the macroeconomic rebalancing of the Chinese economy. Tird, fscal measures should be targeted to maximize their multiplier
effects and to reduce poverty and inequality. Measures
could include:
• On the revenue side, the recently announced personal income tax cuts, while supporting consumption temporarily, have reduced the progressivity of
the overall tax system. Going forward, the tax cuts
should be accompanied by medium-term reforms to
broaden the overall tax base, improve the progressivity of the tax system (including by alleviating
the highly regressive nature of the social security
system), and introduce a recurrent property tax.
• On the expenditure side, reprioritizing spending
toward education, healthcare, and social security can
facilitate rebalancing. At the same time, providing
a better social safety net by increasing rural pension
benefits and widening the coverage of unemployment insurance (currently 40 percent of urban
workers) would help cushion the impact of slower
growth and reduce poverty and inequality.
Large-scale infrastructure investment would be
less desirable, given the build-up of vulnerabilities
from past stimuli (IMF 2017). Assessing the risks
from such strategy requires looking into the general
government’s balance sheet, as well as the infrastructure investment’s returns, and the broader macroeconomic growth impact, because a large component of
past investment-led stimulus occurred in the broader
public sector—mainly off-budget through local
governments and state-owned enterprises (SOEs). We
estimate the general government fnancial balance
sheet for 1997–2017 based on the methodology in the
October 2018 Fiscal Monitor, using various sources
(Garcia-Herrero, Gavila, and Santabarbara 2006;
Ma 2006; Yang, Zhang, and Tang 2017) and adjusting for nonperforming assets of public corporations
from the China Public Finance Yearbooks (Lam and
Moreno Badia forthcoming). Data on the valuation of
fxed assets, required to calculate the full government
net worth, are limited. Instead, we estimate the shortfall of the returns of infrastructure asset relative to the
cost of liabilities to fnance such investment.
Te balance sheet analysis reveals that the
investment-led stimulus undertaken during 2009–12
contributed to a deterioration in the general government’s fnancial position. Several points are worth
noting. First, while the stimulus—amounting to
some 10 percent of GDP—supported economic
growth in the early part of the decade, estimates of
potential growth declined from double-digit levels
to about 6¼ percent by 2015 (Table 1.2.1). Second,
the stimulus led to a decline of net fnancial worth
from 23 percent of GDP in 2009 to 11 percent of
GDP in 2017 (still above the average for emerging
market economies) as the rise in general government
debt outstripped the increase in the general government’s fnancial assets (Figure 1.2.1). Tird, although
nonfnancial infrastructure assets have also risen, the
gap between government asset returns—along with
those on nonfnancial infrastructure assets—and the
Table 1.2.1. China: Long Shadows of InvestmentLed Stimulus during the Global Financial Crisis
Fiscal Stimulus
during the Great
Recession (2009–12) Latest Data 2017 or
2009 2015 Available
General government
Debt to GDP1 34 57 68
Net financial worth to GDP 23 19 11
Macroeconomy
Potential growth rate 10.4 6.3 6.3
Credit intensity ratio2 2.5 3.5 4.1
State-owned enterprises
Credit3 51 66 74
Returns on equity 5.9 3.9 4.2
Sources: CEIC; World Economic Outlook; Deutsche Bank; and IMF
staff estimates.
Note: Indicators are in percent unless otherwise stated.
1 Debt is measured using the augmented concept as in IMF 2017.
2 The credit intensity ratio is measured by the change of credit per unit
change of output.
3 State-owned enterprise credit is measured in percent of GDP based
on IMF 2017.
Box 1.2. China: How Can Fiscal Policy Support Economic Activity and Rebalancing?
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International Monetary Fund | April 2019
interest rate on debt widened, with an estimated
shortfall of 1½–2 percentage points during 2013–15,
partly driven by low proftability among SOEs (Figure 1.2.2; Lardy 2019; Bai, Hsieh, and Song 2016).
Tis analysis suggests that, at the current juncture, a
large-scale public investment stimulus, while temporarily boosting growth, would add to vulnerabilities
and raise the likelihood of a sharp slowdown down the
road when overall leverage is already high and credit
allocation is increasingly inefcient (IMF 2016c).
Beyond the targeted and pro-rebalancing fscal stimulus measures, efforts to deleverage, particularly among
SOEs, should also continue to ensure a sustainable
growth path. At the current juncture, SOEs are highly
leveraged and account for a large share of corporate
credit. Further deleveraging of underperforming SOEs
could improve medium-term growth (IMF 2016c)
and strengthen the general government balance sheet.
Notwithstanding differences relative to the current
environment, the restructuring of public corporations
during 1999–2003—which involved SOE closures and
restructuring and recapitalization of state banks—is
also illustrative of the large potential payoffs of such
strategy. Tose reforms improved SOE proftability
and the equity valuation of state-owned banks (Lardy
2014; Hsieh and Song 2015) and, in turn, raised the
general government’s net fnancial worth from –8 percent of GDP in 1999 to 18 percent of GDP in 2005
(Figure 1.2.1). In addition to continued efforts on
deleveraging, advancing other fscal structural reforms
such as intergovernmental relations, improving fscal
data, and parametric reforms to the social security
system to ensure the long-term sustainability will also
be necessary (IMF 2017).
Local government debt (augmented concept)
Equity holding of financial institutions
Deposits and other financial assets
Central government debt
Equity holdings of state-owned enterprises
Financial net worth
Sources: CEIC; and IMF staff estimates.
Figure 1.2.1. China: General Government Net
Financial Worth after the Investment-Led Stimulus
(Percent of GDP)
–60
–40
–20
0
20
40
60
80
–80
100
1997
98
99
2000
01
02
03
04
05
06
07
08
09
10
11
12
13
14
15
16
17

Investment-led stimulus
during 2009–12
Interest cost on government liabilities
Returns on government financial assets
Returns on local government financing vehicles
specialized in infrastructure investment
Sources: CEIC; China Public Finance Statistical Yearbook; Li and
Mano 2019; and IMF staff estimates.
Figure 1.2.2. China: General Government
Financial Asset Returns and Liability Costs
(Percent)
–1
76543210
–2
8
1997
98
99
2000
01
02
03
04
05
06
07
08
09
10
11
12
13
14
15
16
17
Investment-led
stimulus during 2009–12
Box 1.2 (continued)
32
FISCAL MONITOR: CuRbINg CORRupTION
International Monetary Fund | April 2019
Te International Tax System under Stress
Strains on the current system for taxing multinational enterprises have become more salient than ever.
Te joint project of the Group of 20 and the Organisation for Economic Co-operation and Development
(OECD) project on Base Erosion and Proft Shifting
(BEPS) has made signifcant progress in addressing
some of the most egregious forms of tax avoidance.
But the project has not sought to change the fundamentals of the international corporate tax system.
Cracks in the century-old architecture are now in
plain sight.
• Profit-shifting by multinationals—moving profit
from high- to low-tax jurisdictions—is pervasive.
Problems center on the norm that companies
are liable to corporation tax only where they are
physically present, as well as on the implementation
of the arm’s length principle (which requires that
transactions between related parties within multinational groups be priced, for tax purposes, as if they
took place between unrelated parties). Application
of these has become increasingly complex and
arbitrary, owing to the importance of hard-to-value
intangible assets and the ability that digitalization
creates to conduct business in a country while having little or no presence there.
• Tax competition has been largely unaddressed and
may intensify in the future, imposing ever-larger
pressures on tax revenues. This is especially problematic for low-income countries, which rely relatively
more on corporate taxation as a revenue source.
• Developing countries’ interests, reflecting their being
the home of few multinational enterprises but a
source of income for many, are not well reflected in
current norms; and complexity and profit shifting
bear disproportionately on them.
• Fairness concerns have sparked debate on the allocation of taxing rights, not only in the context of
protecting the interests of developing economies but
also more broadly.
Preserving Multilateralism under Treat
Unilateral initiatives going beyond BEPS, some of
which challenge international norms, risk jeopardizing
the considerable cooperation that the BEPS project has
achieved. Some, for instance, see the “diverted profts
taxes” adopted by the United Kingdom and Australia
in 2016 (anti-avoidance provisions that recoup tax on
income that is diverted to low-tax jurisdictions) as early
departures from the consensual approach of the BEPS
project. Te 2017 US tax reform brought fundamental and novel changes in its international provisions
(Chalk, Keen, and Perry 2018)—one of which, some
have suggested, may violate World Trade Organization
(WTO) rules. And proposals in Europe for “digital
service taxes” on revenues associated with selected
digital activities might be seen as attempts to circumvent the norm that frms with no physical presence
are not liable to corporate tax. Talk of “tax wars” may
be premature, but strains in international tax relations
have become apparent.
Te BEPS slogan was to “tax where value is
created.” Tis was meant to guide real progress
in international tax cooperation. However, differing interpretations of this principle can make it
hard to agree on practical implementation. Tis
is most clearly illustrated by the debate on the tax
consequences of digitalization. For some countries, the targeted digital service taxes seem to be a
political imperative, given domestic perceptions of
under-taxation and pending some longer-term global
solution. Indeed, the international tax framework
should avoid giving highly digitalized and other companies a way to pay very little or no tax. For others,
however, these digital service taxes are little more
than a grab for revenue from a few prominent and
largely US-owned companies. Moreover, pursuing the
suggestion by some that tax be levied where the users
of digital services, such as social media and search
engines, are located would be akin to attributing taxing rights to destination or “market” jurisdictions—a
fundamental departure from current norms (April
2018 Fiscal Monitor). Te digitalization debate has
become emblematic of the need for more ambitious
reforms to the international tax system.
Evaluating Alternative Reform Directions
In January, the members of the “Inclusive Framework” on BEPS agreed to examine a wide range of
policy options—with the aim to come up with a consensus on the multilateral approach by 2020 to reform
the international corporate tax system (OECD 2019a).
Te different options are reflected in a recent consultation document by the OECD’s task force on the
digital economy (OECD 2019b). Te options vary in
several dimensions, but broadly set out three directions
for reform: (1) minimum effective taxation; (2) shift
in taxing rights to the country where users/consumers
Box 1.3. Avoiding International Tax Wars
33
C H A P T E R 1 F I S C A L p O L I C Y F O R A C H A N g I N g g L O b A L E C O N O M Y
International Monetary Fund | April 2019
reside; and (3) departure from the arm’s-length principle in favor of apportionment by formula (that is,
sharing a multinational enterprise’s total profts across
countries by a formula reflecting measures of its presence in each), perhaps only for some residual proft
(left after something like a normal proft is allocated
to countries in which the multinational enterprise’s
functions take place). While not evaluating the precise
proposals or endorsing any of these broad approaches,
IMF (2019b) offers an assessment of these broad
directions for reform, based on various criteria: their
economic properties (how they address proft shifting
and tax competition), impact on developing economies, ease of enforcement, departure from current
norms (and thus legal feasibility), and required degree
of cooperation. Te impact of such proposals will also
differ depending on whether adoption is by one country, a few, or all. For the case of global adoption, these
are the main conclusions:
• Minimum tax proposals can relate to either outbound or inbound investment or both. On
outbound investment, they ensure some minimum
amount of tax is paid wherever in the world its
income arises. This can offer significant (though
incomplete) protection against profit shifting and
tax competition; it also generates positive spillovers
for other jurisdictions, except those with very low
tax rates. A minimum tax on inbound investment
(for example, limiting deduction for some payments often used to shift profits) can be especially
appealing for developing economies to protect
against tax avoidance, because it can be simple to
administer. It can, however, also risk jeopardizing
inward investment.
• Allocating taxing rights to destination countries: In
its pure form, a destination-based system could
rely on “border-adjusted” taxes, which combine
value-added tax (VAT)–like treatment of trade (that
is, exempting exports and taxing imports) with a
wage subsidy (or payroll tax relief). While global
tax competition is already spontaneously leading to
increased reliance on the VAT instead of corporate and labor taxes, conscious movement in this
direction can be more appealing. Examples of such
border adjustment include the destination-based
cash flow tax (see the April 2017 Fiscal Monitor)
and a destination-based allowance for corporate
equity system. These are the most complete solutions to tax competition and profit shifting because
consumers are less mobile than corporate source or
residence. Tax calculation would also be simplified,
and distortions in investment and corporate finance
would disappear. Yet they are also the furthest from
current practice and face potential WTO issues.
Moreover, a destination-based cash flow tax may
amplify refund problems that arise under the VAT,
and unilateral adoption could have significant
adverse spillover effects (Hebous, Klemm, and
Strausholm 2019).
• Unitary taxation with formula apportionment—
proposed by the European Commission for EU
member states and common practice in subnational
corporate taxation in Canada, Germany, Japan, and
the United States. All affiliates of a company consolidate their accounts, generating a unitary tax base
apportioned across participating jurisdictions based
on a formula, according, for example, for the shares
of assets, payroll, employees, and/or sales located
in each. Jurisdictions then apply their own tax rate
to the apportioned base. Formula apportionment
reduces scope for profit shifting, because prices on
intragroup transactions become immaterial; this can
also simplify tax calculation. The ultimate economic
effects depend on the way in which the unitary
base is allocated: tax competition is more limited
the greater the weight placed on allocation by the
destination of sales (or similar criterion), given the
relative immobility of final consumers. Agreeing on
a common base might be difficult, however, because
the redistribution of tax revenues can be large.
Developing economies would most likely gain if
employment receives a large weight in the allocation formula.
• “Residual profit allocation” schemes split a multinational enterprise’s income into a “routine”
return on investment and a “residual” return that
exceeds normal returns. The schemes then allocate
a “normal” return to source countries, potentially
by pricing routine activities on the basis of the
current arm’s-length principle. They differ from
the current system by sharing the residual profit
according to a formula—which avoids problems
with arm’s-length pricing where they are often
most severe. Residual profit allocation is further
from current practice than minimum taxation,
but closer to it than formula apportionment. It
also addresses the weaknesses of the current system
more fully than minimum taxes by substantially
Box 1.3 (continued)
34
FISCAL MONITOR: CuRbINg CORRupTION
International Monetary Fund | April 2019
reducing profit-shifting opportunities and simplifying the system.
Urgent Need for Coordination
Te ultimate assessment of alternatives will depend
on the specifc details of reform proposals and on
one’s preferred weighting of the various criteria—and
no reform direction outlined here scores best on all
accounts. Agreement on potential international tax
reforms would require overcoming several fundamental
obstacles, not least the differing views and interests of
countries of different size and level of development.
For example, tax cooperation has thus far been driven
by the most advanced economies—causing some
unease because their circumstances differ from those
of developing economies. Finding agreement might
thus be hard. Yet putting international corporate tax
on a sound basis requires a cooperative multilateral
approach—and if international tax order is to be
maintained, urgent action is called for. Te current
deliberations in the OECD’s Inclusive Framework
will be critical to the future of the international tax
system, with the 2020 deadline providing the necessary impetus.
Box 1.3 (continued)
35
C H A P T E R 1 F I S C A L p O L I C Y F O R A C H A N g I N g g L O b A L E C O N O M Y
International Monetary Fund | April 2019
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