The IMF says the global financial crisis is having major implications for the public finances of most countries. Fiscal revenues are declining through the operation of automatic stabilisers (e.g unemployment benefit payments) and because of lower asset and commodity prices. The Fund says in a staff paper, published last Tuesday, that debt-to-GDP ratio of advanced countries is expected to rise by 20 percentage points in 2009 - - the most pronounced upturn in the last few decades. The one-year increase in government debt is three times as large as that experienced during the 1993 recession. More than a quarter of this increase is due to financial sector support packages. The debt ratio for the average of the emerging economies also shows a sizable increase in 2009, the first since 2002.
The Fund says fiscal balances will be severely affected by the crisis in the short run. For G-20 advanced economies, fiscal balances are projected to worsen, on average, by 8 percentage points of GDP in 2009 relative to 2007, reaching 93 ⁄4 percent of GDP in 2009. The fiscal balances of G-20 emerging economies deteriorate less—given the lower impact on growth, automatic stabilisers and fiscal stimulus—but still significantly (reversing the improvement achieved since 2003). For the advanced countries, half of the deterioration is due to fiscal stimulus and financial sector support, while for emerging economies, a relatively large component is due to declining commodity and asset prices.
The IMF says many countries have recapitalised their banks, particularly the systemically important ones. For the advanced G-20 countries, the average outlay to date is projected at 3.2 percent of GDP, with considerable variation across countries (ranging from 4.6 percent in the United States to none for Australia and Spain). Among smaller advanced economies, Austria, Belgium, Ireland, and the Netherlands have announced large programs, ranging from 3½ to 5½ percent of GDP.
The G-20 represents about 90 percent of global gross national product, 80 percent of world trade (including trade within the European Union) as well as two-thirds of the world's population, according to the IMF.
Measured by purchasing power, Asia accounts for more than 35 percent of world GDP, compared with the US and the EU at 20 percent each.
The G-20 comprises Argentina, Australia, Brazil, Canada, China, France, Germany, India, Indonesia, Italy, Japan, Mexico, Russia, Saudi Arabia, South Africa, South Korea, Turkey, the UK and the US, plus the European Union, represented by the rotating Council presidency and the European Central Bank. The Managing Director of the International Monetary Fund and the President of the World Bank, plus the chairs of the International Monetary and Financial Committee and Development Committee of the IMF and World Bank, also participate at G-20 meetings.
The IMF paper says the impact of the automatic stabilisers is increasing rapidly with the weakening of economic conditions. For 2008, the estimated impact of automatic stabilisers—computed on the basis of changes in the output gap—is just –0.2 percent of GDP for the G-20.9 A larger impact, –1.8 percent of GDP, is projected in 2009, as the output gap widens. The impact in 2009 ranges from –3.5 percent of GDP for the Germany to –2½ percent for France, Italy, Japan, Russia, Turkey, and the United Kingdom, and to –½ percent for several emerging economies, including China, India, and Indonesia (differences across countries reflect differences in the change in the output gap and the revenue and expenditure elasticity assumptions). As a gauge for sensitivity analysis, a uniform 1 percentage point of GDP worsening in the G-20 output gap broadly translates into a ⅓ percent of GDP increase in the fiscal deficit. An intuition behind this approximation is that government size—a good proxy for the magnitude of automatic stabilizers—is around one-third of GDP for the G-20 weighted average.
The IMF says it is worth assessing how projections might change in the event of downside risks materialising. Two scenarios are explored:
Lower growth in 2009–11.If growth is 1 percent a year below the baseline during 2009–2011, fiscal deficits would rise, on average, by 1 percent of GDP, and the debt to GDP ratio would increase by an additional 6 percentage points by 2011. This deterioration would mainly reflect the impact of automatic stabilizers. Fiscal balances in emerging economies are less adversely affected, mainly because of their smaller automatic stabilizers (but could be affected more significantly through further declines in commodity prices).
A prolonged stagnation. What would be the effect of a protracted deflationary slump, akin to the experience of Japan in the 1990s? From 1991 to 2007, GDP annual growth in Japan averaged 1.6 percent, a drop of 2.3 percentage points compared with the 1970–90 average. In light of that experience, a decline in growth (relative to the baseline) of 2 percentage points during 2009–2013—was investigated. In this scenario, for the advanced countries, the fiscal balances would deteriorate, on average by 2 percentage points of GDP relative to the baseline, with debt ratios rising by 18 percentage points by 2013. The IMF says the deterioration is also notable for emerging economies.