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Special Topic: Fiscal Consolidation in Advanced Economies

Many advanced economies emerged from the global financial crisis with high government debt and large fiscal deficits. In response, most of these countries are undertaking fiscal adjustments to reduce deficits, and stabilise and ultimately reduce government debt. Drawing on recent data from the International Monetary Fund (IMF) (particularly the October 2013 Fiscal Monitor [1]), this note addresses the international fiscal consolidation experience so far and how New Zealand compares.

Fiscal consolidation in advanced economies is proceeding

Many advanced economies have made significant efforts over recent years towards fiscal consolidation. Deficits in most countries have narrowed since 2010 and are forecast to continue to narrow (Figures 1 and 2 - note differences in scale).

Figure 1: Fiscal Balances 2010-16, selected higher deficit countries
Figure 1: Fiscal Balances 2010-16, selected higher deficit countries.
Figure 2: Fiscal Balances 2010-16, selected lower deficit/surplus countries
Figure 2: Fiscal Balances 2010-16, selected lower deficit/surplus countries.

Source: IMF, October 2013 Fiscal Monitor. The IMF presents its data on a Government Finance Statistics and calendar year basis. Figures from 2013 onwards are forecasts.

2013 is expected to be a year of particular progress compared with previous years (although individual country plans differ). Consolidation in 2014 and beyond is expected to be more moderate, reflecting the progress made thus far.

Similarly, government debt is expected to stabilise and then start to decline in most countries, although in the near term debt continues to rise for some. Figures 3 and 4 show the government debt paths from 2010 to 2016 in selected countries (again, note differences in scale).

Figure 3: Gross Government Debt, selected higher debt countries
Figure 3: Gross Government Debt, selected higher debt countries.
Figure 4: Gross Government Debt, selected lower debt countries
Figure 4: Gross Government Debt, selected lower debt countries.
Source: IMF, October 2013 Fiscal Monitor.
The IMF presents its data on a Government Finance Statistics and calendar year basis. Figures from 2013 onwards are forecasts.

However, although fiscal consolidation is proceeding broadly as planned in most countries and deficits are narrowing, the extent of actual reduction in deficits so far is not as significant as originally anticipated. The main reason for this is that most countries have experienced weaker economic growth than expected, leading to weaker revenue.

Different countries have approached consolidation differently

The trends of narrowing deficits and stabilising then declining government debt broadly reflect the experience of most advanced economies. But underneath these trends are a number of different approaches. One difference between countries is the extent to which consolidation is achieved by spending measures, revenue measures, or both. New Zealand is somewhat unusual (although not totally alone) in that its fiscal consolidation has been largely on the spending side. Figure 5 shows the extent to which fiscal consolidation so far has been by spending or revenue measures, or both, across a sample of countries (a positive value represents fiscal consolidation and a negative value represents fiscal expansion).

Figure 5: Composition of Adjustment, 2009-13
Figure 5: Composition of Adjustment, 2009-13.
Source: IMF, October 2013 Fiscal Monitor. Data is cyclically adjusted.

As Figure 5 shows, many countries have relied on both revenue and spending initiatives to help reduce their deficits. In many cases, the share of consolidation on the revenue side was more than was initially planned.

There are differences in approach beyond the mix of spending and revenue initiatives. The United States, the United Kingdom, France and Greece are proceeding with fiscal consolidation at a faster pace than most other countries, with adjustment likely to be more than 1% of GDP in 2013. To a large extent this comparatively faster adjustment reflects different starting points, as most of the countries on fast consolidation paths had comparatively high deficits to begin with. Still, individual country circumstances are relevant too. For example, much of the consolidation in the United States in 2013 is due to the extension of automatic spending cuts, or the “sequester”.

At the other end of the spectrum, some countries that do not feel such immediate pressure to consolidate are actually loosening fiscal policy slightly in 2013. Sweden, Germany and Canada fall into this category. In some cases this reflects the fact that these countries have not faced the need for significant adjustment - Sweden is an example. In Germany, on the other hand, fiscal easing reflects the fact that deficit goals were achieved ahead of schedule.

In the middle, countries such as Ireland and Spain are continuing with fiscal consolidation into 2013 and beyond, but at a more moderate pace than the fast consolidation group.

Japan is unusual in that fiscal consolidation is yet to get underway despite having a large deficit and high government debt (it is one of the few countries surveyed that actually increased its deficit since 2010). Consolidation is planned for 2014 and beyond, although some details of what that will involve have yet to be fleshed out.

Getting debt back to acceptable levels is still a challenge for most countries...

Even assuming that planned fiscal consolidation takes place, many countries will still have levels of government debt at or near historical peaks, leaving them vulnerable to economic shocks. Accordingly, the IMF advises most advanced economies to continue efforts to reduce government debt throughout the 2020s.

Figure 6: Aggregate advanced economies’ gross government debt, 2006-18
Figure 6: Aggregate advanced economies’ gross government debt, 2006-18.
Source: IMF, October 2013 Fiscal Monitor.

... but New Zealand is relatively well-placed

Compared with many advanced economies, New Zealand is well-placed in terms of moving into surplus and being able to start reducing its debt. Under current forecasts, New Zealand will move into surplus in the 2014/15 fiscal year (or the 2015 calendar year under the IMF forecasts, which are prepared on a calendar year basis). Of the advanced economies that the IMF surveys, only Estonia, Hong Kong, Korea, Norway, Singapore and Switzerland will also achieve surpluses in 2015.

Moving into surplus means that New Zealand can start paying down its government debt sooner than many other countries. Also, New Zealand’s starting position is more favourable in that government debt was at historically low levels in 2008. Despite two shocks - the global financial crisis and the Canterbury earthquakes - New Zealand’s government debt did not rise to the levels seen in other advanced economies.

The Annual Financial Statements of the New Zealand Government, released on 7 October 2013, show New Zealand is in an even stronger position than that reflected in the IMF’s analysis. The IMF data for New Zealand is based on Budget 2013 forecasts, so values for 2013 are forecasts rather than actual data. But in fact, actual results for the 2012/13 fiscal year were stronger than forecast at Budget 2013. In particular, the 2013 Financial Statements show New Zealand’s operating balance to be -2.1% of GDP in 2012/13, as opposed to the forecast at Budget 2013 of -2.9% of GDP. Similarly, net core Crown debt was forecast to be 27.1% of GDP in 2012/13, but was in fact 26.3% of GDP.

Box 1: Differences between IMF measures and New Zealand government measures

The IMF prepares its comparative international financial data on a Government Finance Statistics (GFS) basis. In contrast, the New Zealand government primarily uses NZ GAAP. That difference, plus differences in time periods used, means that IMF numbers look slightly different from the headline numbers New Zealanders might be more used to seeing.

Besides the time period covered by the data, there are conceptual and coverage differences between the two “headline” series. For example, the New Zealand government uses the Operating Balance Excluding Gains and Losses, or OBEGAL, as the main indicator of its fiscal balance (that is, whether government finances are in surplus or in deficit). One important difference between OBEGAL and the GFS Fiscal Balance is that OBEGAL excludes capital spending, whereas the GFS Fiscal Balance includes it. Figure 7 plots these two measures (using June years for both), showing that while the two measures are different, they are closely related.

Figure 7: Actual and forecast fiscal balances under two different measures, June years
Figure 7: Actual and forecast fiscal balances under two different measures, June years.
Source: The Treasury, 2013 Budget Economic and Fiscal Update.

To help compare fiscal outcomes across countries, the Treasury also produces a set of GFS accounts for central government. The most recent is in the 2013 Budget Economic and Fiscal Update, available at http://www.treasury.govt.nz/budget/forecasts/befu2013.

Notes

 

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