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Continued progress in reducing advanced economy deficits and a gradually improving external environment have lowered short-term fiscal risks, according to this issue, but global prospects nevertheless remain subdued, and many advanced economies face a lengthy, difficult, and uncertain path to fiscal sustainability. Though many advanced economies are now close to achieving primary surpluses that will allow them to stabilize their debt ratios, this is only a first step, as merely stabilizing advanced economy debt at current levels would be detrimental to medium- and longer-term economic prospects. The key elements of the required policy package are well known: foremost among them is setting out—and implementing—a clear and credible plan to bring debt ratios down over the medium term. Debt dynamics have remained relatively positive in most emerging market economies and low-income countries, and most plan to continue to allow the automatic stabilizers to operate fully, while pausing the underlying fiscal adjustment process. Those with low general government debt and deficits can afford to maintain a neutral stance in response to a weaker global outlook. But countries with relatively high or quickly increasing debt levels are exposed to sizable risks, especially once effective interest rates rise as monetary policy normalizes in the advanced economies and concessional financing from advanced economies declines. The widespread use of energy subsidies makes commodity prices an additional source of vulnerability in many emerging market and low-income economies; subsidy reform, higher consumption taxes, and broadening of tax bases would help support consolidation efforts.
The Global Financial Stability Report examines current risks facing the global financial system and policy actions that may mitigate these. It analyzes the key challenges facing financial and nonfinancial firms as they continue to repair their balance sheets. Chapter 2 takes a closer look at whether sovereign credit default swaps markets are good indicators of sovereign credit risk. Chapter 3 examines unconventional monetary policy in some depth, including the policies pursued by the Federal Reserve, the Bank of England, the Bank of Japan, the European Central Bank, and the U.S. Federal Reserve.
Fiscal risks are abating somewhat but remain elevated. In advanced economies, recent policy moves have broadly stabilized public debt ratios, but medium-term prospects are still uncertain, and debt remains at historic highs. Fiscal vulnerabilities are rising in both emerging market economies and low-income countries, although in most cases from relatively moderate levels. Across country groups, fiscal policy should aim at rebuilding policy space while supporting the recovery and long-term growth prospects.
Persistently high debt ratios in advanced economies and emerging fragilities in the developing world cast clouds on the global fiscal landscape. In advanced economies, with narrowing budget deficits, the average public debt ratio is expected to stabilize in 2013–14—but it will be at a historic peak. At the same time, fiscal vulnerabilities are on the rise in emerging market economies and low-income countries—on the back, in emerging market economies, of heightened financial volatility and downward revisions to potential growth, and in low-income countries, of possible shortfalls in commodity prices and aid. Strengthening fiscal balances and buttressing confidence thus remain at the top of the policy agenda. Against that backdrop, this issue explores whether and how tax reform can help strengthen public finances. Taxation is always a sensitive topic and is now more than ever at the center of policy debates around the world. Can countries tax more, better, more fairly? Results reported in this issue show that the scope to raise more revenue is limited in many advanced economies and, where tax ratios are already high, the bulk of the necessary adjustment will have to fall on spending. In emerging market economies and low-income countries, where the potential for raising revenue is often substantial, improving compliance remains a central challenge.
Chapter 1 discusses how fiscal policy operates amid a sharp rise in uncertainty caused by the war in Ukraine. Chapter 2 discusses how international coordination on tax matters can support revenue, inclusion, tax transparency, and greener economies.
Global growth is in low gear, and the drivers of activity are changing. These dynamics raise new policy challenges. Advanced economies are growing again but must continue financial sector repair, pursue fiscal consolidation, and spur job growth. Emerging market economies face the dual challenges of slowing growth and tighter global financial conditions. This issue of the World Economic Outlook examines the potential spillovers from these transitions and the appropriate policy responses. Chapter 3 explores how output comovements are influenced by policy and financial shocks, growth surprises, and other linkages. Chapter 4 assesses why certain emerging market economies were able to avoid the classical boom-and-bust cycle in the face of volatile capital flows during the global financial crisis.
This report discusses fiscal policies to prepare for the next downturn and foster long-term inclusive growth by adapting to changing demographics, advancing technology, and deepening global integration. It also covers recent fiscal developments and the fiscal outlook in advanced economies, emerging markets, and low-income developing countries; recent trends in government debt and analysis of changes in fiscal balances, revenue, and spending; and potential fiscal risks. The report takes on in-depth look at how corruption impacts government policies and operations, the fiscal costs, and how fiscal institutions can help fight corruption.
Fiscal risks remain significant in both advanced and emerging market and developing economies. Fiscal policy continues to play an essential role in building confidence and, where appropriate, sustaining aggregate demand. According to this issue of the Fiscal Monitor, strengthening fiscal frameworks—particularly to manage public finance risks and ensure debt sustainability—must be part of the fiscal policy response. Countries should seize the moment created by lower oil prices to start the process of energy taxation and energy subsidy reform. Finally, fiscal policy can contribute substantially to macroeconomic stability, through the workings of automatic stabilizers. By doing so, fiscal policy can also unlock significant growth dividends.
The global economy remains fragile at this time. While the recovery in advanced economies is softening, many emerging market and developing economies have experienced a significant economic slowdown, and some large countries show signs of distress. Global risk aversion has risen, and commodity prices have continued to fall since the April 2015 Fiscal Monitor. The weaker outlook and concerns about the ability of policymakers to provide an adequate and swift policy response have amplified downward risks and clouded global prospects. According to this issue of the Fiscal Monitor, the challenging environment calls for a comprehensive policy response to boost growth and reduce vulnerabilities. In particular, it is critical to identify policies that could lift productivity growth by promoting innovation. Fiscal policy can play an important role in stimulating innovation through its effects on research and development, entrepreneurship, and technology transfer.
This report discusses fiscal trends in policies aimed at reducing fiscal vulnerabilities and boosting medium-term growth, recent fiscal developments and the fiscal outlook in advanced economies, emerging markets, and low-income developing countries; recent trends in government debt and analysis of changes in fiscal balances, revenue, and spending; potential fiscal risks; and growth from the fiscal policies. It also describes how digitalization can help governments improve implementation of current policy and widen the range of policy options, and opportunities and risks for fiscal policy, including improvements in policy implementation, the design of future policy, and how digitalization can create opportunities for fraud and increase government vulnerabilities.