The Gang of Ten

Tuesday 23 April 2013 14.25

Olivier Blanchard, the IMF's chief economist

By Seán Whelan Economics Correspondent

The good news from Olivier  Blanchard, the chief economist of the IMF and main author of its World Economic Outlook, is that only ten advanced countries have such big debt and deficit problems that they cannot avoid taking action to deal with them. The bad news is that Ireland is one of them.  And more bad news – so is America.  Ditto for Britain.  And Japan.  And six other euro zone states.

So that’s us and the vast bulk of our trading partners all having to engage in traumatic fiscal consolidation at the same time.  A group that between them accounts for some 40% of global GDP.  So much for the export led recovery….

But in this age of growing inequality, it seems only right that not all debt-wrecked countries are created equal in misery.  In another report published this week – the Fiscal Monitor – the IMF says there are clear differences across the gang of ten.

One group – Belgium, France and Italy, have already undertaken a large share of the adjustment needed to bring debt levels down to safe levels over time.  They need only increase their cyclically adjusted primary balance (income over expenditure before interest costs on debt) by between 1 and 3 percentage points of GDP.  For Italy, it says little or no further adjustment is needed, but it will need to maintain a bigger primary surplus than France or Belgium over the next decade, to move debt levels down from their current 120% level.

The second group – Ireland, Portugal, Spain, Britain and the USA – still has some way to go in terms of its outstanding adjustment – close to 5.5% of GDP.  Once this adjustment has been completed, all these countries will need to run large primary surpluses over the medium term to move the debt level down.  This is going to be harder to do, it warns, because of failures to tackle pension reform, and additional measures will be needed to keep the primary surplus constant, especially in the US.

Then, in a class of its own, is Japan.  It needs to make an adjustment of 16 percentage points of GDP to achieve a primary surplus of 7% of GDP in order to set its debt level of a staggering 255% of GDP on a sustainable downward path.

That’s nine countries – Greece was the other one Blanchard mentioned, but the Monitor makes no prescription – though it does note that the deficit this year will be lower than the average for advanced economies at 4.5%, that’s eleven percentage points below where it was in 2009, and the primary balance should be zero.  All told, a pretty impressive performance considering where they started.  Ireland is expected to go to primary balance next year.

But how do our budget plans for this year compare with some of the leading fiscal strugglers of the Western World?  Here is the handy guide from the Fiscal Monitor for you to cut out and keep.

From the Fiscal Monitor, April 2013, IMF Staff.

The United States, despite having averted the “fiscal cliff,” is set for a decline of 1.75% of GDP in its cyclically adjusted primary deficit in 2013, almost 0.5% of GDP more than in 2012, largely reflecting the automatic spending cuts (the so-called sequester) that went into effect on March 1. Currently projected at 6.5% of GDP in 2013, the headline deficit will fall this year to about half its level at the peak of the crisis in 2009, although some of this decline is due to reduced financial sector support. The overall fiscal tightening is one of the largest in recent decades and is clearly excessive in light of cyclical considerations. Uncertainty about this year’s outturn remains. The debt ceiling will need to be raised soon, as it has been suspended only until May (pushing the effective deadline to midsummer, assuming the Treasury again resorts to the available extraordinary measures). Insufficient progress has been made toward an agreement on entitlement reforms and other much-needed measures to control the debt path over the medium term. Adjustment is expected to continue in most other advanced economies this year largely in line with earlier projections, notwithstanding the weak economic recovery.

In Spain, the revision to the fiscal forecasts mainly reflects nonfiscal factors. The estimate of the 2012 deficit (excluding financial sector costs) of 7% of GDP is in line with the October 2012 Fiscal Monitor’s projection. Financial sector support amounted to approximately 3.25% of GDP, bringing the overall deficit to 10.25%. The underlying consolidation was nevertheless very sizeable: an improvement in the cyclically adjusted primary balance of about 3% of GDP (excluding financial sector support) in the face of a large output contraction. Further substantial consolidation is projected for 2013, though the deficit forecast has been revised up by over 0.5% of GDP since the October 2012 Fiscal Monitor, reflecting the worse unemployment outlook and the lack of specified medium-term measures.

In France, a structural adjustment of 1.25 percentage points of GDP is projected, mostly focused-as in previous consolidation efforts-on selective tax increases (with an emphasis on high-income individuals). The deficit is projected to decline to about 3.5% of GDP in 2014.

In the Netherlands, the 2013 deficit is projected at 3.5% of GDP, slightly above the authorities target. The recapitalization of SNS REAAL will have a budgetary cost of about 0.6% of GDP, but this is expected to be fully offset by an increase in revenue from an auction of broadcast spectrum rights.

In Italy, the pace of underlying consolidation will slow to 1% of GDP, a little less than projected earlier, but enough to broadly balance the budget in structural terms. The 2012 deficit is projected to have been at the 3% threshold, allowing Italy to exit the EU Excessive Deficit Procedure.

In the United Kingdom, the 2013 deficit forecast has been revised down by about 0.25% of GDP, mostly reflecting the transfer of Bank of England profits to the Treasury from January 2013 (1 percentage point of GDP), partly offset by projected lower revenue collections. Despite headwinds, the government will undertake continued consolidation to reduce the cyclically adjusted deficit by another 1% of GDP in 2013. Some deficit-neutral measures have been introduced to support growth.

In Ireland, the 2012 fiscal outturn was better than expected. Additional tightening is forecast this year, underpinned by measures amounting to 2.1% of GDP. These include reforms in property taxes and welfare services, as outlined in the 2013 budget. Financial transactions associated with the liquidation of the state-owned Irish Bank Resolution Corporation and the associated exchange of promissory notes for long-term government bonds will result in annual interest savings of about 0.6% of GDP.

In Portugal, fiscal consolidation is projected to continue in 2013, largely through increases in personal income and property taxation. The deficit target has, however, been revised upward from 4.5% of GDP to 5.5% of GDP in 2013 given the weak growth and employment outlook.

In Greece, continued adjustment and a renewed institutional reform agenda (with a focus on revenue administration and expenditure controls) are expected to bring the primary balance to zero in 2013. The overall deficit is expected to fall to 4.5% of GDP this year, below the advanced economy average and 11 percentage points lower than its 2009 peak.

However, a few advanced economies facing limited fiscal pressures are adopting more neutral stances:

In Germany, the cyclically adjusted fiscal balance strengthened by 1% of GDP in 2012 on the back of buoyant revenue and lower interest payments. The cyclically adjusted balance is expected to be largely unchanged this year, with the overall deficit widening by 0.5% of GDP in 2013 as a result of the operation of the automatic stabilizers. The authorities remain on track to meet the requirements of the domestic debt brake rule.

In Canada, the gradual withdrawal of fiscal stimulus is continuing and consolidation plans are being implemented, at both the federal and provincial levels, though at a more modest pace in a number of provinces.

All of which sounds like as good a reason as any to sign off on an EU-US free trade deal as quickly as possible (one with Canada is almost done and dusted, Japan is in the works).  Debt junkies of the world unite…..

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