Director, Fiscal Affairs Department Ruud De Mooij, Deputy Director, Fiscal Affairs Department Era Dabla‑Norris, Assistant Director, Fiscal Affairs Department interacted with the media in Marrakech on fiscal monitor
For all countries, balancing public finances has become increasingly difficult. Difficulties are created by growing demands for public spending, rising interest rates, high debts and deficits, and political resistance to taxes. But there are sharp differences across countries. On the one extreme, some countries lack the cash to pay for urgent spending and lack access to credit. On the other extreme, there are countries that do not face any immediate financing constraints but where unchanged policies would lead to ever‑rising debt. Moreover, many countries need tighter fiscal policy, not just to rebuild fiscal buffers to respond to future shocks but also to help central banks bring inflation down to target.
Worldwide, debt levels are generally elevated, and borrowing costs are climbing. Global public debt is expected to increase to more than 93 percent of GDP in 2023 and to rise onwards, mainly due to major economies, like the United States and China. The increase is projected to be about one percent of global GDP annually over the medium term. Public debt is higher and growing faster than pre-pandemic projections. Excluding these two economies, the ratio would decrease by approximately half percent annually. Slower economic growth, higher interest rates, and pressures on primary deficits also help explain why global public debt would go above 100 percent of GDP by the end of the decade.
Against this backdrop, the Fiscal Monitor dives into the fiscal implications of the green transition. Current national objectives and policies will fail to deliver net zero, with catastrophic consequences. In other words, large ambition gaps, the difference between countries’ nationally defined contributions and what’s required for Paris Agreement goals, and policy gaps (the difference between national targets and outcomes achievable under current policies) remain. The option of scaling up the present policy mix that relies on subsidies and public investment to attain net zero is projected to increase public debt by 45 to 50 percentage points of GDP for both advanced and emerging economies by 2050, compared with business as usual. The Fiscal Monitor shows that the combination of policy instruments can attenuate this most unpleasant trade‑off. Carbon pricing is a central piece but must be supplemented with measures to address other market failures and distributional concerns. Fiscal support is needed to help vulnerable households, workers, communities, and businesses to adapt. The Climate Crossroads report offers policy options to limit the accumulation of additional debt to 10 to 15 percent of GDP by 2050. This brings the scale of the problem down to a size that can be addressed by other fiscal measures.
Often, countries with limited fiscal capacity, low tax revenues, and restricted access to market financing face substantial adaptation costs. They should prioritize and increase the quality of public spending, for example, by eliminating fuel subsidies. They should also strengthen tax capacity by improving institutions and broadening the tax base. The private sector is key to a successful green transition, so authorities should put in place a policy framework, favouring private investment and private financing.
In 2021 and 2022, the IMF backed tax capacity of treasury market development in over 150 member states. Chapter 3 of the Global Financial Stability Report covers climate finance in greater detail. As COP28 nears, a global cooperative approach, led by major players — including China, India, the United States, the African Union, and the European Union — would make a significant difference. A central element would be a carbon price floor or equivalent measures. Other important elements are technology and financial transfers and/or revenue sharing. The latter could bridge financial divergences across countries and contribute to achieving the United Nations Sustainable Development Goals, starting with the elimination of poverty and hunger.
The IMF has a vital role at the center of the international monetary system. It supports sound public finances and financial stability as part of the global financial safety net. Urgent member support is needed to increase quota resources and secure funding for the concessional Poverty Reduction and Growth Trust and the Resilience and Sustainability Trust. The three‑way policy trade‑off described in the Fiscal Monitor is not limited to climate. Countries everywhere are faced with multiple spending pressures. Under such conditions, political red lines limited taxation at an insufficient level translate directly into larger deficits that push debt to ever‑rising heights. Something must give. Policy ambitions must be scaled down or political red lines on taxation moved if public debt sustainability and financial stability are to prevail. The Fiscal Monitor shows that a smart policy mix is the way out of this delimma.
In African, we all know about the high unemployment rates on the continent. We also know about the low growth on the continent. We know about the high poverty levels. So, in that environment, how do you increase taxes? And how do you use taxes as a tool to try to address the issues that you are talking about?
Thank you very much for that question because the revenue mobilisation agenda for Africa is really critical going forward. There are so many needs for spending in terms of development needs, investments in infrastructure, in education, in healthcare. Countries need to invest in adaptation, in mitigation. So, there are huge needs for revenue mobilisation because many countries are also facing high debt levels.
How much can countries generate in terms of revenue?
We released a study two weeks ago that looks into that. So, it explores: What is the revenue potential, given the circumstances in countries? So how much can they maximally raise? And what the study finds is that by reform of policies, reform of administrations, they can generate 7 per cent more of GDP as their potential. And in addition to that, if they would also be able to change their institutions — so the quality of the state’s capacity, if low‑income countries could move to the average level of emerging markets, they could generate another 2 percent. So, we arrive at a revenue potential of all these reforms that could generate 9 percent of GDP in revenue. And, of course, the big question is: How can you do that? So, what are the measures that can contribute to that? And we find that many countries have a huge number of tax concessions. They have an income tax. They have a VAT, but they provide so many tax concessions, exemptions for certain industries, certain commodities. And the revenue foregone from these measures is between 2 and 5 per cent of GDP, so there’s a lot of potential there.
There’s a lot of tax evasion. There are studies on the VAT of tax evasion which relate to failure to register, failure to remit tax, underreporting of income, false claims for refunds. All these issues together add up to 2 to 4 percent of GDP. And this is a matter of good enforcement. Good revenue administration can go a long way in mobilising more revenue. And as Era just said, there are opportunities for, for instance, new taxes, like a carbon tax. A carbon tax is relatively easy to administer, especially interesting for countries that have limited capacity, administrative capacity to generate revenue, because you levy the tax from just a number — a small number of sources, usually large companies. So, there are many opportunities. There are many more, but these are big ones. And the question is often: How do you get it done? How do you manage politically to increase taxes? I think what is very important is to link it to the development agenda. You don’t raise taxes just for the sake of raising taxes; you do it for supporting the development agenda. And there are many examples also in Africa that have managed to increase tax revenue, over a relatively short period of time, quite significantly, by multiple percentages of GDP. And I think we can learn from these examples. On Friday, there will be the fiscal forum, where we have a number of countries explaining their experience in mobilising more revenue.
How would you convince a reluctant government to adopt a carbon taxation, considering the political price it can represent? And are there specific parameters to ensure its effectiveness?
Our latest Fiscal Monitor, Climate Crossroads, highlights the importance of carbon pricing as an important part of the climate mitigation toolkit. And this is for two reasons. Well, first, carbon taxation, like other measures of carbon pricing, relies on the polluter‑pays principle. In other words, those who pollute more pay more. So as such, it can be an effective instrument to encourage energy preservation, to incentivise a shift toward clean energy, to catalyse private adoption, innovation of clean technologies. Second, carbon pricing — carbon taxation, in particular, can be particularly easy to administer because many countries already have fuel taxes; so, this is essentially a top‑up.
That said, carbon taxes, like any other taxes, can be unpopular. And this is because it raises energy prices. But an important thing that needs to be borne in mind is that carbon taxation also raises revenues. And these revenues then, in turn, can be used to compensate vulnerable households, vulnerable individuals from the higher energy prices. In fact, our own research at the IMF finds that when you survey people and ask them about their perceptions about carbon taxation, when they are made aware that the revenues can be recycled to protect them from the higher energy prices and to alleviate the distributional concerns, that actually leads to greater acceptability, political acceptability of carbon taxation.
That said, carbon taxation alone is not enough because it may not necessarily be the optimal policy in hard‑to‑abate sectors, such as buildings, where other types of incentives may be required. And it’s also important to note that a range of complementary policies, sectoral mitigation policies — such as fee bates, public subsidies for incentivising private investment — may be needed. So, the Fiscal Monitor emphasises a mix of policies that can be used to manage the climate transition.
The IMF suggested to address the debt increase resulting from public climate investments, nations should take carbon pricing to generate revenue and stimulate the increased private investments. So, my question is, what alternative measures should be taken in countries where implementing carbon pricing is not feasible?
Fiscal Monitor shows that carbon pricing can be very effective in addressing climate change, for all the reasons that I have just mentioned. If countries, instead, were to rely on just public subsidies or green subsidies and public investment to address climate change and to achieve their net zero targets, this can be fiscally very costly. And our analysis shows that this could lead potentially to higher debt — could increase debt by 45 to 50 percent of GDP. And not all countries can afford such a route. That said, it is possible to put in place carbon price equivalent policies, such as regulations, feebates, tradable performance standards, and a mixture of public subsidies and public investment, in order to achieve net zero goals. But I should — but I should emphasise that it will be costly if we don’t have carbon pricing as part of the policy mix.
Mostly, in advanced economies, post‑pandemic recovery and the energy shock and now the climate change have required and are requiring significant fiscal easing. Is now the time to go back to fiscal austerity? What’s your assessment on Italian public debt? It is very high.
Thanks for your two questions. I would frame the issue of return as a return to fiscal rules, a return to a situation where the normal rules for the conduct of fiscal policy apply, in a context where increasing demands for public support and high inflation make a strong case for fiscal tightening, for most countries. In the case of the euro area, in the case of the European Union, we are very much in favor of a return to rules. We are in favour of the return to fiscal governance procedures in the European Union. And we believe that the commission has put on a proposal that includes very important and constructive elements, like a country‑specific approach based on a risk‑based Debt Sustainability Analysis and also the emphasis on a public spending path as the operational target. Those aspects were elements that we put forward in a paper, joint by the Fiscal Affairs Department and the European Department of the Fund, about a year ago. And we’re welcoming that these elements were taken by the European Commission proposal. We hope that the member states of the European Union will be able to reach a consensus soon because I think that that would very much contribute to stability in the European Union.
When it comes to debt in Italy, in the projections that we have just put out, we have a profile where the public debt‑to‑GDP ratio does decline; but it declines very slowly; and it stays well above the pre-pandemic level of debt. We are of the view that in order to bring the public debt‑to‑GDP ratio down in Italy, there are two elements that are crucial. One, structural reforms that will increase potential growth in Italy. That’s extremely important to dilute public debt gradually over time; but also additional ambition in terms of a fiscal adjustment in the context of a strengthening of the goals that the Italian government has in this area.
I was just wondering if you could, first, just give us a word about the conflict in the Middle East. There’s a lot of attention on this this week. It’s already pushing up energy prices for countries. It’s another shock on top of shock after shock after shock. What sort of fiscal impact might this have? And what are the things you are going to look out for in that? Also, if you could give us a word on kind of the convergence of China and the U.S. in terms of their debt‑to‑GDP ratios in your Fiscal Monitor and your Global Debt Database. They’re kind of converging at the same time. So just very briefly, on the fiscal challenges by the two largest economies in the world. Thanks.
On the situation in the Middle East, you may recall, David, that the chief economist at the IMF, Pierre‑Olivier Gourinchas, commented on possible implications associated with market developments and, in particular, developments in oil markets; but at this point in time, as he has also emphasised, it’s premature to make conjectures about that. We don’t know enough. And, of course, the conflict has not been reflected in the projections, in the numbers that we can deploy at this particular point in time. We are following developments very closely. They are developments of global relevance. When it comes to China and the U.S., the two largest economies in the world are also dominant in terms of global public debt developments. I emphasized in my introductory remarks. So global public debt is projected to increase by about 1 percentage point per year until the end of our projection period, in 2028. And if one would continue at this pace until the end of the decade, one would have global public debt above 100 percent of GDP. Without the U.S. and China, the trend would actually be declining by about half a percentage point per year. So, the two largest economies are really very important.
Something that the U.S. and China have also in common, that I want to emphasize, is ample policy space. Both in the case of the U.S. and in the case of China, the authorities have multiple policy options. They have multiple policy levers that they can use, ample policy space. It’s very important to bear that in mind. But the challenges that both economies face are quite substantial. In both cases, we have very high deficits in our projections. In both cases, we have rapidly growing debt. And in the case of the United States, if one uses, for example, the Congressional Budget Office’s projection, one has the public debt increasing until 2050 to very high levels; and the path of debt is pushed by high deficits, in part, determined by rising interest payments on the debt. So, the U.S. has ample policy instruments to control these developments and will have to choose to use them. And the U.S. can also introduce a stronger set of budget rules and procedures, doing away with the debt ceiling brinkmanship that creates uncertainty and volatility, without contributing much to fiscal discipline in the U.S. When it comes to China, I would not put the emphasis on public debt per se. I would say that the challenge for China is growth, stability, and innovation. And I don’t think that in this press conference, we have time, David, to speak on this at depth, but I am quite happy to explore that bilaterally.