During and After the Crisis

Transcription

1 Fiscal Policy During and After the Crisis Tiff Macklem Associate Deputy Minister G-7 Deputy for Canada Finance Canada

2 Outline of Talk Role of fiscal policy in stabilizing the economy Impact of stimulus in Canada Aftermath need for consolidation Canadian experience of mid-1990s Canada s exit strategy 2

3 Role of Fiscal Policy in Stabilizing the Economy 3

4 In addition to automatic stabilizers, large discretionary stimulus measures were implemented in response to the largest global recession since the 1930s Discretionary Measures in 2009 and 2010, G7 countries Per cent of GDP Canada Japan USA Germany UK France Italy Sources: IMF, The State of Public Finances Cross-country Fiscal Monitor, November IMF estimates exclude loans, including those to the auto sector, for all countries. Figure for Canada includes provincial-territorial stimulus in addition to that assumed in the Economic Action Plan as estimated by the Department of Finance Canada. 4

5 The effectiveness of fiscal policy in stabilizing the economy depends on several factors Response of monetary authority Accommodation Zero-bound constraint Degree of leakage (imports and savings) Degree to which consumers are forward looking Perceived fiscal position (sustainability) Speed of implementation 5

6 Canada s stimulus plan is well-diversified and structured for maximum effectiveness IMF, May % 15% Reducing the Tax Burden Employment Insurance and Training Support for R&D 9% 33% Infrastructure and Housing Support for Industries and Communities 30% An additional $200 billion to improve access to financing i Note: Figures do not include provincial, territorial or municipal leverage. Measures to support research and development include infrastructure improvements to colleges and universities. Measures to support industries and communities include targeted reductions to corporate income tax announced as part of the Economic Action Plan in Budget Source: Budget 2010 Canada s Economic Action Plan, Year 2

7 Prudent fiscal multipliers were used in assessing the impact of the stimulus 2.0 Dollar impact (after 8 quarters) on the level of real GDP of a one-dollar increase in fiscal measures Measures for low- income households and the unemployed Infrastructure/housing investment Personal income tax measures 7

8 Design and situation suggest high effectiveness The sustainable fiscal situation, the composition of the stimulus and its rapid implementation contributed to its effectiveness Widespread global actions limited import leakages Fiscal policy should have led to crowding-in effects with the policy interest rate essentially at zero and with forward-looking agents See NBER Working Paper When is the Government Spending Multiplier li Large? by Christiano, Eichenbaum and Rebelo, October,

9 Impacts of Fiscal Stimulus in Canada 9

10 Areas targeted by the Economic Action Plan rebounded strongly gy following its implementation Real Government Fixed Capital Formation Growth per cent, period to period at annual rates 30 Real Final Domestic Demand Growth per cent, period to period at annual rates Average since Q Q Q Q Q Q Q Q Q Q Q Q4 Source: Statistics Canada. Source: Statistics Canada. 10

11 Consumer and business confidence improved markedly Consumer Confidence Business Confidence index, 2002 = 100 index, 2002 = Jan 2005 Historical Average Jan 2006 Jan 2007 Jan 2008 Jan 2009 Jan Q1 Historical Average 2006 Q Q Q Q Q1 Source: The Conference Board of Canada. Source: The Conference Board of Canada. 11

12 Model-based estimates suggest that the Action Plan has had a significant impact on growth Real GDP Growth and the Economic Action Plan per cent, period to period at annual rates Actual Real GDP Growth Real GDP Growth without EAP Q3 Q4 Q1 Q2 Q3 Q4 Source: Budget

13 and employment Employment Growth and the Economic Action Plan per cent, period to period at annual rates Actual Employment Growth Employment Growth without EAP Q3 Q4 Q1 Q2 Q3 Q4 Source: Budget

14 Private demand has rebounded in Canada but remains fragile in most other G7 countries Index, 2009Q1 = Evolution of Real Private Final Domestic Demand US JAP UK GER FRA ITA* CAN Q1 09Q2 09Q3 09Q4 10Q1 1 Private consumption expenditures and private fixed investment. * Italy does not publish separate estimates for private and public fixed investment. As a result, Italy s private final domestic demand includes government fixed investment. Sources: Statistics Canada; U.S. Bureau of Economic Analysis; Cabinet Office; Office for National Statistics; Deutsche Bundesbank; Institut National de la Statistique et des Études Economiques; Istituto Nazionale di Statistica; Department of Finance calculations. 14

15 Aftermath: The Need for Fiscal Consolidation i 15

16 Stimulus was appropriate and necessary, but there has been a rapid deterioration in the fiscal situation per cent of GDP Total Government Net Debt, G7 Countries 0 Canada Germany France United States United Kingdom Italy Japan Source: IMF, World Economic Outlook (October 2009). 16

17 Gross debt in the G-7 now as high as in the early 1950s per cent of GDP 120 G-7 Gross Government Debt, PPP weighted Source: IMF Calculations 17

18 Sharp rise in public debt is exposing governments with weakest fiscal positions to rapidly rising risk premia Per cent of GDP General Government Gross Financial Liabilities basis points 10-Year Spreads to Germany Portugal Italy Ireland Greece Spain Portugal Italy Ireland Greece Spain 0 Oct-09 Nov-09 Dec-09 Jan-10 Mar-10 Apr-10 Source: OECD 18

19 Most countries facing additional pressure from population p aging g Elderly (age 65+) as a Proportion of the Population: Expected Changes from 2010 to 2030 percentage points Europe China Italy U.S. France Canada Germany Japan Source: United Nations World Population Prospects

20 Canadian Consolidation Experience of the mid-1990s 20

21 Debt burden rose steadily for more than two decades per cent of GDP Net Debt Federal Provincial/Territorial Source: Canada and Provincial Public Accounts 21

22 Growing sense of crisis by mid-1990s provided the impetus for significant action 1994 Mexican peso crisis - Rapid depreciation of the Canadian dollar - Demonstrated the vulnerability of high-debt nations to international financial markets WSJ Editorial: Bankrupt Canada? (January, 1995) - Honorary member of the third world - Canada could hit the debt wall and have to call the IMF 22

23 The policy actions were very difficult and painful, but led to the elimination of a large deficit in just four years per cent of GDP Total Government Program Spending per cent of GDP Total Government Fiscal Balance 42 Peak to trough: Total government 40 program spending -9.6 p.p. of GDP Budgetary Balance Primary Balance Peak to trough: Total government budgetary balance p.p. of GDP Source: Statistics Canada. 23

24 Major 1998 reform to CPP/QPP also put the systems on a sustainable path over the long run CPP and QPP Contributions and Benefits per cent of GDP per cent of GDP 4 3 Cumulative Balance (right) Contributions Benefits 1998 Reform raised contribution rates by 70% Actuarial forecasts Sources: Statistics Canada, OSFI Actuarial Report on Canada Pension Plan (2009); L'analyse actuarielle du Régime de rentes du Québec (2007). 24

25 Large fiscal consolidation lowered growth temporarily in 1996, but growth bounced back as credibility and confidence built up per cent 5 4 Real GDP Growth in Canada and the United States Canada U.S Source: Statistics Canada, U.S. Bureau of Economic Analysis. 25

26 Lower debt service costs led to significant debt and tax reductions Total Goverment Net Debt and Revenues Per cent of GDP 100% 46% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Net Debt (left axis) Revenues (right axis) % 42% 40% 38% 36% 34% Source: National Balance Sheet Book Value 26

27 Lessons Learned from Canada s Fiscal Consolidation of the mid-1990s 1. Credible plans must be developed and communicated early Measures well identified Prudent economic assumptions Under-promise/over-achieve 2. Initiate consolidation as soon as possible - don t be too gradual and allow monetary policy to play its macrostabilization role 3. Focus on spending reductions and measures that will increase potential growth What does this mean for the current situation? ti 27

28 Canada s Exit Strategy 28

29 Budget 2009 implemented temporary stimulus and early actions to secure sound long-run fiscal position Temporary Action Plan stimulus, concentrated in 2009 and 2010 Permanent actions to maintain i sound structural t finances: Reforms to Equalization to ensure sustainability Better managed federal compensation regime Reviews of departmental spending and corporate assets 29

30 Budget 2010 builds on Budget 2009 early actions by setting out a 3-point plan to return to budget balance Follow through on the exit strategy in the Economic Action Plan by ensuring that temporary stimulus is wound down by the end of this fiscal year Targeted measures to restrain direct program spending growth that t build over the medium term Comprehensive review of government administrative functions and overhead costs 30

31 Budget 2010 track to return to balance Projected Federal Budgetary Deficit billions of dollars Withdrawal of stimulus reduces deficit by half Impact of Budget 2010 Measures Source: Budget

32 Conclusion Fiscal policy has very different impacts in normal and exceptional economic circumstances Discretionary stimulus actions taken were necessary, appropriate and worked Consolidating in aftermath th of crisis i as important t as stimulus actions Markets already demanding commitment to reduced public debt and improve fiscal sustainability Lessons from Canadian experience 32

33 Fiscal Policy During and After the Crisis Tiff Macklem Associate Deputy Minister G-7 Deputy for Canada Finance Canada