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Transcript of the Press Conference on the Release of the October 2017 Fiscal Monitor

Washington, D.C.

October 12, 2017

Participants: Vitor Gaspar, Director, Fiscal Affairs Department

Abdelhak Senhadji, Deputy Director, Fiscal Affairs Department Catherine Pattillo, Assistant Director, Fiscal Affairs Department Wiktor Krzyzanowski, Senior Communications Officer, Communications Department

Mr. Krzyzanowski: Good morning, everybody. Thank you very much for joining us for this press conference on the October 2017 Fiscal Monitor. My name is Wiktor Krzyzanowski, and I am with the IMF's Communications Department.

Let me introduce the speakers to you. You know very well Vitor Gaspar, who is the Director of the Fiscal Affairs Department. Cathy Pattillo is the Assistant Director in the Fiscal Affairs Department. And Abdelhak Senhadji is Deputy Director in the Fiscal Affairs Department. They are all the key authors of this edition of the Fiscal Monitor.

You have seen the Fiscal Monitor, which should be published in a few minutes on our website, and has been made available to you under embargo. We will not talk long about it but, nevertheless, I will ask Vitor to present the main findings of their research and main developments in the fiscal sphere. Then we will be able to answer any questions you may have both in the room and also on IMF.org.

Mr. Gaspar: Good morning. Thank you, Wiktor. And thank you, all, for your interest in the Fiscal Monitor.

This Fiscal Monitor is devoted to tackling inequality. It includes a statistical annex that puts together a wealth of indicators on public finances. The data allows an overview of fiscal policy across countries.

In my introduction, I will start with the current fiscal situation and prospects and then quickly move to tackling inequality.

As you heard yesterday, the economic recovery is gaining pace and is broad based all over the world. It provides a global window for policy action to engage in structural reforms and address longstanding imbalances. Fiscal policy should avoid pro‑cyclicality and address excessive debt. It is also important to build buffers and tax capacity. Buffers and tax capacity are fundamental for fiscal policy to be able to fulfill its role over the length of the business cycle.

On to fiscal developments by country group: The emphasis on advanced economies is still on high levels of public debt, which remain very close to record highs. They are now expected to slowly decline, but, according to our projections, they will still be above 100 percent of GDP on average for advanced economies by 2022.

In emerging markets, fiscal consolidation has come to a standstill, and the average public debt‑to‑GDP ratio is projected to increase towards the end of the forecasting period. In particular cases, where this rise in public debt coincides with the expansion phase of the credit cycle, that is a particular source of concern.

For low‑income developing countries, public debt is low as a percentage of GDP at around 40 percent and is projected to stay close to that level over the forecasting horizon. But at the same time, there has been an increase in the debt service as a percentage of tax revenue. That leads us to emphasize for this group of countries the importance of tax capacity, the importance of building up tax capacity. Tax capacity is crucial to support policies which are necessary for inclusive growth, including spending on public infrastructure, health, and education. In addition, tax capacity, the imposition of taxes at low rates on a broad basis is necessary to ensure that countries have the capacity to serve their public debt and, hence, have unconstrained access to credit markets.

Let me now turn to inequality and to the chapter of the Fiscal Monitor. I will be even more telegraphic.

In the Fiscal Monitor, we document trends in equality around the world. We argue that fiscal policy is powerful in tackling inequality. We go so far as to claim that fiscal policy can make the difference. We engage in three policy debates which are at this point in time very salient in the discussion about fiscal policy: progressive taxation, universal basic income, and public spending on health and education.

We document that global inequality has started declining in the late 1980s. That marked a turning point in the great divergence that took hold since the beginning of the 19th century, since the industrial revolution.

Declining global inequality is due to catching up across countries and, in particular, the fast growth of large populous economies. I am talking here about China and India.

But if one looks at inequality country by country, one does see increases in inequality. Most people live in countries where inequality has increased. Counting countries, we have increases in inequality in about half the countries while in about the other half, we see declines. The reason for the difference is that large countries with large populations ‑‑ China, India, and the U.S. ‑‑ have recorded increases in inequality.

The Fiscal Monitor presents estimates that show that, for advanced economies, redistribution through taxes and transfers reduces inequality by one‑third. Of this reduction in inequality, 75 percent are operated through transfers and 25 percent by taxes. In contrast, for the remaining economies, redistribution is much lower, and that reflects lower taxes and lower spending in these countries, so the ability to redistribute is much less.

For the three main policy debates we cover – progressive taxation, the UBI, and public spending on health and education – we do not take a position on specific policy packages that countries should adopt. Instead, we document facts and arguments and present case studies that will help politicians and policymakers to make the right choices for their countries.

Mr. Krzyzanowski: Thank you very much, Vitor. I thought it would only be fair to allow our Austrian colleague, Andras Szigetvar, to ask the question he asked yesterday in the press conference and was referred to this press conference.

Questioner: I have two questions. The first one is, you said that the IMF is not taking a position, but in the report, you are saying that the income taxes have maybe gone down too far and there would be scope to raise them. And you have the figure even there, about 44 percent.

My second question is, you are also talking about corporate taxes and showing that they have also been going down too far, but then there is no real conclusion on that. Is there also scope for going up? Why are you making this point?

Mr. Gaspar: Let me just call your attention to the written version of my remarks, which is much longer, and it is illustrated by slides that we believe tell a story and that you may find informative.

On the two questions that you raise about the PIT and the CIT, personal income tax and corporate income tax, what we document in the Fiscal Monitor is that if we start in 1981, the average top marginal rate for the PIT was at 62 percent and that has fallen to 35 percent as about now. That is a measure of a reduction in progressivity of direct taxation that is corroborated by other more sophisticated measures that we report on in the Fiscal Monitor, and you have those measures in one of the slides that we distributed.

Now, that leads us to conclude that for some advanced economies, where top rates have fallen most and where progressivity of direct taxation has followed, there is room to increase top rates without hindering growth. We are agnostic about whether countries will want to make that choice, but it does seem to us that inclusive growth should be at the top of the policy agenda and that should come with an equal emphasis on inclusion and growth.

When it comes to corporate income taxes, the trend in lowering corporate tax rates is a pervasive trend overall in the last few decades. That is something which is often attributed to tax competition. There is, however, the interesting finding that this reduction in corporate tax rates has not been, in general, matched by a fall in corporate tax revenues. And that illustrates something which is very important and we emphasize in the Fiscal Monitor, which is that more than statutory tax rates, one has to look at the way the tax base is determined and focus on what is happening to effective tax rates, rates that the taxpayer – be it people or corporations – effectively pay.

Questioner: A similar question I guess on the idea of a universal basic income. Could you give us your thoughts on that? If you go out to Silicon Valley, they are very supportive of this idea. I think they are doing a pilot project in Oakland. And when you say to people that robots are going to steal our jobs, they say: do not worry about it. You are going to get a universal basic income; we are going to take care of you. I am wondering if you could elaborate on your findings.

Mr. Gaspar: That is one of the arguments that we engaged with in the Fiscal Monitor. If you have technological progress that calls into question the future of work, if people face radical uncertainty about their future, then it turns out that the case for social insurance is strengthened. The UBI is one among many ideas that one can examine as a response to this increased uncertainty, this pacing up of economic change.

In the Fiscal Monitor, we thought that the UBI was particularly interesting as an idea because it does have systemic implications for public finance. The UBI, if introduced at a reasonable level – and the Fiscal Monitor considers simulations with a universal basic income at 25 percent and 10 percent of median income – that has important budgetary implications. For example, for advanced economies, the cost of the 25 percent hypothesis would be around 7 percent of GDP. And then you have to discuss what would UBI be replacing? Would it be public spending, which is inefficient and inequitable? Our favorite example in the Fiscal Monitor is energy subsidies. Would you finance the UBI through progressive income taxation? Would you finance UBI with a VAT?

So, that allows us to engage with policymakers on a discussion that is not only relevant for the current debate on the UBI, which is very lively, as you report, but also to identify some more general principles that apply not only to the UBI but to other programs that address the issue of increased uncertainty in the future of work and the accelerated pace of economic change.

Questioner: Two questions on China. First, it appears that the inequality situation in China worsened in recent years. I wonder if you have some reasoning or logic behind this.

The second is that you are projecting in the future, maybe in the near 5 years or 10 years, the public debt to GDP ratio in China will increase again. Can you name some reasons or causes behind this?

Mr. Gaspar: China is an excellent example of something that we emphasized in the Fiscal Monitor, which is that when you look at economic welfare, one has to take into account the evolution of a mean income – roughly speaking, GDP per capita – but also the distribution of income across households.

In the last few decades, China has benefitted from extremely fast growth. And that means that when we look at the distribution of income in China, you see that all these styles of the income distribution have benefitted very strongly from that growth.

It is quite impressive that in China literally hundreds of millions of people have been lifted off poverty by economic growth. The elimination of extreme poverty in China is within striking distance. So, when one is in a process like this one, the fact that one does see an increase in equality is compatible with a general improvement of the economic situation for all segments of the population.

Going forward, more emphasis on social safety nets, social policy support mechanism, domestic consumption in China are a part of the strategy of rebalancing the Chinese economy, and we would expect these types of considerations to be much more relevant going forward.

On public debt, we have been emphasizing the importance of the implementation of the budget law of 2014. And in that context, the key aspect is to improve transparency and make sure that some liabilities that the IMF classifies in the augmented debt come into budget and are transparently reported. That is our key priority. And from that viewpoint, an increase in the public debt ratio for that reason would not be a cause for concern.

In China, there are issues related to the trend in private debt, nonfinancial corporate debt, but I am sure you discussed that in the context of the Global Financial Stability Report. Questioner: Your primary surplus projection for Greece is significantly lower than the Greek government's one, despite the fact that the GDP projections are similar. Why is that, to your mind? And to the extent that you can answer that, does it have any effect on the Greek program and new measures that might be needed in that regard?

Mr. Gaspar: You almost asked the question and gave the answer. The answer is that since Greece is a program country, I think that you should address that question at the press conference of the European Department on Friday.

Questioner: The IMF report has spoken about a universal basic income for India and against the current subsidy regime. Can you talk about it more? Because the simulation you have done on that is using 2011‑12 data.

Mr. Gaspar: What we do in the Fiscal Monitor is an experience that I think is very enlightening. We use India as an example, and we use the schemes that were in place in India at around 2011. And the schemes that we considered are schemes that aimed at ensuring access to necessities by the Indian population and also schemes of fuel subsidies.

What we show in that example, which is very telling, is that given our estimates of the impacts of the 2011 programs, a UBI would actually benefit the poor more for the same budgetary cost.

So, the point to retain is that you do see some programs that are applied in countries that do targeting, but the impact of the targeting is that the relatively well off benefit proportionately more. In such case, a UBI looks like a very attractive alternative, the point that I tried to make in general when I said that the UBI looks good when it substitutes for inequitable and inefficient public spending.

Now, it turns out that the situation in India has changed a lot. Energy subsidies have been deeply reformed during the period since 2011. India is engaging in very ambitious programs in terms of fiscal policy and public finance, and, more generally, India is engaged in a fascinating process of economic development and transformation. In that context, India may want to ponder a UBI or it may opt in a completely different direction. That depends on the politicians' and policymakers' assessment of the facts of the situation. It depends on the social and political preferences in India.

Questioner: Several economists agree that one of the best ways to reduce inequality is by improving the growth of the economy. Brazil has a challenge, mentioned by the IMF yesterday, as far as to address fiscal issues and to try to get 2 percent growth in the medium term. I would like to ask Dr. Gaspar: What would be the most important measures as far as the fiscal side is concerned in Brazil to address this situation?

I just would like to add something else. What is the assessment from you or IMF as far as the fiscal measures for the short run? I mean, the approval or not of the social security reform this year. Are you counting on this or not?

Mr. Gaspar: I will transform your two questions into three, if you do not mind. The bonus question that I will answer without having been questioned has to do with the fact that Brazil and several other countries in Latin America that have been historically characterized by high levels of inequality have made progress in reducing inequality recently. So, you did not ask about that, but I have to answer because that is a very important development.

In Latin America, a new generation of social programs that, in Brazil, are associated with Bolsa Família and Oportunidades, and other social programs, have been effective in reducing inequality in a continent that has been characterized by very high levels of inequality. And in the material that was distributed to you, there is a map where this progress in Latin America is quite evident.

Brazil is a country – now to your questions – that is emerging from a long and deep recession. The recent economic developments are favorable. So, it is now timely to put the public finances on a sustainable path.

From that viewpoint, the change in the expenditure rule that does cap primary spending in real terms is a real and true progress, and it offers the promise of being effective in the medium to long term, which leads to the link to your last question: What is the priority for the short run? And what did we assume concerning social security reform?

We did assume that social security reform would take place, but it would take place with a slight delay relative to the calendar that was anticipated. It will be a crucial element for anchoring the public spending path and make the ceiling effective.

There are other aspects of the Brazilian economy that have to do with structural reform that should be in the package of priorities for the government in order to attain inclusive growth.

Questioner: Vitor, in all the propositions of these impacts of universal basic income, Mexico and Brazil as examples are very good in form. But after 25 years of cash transfers to poverty, we only have reduced 1 percent of the Gini, and it recoups or it takes more than 10 percent of the budget in every fiscal year.

Which kind of change could be implemented in gaining against the poverty or inequality just by changing cash transfers to this measure of universal basic income? For Mexico, you said it could be 5,000 pesos; more or less, it is like $300. But the last measure for cash transfers to poverty was 8,000 pesos; more or less $500 dollars, and it does not go in a good direction. Why could this change the view?

Mr. Gaspar: As I was saying, when we engaged in the debate about the UBI, we want to look at arguments and facts that are relevant to make a decision. And among the facts that are relevant is what is going on in countries and what is working.

What we do see is that targeted cash transfers and conditional cash transfers have been successful in Latin America, and they have made a dent into the very high levels of inequality that characterize the region, and they seem to benefit from strong social and political support. So, they constitute progress. And there is the promise that by making those programs even better targeted and more effective, one will be able to have progress in the direction of inclusive growth in Latin America, which is the crucial dimension to take into account.

Questioner: I am going through your report, and I look at Ghana's debt‑to‑GDP ratio. It is 70 percent next year. For the next three years, I see the extrapolations are going down significantly. Is it because the economy is expanding or government is cutting down on its expenditure and borrowing? And what should be the policy response to sustain? Because there is a tendency that if the ratio is coming down, for every government to kind of borrow more.

Mr. Gaspar: Let me give you a very general answer. When you do have public debt at high levels, you have in a sense to make sure that it comes down sufficiently fast to build credibility along a path that ensures sustainability and easy access to financial markets. That is crucial.

I would apply to Ghana the same approach that we had for Greece because, since we do have an active program with Ghana, I would not want to comment on details – that, by the way, would be my colleague Cathy Pattillo to do – but, instead, invite you to come to the conference of the African Department on Friday.

Questioner: I would like you to comment a bit about Africa. I know you may send me to the African Department, but I would like you to talk about if Africa – and particularly Nigeria – has made progress in not widening the gap between the haves and have nots. It is a different story that most African countries are growing despite a recession hitting, like Nigeria, being Africa's biggest economy, as well as South Africa. How do you think that inequality can be reduced? Because the gap between the haves and the have nots in Africa is still increasing.

Mr. Gaspar: Let me tackle the general question and then pass it on to Cathy for the specific comment on Nigeria. One question that is perfectly legitimate is: Why is it the case that, given that we have this recovery around the world, we are calling to countries to do more, to do more to promote inclusive growth, to do more to fight inequality, to do more to increase the growth rate of potential GDP? Why is it?

Well, because when you look at the details, there are many things that need mending. One, which is particularly relevant for Africa, is that not all countries share in this upswing. Too many countries in Africa had GDP per capita falling in 2016. And even for the medium term, there are quite a few that will be growing less than advanced economies. There are many countries in Africa that will not be catching up. So not all countries are sharing in the growth of the global economy.

And then there is the point that you referred to, which is distribution of income, access to basic services like public infrastructure, health, and education. Poverty is still an issue in Africa.

In Africa, we very much emphasize tax capacity. In many African countries, it is necessary to increase the capacity of countries to mobilize tax revenue so that they can fulfill their role in promoting inclusive growth and that for Africa, for Sub‑Saharan Africa, is the main challenge.

Ms. Pattillo: Mr. Gaspar has been very comprehensive on Africa and inequality issues. Just to put a little bit in the context, for Sub‑Saharan Africa, since the mid 1990s, there was a lot of growth acceleration, and that allowed average inequality to fall and poverty to be significantly reduced in many countries. Nigeria is one of the countries where initially from the mid‑nineties inequality fell, but then there was some resurgence more recently.

The factors explaining the different drivers of inequality across countries are very complex. Mr. Gaspar has touched on some of the factors. For Nigeria, as you heard in the WEO press conference, in the short term, there is some resumption of economic growth, but real per capita income with current policies will remain flat. So, you are not going to be able to address inequality and poverty without resuming growth and per capita growth. The priorities are fiscal consolidation that will mainly be driven by revenue mobilization, nonoil revenue. And that building of capacity will allow the funding of expenditures: education, health, infrastructure, and the servicing of debt.

Mr. Krzyzanowski: I will take one question online just because it is very topical – from a colleague from Indonesia: When a country wants to increase tax, there are fears the economy will weaken. To what extent can a country increase its tax rates without sacrificing economic growth?

Mr. Gaspar: One has to distinguish very carefully between the cyclical implications from fiscal and tax policy, from their structural implications. If one looks at tax policy as one of the instruments that one needs to have in place to sustain inclusive growth and if one focuses on a country like Indonesia, where there are very clear needs in terms of the provision of public infrastructure – you just have to think about the geography of Indonesia, with more than 1,000 islands; you have to think about the needs for provision of education and health – then it is very clear that, if the country has a tax‑to‑GDP ratio which is hardly above 10 percent of GDP, that increasing tax capacity is something that not only is not going to hinder growth; on the contrary, it is a necessary condition for Indonesia to be able to support inclusive growth.

Questioner: In terms of the advanced countries, do you have a figure in mind where if you were to introduce a more progressive rate of taxation, where the marginal rate becomes a problem, where it gets too high and becomes a problem? You notice it has dropped to 33 percent on average or whatever. But is there an upper figure where it becomes a problem in terms of economic growth and prosperity?

Mr. Gaspar: We are not able to estimate such a threshold, so you will not find an upper bound in the Fiscal Monitor.

What we do see is that, from the 70s, the top rates have fallen from 62 percent to 35. And around the levels that we have now – in particular, in the countries where top marginal tax rates are lower, we do see room for increasing those without hindering growth.

IMF Communications Department

PRESS OFFICER: Wiktor Krzyzanowski

Phone: +1 202 623-7100Email: MEDIA@IMF.org

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