Fiscal Policy Looks Forward

Medium-term, credible fiscal adjustment plans needed

Well-balanced fiscal policy can help reduce inequality

Quality of fiscal adjustment just as important as quantity

“The fundamental question that policymakers face today is how to reduce deficits and debt levels in a way that ensures stability and equity but is sufficiently supportive of economic growth and employment—how do innovative and activist ideas about fiscal policy fit with traditional strategies of fiscal consolidation?” said IMF First Deputy Managing Director David Lipton, who spoke at the fourth annual Fiscal Forum.

The Fiscal Forum, held annually to coincide with the IMF’s Spring Meetings, brings together policymakers, technical experts, and academics from across the world to hear and exchange views on fiscal policy. The financial, economic, and debt crises across the world in recent years have changed the way policymakers look at the role of fiscal policy.

As many countries continue with efforts to trim deficits, there was acknowledgment among Forum participants that public support for the difficult choices on spending cuts is growing fatigued. While no quick fixes to fiscal consolidation exist, ensuring a balanced and equitable fiscal adjustment is generally seen as the best means for gaining public support.

Inequality and inclusive growth

A portion of the discussion at the Forum focused on the need to achieve fiscal adjustment while at the same time ensuring adequate social protection, as well as ways to help address the growing inequality seen now in many parts of the world. There is some evidence to suggest that countries that fail to become more equitable in terms of the distribution of their living standards may fail to get on a sustained growth path. “Unequal access, for example to credit markets, prevents profitable projects from being undertaken and this generates inequality and inefficiencies—reducing an economy’s efficiency and slowing down growth,” said Francois Bourguignon, professor of economics at the Paris School of Economics.

This has implications for the choices that policymakers are faced with when designing fiscal policy, and current budgetary practices might have to be rethought in order to accommodate new approaches to budgeting. Rethinking the budgetary process could mean transforming it into something more than an exercise in deciding “who gets what’’ and make it about intended results of the expenditures, so government ministries would clearly and...