#22:352,359 Finance & Development, June 2005 - Back to Basics - Fiscal Space: What It Is and How to Get It 42(2)
Defining fiscal space
What is fiscal space? It can be defined as room in a government´s budget that allows it to provide resources for a desired purpose without jeopardizing the sustainability of its financial position or the stability of the economy. The idea is that fiscal space must exist or be created if extra resources are to be made available for worthwhile government spending. A government can create fiscal space by raising taxes, securing outside grants, cutting lower priority expenditure, borrowing resources (from citizens or foreign lenders), or borrowing from the banking system (and thereby expanding the money supply). But it must do this without compromising macroeconomic stability and fiscal sustainability—making sure that it has the capacity in the short term and the longer term to finance its desired expenditure programs as well as to service its debt.
会計スペースの定義
財政空間とは それは、財政状態の持続可能性や経済の安定性を危うくすることなく、それが望ましい目的のために資源を提供することを可能にする政府の予算内の余地として定義することができます。 そのアイデアは、財政的な余地が存在するか、余分なリソースが価値のある政府支出のために利用可能にされることになっているならば、作成されなければならないということです。 政府は、増税、外部補助金の確保、優先順位の低い支出の削減、（市民や外国の貸し手からの）資金の借り入れ、または銀行システムからの借り入れ（それによってマネーサプライの拡大）によって財政空間を作り出すことができます。 しかし、マクロ経済の安定性と財政の持続可能性を犠牲にすることなくこれを行う必要があります。つまり、短期的にも長期的にも、希望する支出プログラムの資金調達と債務返済の能力があることを確認します。
Finance & Development, June 2005 - Back to Basics - Fiscal Space: What It Is and How to Get It
42(2)
https://www.imf.org/external/pubs/ft/fandd/2005/06/basics.htmFinance & Development, June 2005 - Back to Basics - Fiscal Space: What It Is and How to Get It
Back to Basics -- Fiscal Space: What It Is and How to Get It
Peter Heller
The 'fiscal space' charade – IMF becomes Moody's ... - Bill Mitchell
room in a government´s budget that allows it to provide resources for a desired purpose without ...
Ultimately, real resource availability constrains prosperity - Bill Mitchell
room in a government´s budget that allows it to provide resources for a desired purpose without ...
The ‘fiscal space’ charade – IMF becomes Moody’s advertising agency – Bill Mitchell – Modern Monetary Theory
2015/6/4
http://bilbo.economicoutlook.net/blog/?p=31093The ‘fiscal space’ charade – IMF becomes Moody’s advertising agency
The IMF has taken to advertising for the ratings agency Moody’s. It is a good pair really. Moody’s is a disgraced ratings agency and the IMF has blood on its hands for its role in less developed nations and for its incompetence in estimating the impacts of austerity in Europe. Neither has produced research or policy proposals that can be said to advance the well-being of nations. Moody’s has shown a proclivity to deceptive behaviour in pursuit of its own advancement (private largesse). The IMF struts around the world bullying nations and partnering with other institutions to wreak havoc on the prosperity of citizens. Its role in the Troika is demonstrative. Anyway, they are now back in the fiscal space game – announcing that various nations have no alternative but to impose harsh austerity because the private bond markets will no longer fund them. They include Japan in that category. Their models would have drawn the same conclusion about Japan two decades ago. It is amazing that any national government continues to fund the IMF. It should be disbanded.
As background to this blog, please read my blogs:
1. Ratings firm plays the sucker card … again
3. Time to outlaw the credit rating agencies
4. Ratings agencies and higher interest rates
5. Moodys and Japan – rating agency declares itself irrelevant – again
The IMF define – Fiscal Space – to be the :
… room in a government´s budget that allows it to provide resources for a desired purpose without jeopardizing the sustainability of its financial position or the stability of the economy. The idea is that fiscal space must exist or be created if extra resources are to be made available for worthwhile government spending. A government can create fiscal space by raising taxes, securing outside grants, cutting lower priority expenditure, borrowing resources (from citizens or foreign lenders), or borrowing from the banking system (and thereby expanding the money supply). But it must do this without compromising macroeconomic stability and fiscal sustainability – making sure that it has the capacity in the short term and the longer term to finance its desired expenditure programs as well as to service its debt.
It is always good to work with first principles as they will rarely lead you astray. They cut out all the humbug in the media, the statements by politicians and the ideological ravings of vested interests.
The above definition is not based on first principles but is an ideological statement. It assumes that the government in question has the same constraints that restricted governments during the gold standard when currencies were convertible and exchange rates were fixed.
Here are the relevant first principles, which many of you will know well by now.
In a fiat monetary system:
- A sovereign government is not revenue-constrained which means that fiscal space cannot be defined in financial terms.
- The capacity of the sovereign government to mobilise resources depends only on the real resources available to the nation.
- A currency-issuing government can always meet the liabilities it issues in its own currency.
- Nations that have ceded their sovereignty by entering currency zones (such as the Eurozone); by dollarising their currencies; by running currency boards; and similar arrangements clearly are not sovereign and face the same constraints that a country suffered during the gold standard era.
On September 1, 2010, the IMF released Staff Position Note SPN/10/11 – Fiscal Space. It contained some econometric modelling that sought to define how much scope there was for governments to expand their deficits.
It is a very dodgy piece of analysis (more later).
On December 20, 2011, the credit rating agency Moody’s released a special report – Fiscal Space. This paper informs Moody’s – fiscal space tracker, which purports to present a “fundamentals-based measure of the risk of sovereign debt default”.
The analytical framework used by Moody’s comes directly from the 2010 IMF paper. The credit rating agency just mimics the approach outlined in that 2010 Staff Position Note.
I do not recommend reading either paper. I have done the due diligence for you and I conclude that you are better to watch the grass grow or count socks in your drawer. Something like that.
This week (June 2015), the IMF released a new Staff Discussion Note (SDN/15/10) – When Should Public Debt Be Reduced? – which essentially attempts to repeat the same spurious arguments and methodology presented in the 2010 paper ((some of the authors of the 2010 paper overlap here).
In this new attempt, the IMF is now taken to advertising the work of Moody’s, which was just an application of its own work.
But they clearly thought that the fancy looking, multi-coloured graphic that Moody’s presented is worth repeating as a pedagogical device to ram homethe message.
Here is the graph (Figure 1 in the 2015 IMF paper). The graph has 30 nations which are classified as having either grave risk, significant risk, caution or safe in terms of an alleged “distance to debt limit”.
So it is bright enough! But not very smart.
Let’s apply those first principles. Here are the 30 nations with some extra relevant information.
Australia – sovereign issuer, freely convertible currency, no or negligible foreign currency debt.
Canada – sovereign issuer, freely convertible currency, no or negligible foreign currency debt (only for central bank reserve management).
Iceland – sovereign issuer, freely convertible currency, some foreign currency debt.
Israel – sovereign issuer, freely convertible currency, some foreign currency debt.
Japan – sovereign issuer, freely convertible currency, no or negligible foreign currency debt.
New Zealand – sovereign issuer, freely convertible currency, some foreign currency debt
Norway – sovereign issuer, freely convertible currency, no or negligible foreign currency debt.
South Korea – sovereign issuer, freely convertible currency, some foreign currency debt.
Sweden – sovereign issuer, freely convertible currency, some foreign currency debt.
Taiwan – sovereign issuer, freely convertible currency, some foreign currency debt.
UK – sovereign issuer, freely convertible currency, no or negligible foreign currency debt.
USA – sovereign issuer, freely convertible currency, no or negligible foreign currency debt.
Singapore – sovereign issuer, freely convertible currency, no foreign currency debt.
Switzerland – sovereign issuer, freely convertible currency, some foreign currency debt.
Denmark – sovereign issuer, loose peg to euro, some foreign currency debt.
Hong Kong (China) – sovereign issuer, pegged to USD
Austria – non sovereign in currency.
Belgium – non sovereign in currency.
Cyprus – non sovereign in currency.
Finland – non sovereign in currency.
France – non sovereign in currency.
Germany – non sovereign in currency.
Greece – non sovereign in currency.
Ireland – non sovereign in currency.
Italy – non sovereign in currency.
Luxembourg – non sovereign in currency.
Malta – non sovereign in currency.
Netherlands – non sovereign in currency.
Portugal – non sovereign in currency.
Spain – non sovereign in currency.
So those sovereign-issuing nations with no or negligible debt denominated in foreign currency have no default risk on their public debt associated with factors such as size of deficit, outstanding debt stocks etc. Their government’s can always meet their liabilities and would only default as an insane act of politics.
There are no financial risks associated with their debt.
I haven’t done a complete analysis of the proportions of debt that are denominated in foreign currency for the other currency-issuing nations. My feeling is (from old data) that the proportion varies but is small.
At any rate, these nations can always meet their domestic obligations (including servicing debt denominated in their own currency which is held by foreigners) but in some weird situation might find it hard to service their foreign-denominated debt. Highly unlikely but there is a smidgen of risk.
For the non-sovereign in currency nations – all of which are ‘happily’ ensconced in the failed Eurozone, they all face public debt default risk. The risk varies but they all are exposed to it.
So the first thing we conclude from this vacuous study by the IMF, which Moody’s thinks is useful for their purposes too (that should be warning in itself that something is not robust), is that it is a meaningless exercise to combine truly sovereign nations with no default risk with another block of nations, all of which face default risk.
The IMF concept of fiscal space is outlined more fully in the 2010 paper I cited above. Basically, they conduct a very contentious econometric exercise where they estimate the “debt limit” of each nation.
How do they do that?
They relate the primary fiscal balance (difference between government spending and revenue net of interest payments) to the outstanding public debt in what they term a “primary balance reaction function”.
This tells them what governments do with respect to fiscal policy at different debt levels.
They claim when debt is low, the primary balance is relatively unresponsive but as the debt levels rise, the primary balance “responds more vigorously but eventually the adjustment effort peters out as it becomes increasingly more difficult to raise taxes or cut primary expenditures further.”
So there is allegedly some debt level where the:
… primary balance does not keep pace with the higher effective interest payments (equal to the interest rate–output growth rate differential multiplied by the debt ratio), there will be a debt level above which the dynamics become explosive, with the public-debt-to-GDP ratio rising without bound. At that point, the government must either undertake extraordinary fiscal adjustment (i.e., primary adjustment beyond the country’s historical response to rising debt) or default on its debt. It is natural to consider this point the debt limit—and the distance to it from the current debt ratio to be the available fiscal space.
Effectively, they claim that the debt limit is when the private bond markets stop ‘funding’ the government and radical austerity is required.
They relate that reaction function with an “effective interest rate schedule”, which tells the government the rate at which interest payable exceeds the real growth rate of the economy multiplied by the outstanding debt. It is a growth-adjusted interest payments relationship. The technicalities need not concern us.
Essentially, the debt limit is reached when the debt and interest payments are so high that:
… there is no sequence of positive shocks to the primary balance (in the absence of an extraordinary fiscal effort) that would be sufficient to offset the rising interest payments. Therefore, debt becomes unsustainable, and the interest rate effectively becomes infinite.
Close down government time!
They put the numbers in the graph (above) to these concepts by econometric modelling. Essentially they run regressions which include explanatory variables such as:
Debt
Output gap
Trade openness
Inflation
Oil prices
Dependency ratio
Political stability
etc
The results should be treated with a grain of salt. I only list a few issues – there are many statistical issues that one could raise but in the interests of keeping this blog readable I will demur.
First, they do not differentiate between currency-issuers (as above) and the Eurozone nations (currency-users).
Second, they use technical dodges (ad hoc autoregressive corrections) to mop up estimation problems. These usually indicate a mis-specified econometric relationship and means that the model is incorrect.
Third, they admit that “the coefficients on the debt ratio, however, are common across countries; this is necessary because (as hypothesized) the response of the primary balance varies by the debt level, but the full range of debt is not observed for any individual country.”
That point is in a small print footnote to the results Table 1. What does it mean. It means they have not been able to freely estimate the most important unknowns in their model (the relationship between the primary balance and debt) and so they have just imposed the relationship on all nations.
In econometrics, this is called imposing a restriction on the model to simplify the estimation process. The problem is that such impositions should be stochastically ‘tested’ using significance tests. One examines the difference between the restricted model and the unrestricted model and uses special tests to determine whether these differences are statistically significant or not. If not, the imposition of the restriction is acceptable and simplifies the estimation process.
They did not do that. So the coefficients on the debt variables are essentially ‘made up’ and cannot be applied with confidence to all the nations (especially those with no relevant data).
Fourth, conceptually, the model ignores basic realities. The central bank of a sovereign nation can set whatever yield on public debt that it considers desirable. These nations might pretend they at the behest of the private bond markets but when push comes to shove, the central bank always dominates.
Please read my blog – Who is in charge? – for more discussion on this point.
So the idea that a government has to stop net spending or needs harsh austerity if the private bond markets start pushing up yields to ridiculous levels is ridiculous.
Even the ECB in the Eurozone has demonstrated it can control yields whenever it wants by buying up government bonds in secondary markets.
Fifth, a sovereign, currency-issuing nation does not even have to issue debt to maintain deficit spending levels at whatever level they desire. It can instruct the central bank to credit bank accounts at will. Given the propensity of such governments to impose voluntary restrictions on themselves, such a move might require a legislative change.
But the fact is that when the crisis hit these governments had no trouble getting cash.
Sixth, the case of Japan. The IMF/Moody’s modelling would have declared Japan to have zero fiscal space nearly two decades ago. This has been a repeated claim.
Since that time, Japan has continued to run large deficits and issue bonds and very low yields. It reached the IMF debt limit from their models years ago.
So how do they explain that?
In this blog – Moodys and Japan – rating agency declares itself irrelevant – again – I discussed earlier attempts by Moody’s to impose this moronic framework on Japan in 2011.
Even earlier, the same pantomime was played out in the 1990s. Japan is an advanced nation with currency sovereignty. In November 1998, the day after the Japanese Government announced a large-scale fiscal stimulus to its ailing economy, Moody’s Investors Service began the first of a series of downgradings of the Japanese Government’s yen-denominated bonds, by taking the Aaa rating away.
The next major Moody’s downgrade occurred on September 8, 2000.
Then, in December 2001, Moody’s further downgraded the Japan Governments yen-denominated bond rating to Aa3 from Aa2. On May 31, 2002, Moody’s Investors Service cut Japan’s long-term credit rating by a further two grades to A2, or below that given to Botswana, Chile and Hungary.
In a statement at the time, Moody’s said that its decision “reflects the conclusion that the Japanese government’s current and anticipated economic policies will be insufficient to prevent continued deterioration in Japan’s domestic debt position … Japan’s general government indebtedness, however measured, will approach levels unprecedented in the postwar era in the developed world, and as such Japan will be entering ‘uncharted territory’.”
The then Japanese Finance Minister responded (with some foresight):
They’re doing it for business. Just because they do such things we won’t change our policies … The market doesn’t seem to be paying attention.
Indeed, the Government continued to have no problems finding buyers for their debt, which is all yen-denominated and sold mainly to domestic investors.
In the New York Times (July 6, 2002) the logic of the rating decision was questioned:
How … could a country that receives foreign aid from Japan have a better rating than Japan itself? Japan, with an economy almost 1,000 times the size of Botswana’s, has the world’s largest foreign reserves, $446 billion; the world’s largest domestic savings, $11.4 trillion; and about $1 trillion in overseas investments. And 95 percent of the debt is held by Japanese people …
Former Moody’s President, John Bohn Jr. had in 1995 claimed that: “We’re in the integrity business: People pay us to be objective, to be independent and to forcefully tell it like it is.” (Reference: Ratings Trouble, Institutional Investor, October 1995: 245).
Integrity business history lesson
In January 2011, the – US Financial Crisis Inquiry Commission – which had been formed by the US government to “examine the causes of the current financial and economic crisis in the United States”, issued its final – Report.
Among the key conclusions were the following:
1. The “financial crisis was avoidable” – it was the “result of human action and inaction … The captains of finance and the public stewards of our financial system ignored warnings and failed to question, understand, and manage evolving risks within a system essential to the well-being of the American public.”
2. “there were warning signs. The tragedy was that they were ignored or discounted.”
3. “The prime example is the Federal Reserve’s pivotal failure to stem the flow of toxic mortgages, which it could have done by setting prudent mortgage-lending standards. The Federal Reserve was the one entity empowered to do so and it did not.”
4. “We conclude widespread failures in financial regulation and supervision proved devastating to the stability of the nation’s financial markets … the financial industry itself played a key role in weakening regulatory constraints on institutions, markets, and products. It did not surprise the Commission that an industry of such wealth and power would exert pressure on policy makers and regulators. From 1999 to 2008, the financial sector expended $2.7 billion in reported federal lobbying expenses; individuals and political action committees in the sector made more than $1 billion in campaign contributions.”
5. “We conclude dramatic failures of corporate governance and risk management at many systemically important financial institutions were a key cause of this crisis … Too many of these institu- tions acted recklessly … Our examination revealed stunning instances of governance breakdowns and irresponsibility”.
6. “We conclude a combination of excessive borrowing, risky investments,and lack of transparency put the financial system on a collision course with crisis … leverage was often hidden — in derivatives positions, in off-balance-sheet entities, and through ‘window dressing’ of financial reports available to the investing public.”
7. “We conclude there was a systemic breakdown in accountability and ethics”.
And in the context of today’s blog:
8. “”We conclude the failures of credit-rating agencies were essential cogs in the wheel of financial destruction:
The three credit rating agencies were key enablers of the financial meltdown. The mortgage-related securities at the heart of the crisis could not have been marketed and sold without their seal of approval. Investors re- lied on them, often blindly. In some cases, they were obligated to use them, or regulatory capital standards were hinged on them. This crisis could not have happened without the rating agencies. Their ratings helped the market soar and their downgrades through 2007 and 2008 wreaked havoc across markets and firms.
The Commission used Moody’s as a case study. They said that the agency “rated 45,000 mortgage-related securities as triple-A. This compares with six private-sector com- panies in the United States that carried this coveted rating in early 2010”.
They found that “83% of the mortgage securities rated triple-A” by Moody’s in 2006 “ultimately were downgraded”.
The financial firms paid the ratings agencies to get these triple-A endorsements, while the ignorant public considered the ratings to be ‘independently’ derived from sound modelling. Nothing of the sort occurred.
Earlier, on April 23, 2010, the US Congress Permanent Committee on Investigations commenced a hearing – Wall Street and the Financial Crisis: The Role of Credit Rating Agencies.
After deliberations and evidence, the Committee, which has used Moody’s and Standard & Poor’s as “case studies” reported that “those credit rating agencies allowed Wall Street to impact their analysis, their independence, and their reputation for reliability. And they did it for the money”.
They found that the rating agencies “were operating with an inherent conflict of interest, because the revenues they pocketed came from the companies whose securities they rated … like one of the parties in court paying the judge’s salary”.
Further, the Committee found that the ratings agencies gave top ratings to financial products that they knew would not be “unlikely to perform”. For some products, up to 97% that had been given triple-A ratings were downgraded to junk status.
The Committee found the “credit rating models” were built on wrong assumptions, which was admitted by Moody’s and S&P.
Evidence showed the S&P operatives knew that there had been “rampant appraisal and underwriting fraud in the industry for quite some time” but the credit rating agencies “failed to adjust their ratings to take … [this criminality] … into account”.
A tawdry story no doubt.
Conclusion
It is amazing to see the IMF and Moody’s playing tag with each other and peddling the myths together. One is a disgraced ratings agency and the other had blood on its hands for its role in less developed nations earlier and more recently for its incompetence in estimating the impacts of austerity in Europe.
A good match I guess. Both should be disregarded.
That is enough for today!
(c) Copyright 2015 William Mitchell. All Rights Reserved.
Ultimately, real resource availability constrains prosperity – Bill Mitchell – Modern Monetary Theory
2016/2/11
http://bilbo.economicoutlook.net/blog/?p=32938 tr:☆Ultimately, real resource availability constrains prosperity
There are many misconceptions about what a government who understands the capacity it has as the currency-issuer can do. As Modern Monetary Theory (MMT) becomes more visible in the public arena, it is evident that people still do not fully grasp the constraints facing such a government. At the more popularist end of the MMT blogosphere you will read statements such that if only the government understood that it can run fiscal deficits with impunity then all would be well in the world. In this blog I want to set a few of those misconceptions straight. The discussion that follows is a continuation of my recent examination of external constraints on governments who seek to maintain full employment. It specifically focuses on less-developed countries and the options that a currency-issuing government might face in such a nation, where essentials like food and energy have to be imported. While there are some general statements that can be made with respect to MMT that apply to any nation where the government issues its own currency, floats its exchange rate, and does not incur foreign currency-denominated debt, we also have to acknowledge special cases that need special policy attention. In the latter case, the specific problems facing a nation cannot be easily overcome just by increasing fiscal deficits. That is not to say that these governments should fall prey to the IMF austerity line. In all likelihood they will still have to run fiscal deficits but that will not be enough to sustain the population. We are about to consider the bottom line here – the real resource constraint. I have written about this before but the message still seems to get lost.
First of all here is a totally general statement about the capacity of a currency-issuing government that applies to any nation and is a fundamental principle of MMT.
Accordingly, such a government can always use its currency-issuing capacity to ensure that all available productive resources that are for sale in that currency, including all idle labour, can be productively engaged.
That is, such a government can always, without exception, ensure there is full employment.
There is no financial constraint on such a government who desires to achieve that desirable policy goal.
While that might sound salutary, and, by comparison with the ambitions of most governments in this neo-liberal era, is light years ahead on any well-being index, it somewhat evades a further question as to whether achieving this desirable goal moves a nation out of poverty.
So, second, here is another totally general statement to complement the first. The worst-case scenario for a nation, irrespective of its government’s currency-issuing capacity, is defined by the real resources that such a nation can access.
If a nation can only access limited quantities of real resources relative to its population, then no matter what capacities the government might have, that nation, in all likelihood, will be poor.
The ultimate constraint on prosperity is the real resources a nation can command, which includes the skills of its people and its natural resource inventory.
Thus, even if the government productively deploys all the resources a nation has available, it will still be poor if its resource base is limited.
Clearly, productively deploying all resources is a necessary condition for prosperity. And that remains the responsibility of the currency-issuing government after all of the non-government sector spending decisions have been made. But it is not a sufficient condition. A nation has to have sufficient resources to be prosperous.
The problem in this neo-liberal era is that currency-issuing governments use the myth that they are financially constrained to avoid fulfilling the responsibility to achieve full employment no matter how resource rich the nation might be.
So we have the obscene situation where even resource rich nations are succumbing to elevated levels of mass unemployment and increasing poverty rates amidst the ‘plenty’ because the ideological currents at the moment that has spawned an obsessive neo-liberal Groupthink are intent on shifting national income distribution in favour of those at the top end at the expense of everyone else.
Please read my blog – Bad luck if you are poor! – for more discussion on this point.
Moreover, world poverty is not being solved as multilateral institutions such as the World Bank, the UNDP, and the IMF, who remain locked in the grip of the neo-liberal myth that austerity leads to prosperity – or should I say, are principle instruments of that myth.
I was at a United Nations Development Program (UNDP) workshop some years ago to discuss employment guarantees.
While the main focus of the two days was meant to be employment guarantees, the conversation appeared to be dominated by discussions about fiscal space. Almost every presenter (bar me and one other) had several slides covering the topic as if it mattered.
The UNDP appears to be obsessed with the concept and it conditions the way they think about macroeconomics and constrains the way they construct the development agenda.
Their policy vision is so constrained by this erroneous thinking that their capacity to eliminate poverty is limited. Countries will never be able to create the requisite number of jobs necessary to fully employ the available labour while they are being advised by ‘experts’ who operate in the neo-liberal macroeconomic paradigm.
I was heavily criticised at the Workshop for daring to marry my advocacy for the Job Guarantee with Modern Monetary Theory (MMT) logic. One UNDP official claimed I had performed a “dis-service” (quote) to the proceedings by talking about macroeconomics in the context of employment guarantees.
He claimed that any discussion of employment guarantees should be de-coupled from the ideological debate about macroeconomic theory. He was warmly clapped by the audience (with notable exceptions). It was an appalling experience. I packed up at the end of my session and drove a few hundred kms south to Washington D.C. where better waters lay!
The problem is that the UNDP are obsessed with macroeconomics.
In its 2004 publication – Making fiscal policy working for the poor – we read:
Macroeconomic policies represent a key ‘entry point’ for the UNDP’s activities to foster human development. In order to present programme countries with viable macro policy options, UNDP seeks to support access to policy advice that presents a menu of feasible options and alternative analyses.
The link between macroeconomic theory and poverty alleviation goals is undeniable. We have to get the former right before we will make significant progress in eliminating poverty.
But both the UNDP and the IMF push a flawed macroeconomic line, which reduces, perhaps negates their ability to meet their stated charters.
The IMF defines – Fiscal space – as the
… room in a government´s budget that allows it to provide resources for a desired purpose without jeopardizing the sustainability of its financial position or the stability of the economy. The idea is that fiscal space must exist or be created if extra resources are to be made available for worthwhile government spending. A government can create fiscal space by raising taxes, securing outside grants, cutting lower priority expenditure, borrowing resources (from citizens or foreign lenders), or borrowing from the banking system (and thereby expanding the money supply). But it must do this without compromising macroeconomic stability and fiscal sustainability – making sure that it has the capacity in the short term and the longer term to finance its desired expenditure programs as well as to service its debt.
The UNDP also talks about fiscal space a lot. In its 2007 publication – Fiscal Space for What? Analytical Issues from a Human Development Perspective we encounter this definition in the first paragraph:
… is the financing that is available to government as a result of concrete policy actions for enhancing resource mobilization, and the reforms necessary to secure the enabling governance, institutional and economic environment for these policy actions to be effective, for a specified set of development objectives.
While the UNDP always exudes a sort of higher moral ground relative to the IMF when discussing economic development, when it comes down to it, there is not much difference at all between the two.
The UNDP and IMF both assume that government has the same constraints that restricted governments during the gold standard when currencies were convertible and exchange rates were fixed. These definitions, despite their subtle differences, could have been written in 1950.
In a fiat monetary system, whether the nation is rich in real resources or poor, the concept of fiscal space is not captured by these ‘financial’ constraint type approaches.
MMT teaches us that:
- A sovereign government is not revenue-constrained which means that fiscal space cannot be defined in financial terms.
- The capacity of the sovereign government to mobilise resources depends only on the real resources available to the nation.
There are hundreds of developing countries that enjoy currency sovereignty which means they can enforce tax liabilities in the currency that the government issues. It doesn’t matter if other currencies are also in use in those countries, which is common.
For example, the USD will often be in use in a LDC alongside the local currency and be preferred by residents in their trading activities. But, typically, the residents still have to get local currency to pay their taxes. That means the government of issue has the capacity to spend in that currency.
And that brings us back to the real resource constraint which is different to a balance of payments constraint.
As long as there are real resources available for use in a LDC, the government can purchase them using its currency power.
Mass unemployment is a major reason for sustained poverty and there are millions of people unemployed across the LDCs. They are real resources which have no ‘market demand’ for their services. The government in each country could easily purchase these services with the local currency without placing pressure on labour costs in the country.
That should be the starting point for a development plan and one I emphasise when I give advice to governments in poorer nations who seek help with regional and community development strategies.
What would be the consequences of this full employment strategy?
The neo-liberals claim that if we try to eliminate poverty with public sector job creation programs, the newly employed workers will increase their food intake (good) and, given that many LDCs import food, this will blow the current account out as imports rise relative to exports and cause inflation.
Why the inflation? Well because the exchange rate apparently enters a death-spiral (depreciation), which soon enough transcends into a full-blown currency crisis. Phew!
Please read my blog from yesterday – Balance of payments constraints – for more discussion on this point.
The reality is that all open economies are susceptible to balance of payments fluctuations. What is usually not mentioned is that these fluctuations were terminal during the fixed exchange rate system for deficit countries because they meant the government had to permanently keep the domestic economy is a depressed state to keep the imports down so as not to run out of foreign reserves.
For a flexible exchange rate economy, the exchange rate does the adjustment. There is no balance of payments constraint facing a nation in this regard.
Is there evidence that fiscal deficits create catastrophic exchange rate depreciation in flexible exchange rate countries? None at all. There is no clear relationship in the research literature that has been established. If you are worried that rising net spending will push up imports then this worry would apply to any spending that underpins growth including private investment spending. The latter, in fact, will probably be more ‘import intensive’ because most LDCs import capital.
Indeed, well-targetted government spending can create domestic activity which replaces imports. For example, Job Guarantee workers could start making things that the nation would normally import including processed food products.
Moreover, a fully employed economy with a skill development structure embedded in the employment guarantee are likely to attract FDI in search of productive labour. So while the current account might move into deficit as the economy grows (which is good because it means the nation is giving less real resources away in return for real imports from abroad) the capital account would move into surplus. The overall net effect is not clear and a surplus is as likely as a deficit.
Finally, even if ultimately the higher growth is consistent with a lower exchange rate this is not something that we should worry about. Lower currency parities can stimulate local employment (via the terms of trade effect) and tend to damage the middle and higher classes more than the poorer groups because luxury imported goods (ski holidays, BMW cars) become more expensive.
These exchange rate movements will tend to be once off adjustments anyway to the higher growth path and need not be a source of on-going inflationary pressure.
Now, what about a nation that has to import all of its essentials to sustain life?
There is considerable research available which reports on how dependent nations are on food imports. The Worldwatch Institute in Washington does some great research in this regard.
Imports of grain, for example, have been rising significantly over the last several decades. The Worldwatch Food Trade and Self-Sufficiency report shows that in 2013:
… more than a third of the world’s nations — 77 in all — imported at least 25 percent of the major grains they needed. This compares to just 49 countries in 1961, an increase of 57 percent over half a century …
Even more worrying, 51 countries—about a quarter of the community of nations—imported more than half of their grain in 2013, and 13 imported all of the grain they needed.
In part, this trend is being exacerbated by IMF development programs, which push nations into an export-led strategy (with cash agricultural products) and destroy the previous sustainable subsistence agriculture.
World markets get flooded with produce, prices fall, the nations cannot service their debts to the IMF, who then pushes more debt and more draconian policies onto them.
I have also written in the past about the indecent way in which financial markets speculate on food commodities and manipulate commodity prices to their advantage. The losers are not just the counter parties to the financial products but the millions of impoverished citizens who cannot access essential food resources even if they are grown within their national borders.
Please read my blogs – Food speculation should be (mostly) banned and We should ban financial speculation on food prices – for more discussion on this point.
But with those considerations aside, we have to acknowledge that if a nation has little that the world wants by way of its exports, and is food dependent on imports (and perhaps, other essential resources) then the capacity of the currency-issuing government to alleviate poverty is limited.
An understanding of MMT should bring that point home.
There are several major shifts in international thinking that have to occur to alleviate this reality.
First, where imported food (or other essentials) dependence exists then the well-being of the citizens in that nation cannot be solved within its own borders, especially if its export potential is limited.
Imposing austerity on these governments is no solution. The world has to take responsibility to ensure that it alleviates any real resource constraints that operate through the balance of payments.
Note, this is not a balance of payments constraint as it is normally considered. It is a real resource constraint arising from the unequal distribution of resources across geographic space and the somewhat arbitrary lines that have been drawn across that space to delineate sovereign states.
In this context, a new multilateral institution should be created to replace both the World Bank and the IMF, which is charged with the responsibility to ensure that these highly disadvantaged nations can access essential real resources such as food and not be priced out of international markets due to exchange rate fluctuations that arise from trade deficits.
I will write more about what that type of institution might look like in terms of governance, resourcing, and all the rest of it.
But in a progressive New World, there is no place for the current multi-lateral institutions such as the IMF and the World Bank.
Second, there has to be international agreements to outlaw speculation by investment banks on food and other essential commodities.
Third, a further progressive policy intervention, which, ideally, should be agreed to at the international level should be to declare illegal speculative financial flows that have no necessary relationship with improving the operation of the real economy. I will write more about that in due course.
In the absence of such international commitments, nations should consider imposing capital controls where they can be beneficial bulwarks against the destructive forces of speculative financial capitalism.
Please read my blog – Are capital controls the answer? – for more discussion on this point.
Fourth, in some situations a case can be made to impose import controls on equity grounds where the export base is thin and a nation is struggling to amass sufficient real resources to ‘feed and clothe’ its people.
While imports are clearly a benefit and exports are clearly cost there are still equity implications involved in the mix of imports that a nation might enjoy.
I heard once that South Africa had the largest per capita ownership of BMW cars, which is astounding, if true, given the mass poverty of the majority of its population.
Selective import controls, if they can be effectively designed, can ensure that a nation with a limited export base can import goods and services that target the provision of benefits via imports to the poor in the first instance.
Fifth, in some cases it will be in the global interest to restrict the capacity of a nation to export. For example, I’m thinking of those arguments where it is better to leave the coal in the ground than to mine it and worsen the environmental damage already existing.
In those cases, a single nation should not be punished for the pattern of geographic resource distribution and a global response is needed to make sure the damage to that nation’s export potential does not impair its ability to import and fight poverty.
Conclusion
I hope this blog has rounded off the recent discussion about balance of payments, external constraints etc.
I also hope it has clarified that a currency-issuing government can certainly use its capacities to improve the well-being of its citizens but in doing so, the nation may still remain poor, if its real resource space is limited.
A major restructuring of the multinational institutional framework, which includes scrapping the World Bank and its other neo-liberal sibling, the IMF is required to provide solutions to poverty in these cases.
The series so far
This is a further part of a series I am writing as background to my next book on globalisation and the capacities of the nation-state. More instalments will come as the research process unfolds.
The series so far:
1. Friday lay day – The Stability Pact didn’t mean much anyway, did it?
2. European Left face a Dystopia of their own making
3. The Eurozone Groupthink and Denial continues …
4. Mitterrand’s turn to austerity was an ideological choice not an inevitability
5. The origins of the ‘leftist’ failure to oppose austerity
6. The European Project is dead
7. The Italian left should hang their heads in shame
8. On the trail of inflation and the fears of the same ….
9. Globalisation and currency arrangements
10. The co-option of government by transnational organisations
11. The Modigliani controversy – the break with Keynesian thinking
12. The capacity of the state and the open economy – Part 1
13. Is exchange rate depreciation inflationary?
14. Balance of payments constraints
The blogs in these series should be considered working notes rather than self-contained topics. Ultimately, they will be edited into the final manuscript of my next book due later in 2016.
That is enough for today!
(c) Copyright 2016 William Mitchell. All Rights Reserved.
#22:352,359 Finance & Development, June 2005 - Back to Basics - Fiscal Space: What It Is and How to Get It 42(2)
Defining fiscal space
What is fiscal space? It can be defined as room in a government´s budget that allows it to provide resources for a desired purpose without jeopardizing the sustainability of its financial position or the stability of the economy. The idea is that fiscal space must exist or be created if extra resources are to be made available for worthwhile government spending. A government can create fiscal space by raising taxes, securing outside grants, cutting lower priority expenditure, borrowing resources (from citizens or foreign lenders), or borrowing from the banking system (and thereby expanding the money supply). But it must do this without compromising macroeconomic stability and fiscal sustainability—making sure that it has the capacity in the short term and the longer term to finance its desired expenditure programs as well as to service its debt.
会計スペースの定義
財政空間とは それは、財政状態の持続可能性や経済の安定性を危うくすることなく、それが望ましい目的のために資源を提供することを可能にする政府の予算内の余地として定義することができます。 そのアイデアは、財政的な余地が存在するか、余分なリソースが価値のある政府支出のために利用可能にされることになっているならば、作成されなければならないということです。 政府は、増税、外部補助金の確保、優先順位の低い支出の削減、（市民や外国の貸し手からの）資金の借り入れ、または銀行システムからの借り入れ（それによってマネーサプライの拡大）によって財政空間を作り出すことができます。 しかし、マクロ経済の安定性と財政の持続可能性を犠牲にすることなくこれを行う必要があります。つまり、短期的にも長期的にも、希望する支出プログラムの資金調達と債務返済の能力があることを確認します。
Finance & Development, June 2005 - Back to Basics - Fiscal Space: What It Is and How to Get It
42(2)
https://www.imf.org/external/pubs/ft/fandd/2005/06/basics.htmFinance & Development, June 2005 - Back to Basics - Fiscal Space: What It Is and How to Get It
Back to Basics -- Fiscal Space: What It Is and How to Get It
Peter Heller
"Fiscal space" is a term that has recently become fashionable in the aid community. But what it means is fuzzy. Sometimes, the concept has cropped up when governments have argued that fiscal constraints should be relaxed to accommodate additional borrowing to finance infrastructure projects. The logic is that these projects create productive assets that pay for themselves over the long term, thus creating the fiscal space that they need. But recently, the term has also been used by advocates of higher health and education outlays who have argued that these expenditures will eventually pay for themselves through higher returns to human capital. Although the term is new, the concept is not. It has long been an element of sound fiscal analysis. And the challenge of creating fiscal space is one that has always confronted governments and their advisors, including international financial institutions like the IMF.
Defining fiscal space
What is fiscal space? It can be defined as room in a government´s budget that allows it to provide resources for a desired purpose without jeopardizing the sustainability of its financial position or the stability of the economy. The idea is that fiscal space must exist or be created if extra resources are to be made available for worthwhile government spending. A government can create fiscal space by raising taxes, securing outside grants, cutting lower priority expenditure, borrowing resources (from citizens or foreign lenders), or borrowing from the banking system (and thereby expanding the money supply). But it must do this without compromising macroeconomic stability and fiscal sustainability—making sure that it has the capacity in the short term and the longer term to finance its desired expenditure programs as well as to service its debt.
How can this be done? The government must ensure that the higher expenditure in the short term, and any associated future expenditure—including any recurrent spending on operations and maintenance required by an infrastructure investment, or by the establishment of a school or hospital—can be financed from current and future revenues. If debt-financed, the expenditure should be assessed by reference to its effects on the underlying growth rate and the country´s revenue-generating capacity. The government needs to be sure, in particular, that increased outlays in one worthwhile area—health, for example—will not ultimately crowd out productive spending elsewhere.
For developing and emerging market countries, fiscal space may seem a more immediate issue than in advanced economies because there are more pressing needs for expenditure today. But longer-term issues are also involved, even for lower-income countries, because of the need to ensure that there will be room to respond to unanticipated fiscal challenges. For example:
- Countries that receive significant flows of foreign resources for a specific sector (such as health care) may, as a result of the associated expansion of the sector, face additional future spending needs that may essentially preempt a share of the growth of future domestic budgetary resources.
- Foreign resource inflows, such as aid, may hurt a country´s macroeconomic situation (for example, by raising its real exchange rate and thus reducing its international competitiveness) or cause excessive aid dependency, so that such inflows may need to be limited. A foreign-financed expansion of a specific sector (for example, education) may then imply limits on the magnitude of foreign resources available to other sectors.
- Resource inflows may finance a government activity, such as pension reform, that creates a liability in the form of future payouts that are highly uncertain in magnitude and timing.
The IMF´s approach
What is the IMF´s stance? When the IMF evaluates a country´s macroeconomic situation, it is open to the creation of fiscal space through higher foreign grant inflows for spending on infrastructure or social programs. But the IMF would flag a concern if the higher spending jeopardized macroeconomic stability or debt sustainability. Such caution particularly extends to the use of central bank credit, given the IMF´s concern with inflation and its damaging effects on growth and poverty. Moreover, higher spending in a sector, even if financed from external grant flows, may have implications for other sectors that will need to be taken into account.
How is potential fiscal space determined? The IMF looks at both the scope for greater public saving through expenditure rationalization and tax reform, and the extra resources that can be mobilized from borrowing and grants. It also appraises underlying factors that affect the outcome of government policies.
Reprioritizing expenditure. Curbing unproductive spending should be an important objective. This may require cuts in subsidies or military outlays, wage restraint, or rationalization of elements of the civil service (including by tackling the common problem of ghost workers). But at the same time, productive spending needs to be protected: not spending enough on a sector (say, health) can have damaging social effects and prove to be a false economy, raising future spending requirements by weakening the sector so much that it would be costly and time consuming to "rebuild" it.
Boosting efficiency. Other aims should be to streamline the implementation of programs, reduce corruption, and improve governance. Donors can help by paring conditionality, eliminating aid-tying, reducing administrative overheads, better coordinating spending in a sector, and reducing the administrative overload imposed on the limited number of recipient country program managers.
Raising revenue. For countries with low ratios of government revenue to GDP, broadening the tax base and improving tax administration are likely to be important objectives. For low-income countries, a tax ratio of 15 percent of GDP should be seen as a minimum objective.
Increasing borrowing. Given that domestic and foreign borrowing must be serviced and repaid, policymakers need to evaluate whether the social return from the uses to which the borrowing is put justifies the cost. Governments may choose to borrow without taking specific account of the direct returns, but then must do so when assessing the overall sustainability of a program. Such assessments typically weigh an economy´s prospective growth rate, potential for exports and remittances, prospective interest rate environment, revenue elasticities, composition of existing debt (in terms of interest rates, maturity, and currency of borrowing), and terms of new debt being considered.
The case of Malawi, Tanzania, and Zambia How much extra fiscal space might there be in Malawi, Tanzania, and Zambia? This question was considered in a recent IMF review. On the tax front, only Tanzania would have room for higher taxes, since tax-GDP ratios in Malawi and Zambia are already high by regional standards. Tanzania might also be able to reprioritize spending, but Malawi and Zambia would be constrained by the high share of wages and salaries and interest payments in total spending. How about higher concessional borrowing? Tanzania could pursue this route, but Malawi and Zambia would be hampered by high domestic debt levels—and until external debt is brought down to sustainable levels through debt relief, taking on more debt would be questionable. Thus, the best route for all three countries would be more foreign grants. But for this to work, Malawi and Zambia in particular would need to strengthen public expenditure management. And they would all need to pursue sound macroeconomic policies to limit any potential adverse effects on real exchange rates or interest rates. |
Monetary expansion. This is not a desirable option! A government´s borrowing from the banking system should be driven by monetary policy objectives—namely, the creation of sufficient liquidity to support an economy´s real growth, with no more than low inflation. Even if a government were explicitly to rely on money creation to facilitate somewhat higher government expenditure, there are clear limits, given the potential inflationary impact.
Securing more external grants. For many developing countries, this is increasingly feasible given the global commitment to help countries reach the Millennium Development Goals (MDGs). Grants can clearly provide more fiscal space than borrowing, where debt sustainability considerations have to be taken into account even when loans are highly concessional. But only a sustained and predictable flow of grants can create the potential for a scaling up of expenditure that can be maintained, and reduce the uncertainty as to whether a grant is simply of a one-time nature. (See Back to Basics in F&D, December 2004). And countries will need to take account of the potential macroeconomic consequences in terms of international competitiveness that may arise from a signficant scaling up in absorption of external resource inflows.
Pursuing sound macroeconomic policies. Delays in completing IMF program reviews or cessation of IMF-supported programs—which often results from a country´s failure to implement agreed macroeconomic policies—can affect assistance from other lenders and donors, and result in volatile flows. Countries that manage policies well are likely to have greater potential for creating extra fiscal space. Governments need to clarify with donors the likely availability of foreign assistance over the medium to long term and structure their expenditure programs accordingly.
In sum, the fiscal space debate has proven useful, reflecting the importance of clarifying ways to facilitate expanded spending by governments to foster growth through higher infrastructure spending and to finance programs vital to the achievement of the MDGs, particularly those related to HIV/AIDS. And the IMF is committed to working with countries to explore the scope for expanded fiscal space.
| Peter Heller is Deputy Director of the IMF´s Fiscal Affairs Department. |
0 件のコメント:
コメントを投稿