A big challenge for the economic development of small island countries is dealing with external shocks. The Pacific Islands are vulnerable to natural disasters, climate change, commodity price changes, and uncertain donor grants. The question that arises is how should small developing countries formulate a fiscal policy to achieve economic stability and fiscal sustainability when prone to various shocks? We study how natural disasters affect long-term debt dynamics and propose fiscal policy rules that could help insulate the economy from such unexpected shocks. We propose fiscal rules to address these shocks and uncertainties using the example of Papua New Guinea. Our study finds the advantages of expenditure rules, especially a recurrent expenditure rule based on non-resource and non-grant revenue, interdependently determined by government debt and budget balance targets with expected disaster shocks. This paper contributes to the literature and policy dialogue by theoretically analyzing the impact of natural disasters on debt sustainability and proposing fiscal rules against natural disasters and climate changes. Our fiscal policy framework is practically applicable for many developing countries facing increasing frequency and impact of natural disasters and climate change. Our rules-based fiscal framework is crucial for sustainable and countercyclical macroeconomic policies to build resilience against devastating natural hazards.
is expected to record a primary surplus of about 6.2 percent of GDP in 2019 and will continue to record solid primary surpluses on the forecast horizon . As a result, Cyprus’ public debt is on a firm downward trajectory. Despite spending pressures, the broad political consensus for spending restraint continues to hold. The authorities have cappedexpendituregrowth to nominal medium-term economic growth, as reflected in the medium-term budget plan for 2020–22.
Since last year’s Article IV report, there has been continued significant
considered that what the situation requires is vigilance.
Directors supported the authorities’ approach of conducting fiscal policy within a medium-term framework with transparent rules. They agreed that by cappingexpendituregrowth in real terms, the framework had contributed to tighter control over spending and facilitated fiscal consolidation in recent years. With strong growth and improved revenue prospects, most Directors encouraged the authorities to aim for a further improvement in the structural fiscal balance and to avoid any additional fiscal stimulus. They
makers, allowing for automatic stabilizers and being more transparent and more resilient to measurement errors. Cons of expenditure rules are they may reduce incentives to mobilize revenues.
Although cappingexpendituregrowth is an important type of expenditure rule, it may not be suitable for the Pacific Islands. In general, a simple expenditure growth rule related to trend GDP should be applied only when the initial fiscal position is deemed appropriate. In the case of Pacific island countries, cappingexpendituregrowth may not be an appropriate strategy because
International Monetary Fund. Middle East and Central Asia Dept.
-21). The property of such a spending rule is illustrated below, providing a smoother path of spending - with a similar outcome in terms of level of spending achieved towards the end of the sample. Note however, that by construction this exercise is purely counter-factual. As such, the recommendation of cappingexpendituregrowth at 4 percent cannot be seen as a recommendation for the future, as it would heavily depend on projections of future parameters and would warrant caution in determining the ceiling.
Counterfactual Illustration of an Expenditure
This 1999 Article IV Consultation highlights that the Netherlands posted a strong economic performance during the 1990s, based on sound macroeconomic policies and complementary and interlocking reforms to fiscal policy, social security, and labor and product markets. Robust real GDP growth was combined with strong job creation and falling unemployment, as well as increasing labor participation rates. Economic activity remained strong in 1998, with real GDP expanding 3.8 percent. A slowdown that started mid-year was temporary, and growth picked up again toward the end of the year.
46. However, the fiscal framework, which has proved its worth, should not be reopened; instead, expenditure should be held below the ceiling . By cappingexpendituregrowth, the framework has contributed to tighter control of government spending and helped to foster sustainable reductions in the tax burden and the public-debt ratio. Opening the framework to allow short-run adjustments to the fiscal stance for purposes of demand management, or even to implement a somewhat tighter medium-term deficit path, would almost certainly weaken fiscal discipline. The
their evolving priorities, and may erode some essential government services to unsustainably low levels. Moreover, it could lead to possible reductions in capital expenditures. Against this backdrop, the emphasis should be on raising revenue and on expenditure reallocation.
28. To enhance the allocation of resources, the medium-term consolidation path should be accompanied by an expenditure growth ceiling . Cappingexpendituregrowth in real terms for 2012–15 would set a consolidation path toward a deficit of 1 percent of GDP. It would also facilitate the transition
Luc Eyraud, Mr. Xavier Debrun, Andrew Hodge, Victor Duarte Lledo, and Ms. Catherine A Pattillo
European operational rules with a single expenditure growth rule.
47. Implementation of a single operational rule may nonetheless be challenging in certain cases . First, some operational rules (such as an expenditure rule that does not bind revenue 17 ) cannot achieve the debt objective without being accompanied by some form of adjustment or correction mechanism. For instance, in the context of Israel, Debrun, Epstein, and Symansky (2008) suggested the introduction of a rule cappingexpendituregrowth anchored in a target path for public debt; anchoring the