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Ms. Andrea Schaechter and Mr. Carlo Cottarelli
Today’s record public debt levels in most advanced economies are not only a direct fall-out from the global crisis. Public debt had ratcheted up over many decades before, when it had been used, in most of the G-7 countries, as the ultimate shock absorber—rising in bad times but not declining much in good times. Alongside, primary spending increased, particularly during 1965–85, reflecting predominantly a surge in health care and pension spending. Looking ahead, advanced economies will face the formidable challenge of reducing debt ratios at a time when ageing-related spending, in particular often underestimated pressures from health care systems, will put additional pressure on public finances. Addressing these fiscal challenges will require growth-friendly structural reforms, a fiscal strategy involving gradual but steady fiscal adjustment, stronger fiscal institutions, expenditure and revenue reforms, and an appropriate degree of burden sharing across all stakeholders.
John M. Piotrowski, Mr. David Coady, Justin Tyson, Mr. Rolando Ossowski, Mr. Robert Gillingham, and Mr. Shamsuddin Tareq
Petroleum product subsidies have again started to increase with the rebound in international prices. This note reviews recent developments in subsidy levels and argues that reforming the policy framework for setting petroleum product prices is necessary to reduce the fiscal burden of these subsidies and to address climate change. Between 2003 and mid-2008, global consumer subsidies for petroleum products are estimated to have increased more than eightfold, from $57 billion to $490 billion. Although subsidies decreased to $136 billion by mid-2009, they are projected to increase to $237 billion by end-2010 (or nearly 0.3 percent of global GDP). Tax-inclusive subsidies, reflecting sub-optimal taxation of petroleum products, are projected to increase to $733 billion, or 1.0 percent of global GDP. G-20 countries account for over 70 percent of tax-inclusive subsidies. Halving tax-inclusive subsidies could reduce projected fiscal deficits in subsidizing countries by one-sixth and greenhouse emissions by around 15 percent. Subsidy reform strategies should contain measures to mitigate the impact of higher prices on the poorest groups.
Dimitre Milkov, Mr. Rafael A Portillo, Mr. Plamen K Iossifov, and Mr. John Wakeman-Linn
The financial sector of the Central African Economic and Monetary Community (CEMAC) has been seriously affected by the global financial crisis and resulting global recession. This note assesses the response of CEMAC governments to the global financial crisis and recession, with particular focus on the impact of current policies on each country’s fiscal sustainability as well as the region’s external sustainability and reserve coverage. The note then provides general policy advice to CEMAC governments as they refine their response to the global crisis.