Sanjeev Gupta, Acting Deputy Director, Fiscal Affairs Department, IMF

The major issue for the US is really to put its medium-term debt trajectory on a downward path by dealing with age-related spending, Sanjeev Gupta says

April 11, 2014 9:11 IST | India Infoline News Service
Sanjeev Gupta, Acting Deputy Director, Fiscal Affairs Department, IMF joined the IMF’s European Department in 1986 and also worked in its African Department. Gupta has published extensively on macroeconomic and fiscal policy issues. He was previously a fellow of the Kiel Institute in Germany, Senior Faculty in the Administrative Staff College of India, Hyderabad and Secretary, Federation of Indian Chambers of Commerce and Industry in New Delhi. He has coauthored or co-edited a number of books, including: “Governance, Corruption, and Economic Performance,” edited with G. Abed, November 2002; “Helping Countries Develop: The Role of Fiscal Policy,” edited with B. Clements and G. Inchauste, September 2004; and “The Economics of Public Health Care Reform in Advanced and Emerging Economies,” edited with B. Clements and D. Coady, April 2012.

International Monetary Fund: The IMF is an organization of 188 countries, working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world. The rationale for this is that private international capital markets function imperfectly and many countries have limited access to financial markets. Such market imperfections, together with balance of payments financing, provide the justification for official financing, without which many countries could only correct large external payment imbalances through measures with adverse effects on both national and international economic prosperity. The IMF can provide other sources of financing to countries in need that would not be available in the absence of an economic stabilization program supported by the Fund.

Don't have credible medium-term consolidation plan for US: IMF

The major issue for the US is really to put its medium-term debt trajectory on a downward path by dealing with age-related spending, Sanjeev Gupta says

Below is the transcript of a press briefing on the Fiscal Monitor Report:

Many central banks around the world are targeting/battling inflation that is below the target. The US inflation is below 2% and the US has already normalized monetary policy. Do you think the time is right? With inflation below 2%, what do you think is an appropriate stimulative package for the US at this moment and its implication for emerging markets?
In the case of the US, the budget deficit has been reduced quite substantially in the last few years. The major issue for them is really to put their medium-term debt trajectory on a downward path by dealing with age-related spending, so they need to focus more on implementing these reforms so that the debt is on a more sustainable path over the medium term. We do not have a credible medium-term consolidation plan for both the US and Japan.

We have seen expenditure controls through cutting down public sector development programs and slower disbursements through income support programs. What do you think is the right direction? 
On the general sort of issue of cutting expenditure programs, one of the things that we discussed in our Fiscal Monitor is that countries should avoid across-the-board cuts in spending, and they should look at efficiency and equity when sort of restructuring their expenditure programs, whether it is employment, government employment, whether it is social transfers, because in all those programs one has to find ways to improve the spending quality and that is possible in those countries. So, what we have to avoid is that in reforming these programs there are no across-the-board cuts which may penalize both efficiency and equity.

Could you explain why you think it is acceptable to increase retirement ages when blue collar workers are the least able to cope with higher retirement ages? Could you also comment on the UK government’s decision to ring-fence health and education spending and cut other departments? Do you think that is a good way to go about dealing with public spending?
The reason why we recommend raising the retirement age is because, if you look at the life expectancy going forward, that is rising quite a bit. What it means is that people are going to live longer and the pension system will have to provide pensions to people who may not have contributed enough to be able to recover these amounts.

However, some low-income workers may not live that long. So, what we are suggesting, if you look at the Fiscal Monitor, is that for those people, there would have to be some other social assistance provisions, whether it is done in the context of disability payments, whether it is in the context of increasing the years that they contribute, and that is taken into account in determining the pension payments.

When you compare the life expectancy now against the statutory pension age in most countries, the life expectancy is much higher and that could be a major fiscal challenge for many of the countries unless something is done about it. The choices the countries face is either to raise the retirement age or to raise payroll taxes, which again is not going to be very beneficial to the economies, or cut the benefits. These are the tradeoffs. We feel that against all these tradeoffs, perhaps raising the retirement age is a better option.

You mentioned in the report the fiscal risks associated with elections in Brazil this year. I would like you to elaborate a little bit more of what would be the concerns. What kind of fiscal reforms do you recommend or are most needed in Brazil right now.
During an adjustment process or fiscal consolidation, you want to make sure that access of the population to critical social services is maintained. So, I think it is a good idea to protect that spending. In fact, if you look at Fund-supported programs, this is one of the key elements of those programs. We have told countries that they ought to protect or increase such spending during the period when fiscal consolidation is taking place.

Brazil is indeed facing elections soon. However, you know that recently it has been announced that the outcome for the primary surplus in Brazil has been 1.9 for 2013. The government has announced the target for 2014 as also 1.9. So, at this point, the government has expressed intentions to maintain fiscal discipline through to 2014. We think that this is important, something that we have supported, and we think is appropriate to do so in this coming year.

The Fiscal Responsibility Law, which underpins the fiscal policy framework in Brazil, has so far provided good guidance and we have encouraged the government to maintain this fiscal framework and stick to it this year and the following.

Over the medium term, however, we think that Brazil should set itself a bit more ambitious targets, including going back to the 3 percent primary surplus that they had before. Another challenge is to address specific challenges that exist in the fiscal framework in Brazil, such as, for example, the discipline of sub-national governments, which so far is an important point of pressure on public finances; curtail policy lending, which is also an important point of pressure in the budget; and not to rely on exceptional items of financing. Those are tasks that over the medium term should be tackled.

What is your assessment of Italy’s government efforts to reduce debt and balance the structural budget by 2016, and what are your recommendations looking forward?
Italy should continue to make progress toward its target of achieving a zero structural budget balance in due course under the new fiscal rule that they have, and they should lock in the gains that they have achieved through fiscal consolidation in the past few years. However, they should rebalance their budget through implementing structural measures on the spending side, which is being done in the context of the Spending Review, and then implement some reforms on the tax side to lower the cost of employment. So, in this context, we welcome the new program that was announced yesterday, the three-year program, which is moving in this direction.

Could you tell me what are the differences, if there are any, between countries in the Eurozone and countries that are in the EU that have not yet adopted the euro like Hungary, Poland.
On the issue of the Eurozone and non-Eurozone, I think my answer would be that we have to look specifically at the countries that we are talking about other than generalize across all groups of countries.

What is your assessment of the financial situation in the Caribbean in light of the current global financial status? If possible, make specific references to St. Kitts and Nevis, one of the region’s smallest states.
The Caribbean perhaps is one of the areas that has suffered a tightening of financing conditions not only now but for some time now. We reiterate this advice for the Caribbean countries that are at risk in terms of facing financing conditions that are tougher at this point.

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