3 Fiscal Monitor Update, January 2012
… and further substantial consolidationis in the pipeline
the cyclically adjusteddeficit is forecast to fall sharply this year, byaround 1½ percent of GDP. These projections assume that Congress will extend payroll tax relief and jobless benefits for thelong-term unemployed beyond their expiration date at the end of February.Without these extensions, the cyclicallyadjusted deficit would decline by over 2 percentage points of GDP—the largest annualfall in at least four decades—with negativerepercussions for the still unsettled economicoutlook. The risk of too rapid short-termadjustment stands in marked contrast to thecontinued lack of progress in clarifying amedium-term consolidation strategy,including the failure of the Joint SelectCommittee on Deficit Reduction to reachagreement on a medium-term program tostrengthen public finances.
is projected to be the only largeadvanced economy to implement a fiscalexpansion in 2012, reflecting in partreconstruction costs related to the naturaldisaster. Total reconstruction costs are now budgeted at about 4 percent of GDP over 2011–13, financed initially through bondsales. These bonds are intended eventually to be redeemed through sales of government-owned stocks and a temporary increase in thecorporate tax rate, for 3 years, and in personalincome tax rates, spread over 25 years tominimize its impact. As part of its medium-term fiscal strategy, the government is tosubmit a tax reform bill, including its proposal for doubling the consumption taxrate to 10 percent by 2015, but this will not be sufficient in itself to put the debt ratio on adownward path.
, actual and potentialGDP growth estimates have been reviseddown, weakening projected headline andcyclically adjusted balances. To prevent afurther slowdown of the economy, thegovernment has indicated that it willaccommodate the weakened cyclicallyadjusted balance and let automatic stabilizersoperate freely over the next three years, withthe composition of adjustment beingreshuffled to make it more growth-friendly.The cyclically adjusted deficit is stillexpected to fall markedly this year, however.To maintain the government’s commitment to balance the current cyclically adjusted budgetwithin five years, further spending cuts in2015–17 have been announced.
, fiscal targets for 2012 areexpected to be slightly stronger thanenvisaged earlier, locking in over- performance from last year.
Many advanced economies have introducednew measures to support the achievement of their deficit targets. The new government in
has announced a first package of measures of 1.1 percent of GDP, includingspending cuts and temporary tax increases onincome, capital, and high-value homes. The package also includes a limited increase insocial spending and tax expenditures(mortgage deduction). A draft budget for 2012 will be submitted to Parliament by end-March. In
, the adjustment packageapproved in December will augment by1¼ percent of GDP the fiscal consolidationenvisaged over 2012–14, following the Julyand September packages (resulting in a fiscaleffort of 3¼ percent and 1¼ percent of GDPthis year and next, respectively), enough to bring the budget into balance in cyclicallyadjusted terms next year. Key elements of the package include the reintroduction of realestate taxes on primary residences and pension reforms (tightening eligibility for early retirement, reducing pension indexationand accelerating the increase in retirement