Carlo Cottarelli Director, Fiscal Affairs Department September 2011

2 Fiscal Monitor, September 2011

3 1. The state of the public finances before the 2008 crisis 2. The effect of the crisis on the fiscal accounts 3. The risks arising from the current situation 4. Policy conclusions Overview

4 1. The state of the public finances before the 2008 crisis

General Government Gross Debt in G-7 Economies, (In percent of GDP)

General Government Gross Debt in Selected Advanced Economies, (In percent of GDP)

General Government Gross Debt in Emerging Economies, (In percent of GDP)

8 2. The effect of the crisis on the fiscal accounts

9 Change in General Government Debt and Deficit: Advanced Economies Change in debt with respect to Canada France Germany Greece Italy Japan Portugal Spain United Kingdom United States Change in deficit with respect to 2007

10 Change in General Government Debt and Deficit: Advanced Economies Canada France Greece Japan Portugal Spain United Kingdom United States Change in debt with respect to Change in deficit with respect to 2007 Italy Germany

Portugal 11 Change in General Government Debt and Deficit: Advanced Economies Change in debt with respect to 2007 Canada France Germany Greece Italy Japan Spain United Kingdom United States Change in deficit with respect to 2007

Change in General Government Debt and Deficit: Advanced Economies Change in debt with respect to 2007 France Germany Greece Italy Japan Portugal Spain United Kingdom United States Canada Germany Greece Japan Portugal Spain United Kingdom United States 12 Change in deficit with respect to 2007

13 Change in General Government Debt and Deficit: Advanced Economies Change in debt with respect to 2007 Italy Change in deficit with respect to 2007 Japan Canada France Germany GreeceItaly Portugal Spain United Kingdom United States

14 Change in General Government Debt and Deficit: Advanced Economies Change in debt with respect to 2007 Japan Canada France Germany GreeceItaly Portugal Spain United Kingdom Change in deficit with respect to 2007 United States

Change in General Government Debt and Deficit: Emerging Economies Brazil China India Mexico Russia Average Advanced Change in deficit with respect to 2007 Change in debt with respect to

16 Change in General Government Debt and Deficit: Emerging Economies Brazil China India Mexico Russia Average Advanced Change in deficit with respect to 2007 Change in debt with respect to

17 Change in General Government Debt and Deficit: Emerging Economies Brazil China India Mexico Russia Average Advanced Change in deficit with respect to 2007 Change in debt with respect to

18 Change in General Government Debt and Deficit: Emerging Economies Brazil China India Mexico Russia Average Advanced Change in deficit with respect to 2007 Change in debt with respect to

19 Change in General Government Debt and Deficit: Emerging Economies Brazil China India Mexico Russia Average Advanced Change in deficit with respect to 2007 Change in debt with respect to

20 G-20 Advanced Economies: Increase in General Government Debt, 2008–15 (Total increase: 38.6 percentage points of GDP)

21 Illustrative Scenarios for Primary Balance Adjustment and Debt, General Government Gross Debt-to-GDP Ratio Overall Balance Primary Balance Cyclically Adjusted Primary Balance

22 Cyclically Adjusted Primary Balance that Needs to Be Maintained in 2020–30 to Achieve Debt Target by 2030 (In percent of GDP)

23 2. The risks arising from the current situation

24 General Government Deficit vs. Debt in Euro Area Countries, 2011 Austria Belgium Cyprus Estonia Finland France Greece Ireland Italy Luxembourg Malta Netherlands Portugal Slovak Republic SloveniaSpain Germany Gross Debt (percent of GDP) 2011 Deficit (percent of GDP)

25 General Government Deficit vs. Debt in Euro Area Countries, 2011 Austria Belgium Cyprus Estonia Finland Greece Italy Luxembourg Malta Netherlands Slovak Republic Slovenia Spain Germany Austria Belgium Cyprus Estonia Finland France Greece Ireland Italy Luxembourg Malta Netherlands Portugal Slovak Republic SloveniaSpain Germany Gross Debt (percent of GDP) France Ireland Deficit (percent of GDP) Portugal

26 General Government Deficit vs. Debt in Euro Area Countries, 2011 Austria Belgium Cyprus Estonia Finland France Greece Ireland Italy Luxembourg Malta Netherlands Portugal Slovak Republic SloveniaSpain Germany Japan United States Gross Debt (percent of GDP) 2011 Deficit (percent of GDP)

27 1. Past and future fiscal trends Why Euro Area Countries Are Different from US and Japan?

28 General Government Deficit vs. Debt in Euro Area Countries, 2011 Austria Belgium Cyprus Estonia Finland France Greece Ireland Italy Luxembourg Malta Netherlands Portugal Slovak Republic SloveniaSpain Germany Japan United States Gross Debt (percent of GDP) 2011 Deficit (percent of GDP)

2011 General Government Deficit, in percent of GDP

30 Change in the Deficit in the Euro Area, US and Japan Percent of GDP change, Fall 2009 FM Current FM

31 Fiscal Outlook: Increase in General Government Debt during Spain Belgium France (Change in percent of GDP) Germany Italy October 2009 Sept 2011 October 2009 Sept 2011 October 2009 Sept 2011 October 2009 Sept 2011 October 2009 Sept 2011 United States Japan October 2009 Sept 2011 October 2009 Sept Increase in debt, Increase in debt, Increase in debt, Increase in debt, Increase in debt, Increase in debt, Increase in debt,

32 1. Past and future fiscal trends 2. Long-term pressures on spending for health care and pensions Why Euro Area Countries Are Different from US and Japan?

33 NPV of Pension and Health care Spending Change 2010–50 (Change in percent of GDP)

34 NPV of Pension and Health care Spending Change 2010–50 vs. Yield Spreads

35 1. Past and future fiscal trends 2. Long-term pressures on spending for health care and pensions 3. Banks 4. Growth Why Euro Area Countries Are Different from US and Japan?

36 Sovereign Bond Yield Spreads and Projected Real GDP Growth

37 Sovereign Bond Yield Spreads and Real GDP Growth

38 High Public Debt is Bad for Growth Rogoff and Reinhart: “This Time is Different: Eight Centuries of Financial Folly” (2009) Kumar and Woo: “Public Debt and Growth” (2010) Steven Cecchetti: “The Real Effects of Debt” (2011)

39 Advanced Economies: Debt Above 80 percent of GDP AUSAUT BEL CAN CZE DEN DEU ESP FIN FRA GBR GRC ICE IRE ISR ITA JPN NED NZL PRT SLK SLV USA %81% 2011

40 1. Past and future fiscal trends 2. Long-term pressures on spending for health care and pensions 3. Banks 4. Growth 5. Sources of financing Why Euro Area Countries Are Different from US and Japan?

41 Sources of Financing: Holders of Public Debt Japan Central Government Bonds United States Treasury Securities Ireland Central Government Bonds Portugal General Government Debt Spain Central Government Securities Greece Central Government Marketable Debt Italy General Government Securities Belgium Gross Government Debt France Central Government Securities Private Residents Central Bank Private Non-residents Official Non-residents Note: For Ireland, France, Italy, Portugal, Greece and Spain: Private non-resident, includes ECB.

42 United States: Ownership of Treasury Securities Private Non-residents Central Bank Official Non-residentsChina

43 Private Non-residents Holders of Debt vs. Yield Spreads

44 4. Policy conclusions

45 1. United States and Japan need a clear plan 2. Europe needs: 1. Adjustment in fiscal fundamentals Policy Conclusions

46 General Government Deficit vs. Debt in Euro Area Countries, Austria Belgium Cyprus Estonia Finland France Greece Ireland Italy Luxembourg Malta Netherlands Portugal Slovak Republic Slovenia Spain Germany Malta Gross Debt (percent of GDP) Austria Belgium Cyprus Estonia Finland France Greece Ireland Italy Luxembourg Netherlands Portugal Slovak Republic Slovenia Spain Germany

47 1. United States and Japan need a clear plan 2. Europe needs: 1. Adjustment in fiscal fundamentals 2. Reforms to boost potential growth Policy Conclusions

48 Initial debt ratio at 100% Increase the growth rate for 10 years by 1 p.p. Spending constant in per capita terms, assuming a 40% tax ratio Would lower public debt by 29% of GDP The Role of Growth Lowering Debt Ratios Debt in Percent of GDP Year Role of Growth in Debt Reduction 29% Difference Baseline With growth increased by 1 percentage points

49 1. United States and Japan need a clear plan 2. Europe needs: 1. Adjustment in fiscal fundamentals 2. Reforms to boost potential growth 3. Banking 4. Financing for countries that are adjusting Policy Conclusions

Thank You!

General Government Gross Debt: G7 Weighted Average B

General Government Gross Debt: Canada B

General Government Gross Debt: France B

General Government Gross Debt: Germany B

General Government Gross Debt: Italy B

General Government Gross Debt: Japan B

General Government Gross Debt: United Kingdom B

General Government Gross Debt: United States B