1. 1 Transparent and Credible Strategies to Achieve Medium-Term Fiscal Sustainability Carlo Cottarelli XXII Regional Fiscal Policy Seminar, ECLAC, Santiago de Chile January 26, 2010

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3. 3 Fiscal outlook in advanced G-20 countries (all variables in percent of GDP) -12 -10 -8 -6 -4 -2 0 -7 -6 -5 -4 -3 -2 0 1 2 3 60 70 80 90 100 110 120 130 20000102030405060708091011121314 General Government Gross Debt 20000102030405060708091011121314 20000102030405060708091011121314 Overall balance Cyclically-adjusted primary balance Primary balance

4. 4 Fiscal balances and debt in emerging G-20 countries (in percent of GDP) -5 -4 -3 -2 0 1 2 20000102030405060708091011121314 30 35 40 45 50 55 General government gross debt (right scale) Fiscal balance (left scale)

5. 5 Fiscal balances in LAC (in percent of weighted GDP)

6. Some LAC economies saved during the commodity price boom (Real percentage change, 2005-2007) 6 Commodity related revenue Other revenue

7. 7 Debt in LAC and G-20 economies (in percent of GDP)

8. 8 Is living with high debt an option? Three downsides: Three downsides: 1.Less flexibility to respond to shocks 2.Higher interest rates 3.Lower potential growth (?)

9. 9 Assumptions Goal: debt ratios < 60% of GDP by 2030 Goal: debt ratios < 60% of GDP by 2030 Adjustment in the primary balance will start in 2011 Adjustment in the primary balance will start in 2011 Adjustment will last 10 years; constant primary balance afterwards Adjustment will last 10 years; constant primary balance afterwards

10. 10 General government gross debt-to-GDP ratio 0.00 20.00 40.00 60.00 80.00 100.00 120.00 200720082009201020112012201320142015201620172018201920202021202220232024202520262027202820292030 -10.00 -8.00 -6.00 -4.00 -2.00 0.00 2.00 4.00 6.00 200720082009201020112012201320142015201620172018201920202021202220232024202520262027202820292030 Cyclically- adjusted primary balance Primary balance Overall balance Fiscal Balances in Advanced Economies (in percent of GDP)

11. 11 Fiscal action must extend beyond pensions and health care Not renewing the stimulus measures Freezing real primary spending per capita (excluding health and pension spending)  With primary spending at 23% of GDP, real growth rate of 2%  the primary balance ↑ 3½ % of GDP Tax measures  Broaden the tax base  Correct externalities (carbon taxes ½ % of GDP) 8% Improvement in Cyclically Adjusted Primary Balance Fiscal Stimulus Expiring (1.5%) Freeze in Real Spending (3.5%) Tax Measures (3%) 0 1 2 3 4 5 6 7 8 9 Percent of GDP

12. 12 Conclusions Too soon to tighten fiscal policies Too soon to tighten fiscal policies Not too soon to: Not too soon to: 1. Communicate strategies and measures to ensure fiscal solvency 2. Implement actions without a negative impact on demand: Strengthening medium-term fiscal frameworks Strengthening medium-term fiscal frameworks Substantive reforms of entitlements Substantive reforms of entitlements