A paper by the International Monetary Fund lays out a framework for Fund staff to assess fiscal space.
The paper, which was discussed by the IMF’s Executive Board earlier this year, puts forward a set of tools to assess available fiscal space in a way that is broadly comparable across countries and provides IMF staff, and policymakers, with a consistent approach to assessing available space as an input to inform decisions about fiscal policy.
The framework leverages the many tools for fiscal sustainability that have been developed by staff over the years, organizing them into a systematic and consistent set of considerations. While the Fund regularly assesses countries’ fiscal space to inform its policy recommendations, this new tool would take the analysis one step further, by allowing Fund staff to qualitatively assess the degree of fiscal space in a consistent manner across all member countries.
The concept of fiscal space can be defined as the ability of a government to raise spending or lower taxes without endangering market access and debt sustainability. As demonstrated in the framework, making such a determination requires a comprehensive and multi-dimensional approach. The use of fiscal space as a means to bolster demand and support long-term growth has been at the center of the Fund’s global policy advice in the context of the “new mediocre” that continues to weigh on the global economic recovery.
In the current context, for instance, it can be applied to the question of the scope for fiscal support in individual countries based on their macroeconomic situation and prevailing global policy challenges, including diminished gains from additional monetary policy support and the need to finance structural reform priorities.
This framework will be applied initially in Article IV consultations of about 40 major economies. It will also be updated over time, based on further experience, research, and feedback. It is expected to evolve in response to experience gained through implementation in bilateral surveillance, as well as to new metrics and approaches to fiscal sustainability developed by Fund staff.