#1財務 Discussion "An Overview of Fiscal and Public Debt Dynamics, and Current Fiscal Policy Settings in Asia and the Pacific" IMF STI-OAP Webinar September 26, 2023 UEDA Junji Disclaimer: The views in the presentation slides are those of the presenter and do not reflect the view of the organizations to which he belongs.#2Topics for discussion ■ Impacts of inflation on public finances ✓ Impacts on expenditures and revenues ✓ Mitigating fiscal measures for inflation ■Impacts of fiscal policies on inflation ✓ How the fiscal instruments affect inflationary pressure ✓ Fiscal multipliers and impacts on international trade 2#3Immediate impacts of inflation on public finances Inflated Nominal Values Indexation Inflation S Sovereign Debt Structure Market Expectations M M GDP Denominator • Nominal GDP increases with inflation lead to lower fiscal deficits and public debt as a ratio to GDP. Revenue ⚫. The nominal tax base also grows with inflation (for example, value-added tax and profit tax). • If income tax brackets are not indexed to inflation, taxpayers may be pushed into higher tax brackets (bracket creep). (Source) IMF, 2023, Fiscal Monitor April 2023 Primary Expenditure • Primary expenditure does not usually move immediately with inflation. However, public expenditure can go up with inflation with a short delay via indexation of public goods and services (for example, public wage, social benefits, subsidies, pension, and medical expenses) to inflation. Interest Bill and Debt Service • Interest payments on inflation- indexed bonds go up with inflation. • Governments with more short-term debt (S) than long-term debt (L) face higher refinancing costs as investors ask for higher returns to compensate for expected inflation. They pay higher interest on foreign-currency-denominated debt (F) than on domestic-currency debt (D) when the currency depreciates due to inflation. 3#4CPI: cross-country comparison CPI Inflation rates for major items (July 2023, YoY) (YOY, %) 12.0 US UK (% Food Gasoline (% Electricity . Germany EU 10.0 • China Japan 16.0 5.0 10.0 1.1 14.0 0.0 8.0 6.0 4.0 2.0 0.0 6.7 12.0 -7.7 -5.0 3.0 0.0 10.0 8.0 -10.0 -19.9 -24.9 14.9 -15.0 6.0 11.6 8.8 -10.0 -20.0 4.0 -25.0 2.0 3.6 -2.0 2020 14 7 10 14 7 10 1 4 7 10 14 7 10 14 7 2019 0.0 2021 2022 2023 Japan ՏՈ EU UK -30.0 Japan ՏՈ EU UK -20.0 -0.5 Japan US EU UK (Source) Bloomberg, Ministry of Internal Affairs and Communications, United States Department of Labor, Eurostat, Office for National Statistics (UK) 4#5CPI and import price in Japan CPI: composition (YOY, %) 5.0 Others Durable goods (Household&Recreational) Electricity&Gas 60 60 50 40 40 4.0 Food, less fresh food Communication Petroleum products All items, less fresh food 3.0 20 30 (YOY, %) Import price index (yen-denominated price index) | Beverages & foods and agriculture products for food Metals and related products Lumber & wood products and forest products Petroleum, coal and natural gas Exchange rate factor Error term Others All commodities 2.0 1.0 0.0 -1.0 XXXXX E☑ XXXXXXX 10 0 -10 -20 -30 1 3 5 7 9 11 1 3 5 7 9 11 1 3 5 7 9 11 1 3 5 7 2020 2021 2022 2023 (CY2020 100) 170.0 160.0 -2.0 150.0 1 3 5 7 9 11 1 3 5 7 9 11 1 3 5 7 9 11 1 3 5 7 3 4 5 6 7 8 2020 2021 2022 2023 2023 (Source) Ministry of Internal Affairs and Communications (Source) Bank of Japan, Bloomberg 5 5#6Mitigating measures for surging energy price ■Mitigating measures for fuel oil price changes (yen/liter) 216 212 208 Gasoline price after subsidy Gasoline price without subsidy 204 200 196 192 12.5 Application OIL Lowering prices Subsidy ☐ 188 184 180 Lowering prices 176 172 168 164 Government Wholesaler of fuel oil Retailers of fuel oil (gas station, etc.) Consumer 2022/1/17 2022/2/14 2022/3/14 = 2022/4/11 2022/5/163 2022/6/133 2022/7/11 2022/8/83 2022/9/53 2022/10/33 2022/10/315 2022/11/28: 2022/12/26 2023/1/30 2023/2/27 2023/3/27 2023/4/24 2023/4/24 2023/5/29 2023/6/26 2023/7/24 2023/8/21 (Source) Agency for Natural Resources and Energy, Ministry of Internal Affairs and Communications ■Mitigating measures for electricity and gas price changes Government Electricity bill Subsidy Lowering prices Retailers of electricity and city gas, etc. Users (households and companies, etc.) City gas bill Households and companies with low voltage agreement, etc. 7yen/1kWh 囲 Companies with high voltage agreement, etc. 3.5yen/1kWh Households and companies with less than 10 million m3 use, etc. 30yen/1m³ Effects of mitigating measures for electricity and gas are estimated to be lowering CPI by 1.0%pt. (July 2023, All items) 6#7BOJ's recent statement on monetary policy April 28, 2023 Statement on Monetary Policy (excerpt) 2. With extremely high uncertainties surrounding economies and financial markets at home and abroad, the Bank will patiently continue with monetary easing while nimbly responding to developments in economic activity and prices as well as financial conditions. By doing so, it will aim to achieve the price stability target of 2 percent in a sustainable and stable manner, accompanied by wage increases. The Bank will continue with Quantitative and Qualitative Monetary Easing (QQE) with Yield Curve Control, aiming to achieve the price stability target, as long as it is necessary for maintaining that target in a stable manner. It will continue expanding the monetary base until the year-on-year rate of increase in the observed. consumer price index (CPI, all items less fresh food) exceeds 2 percent and stays above the target in a stable manner. The Bank will continue to maintain stability of financing, mainly of firms, and financial markets, and will not hesitate to take additional easing measures if necessary. 7#8Economic and Fiscal Projections for Medium to Long Term Analysis * Council on Economic and Fiscal Policy (Cabinet Office, July 25, 2023) The Primary Balance for the central and local governments combined will turn into a surplus in FY2025 by continuing efforts to improve expenditure efficiency in the scenario of Growth Achieved Case. In the Economic Growth Achieved Case, the ratio of outstanding debt to Nominal GDP gradually decline while the Primary Balance for the central and local governments combined will turn into a surplus. It is projected to rise in the latter half of the projecting periods in the Baseline Case. Primary Balance (Ratio to Nominal GDP) 4.0% (Sum of the Central and Local Governments) Outstanding Debt (Ratio to Nominal GDP) (Sum of the Central and Local Governments, % of GDP) 230% 2.0% 0.0% ▲2.0% ▲ 4.0% 206.6% 210.6% 191.2% 0.1% (0.7tn) 210% 190% 2.6% کر گرد 170.7% ▲0.4% 170% ▲2.3tn) 150% 130% ▲9.1% ▲6.0% ▲8.0% 10.0% 2002 2007 2012 2017 110% 20232025 2032 2002 2007 2012 2017 2023 2028 2032 ("tn" stands for "trillion yen.") F Economic Growth Achieved Case: Assuming that potential growth rate steady rises, achieving around real 2% and nominal 3% GDP growth. Economic Growth Achieved Case (Considering the expenditure reform): Assuming that potential growth rate steady rises, achieving around real 2% and nominal 3% GDP growth. Also, assuming the effect on improvement in the primary balance by efforts for increasing spending efficiency to be about 1.3 trillion yen per year when its impact on the economy is taken into consideration. Baseline Case: Growth rates of GDP are assumed to be in the mid-0% range for both real and nominal GDP every year. (Source) Cabinet Office "The Economic and Fiscal Projections for Medium to Long Term Analysis", July 2023 8#9Provisional Translation Issues for fiscal management in Japan National Security Defense buildup program for FY2023-2027 sets the level of defense force development expenses at around 43 trillion yen (1.6 times the amount in the previous program for FY2019- 2023) The revenue will be secured for maintaining stable defense capabilities. Green Transformation (GX) • • • GX Economy Transition Bonds will be established to provide upfront investment support in the amount of 20 trillion yen over the next 10 years. The GX Economy Transition Bonds are going to be redeemed by future fiscal resources through embodying the vision of Pro-Growth Carbon Pricing. FY2023 budget includes 0.5 trillion yen, in addition to 1.1 trillion yen in FY2022 supplementary budget. Policies related to children Based on "Policy on Future Strategy for Children", the Government will fundamentally strengthen its policies. Promote "Acceleration Plan for Child and Childrearing Support" without requiring the people to bear any substantial additional burden. The budget for "Acceleration Plan for Child and Childrearing Support" is currently estimated to be approximately 3 trillion yen. 9#10Panel evidence of fiscal policy impact on inflation, 1950-2019 Impulse response of 1% of GDP rise in government spending on inflation; - Bayesian Panel VAR encompassing 17 advanced countries, 1950-2019 (dotted lines show the 90% confidence bands) - Percentage points 1950-1985 1.5 1.3 1.1 0.9 0.7 1.5 1.3 0.5 0.3 0.1 -0.1 Percentage points 1.1 0.9 0.7 0.5 0.3 0.1 -0.1 -0.3 -0.5 -0.3 -0.5 1 2 3 4 5 6 7 8 9 10 11 12 Years (Source) IMF, 2023, Fiscal Monitor April 2023, Figure 2.9. 1986-2019 1 2 3 4 5 6 7 8 9 10 11 12 Years 10#11Fiscal policy impact on inflation in the United States, 1939-2015 Impulse response of 1% of GDP rise in government spending on inflation; - identified by quarterly news of additional military spending in the US 1.0 0.8 Impulse Response for Inflation Impulse Response for Output 1.0 0.8 Percentage points 0.6 0.4 0.2 Percent 0.6 0.4 0.2 0.0 0.0 -0.2 -0.2 0 1 2 3 4 5 6 7 8 9 10 11 12 Quarters following the shock 0 1 2 3 4 5 6 7 8 9 10 11 12 Quarters following the shock (Source) IMF, 2023, Fiscal Monitor April 2023, Figure 2.10. 11#12Impacts of fiscal policies (additional deficit) on inflation ■ Key questions: ✓ How are the additional fiscal deficit linked to public/private demands immediately? Additional fiscal deficits (larger spending/ less taxes) Larger private saving Mitigating private debt increases Inflation of import prices Depreciation of currency Worsened external balance Larger private/ public spending Larger imports Inflation of domestic price and wage How large is the fiscal multiplier? 12#13-6 -4 -2 6 Exchange rate and external balance in Japan External balance (SNA) (% of GDP) (USD/JPY) 300 4 2 0 My 250 200 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 Other current transfers balance Factor income balance Goods and services balance (Source) IMF, Bloomberg, Cabinet Office (CY) 0 50 100 150 Exchange rate (market rate and PPP rate) PPP rate market rate 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022 (CY) 13