Following is the transcript of a CNBC interview with Vitor Gaspar, Director of Fiscal Affairs, International Monetary Fund. The interview was broadcast on CNBC on 20 April 2017.
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Interviewed by Geoff Cutmore, Anchor, CNBC at IMF Spring Meeting 2017.
Geoff Cutmore: So let's get started. I want to kick off by asking you about Donald Trump's fiscal policies and when they might be delivered, and whether we should encourage them, or whether we should look at them as at a point where the economic cycle looks strong in the United States, as something that is unnecessary at this point.
Vitor Gaspar: Fiscal policy is always necessary. Fiscal policy is a tool kit that includes many instruments. And what we have found out and what we emphasize in the Fiscal Monitor is that the tools in the tool kit are more powerful than what many people believed until recently. But at this point in time the evidence that we have power fiscal tools at our disposal is becoming increasingly evident. Those tools allow governments to deliver counter-cyclical policies that help to smooth business cycle fluctuations; I guess that's what you are talking about. But also foster growth friendly policies when they interact with other structural policies when they act on their own, and they deliver inclusiveness in societies in the sense that they make sure that the benefits from growth are widely shared. So fiscal policy is always present -- Fiscal policy is always necessary.
Geoff: You're getting very theoretical. Let's bring this down to some brass tacks. We have an American federal budget that doesn't look in great shape. Despite that, we have terrific growth profile here in the U.S. at the moment. We have near full employment. Why does the economy need to be stimulated further at this stage with fiscal policy?
Gaspar: The theme that we explore concerning that in the Fiscal Monitor is that we assume for the United States, it's an assumption, because we will be learning about U.S. fiscal policy from the U.S. administration, from Congress in the coming weeks. So at this point in time we don't know the details. But we assume a fiscal stimulus that will be based on tax cuts, mostly personal income tax and corporate income tax. And we work out the implications of that for the economy and for the public debt to GDP ratio going forward. What we find is that such a mildly pro-cyclical fiscal policy in United States would be associated with a significant increase in the public debt to GDP ratio which is something that we find in many countries. When countries in good times follow pro-cyclical policies, the public debt to GDP ratio ratchets up.
Geoff: Is it appropriate at the moment though? I mean you make a very good point I think about when it's best to apply fiscal policy. And clearly it works better in depressions or times of economic hardship. Why use it now when apparently monetary policy has already given this economy a good shove?
Gaspar: This is an assumption not a recommendation, it's important to say that. So what we recommend is that U.S. fiscal policy be broadly neutral this year and then would be put in a mildly gradual consolidation path that would stabilize and eventually reduce the public debt to GDP ratio because that's important for the U.S. economy to be ready for very important challenges going forward. For example population aging and the impacts of population aging on health spending. Growth is key, growth is absolutely key. And when we think about growth, we should be thinking about long run growth, not so much business cycle fluctuations. And if you think at the potential growth of the U.S. economy going forward it has to come either from labor market participation, capital accumulation, that is investment, or perhaps less but most importantly productivity growth. And structural policies that aim at improving productivity growth, that aim at improving growth prospects are likely to be absolutely central to the strategy of the new U.S. administration.
Geoff: It's very early days and until we get a fiscal package implemented by this administration, we're still working with scant details. But at the moment it does seem to be very focused on corporate tax reductions. Is that the right way for them to go?
Gaspar: Let me give you two answers for one question. I think that you should be pleased with that you get two for the price of one. The first thing is that I want to emphasize that I completely agree with what you said as an assumption, that is, we don't know much about the fiscal strategy of the new administration and Congress going forward. We're likely to learn a lot in the next few weeks. And that's why in the world economic outlook, there is a box that discusses possible scenarios for fiscal policy in the United States involving infrastructure spending, involving personal income tax reform, involving corporate income tax reform and various assumptions are made, forms of sensitivity are put in place, implications for the U.S. economy, implications for the rest of the world. So that's my answer number one. Let me make the transition to answer number two. We at the IMF have been arguing for many years that corporate income taxation in the U.S. is badly in need of reform. Why? Well many reasons. But let me just give you the bottom line. If you look at the corporate income tax rate, the U.S. has one of the highest rates in the world. It stands out among advanced economies while at the same time the corporate tax revenue to GDP ratio at 2.1 percent is well below the average of advanced economies which stands at almost three percent. So very high tax rates, very narrow tax base. And clearly the recommendation from that viewpoint is very simple. Lower the tax rate, widen the tax base.
Geoff: Those are political decisions and governments seem to find it quite hard to make the appropriate decisions. How do they overcome that?
Gaspar: So that gives me an opportunity to make a little bit publicity of recent work by the IMF. We have put out at the spring meetings a book called Fiscal Politics. That book goes around systematically for advanced economies, emerging market economies, low income countries, documenting how politics interact with fiscal policymaking, and how in some cases, political behavior may induce some biases in fiscal policy making -- like pro-cyclical bias in debt and deficits, bias in composition of public expenditures against investment, and some others that have been listed by people in the literature. Then we go on to look at how fiscal rules frameworks and institutions can help bring those biases under control and we show systematic evidence on that. And last but not least we look at international rules, international cooperation, international frameworks, and see how that interacts with national politics to deliver fiscal policy outcomes.
Geoff: There's an old joke that starts -- rather the punchline is you wouldn't want to start from here. And isn't that the problem when you come back down to it. That if we look at the developed world and increasingly some parts of the emerging world, specifically debt in China, countries are going to find it very difficult to implement significant fiscal spending where they have large debt.
Gaspar: So that's exactly the theme of the Fiscal Monitor. The title of the Fiscal Monitor this time is achieving more, given how much there is to do with fiscal policy around the world. Fiscal policy is asked to do more. But at the same time given the challenges of population aging, given low productivity growth, given high levels of that in many countries, it is being asked to do more with less -- achieving more with less. That's what is our theme. And we put up five guiding principles that we believe are very useful in the current context. Fiscal policy should be counter-cyclical, fiscal policy should be growth friendly. It should be inclusive. It should be grounded on strong tax capacity. And last but not least, it should have a prudent management of a public finance risks and more broadly macroeconomic risks, which links up to your question on China.
Geoff: You have a very theoretical approach to how fiscal policy should be implemented by many of these countries. So if you look at the way the countries themselves have followed your guidelines how well are they doing? It strikes me that not very well at all.
Gaspar: Well I think that you may have a bias in terms of finding flaws in policymaking. We have seen that over the years --
Geoff: Where have the successes been?
Gaspar: For example if you look at how counter-cyclical policies have been you see that in recent years after the global financial crisis, and once the crisis has departed from its acute stage, policies have become systematically more counter-cyclical. I would count that as a success. In many cases you see that countries have reinforced their practices of management of risk in public finances –a balance sheet approach. You have cases where countries have put in place effective rules and frameworks. You have many cases of success. But if you want to be concrete one has to pick say a country - You mentioned China. You want to go there?
Geoff: Well we can. But China it seems to me has run up very large debts in its shadow banking system. It's recycled its trade dollars into a significant fiscal spending. But we're watching a country that is stifled with debt and is saying its growth rates decline. That's not how it should be is it?
Gaspar: Look I have a much more optimistic view of China than you have. I would start by saying that the growth performance of China since 1978 has been truly impressive at this point in time. If you look at GDP per capita in purchasing power parities, China is the largest economy in the world. It's still the economy that contributes most to growth in the world economy. It's an economy that is rebalancing its growth model, it's moving out of manufacturing into services. It's moving out of investment into consumption. It's moving, to a certain extent, out of exports and into domestic demand. All that is a part of a very strong process of rebalancing. Yes there are risks that we emphasize in the global financial stability report and in the Fiscal Monitor. If you look at debt levels in China they're increasing very fast in the last 10 years. They're increasing faster than GDP. The numbers stand out in international comparisons, debt levels are high, they're rising. Credit growth numbers are truly impressive as part of the rebalancing of China, one needs to see those rates of growth slow down. How is that going to happen? Now it's going to happen because a number of measures are already being taken in terms of financial supervision and regulation. It's going to continue because fiscal policy is going to be supportive. If you would allow me I would tell you how we think that fiscal policy can help.
Geoff: Let's just move on very quickly because you know we've only got a certain amount of time in the interview and we could talk theoretically about fiscal policy until the cows come home. So I want to ask you about --
Gaspar: Very concrete about China.
Geoff: I want to ask you about the European context. Germany is constantly criticized for having fiscal headroom but not doing more to be stimulative within the Eurozone. We see economies that are generally starting to show improving growth with the use of monetary policy. What...What do you think should be happening in Europe at this point to take advantage of the kind of fiscal policy that you think is appropriate?
Gaspar: So let's go Germany, in order to be concrete. Clearly, the fact that Germany has fiscal space, the fact that Germany has room to maneuver is a good thing. We believe that a policy in which Germany would use the fiscal space that it does have would help. Macroeconomic adjustment in the euro area as a whole would help support monetary policy in closing the output gap and bringing inflation back to the price stability objective of the central bank. But at the same time if Germany would do it in a growth-friendly way that would be appropriate and benefit Germany at the same time. One example is investment in infrastructure. There is some old infrastructure in Germany that would benefit if it would be renovated. And there are some areas which are new areas, where new investment could be highly productive. Given fiscal space and the very favorable financing conditions, we see an opportunity for a win-win situation.
Geoff: But the Germans are not doing it.
Gaspar: The Germans are doing it to a certain extent. Rebalancing is going on in the German economy in general and we could talk about that. But clearly, one of the things that you see in Germany in the last few years is that the effort in public infrastructure has actually increased as have some important initiatives having to do with people like support for refugees.
Geoff: France is having an election, at this point we don't know who is going to be the winning candidate, but clearly tax adjustment and tax reform is a critical story for that country. What's your best hope that we will get past the election in terms of tax reform?
Gaspar: So at this point in time if I hadn't already made my pitch for the Fiscal Politics book I would. But since I have, let me talk about France, we never comment on specific political events. We do not do that. But if I were to pick my first priority for fiscal policy in France, I would pick rationalization of public expenditures because France is a country where tax levels are already very elevated. So our view is that the first priority should be to focus on the public expenditure side, to rationalize the public expenditure side, and we do see that France has the administrative capacity and the opportunity to get quite sizable gains in that dimension.
Geoff: And just to wrap up. If the IMF's own outlook on the world is true, then growth is improving, we could expect inflation perhaps to stop increasing, interest rates to gradually be rising. Does that mean many governments have missed an opportunity to fund infrastructure spending, other fiscal activities that would be beneficial at very low interest rates?
Gaspar: So we have been pushing for investment in infrastructure, we have been pushing for structural reform for a number of years. And clearly, we would have liked to have seen faster progress in these dimensions. But you should not forget that the cycle of increasing interest rates that you just described is in the context of improving business cycle prospects and so from that viewpoint the two forces offset each other. If you're an investor, you'll have a higher cost of funding. But on the other hand you face brighter demand prospects and your investment opportunities will look more attractive.
Geoff: Thank you very much.