The Unassuming Economist

From a paper by Jérémie Cohen-Setton and Peter Montiel:

“The Fund deserves credit for adapting its fiscal policy advice promptly and pragmatically to an extraordinary macroeconomic environment. In the aftermath of the Global Financial Crisis, exceptional economic slack, disinflationary pressures, and historically low interest rates led the Fund to reassess its long-standing emphasis on fiscal prudence. Without abandoning its focus on sustainability, it became a strong advocate of countercyclical fiscal support—promoting expansionary measures anchored in credible medium-term consolidation plans and underpinned by strong fiscal institutions. The Fund also showed greater willingness to relax medium-term spending plans to accommodate priority investments in infrastructure, social protection, and climate transition, especially when such measures could both sustain demand and strengthen the foundations for future growth. This reorientation reflected new research findings and strong intellectual leadership, which helped challenge entrenched views. As output gaps closed, inflation returned, and interest rates rose, the Fund appropriately re-emphasized the underlying trade-offs among fiscal objectives.

Over time, bilateral surveillance became more attuned to fiscal trade-offs, with advice increasingly differentiated across countries according to fiscal space and cyclical conditions. Analytical work on the costs of consolidation improved realism, but the operational use of diagnostic tools remain uneven. Greater and more systematic use of these tools—alongside stronger analysis of automatic stabilizers and clearer justification of fiscal package size—would further enhance the quality of advice.

The Fund’s coverage of fiscal risks, institutions, and distributional issues has expanded, but mitigation advice is often generic. Engagement on fiscal rules has also tended to be reactive, limiting influence at the design stage. While the Fund rightly focuses on protecting the poorest—who are least represented in the policy process—it could gain traction by also considering effects on middle-income groups, whose perceptions of fairness shape reform acceptance. Similarly, although advice on the composition of fiscal adjustment has become more nuanced, staff often converge on a narrow set of preferred measures rather than presenting alternative policy options. Offering such menus, outlining the main pros and cons of each, would strengthen policy debate and help authorities select measures consistent with their social preferences and political realities.

Finally, the integration of long-term policy objectives into fiscal advice remains incomplete, weakening both the articulation of trade-offs and the rationale for medium-term debt targets. Staff increasingly acknowledge that there may be valid reasons to temporarily relax medium-term spending plans to accommodate essential public goods—such as climate mitigation, defense, or social spending—but these considerations are treated unevenly across reports. Strengthening the analytical basis for these recommendations—by grounding fiscal advice in transparent assessments of costs and benefits and by applying a clearer framework for choosing among feasible medium-term debt anchors—would enhance the coherence and evenhandedness of the Fund’s fiscal advice.”