Asian Development Outlook 2014: Fiscal Policy For Inclusive Growth

15/4/2014
Asian Development Outlook 2014

Fiscal Policy for Inclusive Growth
Joseph E Zveglich
Assistant Chief Economist Asian Development Bank 15 April 2014
The views expressed in this document are those of the author and do not necessarily reflect the views and policies of the Asian Development Bank, or its Board of Governors, or the governments they represent.
15/4/2014
Key messages
Steady growth forecast for developing Asia: 6.2% in 2014 and 6.4% in 2015, up from 6.1% in 2013 Growth supported by improved outlook of advanced economies, but offset somewhat by moderation in PRCs growth Risks receding, but there are a few areas to watch Fiscal response needed to tackle widening inequality
Economic outlook
15/4/2014
Developing Asia extends steady growth

% 10 8 6 4 2 0 2009
f: forecast
GDP growth
9.2 7.4 6.0 6.1 6.1 6.2 6.4
2010
2011
2012
2013
2014f
2015f
supported by improved outlook of advanced economies

GDP growth (%) 2012 Actual 2013 Estimate 2014 ADO 2014 projection
1.9 2.8 1.0 1.3
2015 ADO 2014 projection

2.2 3.0 1.4 1.3
Major industrial economies United States Euro area Japan
1.3 2.8 -0.7 1.4
1.0 1.9 -0.4 1.5
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Subregional performance varies

2013 South Asia India Pakistan Sri Lanka Southeast Asia Indonesia Malaysia Philippines Singapore Thailand Viet Nam
f: forecast
2014f 5.3 5.5 3.4 7.5 5.0 5.7 5.1 6.4 3.9 2.9 5.6
2015f 5.8 6.0 3.9 7.5 5.4 6.0 5.0 6.7 4.1 4.5 5.8 Central Asia Azerbaijan Kazakhstan East Asia China, Peoples Rep. of Hong Kong, China Korea, Rep. of Taipei,China The Pacific Fiji Papua New Guinea
2013 2014f 2015f 6.5 5.8 6.0 6.7 7.7 2.9 2.8 2.1 4.8 3.6 5.1 6.5 5.0 6.0 6.7 7.5 3.5 3.7 2.7 5.4 2.8 6.0 6.5 4.8 6.4 6.7 7.4 3.6 3.8 3.2 13.3 3.0 21.0
4.8 4.9 3.6 7.3 5.0 5.8 4.7 7.2 4.1 2.9 5.4
PRCs growth will moderate

% 12 10.4 10 8 6 4 2 0 2009 2010 2011 2012 2013 2014f 2015f 9.2 9.3 7.7 7.7 7.5 7.4
GDP growth
As authorities
Focus on quality of growth Control credit growth, tackle shadow banking, and local government debt Reduce overcapacity
15/4/2014
while Indias picks up

% 10 8.6 8 6.7 6 4.5 4 4.9 5.5 6.0 9.3
GDP growth
Growth to be supported by
Measures to address current account and fiscal deficits Government actions to expedite project approval Improved global outlook
But constrained by
2009 2010 2011 2012 2013 2014f 2015f
Infrastructure bottlenecks Regulatory barriers
Country-specific factors driving Southeast Asia growth

% 8 7 6 5 4 3 2 1 0 Southeast Asia Indonesia 2013 Malaysia 2014f Philippines 2015f Thailand
2.9 2.9 5.0 5.0 5.4 5.8 5.7 6.0 4.7 5.1 5.0
GDP growth
7.2 6.4 6.7
4.5
10
15/4/2014
Global commodity prices remain soft

Agricultural price indexes
$/barrel 2010=100 160 150 140 130 120 110 100 90 80 70 Jan Apr Jul 2012 Beverages Grains Oct Jan Apr 2013 Food Other food Jul Jan 2014 Edible oils Raw materials Oct 0 80 60 40 20 160 140 120 100
Price of Brent crude
Annual average
Spot
11
keeping inflation in check

% 8 6 4.4 4 2 0 2009
f: forecast
Inflation
5.9
5-year moving average
3.7
3.4
3.6
3.7
1.4
2010
2011
2012
2013
2014f
2015f
12
15/4/2014
Current account surplus has flattened

Current account
% of GDP 6 5 4 3 2 1 0 2009
f: forecast
Developing Asia
4.9
People's Republic of China
4.0 3.4
4.0
2.0 1.9
2.3 1.8
2.1 2.1
1.9 2.0
1.9 1.9
2010
2011
2012
2013
2014f
2015f
13
Risks to the outlook

Risks have lessened, but a number of areas to watch:
Shock to global financial markets from shift in US monetary policy Weaker than expected recovery in advanced economies Deeper than anticipated slowdown in PRCs growth
These are manageable
14
15/4/2014
Countries with weaker fundamentals are more vulnerable to shocks

Exchange rate depreciation (-) or appreciation (+) (23 May-30 Aug 2013) Current account balance (% of GDP, 2013 Q1) % 5 0 -5 -10 -15 -15.4 -20 IND INO KOR MAL PHI THA
IND=India; INO=Indonesia; KOR=Rep. of Korea; MAL=Malaysia; PHI=Philippines; THA=Thailand
1.7
3.5
3.7
2.7 0
-3.9
-2.7 -7.7 -12.5 -6.4 -7
15
Fiscal policy for inclusive growth
16
15/4/2014
Widening inequality calls for government response

Increase in Gini coefficient, economies with rising inequality, 1990s - 2000s
Indonesia PRC Lao PDR Georgia Bangladesh India Korea, Rep. of Sri Lanka Mongolia Taipei,China Singapore Tajikistan 0 2 4 6 8 10
Gini coefficient measured in 0-100, where 0 means perfect equality and 100 means perfect inequality.
17
Asia has scope to spend more on equity-promoting programs

Public spending on education, health, and social protection, 2010
% of GDP 25 20 15 10 5.5 5 0 Education Developing Asia Health care Latin America and the Caribbean Social protection OECD 2.9 5.3 2.4 3.9 8.1 12.0 6.2 20.0
18
15/4/2014
but structural issues will erode Asias current fiscal space

Gross government debt, selected economies, 2012
India Pakistan Malaysia Lao PDR Viet Nam Myanmar Thailand Philippines Armenia Republic of Korea Hong Kong, China Nepal Georgia Cambodia PRC Indonesia Kazakhstan 0 Current and projected public spending on health Developing Asia Central Asia
OECD = 108.7 WLD = 80.8 LA = 52.0 DA = 36.0
2.4 2.2 3.0 1.0 1.9 1.7 4.5
7.3
East Asia South Asia Southeast Asia The Pacific 0
9.7
3.6 3.6 4.5
40 80 % of GDP
120 2010
5 % of GDP 2050, projected
10
DA=Developing Asia; LA=Latin America; WLD=World
19
so Asia must also strengthen the revenue side for fiscal sustainability
Composition of tax revenues and social contributions, 2010 % of GDP 30 25 20 15 10 5 0 7.6 2.9 OECD 28.3 25.4 8.5 3.0 6.3 4.8 1.7 13.0 2.3 3.7 19.8 3.0 1.6 10.1 1.7 3.5 Indirect Personal income Corporate Tax revenues and social contributions Social contributions Property
Latin America & Developing Asia Caribbean
20
10
15/4/2014
A wide range of options should be explored

Broaden base for personal income tax and VAT Increase use of corrective taxes and nontax revenues Introduce progressive taxes on property, capital gains, and inheritance Improve collection and tax administration through ICT
21
Planning for inclusive fiscal policy

Medium-Term Fiscal Framework to incorporate inclusive growth into fiscal policy
Annual review of inclusive government programs Align concrete medium-term targets with means to finance them to ensure fiscal sustainability
More and better fiscal data for evidencebased policy making
22
11
15/4/2014
Key messages
Steady growth forecast for developing Asia: 6.2% in 2014 and 6.4% in 2015, up from 6.1% in 2013 Growth supported by improved outlook of advanced economies, but offset somewhat by moderation in PRCs growth Risks receding, but there are a few areas to watch Fiscal response needed to tackle widening inequality
23
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15/4/2014

Asian Development Outlook 2014

Developing Asia extends steady growth

supported by improved outlook of advanced economies

2015 ADO 2014 projection

Major industrial economies United States Euro area Japan

1.3 2.8 -0.7 1.4

1.0 1.9 -0.4 1.5

Subregional performance varies

PRCs growth will moderate

while Indias picks up

Infrastructure bottlenecks Regulatory barriers

Country-specific factors driving Southeast Asia growth

Global commodity prices remain soft

Price of Brent crude

keeping inflation in check

Current account surplus has flattened

People's Republic of China

Risks to the outlook

These are manageable

Countries with weaker fundamentals are more vulnerable to shocks

-2.7 -7.7 -12.5 -6.4 -7

Fiscal policy for inclusive growth

Widening inequality calls for government response

Asia has scope to spend more on equity-promoting programs

but structural issues will erode Asias current fiscal space

2.4 2.2 3.0 1.0 1.9 1.7 4.5

East Asia South Asia Southeast Asia The Pacific 0

3.6 3.6 4.5

5 % of GDP 2050, projected

DA=Developing Asia; LA=Latin America; WLD=World

Latin America & Developing Asia Caribbean

A wide range of options should be explored

Planning for inclusive fiscal policy

More and better fiscal data for evidencebased policy making

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