Enhancing The Slovenia’s Fiscal Framework: A Way Forward
Gonzalo CapriroloSenior Economist IMAD
The views expressed are those of the author and do not necessarily represent those of the IMAD
IMAD Conference: Fiscal Consolidation, Policy Framework and Governance
Ljubljana, Slovenia June 20th, 2011
Outline
1. Policy track record and relevance for improving the fiscal framework
2. Recent changes to fiscal framework
3. A way forward
4. Summary
2
Policy track record
1. Budget outcomes broadly in line with plans
2. Debt-to-GDP ratio declined before the crisis
3. Expenditure followed the facto a prudent expenditure growth rate (i.e. medium-term rate of potential growth)
4. Wage shocks and importance of sustainable public sector wage policy
5. Importance of revenue neutral tax reforms and cyclical tax revenue in enhancing fiscal framework
3
Recent changes to policy framework
Reliance on alternative macroforecast for estimating fiscal projections
Introduction of a “rule” to determine ceilings for general government’ expenditure
Creation of an independent fiscal council with the mandate of monitoring ex-post government’s adherence to stability of public finances
4
Fiscal framework and recent changes
Framework before changes Recent changes
Methodology used to set fiscal targets
- National methodology on cash basis - Targets translated/ derived with respect to targets on ESA 95 methodology on accrual basis
Fiscal targets - Planned balances were actual targets - Structural deficit 1% of GDP (2005-2011)
- Primary balance and debt (2010-- Structural balance (unspecified date of compliance)- Reducing deficit below 3% of GDP by 2013
Expenditure ceilings - Ceilings on State budget expenditure (until 2009) related to MTO. t+2 Not fixed ceilings
- Ceilings on general government expenditure (2010- ) related to debt and primary balance targets. T+2 fixed ceilings,1 year variable
Reporting and monitoring policy targets
- Parliament- Court of Audit- IMAD (2007-
- Fiscal Council (2009-
Fiscal rules - Pension fund balance budget- Local communities maximum indebtedness 20% of last years revenue
Independent macroeconomic forecast
- IMAD (more than 20 years) - Possibility to use alternative macroeconomic forecast in budget formulation (OECD; BS; and EC)
5
No clear rationale for changing forecast
6
-8
-6
-4
-2
0
2
4
6
8
10
12
14
2005 2006 2007 2008 2009 2010
GDP (actual and forecasted) and government expenditure growth rates
2004SF
2005SF
2006SF
2007SF
2008SF
2009SF
2010SF
GDP
Expenditure
No “biased” forecasts reducing overall fiscal discipline
Not a rule but a framework for setting expenditure ceilings
7
Nominal growth of general government expenditure (g*) is determined as follows:
g* = gtrend - u×(bt - b*) - v×(ft - f*) trend growth Corrective part of the formula where Gt+1 Forecast for general government expenditure in the following year (in EUR), Gt Estimate of general government expenditure in the current year (in EUR), gtrend Arithmetic average of the past three years, the current year and forecasts for nominal growth of potential gross
domestic product in the next three years (%) bt Estimate of consolidated gross general government debt for the current year (share of GDP), b* Target level of consolidated gross general government debt (share of GDP), ft Estimate of general government primary balance for the current year (share of GDP), f* Target level of general government primary balance (share of GDP), u Speed of reaching the target level of consolidated general government gross debt (a value between 0 and 1), v Speed of reaching the target level of general government primary balance (a value between 0 and 1).
A fiscal rule is defined as a permanent constraint on fiscal policy through simple numerical limits on budgetary aggregates (Kopits and Symansky, 1998).
The expenditure’s celings framework: issues for improvement
The relation between the numerical target and instruments is not well defined (e.g. Does the debt level target expenditure or vice-versa?). Expenditure is not linked directly to the debt ratio without considering also the revenue side
Estimation subject to uncertainty (i.e. potential output) and involves discretionary parameters that makes it non-transparent
Overlapping among targets (i.e. debt, MTO, primary balance). Targets to be prioratized to enhance accountability and transparency
Aimed at period of fiscal consolidation but would require adjustment to cater for countercyclical policy in bad times
In setting expenditure ceilings targeted levels of expenditure-to-GDP ratio to be made explicit
8
Coverage of the ceilings
General government expenditure based on national methodology while relevant targets based on ESA 95 with a wider scope of general government. Need to enhace accountability
Sector general government is not under direct control of the Government (e.g. local government). Need of consistency between instrument and targets
It includes EU funds which should not be constrained
Not clear whether the time horizon to which ceilings apply goes beyond the term of incumbent government setting the ceilings
9
Testing the framework
10
0
2
4
6
8
10
12
14
16
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
General government's expenditure growth (%)
Expenditure growth (actual)
Expenditure growth ("rule")
38
40
42
44
46
48
50
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
General government's expenditure (% GDP)
Expenditure ("rule")/GDP
Expenditure (actual)/GDP
Besides expenditure ceilings discretion is required to achieve fiscal targets
The track record so-far
22
Non-binding ceilings but whatmatters is binding targets
Weaker relation between deficittargeted in national methodologyand debt developments
Econometric evidence inconclusive on: - fiscal rules triggering fiscal consolidation- rules and institutions causing the budget outcomes or both are caused by the same third factor
2010 -Adopted (Dec. 09)
2010 -Suplem. (Jun. 10)
2010 -Outturn (Mar. 11)
2011-Adopted (Nov 09)
2011-Revised (Nov 10)
2011-Stability program (Mar.11)
2011 Draf t supplementary budget (June 9)
9
9,2
9,4
9,6
9,8
10
10,2
10,4
10,6
7,4 7,6 7,8 8 8,2 8,4 8,6 8,8 9
Expe
ndit
ure
€Bn
.
Revenue € Bn
General government revenue and expenditure
6,0
5,54,8
0
2
4
6
8
10
12
14
2009 2010 2011
General government deficit and change in debt, v % BDP
Change in debt
Deficit (ESA 95)
Deficit (National methodology)
Envisaged policy and adherence to targets
12
Accountability on meeting fiscal targets rather than on abiding to constraints that becomes non-binding or not enough to deliver on targets. Need to enhance fiscal framework
-0,2
0,2
-1,3 -1,5-2,0
-7,0
-6,0
-5,0
-4,0
-3,0
-2,0
-1,0
0,0
1,0
2009 2010 2011 2012 2013 2014
Net lending (% GDP)
Difference (11-10)
PS 2010
PS 2011
0,1 -0,7 -0,1 0,2 0,7
34,4
39,6 42 42,7 42,1
38
43,345,3 46,2 46
0
5
10
15
20
25
30
35
40
45
50
2009 2010 2011 2012 2013 2014
Debt (€ Bn and % GDP)
Difference € Bn. (2011-2010)
Debt/GDP % (PS 2010)
Debt € Bn.(PS 2010)
Debt/GDP % (PS 2011)
Debt € Bn.(PS 2011)
Need to take into account both expenditure ceilings and revenue (tax policy and business cycle)
13
-10
-5
0
5
10
15
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
General government revenue, expenditure and GDP-current prices (% change)
Revenue
GDP
Expenditure
1
1
2
Expenditure ceilings to be underpinned by sustainable policies (i.e. wage (1) and revenue (2))
A way forward: A policy framework to provide right incentives
1. Fiscal stability objective to be made explicit in the legislation (Act on Public Finance)
2. Enhancing accountability in planning, approving, delivering and monitoring the objective of fiscal stability:1. government to design fiscal strategy2. parliament to approve and monitor implementation of fiscal
strategy with respect to agreed principles of fiscal stability
3. Improving transparency by specifying the task and content of the respective responsibilities of the government and parliament with regard to fiscal stability
14
thus anchoring fiscal sovereignity
A way forward: Changes to Public Finanec Act
Governments to elaborate 4-year fiscal strategies including targets (MTO) in relation to guiding set criteria on fiscal stability (principles) for their time in office and policy to attain them (i.e. responsibility). Ex-ante framework
Principles of fiscal stability:1. Consistency with a sustained trend decrease in the debt-to-GDP ratio
(e.g.towards pre-crisis debt-level)2. Observance of a safety margin for not breaching the 3% of GDP deficit and
with a maximum structural deficit for euro area countries of 1% of GDP3. Consistency with 10-year ahead structural balance projections ensuring 3% of
GDP safety margin
Medium Term Budget Framework aligned to political cycle (accountability)— Expenditure ceilings applied to State budget (exclude EU funds), enhance rules
on local budgets. Fiscal projections beyond 4 year on rolling over basis— Procedural rules on revenue neutral tax reforms. Reporting on tax expenditure
4-year fiscal strategy to be approved by parliament and implementation monitored annually at the time of budget approval
15
Enhancing parliament’s mandate with regard to fiscal stability
The most important roles of the parliament is scrutiny of the government policies (i.e. holding the government to account)
Enhanced parliament mandate with respect to:1. Approving incumbent governments fiscal strategies in line with fiscal
stability principles2. Monitoring implementation of fiscal strategies on yearly basis at time of
parliament approval of budgets (Government to present an annual implementation report)
3. Mandating government to correct for deviations from fiscal targets
Parliament’s fiscal surveillance capabilities in line with new mandate to be enhanced by:
1. Independent fiscal institutions reporting to parliament on consistency of government strategies with fiscal stability objectives and its fulfillment1. Yearly report of Fiscal Council to parliament or/and2. Yearly report from IMAD
16
Enhancing governance of fiscal framework and accountability of Fiscal Council
Fiscal Council governance structure to be streamlined by FC submitting its independent annual report to the parliament for consideration— Report to be basis for:
1. Parliament’s assessment of government’s adherence to its fiscal strategy and to fiscal stability principles
2. Assessment of fiscal council’s adherence to its mandate (i.e. Independent ex-post positive assessment of government fiscal strategy compliance with fiscal stability). Accountability to tax payers
17
Preserving ownership and legitimacy on fiscal stability
New parliament’s mandate with regard to fiscal stability (i.e. approving and monitoring the fulfillment of the government’s fiscal strategy) to strenghten policy ownership at the times when fiscal surveillance framework in the EU is enhanced and is becoming closer to the process of formulation of budget targets in the context of the so-called EU semester
18
Summary
1. Fiscal policy strategies (4-year) to be shaped and monitored in line with principles of fiscal stability (i.e. does not affect adversely the level of interest rates in the economy, that provides public finances’ resiliency to shocks and ensures its long-term fiscal sustainability)
2. MTBF to ensure that budget planning (i.e. expenditure ceilings and government revenue policy) enables reaching fiscal targets
3. Relyance on a single forecast (IMAD)
4. Government and parliament share responsibility for fiscal stability1. Government to elaborate fiscal strategy2. Parliament to approve fiscal strategy and monitor its implementation
5. Parliaments surveillance capabilities to be enhanced by relying on assessment (reports) of independent fiscal institutions
6. Streamline role of Fiscal Council in line with proposed policy set up
19
