Download Fiscal Rules

Ministry of Finance
Fiscal Rules
Eldad Shidlovsky,
Head of Economics and Research Department.
Ministry of Finance
May 2009
Fiscal Rules - Historical Perspective
 The “Deficit Reduction Law” was enacted
in 1992.
 In the first few years, it addressed only the
level of the deficit.
 In 2005 an expenditure limit was added.
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Fiscal Rules - Historical Perspective
Central Government's Budget Deficit
)As Percent of GDP(
6%
5.3%
5%
4.2%
4.1%
4.0%
4%
3.6%
3.5%
3.2%
3.1%
3.1%
3%
2.1%
1.8%
2%
1.0%
1%
0.6%
0.0%
0%
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
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2008
The Use of Fiscal Rules in other Countries
The rules vary among countries:
 The rules refer to the public sector as a whole or
to the central government budget.
 The rules focus on the size of the deficit, on
public debt, size of public expenditure etc.
 Some countries set rules for one year, some use
multi-year rules, and some apply rules over the
course of the business cycle.
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Why are Fiscal Rules Necessary?
 Creation of budgetary anchors that
prevent sliding into a loss of fiscal control.
 Increased stability and credibility of
economic policy in the eyes of the public.
 Increased budgetary transparency.
 Support for improved efficiency of the
public sector.
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Difficulties in Applying Fiscal Rules
 Difficulty in applying anti-cyclical
policy.
 Postponement of expenditures.
 The need to abstain from solutions
that bypass the budget.
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Guidelines for the Proposed Fiscal Rule
 Avoiding as much as possible the use of
economic forecasts.
 The rule should be as simple and transparent as
possible.
 The rule should maintain the credibility of
budgetary policy.
 The rule should prevent the need for frequent
changes, exceptions (such as the "boxes"), and
solutions that bypass the budget.
 The rule should not create a pro-cyclical policy.
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Key Objectives in Establishing the Fiscal Rule
 The key objective in the short term is a
return to fiscal stability by committing to
a downward deficit trend.
 The key objective in the medium and
long term is to achieve a decrease of
the debt-to-GDP ratio to around 60
percent by the end of the next decade.
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Reasons for Reduction of the Debt-to-GDP Ratio
200
180 173
120
100
80
60
40
113
101
Gross Public Debt
percent of GDP, estimates 2008*
160
140
92
78 73
73 72 71
65 63 63
59 57 55
53 48
45 45 44
40 38 36
33 33 28
25 25
20
*Source: OECD, November 2008, Israel: MoF
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18 14
0
Reasons for Reduction of the Debt-to-GDP Ratio
 Increases the economy's resilience to
external shocks.
 The burden of defense spending.
 Population aging.
 Debt reduction decreases interest
expenses and financing costs.
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The Proposed Rule
The fiscal rule will be based on two
components:
 A restriction of real expenditure growth.
 Future increase in expenses will be a
function of the debt-to-GDP ratio.
 A budget deficit ceiling – the budget deficit
ceiling will decrease gradually.
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The Proposed Rule
Development of the debt-GDP ratio simulation,
2007-2020
100%
90%
80%
70%
64.5%
60%
Growth assumptions: GDP growth will be -1% in 2009, 1.5% in 2010 and
50%
3.5% thereafter
40%
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
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2020