Download Brian Olden (IMF)

Enhancing fiscal frameworks and
governance issues
Brian Olden
IMF Regional Public Financial management
Advisor
“FISCAL CONSOLIDATION, POLICY FRAMEWORK AND
GOVERNANCE”
POLICY WORKSHOP
UMAR/IMAD
Fiscal Challenge: Where are we?
• Still not out of the woods, but there are some good news
• A better appreciation of the size of the problem
• More attention to fiscal risks and long-term fiscal
challenges—as highlighted in the November and April
IMF Fiscal Monitors
– Advanced economies, L-T adjustment needs remain large
– spending on pensions—and especially, health care—constitutes
a key challenge to fiscal sustainability
– Challenges to reforms still considerable (i.e. Slovenian pension
reform)
• With the exception if Ireland, net cost of supporting
financial institution less than expected
2
Fiscal Outlook Advanced Countries-November
2010 IMF Fiscal Monitor (percent of GDP)
2
0
-2
-4
-6
-8
Overall Balance
-10
2000
2003
2006
2009
2012
2015
2006
2009
2012
2015
2006
2009
2012
2015
4
2
Cyclically Adjusted Primary Balance
0
-2
Primary Balance
-4
-6
-8
2000
2003
120
110
Gross Government Debt
100
90
80
70
60
2000
2003
3
Change in debt-to-GDP Ratios: Advanced and
Emerging Economies 2006 - 2016
120
100
80
60
40
20
0
2006
2007
2008
2009
2010
Average
Source –IMF Fiscal Monitor April 2011
2011
Advanced
4
2012
2013
Emerging
2014
2015
2016
Market Indicators
• Government financing needs remain exceptionally high in most
advanced economies.
• Financing needs remain more “moderate” among emerging
economies including SEE but not by any means negligible
• Yields and spreads have evolved favorably for emerging
economies relative to advanced countries particularly
peripheral Eurozone countries
– With increased risk appetite and an associated search for yields,
demand for emerging economy sovereign debt rose sharply, leading to
shrinking emerging market spreads.
– The changing perception of sovereign risk is also reflected in a
divergence of CDS spreads between advanced and emerging
economies
• But will it last?
Fiscal Risks for SEE economies
• A less favorable interest rate-growth differential a key source of
risk for emerging economies-including SEE.
• Projected declines in debt ratios assumes a negative interest
rate-growth differential, which offsets the continued primary
deficit.
• Less accommodating developments
– possibly due to ongoing deterioration in public finances in advanced
economies
– Could lead to higher global interest rates and a lower growth rate—
public debt ratios in emerging economies could start rising again.
– Some criticism of over-optimistic forecasts authorities –growth,
government revenues-by country has been noticeable (e.g. 2010 EC
EFP evaluations)
• Increased government guarantees to financial and real sector
as response to the fiscal crises
Is Living With Higher Debt an Option?
• High debt may lead to higher interest rates. It will certainly
lead to a higher interest bill
• High debt levels are associated with lower investment
and slower growth
• They are also associated with higher macroeconomic
volatility, perhaps because capacity to respond to future
shocks is constrained
• Implications of having so many high debt countries at
once are uncertain, and market response may be sudden
and decisive
Source IMF Fiscal Monitor –May 2010
7
So what will be the impact on public
finances?
• Initial post-crisis growth momentum looks to be slowingboth in advanced and SEE countries.
• Economic recovery will be gradual when growth resumes
• Increased debt levels have reduced fiscal space-even for
those with relatively low levels-needs to be restored over
the medium-term
• Financing options uncertain, both due to domestic
banking) and external (competition for capital) factors.
• Fiscal risks remain elevated due to continued uncertainty
over financial and real sectors of the economy
• Downside risks still high-contagion is still a worry if
Eurozone sovereign debt crises exacerbates.
Medium-Term Fiscal Consolidation Process
• Strengthening fiscal institutions will be a key
factor
– Independent fiscal council-gaining in popularity in the CE
and SEE region (Hungary, Slovenia, Romania)
– Strengthening existing fiscal institutions
• Need for medium-term fiscal consolidation
strategy
– Existing capacity to produce medium-term fiscal
frameworks needs to be strengthened and augmented by
realistic medium-term budget frameworks
• General consensus that introduction of fiscal rules
will help
– Fiscal Responsibility Legislation?
Strong budget institutions increase the
probability of successful consolidation
• Enable better understanding of the scale and
scope of the fiscal challenge through
– comprehensive, timely and credible reporting,
– robust medium-term fiscal projections,
– quantification of longer-term structural issues that
raise sustainability concerns), and
– disclosure and management of fiscal risks
• Improves capacity to monitor and enforce
fiscal discipline
Strong budget institutions increase
probability of successful fiscal consolidation
• Assist with development of credible fiscal
consolidation strategy through
– Commitment to transparent medium-term
fiscal objectives or rules.
– Medium-term budget framework setting limits
on medium-term spending commitments.
• Improves capacity to Implement the
consolidation strategy through the budget
process.
Increasing use of independent fiscal agencies
(Fiscal Councils)- including SEE region
• Fiscal Council objective to hold government accountable to meeting
policy objectives and ensure the realism of underlying assumptions,
forecasts and policies.
• Role of Fiscal Councils differ -3 main models
– Agencies that provide objective analysis of current fiscal developments, and
costing of budgetary initiatives- e.g. Netherlands CBP.
– Bodies that produce independent projections and forecasts regarding both the
budgetary variables as well as the relevant macroeconomic variables -Romania,
(Hungary until disbanded)
– Institutions that, in addition to the above tasks, have the mandate to provide
normative assessments, including on the appropriateness of fiscal policy stance US, Korea
• But need to be realistic about what is achievable in low
capacity environments.
– Risk of shifting too many fiscal responsibilities to an independent council,
usurping functions that are rightly the responsibility of the executive, and leaving
substantial gaps in the MoF
What is medium-term budgeting and why is it
important?
What MTBFs Do
1. Reinforce
aggregate fiscal
discipline
2. Facilitate a more
strategic allocation of
expenditure
How They Do It
presenting deferred effects of
today’s decisions
imposing restrictions on future
budgets
early reaction to future adverse
developments
abstracting from annual legal and
administrative constraints
provide an additional dimension
in policy making
Who Benefits
Finance Ministers
Taxpayers
Future Generations
Prime Ministers
Line Ministers
Parliamentarians
Line Ministries
3. Encourage more
efficient intertemporal planning
providing greater transparency and
certainty to budget holders about
their likely future resources
Agencies
Local Governments
13
Key Pre-requisites in delivering Mediumterm budget Frameworks
Political commitments
• Discipline enforced by the minister of finance
• Structured budget process
• Requirement of ministry of finance approval of fiscal impact of new policies
Operational commitments
• Multi-annual commitments are necessary for operational efficiency …
• … but central control is necessary to enforce discipline
Extra-budgetary commitments
• Events outside the budget can derail the implementation of the fiscal
strategy
• Effective discipline within the medium-term budget framework creates
incentives to engage in transactions outside the framework
• Control of off-budget spending, contingent liabilities and tax expenditure
necessary
14
Fiscal Responsibility Legislation
• What is an FRL?
A law (or part of a law) with organic or “standing” status which aims to
improve fiscal discipline by requiring governments to declare and
commit to a monitorable fiscal policy strategy
• Key features of FRLs
– Fiscal Rules
– Medium-Term Budget Framework
– Top-down Budgeting mechanisms
– Requirement for transparency in fiscal policy implementation
– Sanctions for non-compliance
– Escape clauses-to cater for unexpected macro-fiscal events.
1. Source Fiscal Rules: Anchoring Expectations for Sustainable Public Finance-IMF Board paper 2009
Fiscal Responsibility Legislation
• However , in designing FRL need to be sure what
weaknesses in fiscal policy-making is an FRL meant
to solve? Cookie cutter approach is unlikely to work
• Political commitment to implementation is crucial
– Many examples of failed efforts.
– Need for comprehensive exit strategies from crises may help to
focus the effort
– Increased usage in SEE countries (Romania, Serbia, Croatia)
Examples of Procedural FRLs
Country
Australia
Charter of
Budget
Honesty
(1998)
New
Zealand
Public
Finance
Act
(1989)
United
Kingdom
Code for
Fiscal
Stablity
(1998)
Fiscal Principles
Statement Contents
Sample Rules/Objectives
• Keep debt at prudent levels
• LT fiscal objectives
• Balance on ave over cycle
• Adequate national savings
• ST fiscal targets
• Surpluses over forecast period
• Moderate cyclical fluctuations
• Budget priorities
• Ensure stable tax system
• Stabilization measures
• No increase in tax burden from
1996-7 levels
• Regard to future generations
• Accounting basis
• Improve net worth over M-LT
• LT fiscal objectives
• Operating surplus on ave over
cycle
• Keep debt at prudent levels
• Balance operating budget over
reasonable period
• ST fiscal intentions
• Maintain adequate net worth
• S & LT fiscal projections
• Prudently manage fiscal risks
• Assessment of
consistency w/ principles
• Ensure stable tax system
• Transparency
• LT fiscal objectives
• Stability
• Fiscal rules for Parliament
• Responsibility
• ST econ & fiscal outlook
• Fairness
• LT fiscal projections
• Efficiency
• Analysis of cyclical impact
• Keep net debt below 40% of GDP
& reduce to 30% by early 2020s &
20% over the LT
• Net worth rising by early 2020s
• Golden Rule: Balance the current
budget over the cycle
• Sustainable Investment Rule: Keep
debt below 40% of GDP
Fiscal Rules
•
Fiscal rules increasingly popular among advanced and emerging
markets-By 2009 80 countries had fiscal rules in place1
•
Seen as a key element in many countries consolidation strategies
•
Question as to appropriateness of different fiscal rule options
– Procedural vs. Numerical
– Revenue, Expenditure, Deficit, Debt
• Successful fiscal rules need credibility to help deliver the
required adjustment and put debt on a sustainable path.
• Need to examine prerequisites needed prior to introduction of
fiscal rules.
– Important in countries with limited capacity and weak PFM systems
Types of numerical Fiscal Rules
Objective
Type of Rules
Country Example
Debt Reduction
Debt Brake
Switzerland
Debt Sustainability
Debt Ceiling
SGP
Deficit Reduction
Overall Balance
SGP
Countercyclical Policy
Structural Balance
Chile
Reduce Expenditure
Expenditure Ceiling
Sweden
Reduce Taxes
Revenue Ceiling
Denmark
Protect Investment
Golden Rule
UK
Characteristics of good fiscal objectives/
rules
Characteristic
Rationale
Good Practice
Medium-term
horizon
• Separate fiscal policy and
budget decisions in time
• Allow flexibility to deal
with volatility or shocks
• Over the cycle (UK)
• Over the Parliament (NL)
• Annual deficit ceiling
• Debt reduction path
• Limit scope for burden
shifting or creative
accounting
• General govt (SGP)
• Public sector (UK, NZ)
• Budgetary Central Govt
• Central Govt
Binding on
outturn
• Reduce optimism bias in
forecasts
• Ensure deviations are
made up in future
• “Debt brake” rule (Swiss)
• Maintain debt below 40%
of GDP (UK)
• Aim for balance over
the forecast horizon
• Real expenditure
growth targets
Stable over
time
• Build public support
• Raise reputational cost of
breaking the rule
• Procedural FRLs (Aus,
NZ)
• Frequent amendments
to numerical FRLs in LA
Precise &
transparent
• Provide clear guide for
policy-making
• Facilitate evaluation of
compliance
• 1% surplus over the cycle
(Sweden)
• Increase net worth over
time
Comprehensive
in scope
Bad Practice