Download A new budget rule for Germany

A new budget rule for Germany?
Christian Kastrop
Federal Ministry of Finance, Germany
“Die Rolle des Parlamentariers im
Haushaltszyklus”
Berlin, 22. Juni 2007
Bundesministerium der Finanzen
Berlin
Outline
• Status quo and problems of the existing
budget rule
• Why a reform now?
• Criteria for a new budget rule
• Proposals for a new budget rule and their
compatibility with the criteria
• Federal aspects of a reform
Bundesministerium der Finanzen
Berlin
Status quo
• Article 115 of the German Constitution
• Net borrowing limited to (gross) public
investment
• Exception to the rule only in case of a
“disturbance of the macroeconomic
equilibrium”
Bundesministerium der Finanzen
Berlin
Problems of the status quo
• Marked increase in the central government's
indebtedness could not be prevented
=> room for manoeuvre reduced as interest
payments increased.
• Article 115 not so much in line with
the objective of long-term sustainability
• Methodological criticism of Article 115
– investment concept
– exception rule
– no enforcement during execution
Bundesministerium der Finanzen
Berlin
Increase of public debt according to
governmental levels
Indebtedness (% of GDP)
60
50
Länder and communities
Federation (incl. special funds)
40
30
20
10
19
70
19
72
19
74
19
76
19
78
19
80
19
82
19
84
19
86
19
88
19
90
19
92
19
94
19
96
19
98
20
00
20
02
20
04
20
06
0
Bundesministerium der Finanzen
Berlin
Why a reform now?
Favourable conditions for a reform
• Short term: cyclical improvement of the fiscal stance and
compliance with the existing budget rules (German
Constitution and SGP).
• Medium term: structural improvement of revenues
(substitution of one-off measures by tax revenues).
• Also: Länder are looking for early-warning system for
distressed budget cases (Federalism Commission II).
 Guarantees acceptance by the public.
 Grand coalition may have the majority to change the
constitution.
Bundesministerium der Finanzen
Berlin
Criteria for a budget rule
• Limit of net borrowing
Essential
criteria for
every budget
rule
• Consideration of business cycle
• Compatibility with SGP
• Sustainability of public finances
• Future viability
• Technical feasibility
Special
aspects in
case of
Germany
• Legal feasibility
• Transition to new budget rule
• Consideration of federal aspects
Bundesministerium der Finanzen
Berlin
Proposals for a new budget rule
• SGP-consistent budget rule – short: SGP-model
• Budget rule similar to Swiss model but with net
investment concept
=> proposal of the German Council of Economic
Experts (CEE) – short: CEE-model
• Soft modification of existing budget rule
Bundesministerium der Finanzen
Berlin
Soft modification of existing rule
• Marginal restriction of investment concept
• Exception to the rule: restriction of net borrowing to amount
equal to 3 % of tax revenues
Pro
• Relatively easy to put through from political point of view, also
in the Länder
• No transition rule necessary
Contra
• Almost no improvement to existing rule concerning especially
exception to the rule.
• Compatibility with SGP (3 % deficit and structurally balanced
budget) not guaranteed as not primary objective of the rule.
Bundesministerium der Finanzen
• No consideration of business cycle
Berlin
Limit of net borrowing
Investment concept (Golden Rule)…
• Intergenerational equivalence principle makes sense
• but:
– net investment concept difficult to implement (correct depreciation?),
– difference between public investment and consumption,
– how to handle education expenditure (no/weak correlation with output,
depreciation rate, allocative distortion)?,
– discussion of investment could widen debt limit,
– demographic change and pay-as-you-go-benefit system increase
sustainability gap and therefore counteract intergenerational equivalence
principle,
– productivity of private investment (as a substitute) is neglected,
– only limited analogy to private sector concerning return on investment.
Bundesministerium der Finanzen
Berlin
Limit of net borrowing
… versus structurally balanced budget
• avoids most of the problems in conjunction with investment
concept,
• reduces public debt in the medium term and leads to
sustainable public finances,
• consistent with the reformed SGP,
• structural deficit is restricted to zero in the medium term
 can be achieved by adequate composition of expenditures and
revenues,
 nevertheless, expenditures must be shifted to the ones that are most
efficient and with highest quality persists.
Bundesministerium der Finanzen
Berlin
Limit of net borrowing
SGP-model
• Structurally balanced budget, but deficit of central government max. 0.25%
of GDP (about € 6 bn).
– Reason: sufficient flexibility for one-off effects with reforms.
– Size: SGP allows max. deviation of 0.5% of GDP of overall budget (“close to
balance”), Federation with social security gets half of it.
=> Quantitatively very similar to net investment concept.
CEE-model
• Net borrowing up to net investment, i.e. increase of public wealth minus
realisation and depreciation of public property
• Depreciation data from SNA
Bundesministerium der Finanzen
Berlin
Consideration of the business cycle
Both models
• Symmetrical consideration in both concepts according to
automatic stabilizers
SGP-model
• Cyclical adjustment according to production function
approach as for SGP
CEE-model
• Cyclical adjustment by HP-filter as in Swiss model
Bundesministerium der Finanzen
Berlin
Compatibility with SGP
Both models: 3 % deficit criterion guaranteed
SGP-model
to a large extent:
• Aim of a structurally balanced budget supported
• Adoption of the agreed method of cyclical adjustment of
fiscal balances
CEE-model
partially:
• Aim of a structurally balanced budget might not be observed
• Cyclical adjustment more restrictive than production function
method applied in SGP
Bundesministerium der Finanzen
Berlin
Intergenerational justice
Both models
• In the long run, public debt in percent of GDP will be
reduced to far below of 60 %
• Debt reduction can be used to cover implicit
liabilities
• Important contribution to long-term sustainability of
public finances.
Bundesministerium der Finanzen
Berlin
Future viability
Both models
• Decreasing public indebtedness relative to GDP
opens room for manoeuvre to shift expenditures
towards tasks relevant to the future
• Improvement of quality of public finances
Bundesministerium der Finanzen
Berlin
Legal feasibility
Both models
• Change of constitution (Art. 115) necessary
• Budget rule has to be observed, non-conformity with the
constitution would be detected immediately in budget draw-up.
• Exceptions only in extreme cases, two-thirds majority of lower
and upper house of parliament as high parliamentary barrier.
SGP-model
• Rule only for draw-up of budget. => Practicability!
CEE-model
• Rule also for execution of budget: Balancing fund as memory
and as buffer if exceeding of rule is established ex post.
• If balancing fund exceeds certain amount, tax increases
(Federation) are automatically established. Bundesministerium der Finanzen
Berlin
Technical feasibility
SGP-model
• Estimation of output gap by production function approach as
for SGP.
• Cyclical component for maximum (cyclical) fiscal balance:
Budget sensitivity × output gap
• Cyclical components of the budget according to SGP: tax
revenues, social security contributions, labour market
expenditures.
• Federation and social security take about 70 % of cyclical
fiscal balance – as measured by tax revenues.
• Not prone to disputes as method of cyclical adjustment agreed
by EPC
Bundesministerium der Finanzen
Berlin
Technical feasibility
CEE-model
• Cyclical adjustment method easier to implement:
HP-filter (with λ = 100) can be calculated more
easily than production function method.
• Cyclical factor: potential GDP/GDP
• But: rule more demanding because of balancing fund
Bundesministerium der Finanzen
Berlin
Transition to the new budget rule
Both models
• New budget rule can be introduced only when budget is
balanced.
SGP-model
• Reduction of net borrowing according to accepted obligation
of annual reduction within SGP: reduction of central
government’s deficit by 0.25% of GDP p.a. (approx. € 6 bn)
CEE-model
• Less restrictive: annual reduction of central government’s
deficit by € 3 bn until 2014.
Bundesministerium der Finanzen
Berlin
Existing rule vs. alternative budget rules
Net borrowing of Federation (bn Euro)
45
39
40
35
40
32
31
28
30
25
24
23
20
20
15
14
11
11
10
13
18
10
7
4
5
19
13
7 6
5
19
5
8
6
4
1 1
2
3
2008
2009
2010
0
-5
-3
2000
0
-1
2001
2002
2003
2004
2005
2006
actual/planned, adjusted to base effects from 2006
2007
CEE-model
SGP-model
Bundesministerium der Finanzen
Berlin
Federal aspects of a reform
• Länder themselves started discussion about a reform, voicing
different proposals.
• Very heterogeneous starting conditions (from distressed to
balanced budgets) may hinder quick and unanimous decision.
• In the Länder, only tax revenues are cyclical, but these are
almost evenly distributed by the financial equalization scheme
between the Federal Government and the Länder.
• But: debt problem remains essentially a problem of the
Federation as the Länder have been – in the aggregate –
reducing their net debt.
Bundesministerium der Finanzen
Berlin
Federal aspects of a reform
Fiscal balances (Maastricht definition) by governmental levels
- in % of GDP* -3,0
-2,5
-2,4
-2,4
-2,2
-2,0
-1,9
-2,0
-1,8
-1,8
-1,7
-1,6
-1,3
-1,4
-0,5
-1,1
-1,3
-1,3
-1,1
-1,0
-0,9
-1,5
-1,3
-1,3
-1,1
-1,1
-1,0
-1,7
-1,5
-1,5
-2,3
-2,2
-1,0
-0,5
-0,4
-0,4
-0,2
-0,1
0,0
1991
1992
1993
1994
*Differences due to rounding.
1995
1996
1997
1998
1999
2000
2001
2002
2003
special funds)
securitiy
social SR
Federation
SV)
und &
(einschl
i.w.S.(incl.
Bund
Länder and
Gemeinden
undcommunities
Länder
2004
2005
2006
February 2007
Bundesministerium der Finanzen
Berlin
Federal aspects of a reform
SGP-model
• Länder may adopt the rule, but need not to.
• Modifications are at the Länder’s discretion as long as they
are compatible with SGP.
CEE-model
• Modifications for sanctions: instead of automatic tax
increases, at the level of the Länder, revenues have to be used
for repayment.
• Because of fiscal equalization scheme, there is no exception
to the rule in case of severe economic downturns.
Bundesministerium der Finanzen
Berlin
Formulation of a new Article 115
(1) The Federation draws up a balanced budget
(SGP) while taking into account the cyclical
position (SGP, CEE) and net investment
(CEE).
(2) Exceptions are only allowed for extreme
cases and require two-thirds majority of
lower and upper house of parliament (CEE).
(3) Details are laid down in federal law.
Bundesministerium der Finanzen
Berlin
Perspectives
•
Current discussion
•
When will a decision be made?
•
What are the chances for realisation?
Bundesministerium der Finanzen
Berlin