Download Causes, Benefits, and Risks of Business Tax Incentives

The Experiences of
India, Pakistan and Sri Lanka
with FRLs
Yang Hyun Jin
Maldives , April 1, 2010
India

Fiscal Responsibility and Budget Management Act
(FRBMA) of 2003
* fiscal deficit 9%; debt GDP ratio 87%

Procedural rules and numerical targets
Transparency requirements
Numerical targets
- Mid-term fiscal policy statement
(contain three year rolling targets)
- Fiscal policy strategy statement
- Macro-economic framework
statement
- Quarterly reports on fiscal
development to Parliament
- Revenue deficit eliminated by
2009 (originally by 2008)
- Annual reduction in revenue deficit
at least 0.5% of GDP
-Caps on government guarantees
and total liabilities
- Prohibit government borrowing from
reserve bank after 2006
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
India’s experience with fiscal rules has been mixed

FRBMA contributed to India’s fiscal policy framework by
strengthening the procedural rules
However, date for achieving current deficit target was
postponed repeatedly; off-budget activities increased, and
there were significant slippages with deficit target (even
before the global crisis)
* current balance: -3.6% (2003), -4.0% (2009)
* government debt: 68.4% (2003), 64.1 (2008)


Focus on current balance target without clear
accounting definition increases incentive for creative
accounting

Reliance on reputational sanctions for
noncompliance; this does not guarantee consistency
between FRBMA and annual budget 3
Pakistan

Fiscal Responsbility and Debt Limitation Act
(FRDL) of 2005
* eliminate revenue deficit and reduce of government debt

Procedural rules and numerical targets
Transparency requirements
Numerical targets
- Mid-term budgetary statement
(three year rolling fiscal estimates,
key fiscal measures and risks)
- Fiscal policy statement (to
contain key fiscal indicators and
performance)
- Debt policy statement
- Presented to the parliament and
available to the public free of
charge
- Revenue deficit to be eliminated
by 2008 (and maintain a surplus
thereafter)
- Total public debt to be reduced to
60% of GDP by 2013
-Every year debt-to-GDP ratio to be
reduced by at least 2.5% of GDP.
- New guarantees cannot exceed
2% of GDP
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Pakistan

Pakistan’s experience with FRDL has been
reasonably good.

Public debt target was achieved in 2009, which was
earlier than the target year of 2013 (58.1% in 2009)
However, revenue deficit target was breached (-3.4%
2008, -1.7% 2009), and new guarantees slightly
exceeded target by 2.07%



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Annual “fiscal policy statement” and “debt
policy statement” has provided clear review
of performance target
Well defined sanctions contributed to
accountability of fiscal policies
Sri Lanka
Fiscal Management Responsibilty Act (FMRA) of
2003
* overall balance -7.8%; public debt ratio 100.6%


Procedural rules and numeral targets
Transparency requirements
Numerical targets
- Fiscal statement (4-year fiscal
goals, short-term objectives, key
fiscal measures)
- Central government overall
deficit not to exceed 5% of GDP
by 2006
- Mid-year and final fiscal position
reports
-Total public debt should be
reduced to 85% of GDP by 2006,
60% by 2013
- Government guarantees cannot
exceed 1% of GDP
during 1 FY
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Sri Lanka
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
Sri Lanka’s experience with FMRA has been
less satisfactory

Overall deficit target set in FRMA already modified
in 2005, and repeatedly postponed thereafter

Quasi-fiscal activities by commercial public
corporations and banks have increased
significantly

Reliance on reputational sanctions and
loosely defined escape clauses have been
proved problematic
Key Lessons from these three
countries’ experiences

Procedural rules should contain:

(ex ante) fiscal policy statements over a medium term
period help ensure transparency
(ex post) reports to the parliament and public are needed,
to ensure accountability




Numerical rules, if included, should be:
simple and transparent
well- defined and enforceable

Sanctions should be credible and enforceable

Escape clauses should be clear and narrowly defined
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Key Lessons (continued)





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Sufficiently developed PFM systems are prerequisites for credible FRL implementation
Numerical targets in law can not guarantee
success of fiscal policies
Weak institutions and poor implementation
capacity may undermine the FRL
Independent monitoring and oversight is
necessary
FRLs require broad political consensus and
support for prudent fiscal policy
Thank you
[email protected]
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