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What are Their Words Worth?
The Political Plans and Economic Pains of Fiscal
Consolidations in the New EU Member States
IIPF Congress 2006
Ondřej Schneider, Jan Zápal
Charles University
Outline
• I. Hypothesis
– 2 groups of countries
• II. Evidence
– Basic facts
– Reform efforts
– Evidence from PEPs & CoPrs
– Sustainability
– Consolidations
• III. Fiscal policy ranking
Ondřej Schneider and Jan Zápal,
IIPF Congress
2
I. Hypothesis
I. Hypothesis
• 2 groups of countries?
– Large government (46-52% of GDP)
Cyprus, Czech Republic, Hungary,
Malta, Poland, Slovenia
– Small(ish) government (36-38% of GDP)
Estonia, Latvia, Lithuania,
Slovakia (since 2003)
Ondřej Schneider and Jan Zápal,
IIPF Congress
4
Large government
55
50
45
40
35
1999
2000
2001
EUR-15
2002
CY
CZ
2003
HU
2004
MT
PL
2005
2006
SI
General government expenditure in % of GDP
Ondřej Schneider and Jan Zápal,
IIPF Congress
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Small(ish) government
60
55
50
45
40
35
30
1999
2000
2001
2002
EUR-15
EE
2003
LV
2004
LT
2005
2006
SK
General government expenditure in % of GDP
Ondřej Schneider and Jan Zápal,
IIPF Congress
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I. Hypothesis
• 2 groups of countries?
– in the breach of SGP –
Excessive deficit procedure (EDP)
Cyprus, Czech Republic, Hungary, Malta,
Poland, Slovakia
– compliant with SGP (non EDP)
Estonia, Latvia, Lithuania, Slovenia
Ondřej Schneider and Jan Zápal,
IIPF Congress
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EDP
2
0
-2
-4
-6
-8
-10
-12
-14
1999
2000
2001
EUR-15
2002
CY
CZ
2003
HU
2004
MT
PL
2005
2006
SK
General government budget deficit in % of GDP
Ondřej Schneider and Jan Zápal,
IIPF Congress
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non EDP
4
2
0
-2
-4
-6
1999
2000
2001
2002
EUR-15
EE
2003
LV
2004
LT
2005
2006
SI
General government budget deficit in % of GDP
Ondřej Schneider and Jan Zápal,
IIPF Congress
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Hypothesis
• Grouping very robust:
– The „bad“ always are: Cyprus, Czech Republic,
Hungary, Malta, Poland
– The „good“ always are: Estonia, Latvia, Lithuania
– Only Slovenia manages big government and low
debt
– Only Slovakia managed to cut government
expenditures massively (but runs deficit)
Ondřej Schneider and Jan Zápal,
IIPF Congress
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II. Evidence
Evidence from PEPs & CoPrs
• Pre-Accession Economic Programme
(PEP)
– 2001
– 2002
– 2003
• Convergence Programme
(CoPr)
– Spring
– Autumn
2004
2004
Ondřej Schneider and Jan Zápal,
IIPF Congress
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Evidence from PEPs & CoPrs
2000
0,0
2001
2002
2003
2004
2005
2006
2007
2009
CoPr - autumn 04
PEP 01
-1,0
2008
PEP 02
-2,0
CoPr - spring 04
-3,0
PEP 03
-4,0
-5,0
-6,0
-7,0
PEP 01
PEP 02
PEP 03
CoPr - spring 04
CoPr - autumn 04
Czech Republic, General government budget deficit in
% of GDP
Ondřej Schneider and Jan Zápal,
IIPF Congress
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Evidence from PEPs & CoPrs
2000
0,0
-2,0
2001
2002
2003
2004
2005
2006
2007
2008
PEP 01
-4,0
PEP 02
-6,0
-8,0
PEP 03
-10,0
CoPr - autumn 04
-12,0
CoPr - spring 04
-14,0
PEP 01
PEP 02
PEP 03
CoPr - spring 04
CoPr - autumn 04
Czech Republic, General government budget deficit in
% of GDP
Ondřej Schneider and Jan Zápal,
IIPF Congress
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Evidence from PEPs & CoPrs
2000
0
2001
2002
2003
2004
2005
2006
2007
2008
-2
Increased
speed
-4
-6
-8
-10
Revisions
-12
PEP 01
PEP 02
PEP 03
CoPr - spring 04
CoPr - autumn 04
Typical pattern
Ondřej Schneider and Jan Zápal,
IIPF Congress
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Evidence from PEPs & CoPrs
Table 3. Average Revision of Expected Budget Deficit
EDP countries
0,55
Non-EDP countries
0,10
Difference
0,45
Election years
0,72
Non-election years
0,28
Difference
0,44
***
**
Between PEP01 and PEP02
EDP countries
Non EDP countries
Difference
0,48
0,43
0,06
1,33
0,33
1,00
1,43
0,38
1,05
***
0,05
0,12
-0,07
Between PEP03 and CP-spring
EDP countries
Non EDP countries
Difference
Between PEP02 and PEP03
EDP countries
Non-EDP countries
Difference
Election years in EDP
countries
Non-election years in EDP
countries
Difference
Election years in non-EDP
countries
Non-election years in non-EDP
countries
Difference
0,56
-0,28
0,85
**
Between CP-spring and CP-autumn
***
EDP countries
Non-EDP countries
Difference
-0,15
-0,10
-0,05
***, **, and * denote significance at the 1 percent, 5 percent, and 10 percent level, respectively.
Source: Authors’ calculations based on NMS’ PEPs and CPs.
Ondřej Schneider and Jan Zápal,
IIPF Congress
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Evidence from PEPs & CoPrs
2000
-1,0
2001
2002
2003
2004
2005
2006
2007
2008
2009
-1,5
CoPr - autumn 04
PEP 01
CoPr - spring 04
-2,0
PEP 02
PEP 03
-2,5
-3,0
PEP 01
PEP 02
PEP 03
CoPr - spring 04
CoPr - autumn 04
Chart 4B. Average non-EDP Country
Ondřej Schneider and Jan Zápal,
IIPF Congress
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Evidence from PEPs & CoPrs
2000
-2,0
2001
2002
2003
2004
2005
2006
2007
2008
2009
-3,0
-4,0
-5,0
PEP 01
PEP 02
-6,0
PEP 03
CoPr - autumn 04
CoPr - spring 04
-7,0
-8,0
PEP 01
PEP 02
PEP 03
CoPr - spring 04
CoPr - autumn 04
Chart 4B. Average EDP Country
Ondřej Schneider and Jan Zápal,
IIPF Congress
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Consolidations
• Definition of consolidation
t
t+ 1
t+ 2
t+ 3
t+ 4
Successful
1 % of GDP
in initial year
Not
successful
General government primary budget deficit in % of GDP
Ondřej Schneider and Jan Zápal,
IIPF Congress
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Deficit
reduction
Total
revenue
Total
expenditure
Collective
consumption
Employees’
compensation
Social transfers
Subsidies
Investment
Not
Successful
successful
Consolidations
5,45
-2,20
-7,70
-1,50
-1,85
-1,58
-0,25
-0,30
4,62
0,14
-4,50
-0,50
-0,44
-0,54
-0,16
-0,52
Ondřej Schneider and Jan Zápal,
IIPF Congress
20
% of GDP
Not
Successful
successful
5,45
-2,20
4,62
0,14
Investment
Subsidies
Social transfers
Employees’
compensation
Collective
consumption
Total
expenditure
Total
revenue
Deficit
reduction
Consolidations
Successful consolidations reduce
-7,70
-1,50
deficit
more-1,85 -1,58 -0,25 -0,30
-4,50
-0,50
-0,44
Ondřej Schneider and Jan Zápal,
IIPF Congress
-0,54
-0,16
-0,52
21
% of GDP
-7,70
4,62
0,14
-4,50
-0,54
-0,16
Investment
Employees’
compensation
Subsidies
-2,20
Collective
consumption
Total
expenditure
Total
revenue
5,45
Social transfers
Not
Successful
successful
Deficit
reduction
Consolidations
Successful consolidations
do
not-1,85
rely on
revenue
-1,50
-1,58
-0,25
-0,30
increases
-0,50
-0,44
Ondřej Schneider and Jan Zápal,
IIPF Congress
-0,52
22
% of GDP
-7,70
-1,50
4,62
0,14
-4,50
-0,50
-0,54
-0,16
Investment
Subsidies
-2,20
Employees’
compensation
Collective
consumption
Total
expenditure
Total
revenue
5,45
Social transfers
Not
Successful
successful
Deficit
reduction
Consolidations
Successful
consolidations
rely-0,30
on
-1,85
-1,58
-0,25
expenditure cuts
-0,44
Ondřej Schneider and Jan Zápal,
IIPF Congress
-0,52
23
% of GDP
Investment
-4,50
Subsidies
0,14
Social transfers
4,62
Employees’
compensation
Total
expenditure
Total
revenue
Successful
consolidations
rely on
5,45
-2,20
-7,70
painful
expenditure
cuts
Collective
consumption
Not
Successful
successful
Deficit
reduction
Consolidations
-1,50
-1,85
-1,58
-0,25
-0,30
-0,50
-0,44
-0,54
-0,16
-0,52
Ondřej Schneider and Jan Zápal,
IIPF Congress
24
% of GDP
Investment
Subsidies
0,14
Social transfers
4,62
Employees’
compensation
-2,20
Collective
consumption
Total
revenue
5,45
Total
expenditure
Deficit
reduction
Not
Successful
successful
Consolidations
... -7,70
and less
on-1,85
investment
-1,50
-1,58
-0,25
-4,50
-0,50
-0,44
Ondřej Schneider and Jan Zápal,
IIPF Congress
-0,54
-0,16
-0,30
-0,52
25
% of GDP
Planned consolidations
Deficit
reduction
Total revenue
Total
expenditure
Employees’
compensation
Consolidations
pre EU accession
- realized
4,86
-0,53
-5,41
-0,84
Consolidations
post EU
accession planned
5,28
1,75
-3,53
-1,27
Ondřej Schneider and Jan Zápal,
IIPF Congress
26
% of GDP
Planned consolidations
Deficit
reduction
Consolidations
pre EU accession
- realized
4,86
Consolidations
post EU
accession planned
5,28
Total revenue
Total
expenditure
Employees’
compensation
Post EU accession
consolidations aim
-0,53for deeper
-5,41
-0,84
deficit
reduction
1,75
Ondřej Schneider and Jan Zápal,
IIPF Congress
-3,53
-1,27
27
% of GDP
Planned consolidations
Deficit
reduction
Total revenue
Consolidations
pre EU accession
- realized
4,86
-0,53
Consolidations
post EU
accession planned
5,28
1,75
Total
expenditure
Employees’
compensation
-3,53
-1,27
Ondřej Schneider and Jan Zápal,
IIPF Congress
Post EU
accession
consolidations
-5,41
-0,84 on
rely heavily
revenue
increases
28
% of GDP
Planned consolidations
Deficit
reduction
Consolidations
pre EU accession
- realized
Consolidations
post EU
accession planned
Total revenue
Post EU
accession
consolidations
4,86
-0,53
rely less
on
expenditure
cuts
5,28
Total
expenditure
Employees’
compensation
-5,41
-0,84
-3,53
-1,27
1,75
Ondřej Schneider and Jan Zápal,
IIPF Congress
29
% of GDP
Planned consolidations
Deficit
reduction
Consolidations
pre EU accession
- realized
Consolidations
post EU
accession planned
Total revenue
Total
expenditure
Employees’
compensation
... but bureaucrats will
4,86
-0,53
-5,41
not be happy
-0,84
5,28
-1,27
1,75
Ondřej Schneider and Jan Zápal,
IIPF Congress
-3,53
30
% of GDP
Reform efforts
• NMS differ in their reform efforts
• Main reforms: pensions, health care, tax, fiscal
decentralisation, budgetary rules and procedures
• Most reform minded: Estonia, Slovakia
• Almost no reforms: Hungary, Czech Republic
Ondřej Schneider and Jan Zápal,
IIPF Congress
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Reform efforts
• Pension system reforms
2. pillar introduction
Cyprus
-
Czech Republic
-
Estonia
2002
Latvia
2001
Lithuania
2004
Hungary
1998
Malta
-
Poland
1999
Slovenia
2000
Slovakia
2005
Ondřej Schneider and Jan Zápal,
IIPF Congress
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Reform efforts
• Health care reforms
Reform
Cyprus
YES
Czech Republic
NO
Estonia
YES
Latvia
YES
Lithuania
YES
Hungary
NO
Malta
YES
Poland
YES
Slovenia
YES
Slovakia
YES
Ondřej Schneider and Jan Zápal,
IIPF Congress
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III. Fiscal Policy Ranking
Ranking fiscal policies
• 14 criteria
– Reform efforts
– Consolidation success
– Sustainability gap
– Dependency ratios
– EDP
– Revisions
– ... etc.
Ondřej Schneider and Jan Zápal,
IIPF Congress
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Ranking fiscal policies
Sub-index no.1
Reform efforts
• Pension reform
• Health care reform
• Fiscal stance
• Consolidation
Rank
Slovakia
10
Estonia
9
Slovenia
8
Latvia
7
Malta
6
Lithuania
5
Poland
4
Cyprus
3
Hungary
2
Czech Republic
1
Ondřej Schneider and Jan Zápal,
IIPF Congress
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Ranking fiscal policies
Sub-index no.2
Ageing impact
• Dependency ratio
• Fertility
• Room to rise tax
• Discretion
Rank
Estonia
10
Cyprus
9
Slovakia
8
Latvia
7
Lithuania
6
Hungary
5
Poland
4
Slovenia
3
Malta
2
Czech Republic
1
Ondřej Schneider and Jan Zápal,
IIPF Congress
37
Ranking fiscal policies
Sub-index no.3
Fiscal functions
• Stabilization
• Fiscal stance
• Consolidation
Rank
Malta
9
Estonia
9
Slovakia
8
Slovenia
7
Lithuania
6
Cyprus
4
Latvia
4
Poland
3
Czech Republic
2
Hungary
1
Ondřej Schneider and Jan Zápal,
IIPF Congress
38
Ranking fiscal policies
Sub-index no.4
Rank
Estonia
10
Latvia
7
Lithuania
Past behavior
Slovenia
• EDP
Slovakia
• Revisions
Cyprus
• Speed
Hungary
Malta
• Sustainability
Poland
• Fiscal stance
Czech Republic
and Jan Zápal,
• StabilizationsOndřej Schneider
IIPF Congress
7
7
6
5
4
3
2
1
39
Ranking fiscal policies
Table 8. Ranking Fiscal Policy in NMS
Reform
Ageing
Rank
efforts
impact
CY
CZ
EE
LV
LT
HU
MT
PL
SI
SK
2,4
0,6
4,8
4,4
4,0
2,0
4,2
3,8
4,6
6,0
3
1
9
7
5
2
6
4
8
10
9,4
4,6
10,0
8,4
7,8
7,6
5,6
7,2
6,0
8,8
Rank
9
1
10
7
6
5
2
4
3
8
Fiscal
Past
Rank
Rank
functions
behaviour
2,6
1,8
4,0
2,6
2,8
1,2
4,0
2,0
3,0
3,4
4
2
9
4
6
1
9
3
7
8
6,2
3,0
11,8
7,6
7,6
6,0
5,4
5,0
7,6
7,2
5
1
10
7
7
4
3
2
7
6
Total
Rank
13,0
7,4
18,8
15,0
14,2
10,8
10,6
11,4
12,2
15,4
6
1
10
8
7
3
2
4
5
9
Note: Highest score implies higher rank and denotes “better” fiscal policy.
Ondřej Schneider and Jan Zápal,
IIPF Congress
40
Ranking fiscal policies
OVERALL INDEX
Rank
Estonia
10
Slovakia
9
Latvia
8
Lithuania
7
Cyprus
6
Slovenia
5
Poland
4
Hungary
3
Malta
2
Czech Republic
1
Ondřej Schneider and Jan Zápal,
IIPF Congress
41
Thank You for Your attention
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