Download A new budget rule for Germany

A new budget rule for Germany
in the light of uncertainty about
medium-term economic perspectives
Elke Baumann
Federal Ministry of Finance, Germany
39th CMTEA
September 25, 2008
Iaşi
Bundesministerium der Finanzen
Berlin
Outline
•
•
•
•
Status quo and problems of the existing budget rule
Why a reform now?
Criteria for a new budget rule
Proposal of the Federal Ministry of Finance for a new
budget rule
Special focus on changing economic conditions
and medium-term economic perspectives
Bundesministerium der Finanzen
Berlin
Regulations restricting budgetary policy
Status quo - Art. 115 German Constitution:
Revenue obtained by borrowing shall not exceed the
total of investment expenditures provided for in the
budget (“Golden Rule”)
Exceptions shall be permissible only to avert a
disturbance of the macroeconomic equilibrium
Bundesministerium der Finanzen
Berlin
Golden Rule - Art. 115 German Constitution
Problems and limitations of the existing rule
-
Gross investment concept – depreciations and sales are not
taken into account
-
No clear definition of the exception clause
-
Asymmetric reaction over the business cycle
-
Possible conflicts with objectives and rules of the European
Stability and Growth Pact (SGP)
-
No enforcement during execution
 In almost half of the years since 1975 net borrowing was higher
than gross investment
 Increase in the central government's indebtedness could not be
prevented
Bundesministerium der Finanzen
Berlin
Increase of public debt since 1970
Indebtedness
GDP)
Public
debt (%(%ofofGDP)
70
60
Länder and communities
50
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: 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).
• Judgement of Federal Constitutional Court in July 2007 about
budget in 2004
• Länder are looking for early-warning system for distressed budget
cases (Federalism Commission II).
 High acceptance by the public.
 Grand coalition may have the majority to change the Constitution.
Bundesministerium der Finanzen
Berlin
Why a reform now?
Favourable conditions for a reform
Net lending (+)/borrowing (-) of general government
- in % of GDP -
0.5
0.1
0
-0
-0.5
-1
- 1/2
-1 1/2
-1 1/2
-1.2
-1.5
-1.5
-2
-0
-1.5
structural
-2
-2 1/2
-2.5
-2.8
-3
-3 1/2
-3.5
-3 1/2
-3
-3.7
-4
-3.3
-3
actual
-3.8
-4.0
-4.5
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
Bundesministerium der Finanzen
Berlin
A new budget rule
criteria and requirements
• Compatibility with SGP
• Stabilisation over the business cycle
• Limit for (structural) net borrowing
• Limit one-off measures
• Enforcement (ex post correction)
• Flexibility - future viability (exception clause)
Bundesministerium der Finanzen
Berlin
A new budget rule
composition of net borrowing
The new three components of net borrowing
cyclical
component
• Allowing automatic
stabilizers to work
symmetrically over the
business cycle by cyclical
adjustment in net borrowing
in case of divergences from
potential output
• calculated as the product of
the budgetary sensitivity
(0.51) and the output gap
negative output gap deficit
positive output gap surplus
+
structural
component
• structural deficit of central
government max. 0.35% of
GDP
• Reason: in principal
balanced budget, but
sufficient flexibility for e.g.
one-off effects of reforms.
• Size: SGP allows max.
deviation of 0.5% (“close to
balance”), federal level incl.
social security funds gets
0.35% according to its share
in overall debt.
-
net financial
transactions
• correction for net financial
transactions (mainly
privatization gains) in order
to be compatible with the
Maastricht definition
Bundesministerium der Finanzen
Berlin
Symmetric fiscal policy over the business cycle
Cyclical component with OG calculated by PF approach
GDP, potential growth, output gaps
2 500
5
output gap, % of potential output (rhs)
2 400
GDP
4
potential output
3
positive output gap
=> cyclical surplus2
required
2 200
2 100
1
2 000
0
1 900
-1
1 800
-2
negative output gap => cyclical deficit allowed
1 700
-3
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Bundesministerium der Finanzen
Berlin
%
bn euro (chained volumes)
2 300
Symmetric fiscal policy over the business cycle
Cyclical component depending on medium-term
economic forecast
Lower GDP growth than in baseline scenario
• Risk scenario I (1-time effect): -1 PP in 2009
• Risk scenario II (dynamics weaker over whole forecasting horizon):
-1 PP in 2009 + 2010, -0.5 PP in 2011
Output gaps with different assumptions about
medium-term economic development
2.0
in % of potential GDP
1.5
1.0
0.5
0.0
-0.5
-1.0
-1.5
-2.0
-2.5
2001
2002
2003
2004
2005
2006
2007
2008
Bundesministerium
Finanzen
2009 2010 der
2011
2012
Berlin
Base line scenario
Risk scenario I
Risk scenario II
A new budget rule
composition of net borrowing
The new three components of net borrowing
cyclical
component
• Allowing automatic
stabilizers to work
symmetrically over the
business cycle by cyclical
adjustment in net borrowing
in case of divergences from
potential output
• Size: product of the
budgetary sensitivity (0.51)
and the output gap
central govt: 50 % according
to share of cyclical
components
negative output gap deficit
positive output gap surplus
+
structural
component
• structural deficit of central
government max. 0.35% of
GDP
• Reason: in principal
balanced budget, but
sufficient flexibility for e.g.
one-off effects of reforms.
• Size: SGP allows max.
deviation of 0.5% (“close to
balance”), federal level incl.
social security funds gets
0.35% according to its share
in overall debt.
-
net financial
transactions
• Correction for net financial
transactions (mainly
privatization gains) in order
to be compatible with the
Maastricht definition
• Reason: national financial
statistics are on a cash basis
=> net borrowing does not
include revenues from net
financial transactions
Bundesministerium der Finanzen
Berlin
Limit for (structural) net borrowing
Structural element
• limitation of structural net borrowing, maximum
structural deficit of 0.5 % of GDP
• limit complies with medium term objective of the SGP
(close to balance or in surplus)
• need of distribution of structural net borrowing
between the central government and the Länder.
• Breakdown of 70:30, this means:
– 0.35% of GDP for the central govt and social security funds
– 0.15% of GDP for the Länder
Bundesministerium der Finanzen
Berlin
Financial transactions
Limitation of one-off measures
• Existing budget rule: limit of net borrowing as defined in
national financial statistics does not include revenues from
financial transactions (deficit ≠ net borrowing)
– in the past net financial transactions have been strong
– incentive for one-off operations in order to comply with
golden rule
• New budget rule: definition of net borrowing will still be
based on national financial statistics, nevertheless full
inclusion of financial transactions (i.e. privatisations,
net changes in assets) in accordance with the
methodology in the system of national accounts 
reduction of assets reduces limit of net borrowing by the
same amount
Bundesministerium der Finanzen
Berlin
Net borrowing limit according
to the new budget rule (central govt)
size of the different components in real time
(at the time of establishment of budget)
5
in bn euro
0
-5
-10
-15
-20
2000
2001
Cyclical component
2002
2003
2004
Structural component
2005
2006
2007
2008
Total net borrowing allowed
Bundesministerium der Finanzen
Berlin
Control fund
enforcement and viability
• Need for monitoring and setting incentives not only for the formulation
but also for the execution of the budget – ex post control of compliance
• Deviations from the allowed limits in the execution of the budget will be
put on a special account
• The account should only track structural deviations from the allowed net
borrowing, cyclical deviations due to another economic development
than expected ex ante should not be accounted
• Accumulation over the years. If the (accumulated) debit side of the
account exceeds a specified threshold – i.e. maximum debit of 1% of
GDP –, consolidation measures have to be introduced
• Credit not allowed to be used in order to finance net borrowing in
following years
Bundesministerium der Finanzen
Berlin
Control fund
example calculation for central government
Budget 2005
budget
actual
establishment
in bn euro
1
2
3
4
5
6
7
8
9
10
11
GDP growth, real, in %
Structural component (0.35% of GDP)
Cyclical Component (ex ante)
Effect of difference betw. forecasted and actual GDP
growth on cyclical component
Cyclical Component (ex post) [3 + 4]
Net borrowing limit (+ = surplus) [2 + (3 or 5, resp.)]
Ex post net borrowing (calculated from deviation of
actual net borrowing from target, adjusted by net
financial transactions)
Debit (-) or credit (+) of control fund
Decomposition of target-actual-deviation
Deviation of net borrowing from target
because of other GDP growth than forecasted
[7 - 6 (establishment)]
because of non-cyclical reasons (discretionary) [8]
1.7
0.8
-7.9
-5.7
-13.6
-5.1
-10.8
-18.7
-21.3
-2.7
-7.7
-5.1
-2.7
Bundesministerium der Finanzen
Berlin
Control fund
Ex post correction of cyclical component
Strong revisions of output gap estimates
in % of potential GDP
Output gap estimates for the year 2004
at different times of estimation
0.0
-0.2
-0.4
-0.6
-0.8
-1.0
-1.2
-1.4
-1.6
-1.8
Fall
2003
Spring Fall
2004 2004
Spring Fall
2005 2005
Spring Fall
2006 2006
Spring Fall
2007 2007
Spring
2008
Bundesministerium der Finanzen
Berlin
Net borrowing limit according to
new budget rule (central govt)
Simulation result:
Comparison of ex ante and ex post
Net borrowing (-) limit
0
bn euro
-5
-10
-15
-20
ex ante
-25
ex post
-30
2000
2001
2002
2003
2004
2005
2006
2007
2006
2007
%
GDP growth
4
3
3
2
2
1
1
0
-1
ex ante
ex post
Bundesministerium der Finanzen
2000
2001
2002
2003
2004
2005
Berlin
Net borrowing limit according to new
budget rule (central govt)
Simulation result:
Comparison of ex post limit and realization
bn euro
5
0
-5
-10
-15
-20
-25
-30
-35
-40
Net borrow ing limit ex post
Net borrow ing (-)/lending (+) ex post
2000
2001
2002
2003
2004
2005
2006
2007
Bundesministerium der Finanzen
Berlin
Exception clause
flexibility
• Exception clause for emergency cases (i.e.
natural disaster)
• coupled with a high quorum of the parliament
(60 % or even two-third)
Bundesministerium der Finanzen
Berlin
Open questions
What remains to be clarified? Further procedure?
• Federalism Commission II wants to have a solution,
but still some remaining differences between political
parties, esp.:
- Structural component: elimination (CDU) vs. higher than
0.5 % (SPD)
- Control fund: What threshold should be introduced and how
quick should the debit above the threshold be reduced?
- Specification of exceptions?
• Decisions have to be made very soon as new
elections are coming closer (Sept 2009)
• Reform of Constitution is necessary
• Communication to the public
Bundesministerium der Finanzen
Berlin
The golden rule is
there are no golden rules
George Bernhard Shaw
Thank you for your attention
Bundesministerium der Finanzen
Berlin