Download G. Schwartz

Fiscal Adjustment and Public Investment:
Experiences from the New Member States and
Some Preliminary Policy Lessons
March 23, 2007
Gerd Schwartz
Expenditure Policy Division;
Fiscal Affairs Department,
International Monetary Fund
[email protected]
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Background
o Challenges for fiscal policy in NMS
 Support growth & convergence through higher
investment
 Implement structural reforms under Acquis
Communitaire
 Make room for increasing pressures from age-related
expenditures
 Carry out fiscal adjustment to comply with SGP
targets and enter the Euro zone.
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Three key topics
o Impact of fiscal adjustment on public investment
o Infrastructure in NMS
o Role of new financing mechanisms
 EU Funds
 PPPs
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Public investment: The silent
victim of fiscal adjustment?
o Sizable fiscal adjustment in some countries; volatile
fiscal performance in others
Estonia
Slovakia
7
4
60
14
6
3
50
12
5
2
40
4
1
3
0
10
8
30
6
2
-1
20
1
-2
10
2
-3
0
0
0
1998 1999 2000 2001 2002 2003 2004 2005
1998 1999 2000 2001 2002 2003 2004 2005
Hungary
64
62
60
58
56
54
52
50
48
46
9
8
7
6
5
4
3
2
1
0
1998 1999 2000 2001 2002 2003 2004 2005
4
46
Poland
44
Public debt
(LHS)
Fiscal deficit
(RHS)
5
4
42
40
3
38
2
36
1
34
32
0
1998 1999 2000 20012002 2003 2004 2005
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Public investment: The silent
victim of fiscal adjustment?
o Among NMS, during 1998-2005, there were 38
occurrences of improvements in the fiscal balance
o Out of these 38 occurrences...
 68% cut in non-investment expenditure
(2 percent of GDP)
 45% cut in investment expenditure
(0.5 percent of GDP)
 50% increase in revenue
(1 percent of GDP)
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Public investment: The silent
victim of fiscal adjustment?
o Overall, mixed experience. Investment even rose during
fiscal adjustment in some countries
Estonia
6
5
4
3
2
1
0
-1 1998 1999 2000 2001 2002 2003 2004 2005
-2
-3
Slovakia
14
12
4
10
8
3
6
2
4
1
2
0
0
1998 1999 2000 2001 2002 2003 2004 2005
Latvia
6
5
Public
investment
Fiscal
deficit
Lithuania
4
5
4
3
3
2
2
1
0
-1 1998 1999 2000 2001 2002 2003 2004 2005
1
6
0
1998 1999 2000 2001 2002 2003 2004 2005
Infrastructure: Where do NMS
stand?
o Significant progress since the start of the transition
o But infrastructure still lags behind standards in OMS
Infrastructure Indicators, 1991-2002
(per 1,000 people)
Electricity generation
(kwh)
Fixed and mobile phone
subscribers
Road networks (km)
1991-1995
1998-2002
1991-1995
1998-2002
1991-1995
1998-2002
Baltic states
CEEs
Bulgaria and Romania
4.5
4.6
3.5
4.1
5.3
3.7
247.5
185.0
199.5
587.0
687.0
391.3
7.7
5.6
3.7
16.8
8.6
4.4
EU-12 Average
5.5
6.5
473.1
1119.1
11.1
15.4
Source: The World Bank (2005) World Development Indicators Database; and staff estimates.
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Infrastructure: How much
investment is needed?
o Few estimates available. Not easy to provide concrete
policy guideline at the country level
Infrastructure Investment Needs of NMS, 1995-2010
Sector
Roads
Railways
Telecoms
Water/Sewage
Energy
Environment
Sum
in € billion
44
37
63
180
110
71
505
Source: Brenck and others (2005).
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Infrastructure: Policy options to
increase investment
Private Investment
Public Investment
Short- to
Medium-Term
Use PPPs.
Provide government guarantees.
Reallocate public expenditure.
Implement tax policy measures.
Relax fiscal targets, financed by debt or the
sale of state assets.
Medium- to
Long-Term
Implement improvements
in market-supporting institutions.
Deepen financial markets.
Carry out structural reforms to help reduce
current expenditure.
Improve tax administration and expenditure
management systems to enhance efficiency.
Source: IMF (2005).
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Infrastructure: Policy options to
increase investment
o Appropriate strategy country specific
o Room to strengthen investment planning and efficiency
o Contingent on fiscal and macroeconomic environment
 More flexibility in countries with stronger fiscal
positions
 Need higher public savings in countries facing
imbalances (e.g., current spending reforms)
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New available financing:
Challenges to use EU Funds
o Co-financing and additionality
o Net fiscal impact could be negative
 Recent estimate: fiscal drag of 0.5 percent of GDP1
o Absorption has been relatively slow
 Crucial given increasing size of EU Funds
o Changes in spending allocations can be expected
1/ Source: Rosenberg and Sierhej (forthcoming)
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New available financing:
Challenges to use PPPs
o PPPs can bring efficiency gains but also carry fiscal risks
o How ready is the institutional framework in the NMS?
 Public investment planning: Generally weak
frameworks; lack of use of CBA and VfM analysis
 Legal and institutional framework: Legal frameworks
not tailored to PPPs; inadequate role of MoF in PPP
process; insufficient technical experience
 Fiscal accounting and reporting: Lax standards; nontransparent disclosure of fiscal implications of PPPs
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Concluding remarks
o Overall mixed experience regarding fiscal adjustment
and public investment
o Upgrading infrastructure will require further efforts, but
budgets will remain tight given SGP targets and Euro
adoption goals
o Making room for public investment not linked to
definitions or accounting but to country specific policies
based on sustainable macroeconomic frameworks
o Scope to strengthen efficiency of spending
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Concluding remarks
o New financing presents opportunities and challenges
 EU Funds: Net fiscal impact could be negative;
absorption rates remain low
 PPPs: Need to strengthen PPP frameworks to
capitalize on efficiency gains and manage fiscal risks
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Thank you
Gerd Schwartz
[email protected]
+1-202-623-7308
Disclaimer: The views and opinions expressed in this presentation are those of the author and do not
necessarily represent those of the IMF or IMF policy.
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