Download Fiscal Policy

The Challenges for Macroeconomic Policy:
Fiscal Policy
Polyvios S. Eliofotou
Economist, DG Economic and Financial Affairs - EU Commission
London, 10 February 2012
The views expressed therein
represent my own personal views
and NOT those of the European Commission!
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Outline
1. Scene Setter – Review of recent past
2. Challenges
3. Conclusions
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1. Review of the recent past
1 January 2008 Cyprus, small, open,
services-oriented economy joined EMU
EMU institutional framework
Stability and Growth Pact's (SGP)
provisions
Budgetary targets: close-to-balance or in
surplus over the medium-term safety
margin
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1. Review of the recent past (ctd.)
Figure 1: GDP, General Government Deficit and Debt
10
40
8
44
Gross Debt (RHS)
4
GDP (LHS)
48
52
2
56
0
60
-2
64
-4
68
-6
72
-8
Gen. Govt. Deficit (LHS; % of GDP)
% of GDP
% change, % of GDP
6
76
-10
80
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011e 2012f 2013f
Source: Commission services, AMECO; Commission services' 2011 Autumn Forecast.
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1. Review of the recent past (ctd.)
Figure 2: Fiscal Stance
3.5
∆ in CAPB
Output Gap
2.2
% of GDP
1.5
0.5
-0.5
-2.5
-4.5
-6.5
Structural Balance
-8.5
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011e 2012f 2013f
Note: ∆CAPB denotes the change in the cyclically-adjusted primary b udget b alance.
Source: Commission services, AMECO; Commission services' 2011 Autumn Forecast.
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1. Review of the recent past (ctd.)
Figure 3: Evolution of main revenue items
5
25
18.5
20
4
16.2
15
15.2
3
13.8
12.2
11.2
8.1
11.1
2
5
1
6 p.p.s
0
%of GDP
%of GDP
10
0
8 p.p.s
-5
-1
-10
-2
-15
-3
2000
2001
2002
2003
2004
2005
2006
∆ in Taxes on production and imports (RHS)
Taxes on production and imports (LHS)
2007
2008
2009
2010 2011e 2012f 2013f
∆ in Current taxes on income and wealth (RHS)
Current taxes on income and wealth (LHS)
Source: Com m ission services, AMECO; Com m ission services' 2011 Autum n Forecast .
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1. Review of the recent past (ctd.)
Figure 4: Evolution of main expenditure items
20
2.0
16.2
15.6
15
13.6
1.5
13.3
11.5
9.2
1.0
5
0.5
0
0.0
-5
% of GD P
% of GD P
10
3.5 p.p.s
4.5 p.p.s
-0.5
-10
-1.0
2000 2001 2002 2003 2004 2005
∆ in Compensation of employees (RHS)
Compensation of employees
2006
2007 2008 2009 2010 2011e 2012f
∆ in Social transfers other than in kind (RHS)
Social transfers other than in kind
2013f
Source: Commission services, AMECO; Commission services' 2011 Autumn Forecast .
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1. Review of the recent past (ctd.)
Table 1: Evolution of main expenditure items
% Change
Total Expenditure
Compensation of employees
Social transfers other than in kind
p.m. GDP at current prices
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
9.5 10.7 8.8 18.9 2.5 8.8 6.3 6.5 10.5 7.8 3.1
8.9 5.1 7.6 20.6 4.1 6.0 7.9 7.1 8.2 9.0 1.3
10.4 10.3 14.7 18.3 13.9 12.7 3.2 2.7 14.0 8.1 10.2
8.3 8.1 3.3 6.8 7.7 7.0 7.7 9.7 8.4 -1.8 2.8
Period
2011e Average
5.2
8.5
-0.4
7.8
8.9
10.8
4.2
6.2
Source: Commission services, AMECO; Commission services' 2011 Autumn Forecast.
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2. Challenges
•Short-term
• Stabilisation
• Fiscal Consolidation
• Structural reforms to support growth - competitiveness
•Medium-term
• Build-up of credible + sound fiscal institutions
• Improve Efficiency Quality and composition of
expenditure
•Long-term
• Sustainability Ageing-related expenditure
• Managing potential natural resource revenues
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2. Challenges – Short-term
Stabilisation of the economy
behaviour over the cycle
CY high exposure to external shocks
Fiscal consolidation
need for primary current expenditure restraint
Structural reforms to support growth competitiveness
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2. Challenges – Medium-term
• Building credible modern institutions
Cyprus is among a handful of Member States that do not
have:
fiscal rules
a binding Medium-Term Budgetary Framework
fiscal council
existing fiscal framework does not provide a setting for
sound fiscal policies
Need to: institutionalize expenditure rules, improve
efficiency, transparency and accountability of budgetary
management
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2. Challenges – Medium-term
• Improve Efficiency Quality and
composition of government
expenditure
stricter control of non-productive expenditure
free resources to strengthen the economy's productive
potential via enhancing productivity, innovation and better
utilization of human capital
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2. Challenges – Long-term
Sustainability Ageing-related expenditure
COM / ECOFIN: Assessed CY to be in 'high' risk
2009 Ageing Report pension expenditure to rise by 11½
pps of GDP by 2060 compared to 2½ pps in EU
Main factors: Demographic transition, eligibility
April 2009 pension reform mainly on the revenue side
makes eligibility conditions of old-age pension stricter
26 August 2011 fiscal package pension contributions
(3% on gross earnings) from public sector employees
More action is needed on the expenditure side
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2. Challenges – Long-term (ctd.)
Managing potential resource revenues
Establish legal and regulatory framework for a sound
management of potential resource wealth
Adopt appropriate fiscal policy rules that insulate fiscal
policy from fluctuations in revenues contain fiscal
spending and sterilize revenue windfalls
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3. Conclusions
Learn from past mistakes
Prudent fiscal policy is a precondition for
sustainable growth & employment creation.
Credible fiscal institutions - fiscal governance
Long-term challenges are always easier to tackle
through timely action
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•Thank you!
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