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IP/09/982
Brussels, 23 June 2009
2009 Report on Public Finances: fiscal stimulus was needed to
support economy, but overall success depends on a credible
exit strategy
As the European economy suffers its worst post-war recession, the European
Recovery Plan provides needed fiscal support to ailing economies. But rising
public debts and the contingent liabilities incurred by governments to support
the financial sector, together with the prospected increases in age-related
expenditure and slowdown in potential growth raise concerns about public
finance sustainability. An exit strategy strengthening fiscal policy frameworks,
reforming age-related spending and spelling out the broad consolidation
measures envisaged when the recovery has taken hold is required to address
these concerns and underpin consumer, business and financial market
confidence, the 2009 Report on public finances shows.
"Past experiences teach useful lessons of how fiscal costs of banking crises can be
contained and which factors can facilitate bringing the fiscal houses back in order. The
effectiveness of the fiscal policy stimulus in the short run crucially depends on a credible
commitment to withdraw the stimulus when the recovery is well established. Strong
fiscal governance frameworks, notably national fiscal rules, are a factor of success. For
what concerns the resolution of the banking crisis, a transparent, resolute and swift
strategy, without regress to regulatory forbearance, as well as a fair and uniform
treatment of market participants is key to reduce their impact on public finances.", said
Economic and Monetary Affairs Commissioner, Joaquín Almunia.
This year's edition of the Report on Public Finances reviews how Member States' fiscal
policies address the challenges from the financial and economic crisis. It assesses the
prospects for public finances and policy needs ahead. Accounting for the effect of the
automatic stabilisers, fiscal policy is providing support to the economy in the region of
5% of GDP over 2009-2010, equivalent to more than €600 billion. This does not include
the measures to support banks. In 2009, the largest fiscal stimulus as a percentage of
GDP is being implemented in Spain, Austria, Finland, United Kingdom, Germany and
Sweden (see table p14 of the report).
The report shows that countries that experienced the strongest credit and property
booms also had growing current account deficits and the most buoyant tax revenues
and public expenditure growth. They are now experiencing the largest tax revenue
shortfalls and deficit and debt increases. In a number of these countries with large
macroeconomic imbalances, fiscal space available to run counter-cyclical fiscal policy
without incurring sharp increases in sovereign and economy-wide risk premia was
curtailed from the start of the crisis. Better tailored fiscal policy should aim at building-up
surpluses to tame down buoyant demand during booms and allowing running countercyclical fiscal policies during busts.
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The second part of the report examines developments in fiscal surveillance and focuses
on (i) the challenging statistical treatment of public interventions in the financial system,
(ii) ways to improve the measure of the cyclically-adjusted budget balance, (Iii)
measures of the quality of public finances and (iv) the strengthening of Member States'
medium-term budgetary frameworks.
The report examines the fiscal costs of past systemic financial crises and draws
important conclusions for handling today's crisis. Experience shows that net direct fiscal
outlays to rehabilitate the banking system averaged 13% of GDP in a sample of 49
crises that occurred since 1970 around the world. In some cases, notably in emerging
market economies, the costs were even higher. A risk analysis for the direct fiscal costs
of the current crisis in the EU gives an estimate of between 2¾ and 16½% of GDP
depending on assumptions on the implementation of approved measures and recovery
rates of the government capital injections and loans. Experience shows that the costs
were lower when the banking crisis resolution strategy was implemented swiftly; was
transparent and received broad political support. In particular fiscal costs were contained
if the crises resolution strategy was backed by strong public institutions and legal
frameworks; implied fair and uniform treatment of market participants; and included a
clear exit strategy, including the restructuring of the banking sector.
In addition to these direct fiscal costs of interventions in the financial sector, the large
fiscal deficits - incurred as a result of the pronounced slowdown - contribute to an
increase of public debt-to-GDP ratios. During the past crises those increases went far
beyond the direct costs attributable to tackling the financial sector problems and
amounted to, on average, 20 percentage points. According to the Commission's spring
forecasts, the EU public debt is expected to rise from an average of just below 60% of
GDP in 2007, the lowest level since the Maastricht Treaty was agreed, to nearly 80% in
2010. Experience suggests that any lagging behind of bank resolution policies risks
further adding to the overall fiscal bill. Efforts to restore the health of the financial sector,
even when it implies high upfront fiscal outlays, are a condition to ensure the full
effectiveness of fiscal measures in support of an economic recovery.
The Report is available on:
http://ec.europa.eu/economy_finance/thematic_articles/article15380_en.htm
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