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Fiscal Rules Eldad Shidlovsky, Head of Economics and Research Department. Ministry of Finance

Ministry of Finance. Fiscal Rules Eldad Shidlovsky, Head of Economics and Research Department. Ministry of Finance May 2009. Fiscal Rules - Historical Perspective. The “Deficit Reduction Law” was enacted in 1992. In the first few years, it addressed only the level of the deficit.

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Fiscal Rules Eldad Shidlovsky, Head of Economics and Research Department. Ministry of Finance

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  1. Ministry of Finance Fiscal Rules Eldad Shidlovsky, Head of Economics and Research Department. Ministry of Finance May 2009

  2. Fiscal Rules - Historical Perspective • The “Deficit Reduction Law” was enacted in 1992. • In the first few years, it addressed only the level of the deficit. • In 2005 an expenditure limit was added.

  3. Fiscal Rules - Historical Perspective Central Government's Budget Deficit)As Percent of GDP(

  4. The Use of Fiscal Rules in other Countries The rules vary among countries: • The rules refer to the public sector as a whole or to the central government budget. • The rules focus on the size of the deficit, on public debt, size of public expenditure etc. • Some countries set rules for one year, some use multi-year rules, and some apply rules over the course of the business cycle.

  5. Why are Fiscal Rules Necessary? • Creation of budgetary anchors that prevent sliding into a loss of fiscal control. • Increased stability and credibility of economic policy in the eyes of the public. • Increased budgetary transparency. • Support for improved efficiency of the public sector.

  6. Difficulties in Applying Fiscal Rules • Difficulty in applying anti-cyclical policy. • Postponement of expenditures. • The need to abstain from solutions that bypass the budget.

  7. Guidelines for the Proposed Fiscal Rule • Avoiding as much as possible the use of economic forecasts. • The rule should be as simple and transparent as possible. • The rule should maintain the credibility of budgetary policy. • The rule should prevent the need for frequent changes, exceptions (such as the "boxes"), and solutions that bypass the budget. • The rule should not create a pro-cyclical policy.

  8. Key Objectives in Establishing the Fiscal Rule • The key objective in the short term is a return to fiscal stability by committing to a downward deficit trend. • The key objective in the medium and long term is to achieve a decrease of the debt-to-GDP ratio to around 60 percent by the end of the next decade.

  9. Reasons for Reduction of the Debt-to-GDP Ratio Gross Public Debtpercent of GDP, estimates 2008* *Source: OECD, November 2008, Israel: MoF

  10. Reasons for Reduction of the Debt-to-GDP Ratio • Increases the economy's resilience to external shocks. • The burden of defense spending. • Population aging. • Debt reduction decreases interest expenses and financing costs.

  11. The Proposed Rule The fiscal rule will be based on two components: • A restriction of real expenditure growth. • Future increase in expenses will be a function of the debt-to-GDP ratio. • A budget deficit ceiling – the budget deficit ceiling will decrease gradually.

  12. The Proposed Rule Development of thedebt-GDP ratio simulation, 2007-2020 Growth assumptions: GDP growth will be -1% in 2009, 1.5% in 2010 and 3.5% thereafter

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