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Towards (more) appropriate fiscal policy in Slovenia ! (From Stimulus to Consolidation) Slaven Mićković Ministry of Finance, Republic of Slovena. Mednarodna konferenca UMAR, 20. junij 2011. Two Great Features of Budgeting more efficient use of scarce public resource s and
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Towards (more) appropriate fiscal policy in Slovenia!(From Stimulus to Consolidation)Slaven MićkovićMinistry of Finance, Republic of Slovena Mednarodna konferenca UMAR, 20. junij 2011
Two Great Features of Budgeting more efficient use of scarce public resources and 2. well-targeted expenditure.
Efficiency and effectiveness of public spending are not necessarily supportive to growth! Fiscal policy is not only an instrument of macroeconomic stabilization but also an instrument to achieve growth and poverty reduction objectives. Although stability is necessary for growth, it is not sufficient!
During the budget preparation process, attention has to be focused on the likely growth effects of the level, composition and efficiency of public spending and taxation. Trade-offs and prioritization among programs must be made to ensure that the budget fits government policies and priorities! Appropriate budgeting method: Budgeting with Impact which incorporates General Equilibrium Analysis into the two-phase performance budgeting!
BwI will enable to find optimal level and structure of expenditures by: min by changing level and structure of expenditures subject to the expenditure ceilings (and other constraines)
BwI is a two-phased budgetary preparation approach enforcing „Top-Down“ and „Bottom-Up“ consistency. BwI enables the integration of economic policy in budget preparation process ensuring that expenditure programs are driven by policy priorities. Introduction of BwI and improved fiscal transparency can enhance fiscal credibility and creditor confidence, and hence reduce the public sector’s borrowing costs, thereby increasing its borrowing capacity.
BwI supports different types of budgets according to the budget structure, level of preparation and government level. It supports multi-year budget planning allowing different budget scenarios and "what-if" analysis.
Fiscal Consolidation: • Where (& why) are we now (d=5,5%BDP; B=40%BDP)? • Where we want to be (MTO)? • What is our Fiscal Consolidation Strategie? CONSOLIDATION d = 5,5% BDP B = 40% BDP MTO STRATEGIE
Fiscal Consolidation: • Most of the adjustment will have to stem from fiscal structural reforms • Some reforms should be initiated now • Strengthened fiscal institutions can play a key role in support of fiscal consolidation • Adjusment should be more growth friendly
DEFINITION OF PUBLIC FINANCE EXPENDITURE CEILING Macroec. indicators Public finance revenue Public expenditure ceilings MtFS model Normative restrictions Public finance objective (deficit, debt) Budget constrains Economic reality
Normative restrictions - The Stability and Growth Pact (SGP) framework: Existence of an excessive deficit in Slovenia Introduction of implicit liabilities into themedium-term budgetary objectives (MTOs)
Budget constrains: timing / time horizon is crucial at public finance MTO setting – a newly appointed medium term objective will have to be put in an appropriate /realistic time frame!
Economic reality: 3%deficit ceiling and the recommended safety margins (m) helpidentify a natural and non-trivial limit of convergence for debt and primary surplus ratioswithin the Stability and Growth Pact, targeting deficit & debt at the same time allows for the reconciliation of multiple policytargets, such as safety, speed and quality of convergence, whereas deficit benchmark identifies a convergence path only byfocusing on one of the above criteria, namely safety!
Economic reality: country-specific benchmarks which can guarantee both stability and safety conditions • Steady state target debt and primary surples:
Maximum general government debt that enables “close to balanced or in surplus” budget position
Slovenian MTO basic principles : The MTOs must be country-specific and should ensure credibility and ownership! Fiscal policy cannot be expected to cope with the full structural effects of demographic aging. Fiscal policy surveillance in the context of SGP should aim at fostering that countries respect the safety margin of not breaching the 3% deficit threshold (i.e. lowering debt):this concern should be the driving contribution of fiscal policy to sustainability of public finances. The MTOs need a proper balance between explicit and implicit liabilities. The MTO algorithmshave to take into account adequacy of pensions.
Similarly to credit ratings, the approach to fiscal sustainability should be gradual: the contingent liabilities and the period over which they are measured when included in the MTOs should be shorter, for example next 10 years and not next 45 years, the resulting MTOs should be updated every 4 years for the next 10 years on a rolling basis, the MTOs should ensure that the safety margin of not overcoming the 3% deficit as percentage of GDP should not be breached.
Gradual approach of including contingent liabilities provides more weight to the current fiscal stance within a period where there is more certainty as to the likelihood that contingent liabilities will turn into explicit liabilities. The resulting MTOs will be consistent with the following objectives: providing sufficient margin for not breaching the 3% deficit-to-GDP ratio; keeping the debt below 60% of GDP; ensuring long-term fiscal sustainability; avoiding a distortive allocation of funds in the medium-term based on high degree of uncertain liabilities.
Slovenian public finance MTO: Real budget deficit below 3% of GDP by the end of 2013; Cyclically-adjusted budget deficit below 1% of GDPby the end of 2015; balanced çyclically-adjusted budget position reached by the end of 2016. Additional restriction: public debt during the consolidation phase must not exceed 45% of GDP, target value of public debt is 40% of GDP!
Medium-term fiscal sustainability model (MtFS model): MtFS model is designed on the idea of Hiebert and Rostagno1but restructured in such a way that primary influence of cyclical economic activity is transferred on revenue side, while fiscal consolidation and restructuring is reflected on the expenditure side. MtFS model is a powerful tool for fiscal policy decisions which stimulate convergence and determine a reasonable time horizon to achieve fiscal goals. 1Hiebert, P. and Rostagno, M. (2000), »Close to Balance or in Surplus: A Methodology to Calculate Fiscal Benchmarks«, Fiscal Sustainability
The number of expenditure equations in MtFS model corresponds to the number of government policies: control parameters [u, v] are introduced for each policy of expenditures for which measures of fiscal adjustment are carried out Results of the MtFS model are: scenarios of different combinations and intensity of expenditure cuts and reallocations, a time path for fiscal consolidation defining the velocity of consolidation measures.
Basic principles beyond fiscal rule construction: it is more important to decrease expenditure than to decrease deficit, spending fiscal rule acts counter-cyclically, expenditure targeting improves financial planning of budget users, fiscal balance (deficit) targeting includes risk of too optimistic revenue forecasting, consolidated general government budget balance depends on cyclical swings of economy, potential GDP growth is less volatile than actual GDP growth and as such a better base for expenditure growth, structural deficit is an unobservable quantity and less useful as a target.
Expenditure reaction rule: Gt+1 = Gt × (1 + g*) where g* is nominal growth of expenditures: g* = gtrend - u×(bt - b*) - v×(ft - f*) “preventive” part “corrective” part
gtrendaverage of last three, current and three forecasted potential GDP growths (%), b* targeted/benchmark debt ratio, f* targeted/benchmark primary balance ratio, u the velocity of adjustment to the discrepancy between the current and the target levels of the debt ratio, v the velocity of adjustment to the discrepancy between the current and the target value of primary deficit
Expenditures are supposed: to track the trend growth of the economy to be adjusted by a given percentage of the difference between the current debt ratio and the steady state debt target (u), and by a given percentage of the difference between the current primary surplus ratio and its target ratio in the long run (v)
Results: MtFS model already in use BwI still in progress
