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International Seminar for Experts “The coming enlargement of the the EU” Cicero Foundation October 12-13, 2006 . Fiscal Consolidation and Public Investment:  Friends, Foes, or Neutral Partners? A Look at Bulgaria and Romania . Armin Riess European Investment Bank. Outline.

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slide1

International Seminar for Experts

“The coming enlargement of the the EU”

Cicero Foundation

October 12-13, 2006

Fiscal Consolidation and Public Investment: 

Friends, Foes, or Neutral Partners?

A Look at Bulgaria and Romania

Armin Riess

European Investment Bank

outline
Outline

1. Motivation – EIB interest

2. General observations (EU 27)

  • Public debt sustainability (the long run)
  • Macroeconomic constraints to fiscal policy (the short run)

3. Fiscal consolidation and public investment

  • Bulgaria
  • Romania

4. Conclusion

outline3
Outline

1. Motivation – EIB interest

2. General observations (EU 27)

  • Public debt sustainability (the long run)
  • Macroeconomic constraints to fiscal policy (the short run)

3. Fiscal consolidation and public investment

  • Bulgaria
  • Romania

4. Conclusion

outline4
Outline

1. Motivation – EIB interest

2. General observations (EU 27)

  • Public debt sustainability (the long run)
  • Macroeconomic constraints to fiscal policy (the short run)

3. Fiscal consolidation and public investment

  • Bulgaria
  • Romania

4. Conclusion

public debt in eu 27 of gdp 2006
Public debt in EU-27 (% of GDP), 2006

Maastricht 60% criterion

Source: European Commission, Economic Forecast, Spring 2006

fiscal balance in eu 27 of gdp 2006
Fiscal balance in EU-27 (% of GDP), 2006

Maastricht 3% criterion

Source: European Commission, Economic Forecast, Spring 2006

debt dynamics
Debt dynamics

Change in debt/GDP ratio

= fiscal deficit/GDP ratio

– nominal GDP growth • debt/GDP ratio

debt dynamics8
Debt dynamics

Change in debt/GDP ratio

= fiscal deficit/GDP ratio

– nominal GDP growth • debt/GDP ratio

Key message: debt accumulation the slower, the

  • smaller the deficit
  • higher economic growth
real gdp growth in 2000 05
Real GDP growth (in %), 2000-05

Source: European Commission, Economic Forecast, Spring 2006

bulgaria fiscal balance and public debt in of gdp
Bulgaria: fiscal balance and public debt (in % of GDP)

Public debt (right scale)

Fiscal balance (left scale)

Source: National Statistical Institute (NSI) of Bulgaria; *Projected

romania fiscal balance and public debt in of gdp
Romania: fiscal balance and public debt (in % of GDP)

Pubic debt (right scale)

Fiscal balance (left scale)

Source: IMF; *based on policy measures (1.8% of GDP) relative to initial budget

outline16
Outline

1. Motivation – EIB interest

2. General observations (EU 27)

  • Public debt sustainability (the long run)
  • Macroeconomic constraints to fiscal policy (the short run)

3. Fiscal consolidation and public investment

  • Bulgaria
  • Romania

4. Conclusion

outline17
Outline

1. Motivation – EIB interest

2. General observations (EU 27)

  • Public debt sustainability (the long run)
  • Macroeconomic constraints to fiscal policy (the short run)

3. Fiscal consolidation and public investment

  • Bulgaria
  • Romania

4. Conclusion

macroeconomic constraints
Macroeconomic constraints

Concerns about

  • Inflation  internal imbalances
  • External current account  external imbalances
macroeconomic constraints19
Macroeconomic constraints

Concerns about

  • Inflation  internal imbalances
  • External current account  external imbalances
external current account in of gdp
External current account (in % of GDP)

Current account balance = Trade balance + …

Current account balance = Savings – Investment

external current account in of gdp21
External current account (in % of GDP)

Current account balance = Trade balance + …

Current account balance = Savings – Investment

Investment

Saving

Current account balance

Current account balance =

external current account in of gdp22
External current account (in % of GDP)

Current account balance = Trade balance + …

Current account balance = Savings – Investment

Investment

Saving

Current account balance

(Savings – Investment) of private sector

+ fiscal balance

Current account balance =

outline23
Outline

1. Motivation – EIB interest

2. General observations (EU 27)

  • Public debt sustainability (the long run)
  • Macroeconomic constraints to fiscal policy (the short run)

3. Fiscal consolidation and public investment

  • Bulgaria
  • Romania

4. Conclusion

outline24
Outline

1. Motivation – EIB interest

2. General observations (EU 27)

  • Public debt sustainability (the long run)
  • Macroeconomic constraints to fiscal policy (the short run)

3. Fiscal consolidation and public investment

  • Bulgaria
  • Romania

4. Conclusion

bulgaria contributions to change in fiscal balance in of gdp 2001 05
Bulgaria: contributions to change in fiscal balance (in % of GDP), 2001-05

Change in fiscal balance 3.8 %

Decline in public investment

0.2 %

Decline in interest payments on public debt

2.1 %

Increase in revenue

3.1 %

Change in

fiscal balance

Increase in current expenditure (excl. interest payments)

– 1.6 %

Source: Bulgarian National Bank

romania contributions to change in fiscal balance in of gdp 2001 05
Romania: contributions to change in fiscal balance (in % of GDP), 2001-05

Change in fiscal balance 3.3 %

Decline in public investment

0.3 %

Decline in interest payments on public debt

3.7 %

Change in

fiscal balance

Decline in current expenditure (excl. interest payments)

1.5 %

Decline in revenue

2.2 %

Source: IMF

public investment of gdp
Public investment (% of GDP)

Eurozone countries 2005

Source: AMECO (European Commission)

conclusion
Conclusion
  • Fiscal policy in BU & RO: macroeconomic stability rather than debt sustainability
  • Fiscal consolidation has not come at expense of public investment  “neutral partners”
  • Public investment in BU & RO low compared to NMS-8, but increase possible without deteriorating fiscal balance
slide29

International Seminar for Experts

“The coming enlargement of the the EU”

Cicero Foundation

October 12-13, 2006

Fiscal consolidation and public investment: friends, foes, or neutral partners?

A look at Bulgaria and Romania

Armin Riess

(a.riess@eib.org)

European Investment Bank