slide1 l.
Download
Skip this Video
Loading SlideShow in 5 Seconds..
Fiscal Policy Challenges Facing the New Member States in a Period of Large Capital Inflows & Substantial Investment Re PowerPoint Presentation
Download Presentation
Fiscal Policy Challenges Facing the New Member States in a Period of Large Capital Inflows & Substantial Investment Re

Loading in 2 Seconds...

play fullscreen
1 / 22

Fiscal Policy Challenges Facing the New Member States in a Period of Large Capital Inflows & Substantial Investment Re - PowerPoint PPT Presentation


  • 179 Views
  • Uploaded on

International Seminar for Experts “Catching up after Enlargement” Cicero Foundation October 14-15, 2004 . Fiscal Policy Challenges Facing the New Member States in a Period of Large Capital Inflows & Substantial Investment Requirements . Armin Riess European Investment Bank. Main questions.

loader
I am the owner, or an agent authorized to act on behalf of the owner, of the copyrighted work described.
capcha
Download Presentation

PowerPoint Slideshow about 'Fiscal Policy Challenges Facing the New Member States in a Period of Large Capital Inflows & Substantial Investment Re' - Mercy


Download Now An Image/Link below is provided (as is) to download presentation

Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author.While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server.


- - - - - - - - - - - - - - - - - - - - - - - - - - E N D - - - - - - - - - - - - - - - - - - - - - - - - - -
Presentation Transcript
slide1

International Seminar for Experts

“Catching up after Enlargement”

Cicero Foundation

October 14-15, 2004

Fiscal Policy Challenges Facing the New Member States in a Period of Large Capital Inflows & Substantial Investment Requirements

Armin Riess

European Investment Bank

main questions
Main questions
  • Public debt & fiscal deficits that countries can “afford”?
  • Role of public investment and other expenditure?
  • Role of balance of payments position (notably capital inflows)?
what do we need to examine
What do we need to examine?
  • Key features of CEE economies
  • Public debt sustainability
  • Mixed blessing of capital inflows
real gdp growth projection in 2004
Real GDP growth projection (in %), 2004

Long-run CEE growth potential 4-5%

EU-15 potential

Source: European Commission, Economic Forecast, Spring 2004

consumer price inflation in 2004
Consumer price inflation (in %), 2004

2004 CEE average

EU-15/eurozone target

Source: European Commission, Economic Forecast, Spring 2004

public debt in cee eu 15 of gdp 2004
Public debt in CEE & EU-15 (% of GDP), 2004

Maastricht 60% criterion

Source: European Commission, Economic Forecast, Spring 2004

key features of cee economies summary
Key features of CEE economies - Summary -
  • Real economic growth: CEE > EU15
  • Inflation: CEE > EU15

 Nominal economic growth: CEE > EU15

  • Public debt: CEE < EU15
public debt sustainability ad hoc criteria
Public debt sustainability(ad hoc criteria)
  • Keep public debt/GDP-ratio constant !
  • Debt/GDPshould converge to 60% (Maastricht) !
  • Debt/GDP should fall to zero

(Stability & Growth Pact) !

debt dynamics
Debt dynamics

Change in debt/GDP ratio

= fiscal deficit/GDP ratio

– nominal GDP growth • debt/GDP ratio

where does public investment fit into this picture
Where does public investment fit into this picture?
  • Fiscal deficit can be higher if …
  • … public investment is large today, but expected to fall in the future.
  • Is public investment high in CEE?
public investment in cee eu 15 of gdp 1999 2003 average

CEE average 3.9%

EU15 average 2.3%

Public investment in CEE & EU-15(% of GDP, 1999-2003 average)

Source: European Commission (2003 Spring Forecast) and IMF (Staff Appraisal Reports)

what about other public expenditure
What about other public expenditure?
  • High investment today can justify higher fiscal deficit, but …
  • … other government expenditure may be low today relative to their future level.
  • Example: public pension expenditure
public pension expenditure in selected cee countries in of gdp
Public pension expenditure in selected CEE countries(in % of GDP)

Source: European Commission; Occasional Paper 4, July 2003

public debt sustainability summary
Public debt sustainability- Summary -
  • Debt sustainability does not imply the same fiscal deficit for all countries
  • Some government expenditure (investment) may justify higher fiscal deficits, others (pensions) call for fiscal restraint
  • Public debt sustainability is one thing, macroeconomic stability is another
capital inflows in of gdp 2001 2003 average for cee peak inflow periods otherwise
Capital inflows (in % of GDP)(2001-2003 average for CEE, peak inflow periods otherwise )

1998-9

1996-9

1987-91

Source: IMF (Staff Appraisal Reports); Begg et al. (2002)

capital inflows current account deficits in of gdp 2001 2003 average
Capital inflows & current account deficits(in % of GDP, 2001-2003 average)

Capital inflows

Current account deficit

Source: IMF (Staff Appraisal Reports)

why do large capital inflows occur
Why do large capital inflows occur?
  • Higher returns on physical investment
  • Expected trend appreciation of currency (Balassa-Samuelson effect)
why are capital inflows a mixed blessing
Why are capital inflows a mixed blessing ?

What’s good:

  • Investment finance  higher growth

Too much of a good thing:

  • Overheating of economy (inflation)
  • Credit boom & banking sector stability
  • Excessive currency appreciation & competitiveness
how to cope with large capital inflows
How to cope with large capital inflows?

Banking sector stability

  • Effective prudential regulation & supervision

Overheating of economy

  • Revaluation of exchange rate/exchange rate flexibility
  • Fiscal austerity
fiscal deficit exchange rate regime of gdp 2001 2003 average
Fiscal deficit & exchange rate regime(% of GDP, 2001-2003 average)

“Flexible” exchange rates

Hard currency pegs

Source: IMF (Staff Appraisal Reports)

conclusion
Conclusion
  • Fiscal policy assessment requires a country-by-country approach
  • Coping with ‘dark side’ of capital flows is key (fiscal) policy challenge
  • Fiscal policy challenges other than those concerning the ‘bottom line’