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Fiscal Discipline Charles Wyplosz The Graduate Institute, Geneva Conference on Fiscal Policy IMF, June 2, 2009 PowerPoint Presentation
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Fiscal Discipline Charles Wyplosz The Graduate Institute, Geneva Conference on Fiscal Policy IMF, June 2, 2009. Outline. Fiscal discipline is hard to come by Institutions matter Rules are arbitrary Bureaucrats are great but unwelcome How to affect politicians’ incentives?.

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Fiscal DisciplineCharles WyploszThe Graduate Institute, GenevaConference on Fiscal PolicyIMF, June 2, 2009

outline
Outline
  • Fiscal discipline is hard to come by
  • Institutions matter
  • Rules are arbitrary
  • Bureaucrats are great but unwelcome
  • How to affect politicians’ incentives?
reasons for indiscipline
Reasons for indiscipline
  • Public debt is an externality
    • Private beneficiaries of spending and tax payments
    • Social cohesion
    • Mechanism for internalizing
  • Intertemporal inconsistency
    • Political parties (coalitions vs. single party majority)
    • Political regimes
institutions matter
Institutions matter
  • Large literature
    • Political regime
      • Democracies or not
      • Presidential vs. parliamentary
      • Majority vs. coalitions
    • Budget-setting process
      • Role and rights of parliament
      • Role of Finance Minister
      • Nesting of decisions
      • Rules
institutions matter8
Institutions matter
  • Large literature
  • Difficult to apply
    • Reforms are rare and in response to unusual circumstances
    • No simple lesson from literature
      • Except perhaps role of Finance Minister
    • Many other considerations, anyway
fiscal rules
Fiscal rules
  • Formal budget rules
    • Stability Pact
      • Numerical deficit ceiling (3% rule)
      • External monitoring and sanctions
      • Some effect, maybe
fiscal rules11
Fiscal rules
  • Formal budget rules
    • Stability Pact
    • Swiss “brake” (2003)
      • Aims at budget balance over the cycle
      • Ties expenditures to expected revenues (G=kT)
      • Explicitly allows for countercyclical spending (k a function of the output gap)
      • Bygones are not bygones
fiscal rules12
Fiscal rules
  • Formal budget rules
    • Stability Pact
    • Swiss “brake”
    • Chile and structural budget rule
      • Similar to Switzerland
fiscal rules14
Fiscal rules
  • Formal budget rules
    • Stability Pact
    • Swiss “brake”
    • Chile structural budget rule
    • Sweden and many more: multiyear horizon
sweden
Sweden

Note:

Rules often

established after

debt reduction

fiscal rules16
Fiscal rules
  • Formal budget rules
    • Stability Pact
    • Swiss “brake”
    • Chile structural budget rule
    • Sweden and many more
    • Golden rules
      • Germany
      • UK

All inclusive

Exclude

“productive”

investment

fiscal rules17
Fiscal rules
  • Formal budget rules
  • Informal budget rules
    • The British code for fiscal stability
    • The Dutch medium-term framework
      • Debt sustainability
      • Medium term = planned duration of Parliament
      • Embedded in election platform
      • Relies on expert estimation (CPB)
fiscal rules20
Fiscal rules
  • Formal budget rules
  • Informal budget rules
  • Inherent arbitrariness
    • Deficit vs. debt
    • Gross, net, contingent liabilities
    • Deficit/debt vs. spending
fiscal institutions
Fiscal institutions
  • Dealing with a large number of contingencies
    • Cannot rely on rules
  • Dealing with the deficit bias
    • Cannot rely on the political infrastructure
  • A solution must involve:
    • Judgment
    • Ability to counteract or resist pressure
fiscal institutions22
Fiscal institutions
  • Solution 1
    • Delegate budget to Finance Minister
  • Solution 2
    • Delegate budget balance to independent council
  • Solution 3
    • Advisory council to act as counter-pressure body
    • Can be embedded into budget process
politicians reject empowering bureaucrats
Politicians reject empowering bureaucrats
  • The misleading similarity with central banks
    • Weight of history
    • Income redistribution
  • The difficulty of separating out budget balance from spending and revenue decisions
  • Why are rules preferred to bureaucrats?
conclusions
Conclusions
  • Affect incentives
    • Can be evolutionary
  • The Dutch approach
    • Technical skills
  • The Wisemen approach
    • Independence
  • Europe’s special case
    • Replacing the Stability Pact