Transcript Fiscal Indicators: International Comparison

A New Fiscal Rule
Karnit Flug
Research department
The Bank of Israel
May, 2009
1
Outline
• The starting point: what is the current fiscal
position ( high debt/GDP, inconsistency
between Gov’ decisions)
• Where should the new rule help us get to?
• Desired attributes of a new rule
• Controls, escape clauses, and updates
• The proposed rule
• The projected path of main fiscal aggregates
under the proposed rule
2
Fiscal Indicators at the starting point:
International Comparison
(2007-2008 average)
Israel
General Government Deficit (+)
Gross Public Debt
Tax Burden
General Government Expenditure
3
OECD
EU
Average Average
1.3
-0.6
0.6
78.7
57.2
57.0
35.2
37.1
38.8
45.3
43.9
46.2
The Path of the Debt/GDP
118
115
112
109
106
103
100
97
94
91
88
85
82
79
76
73
70
Constant annual increase of 1.7 percent in expenditure ceiling*
Increase in expenditure according to the specific government decisions*
Constant annual increase of 1.7 percent in expenditure in a slow recovery scenario**
Increase in expenditure according to the specific government decisions in a slow recovery scenario**
2007
2008
2009
2010
2011
2012
2013
2014
2015
*consistent with -1.5% and 1.0% growth rate in 2009 and 2010 respectively, and from 2011 and
onwards a higher growth rate of around 4.0% per annum.
**consistent with -1.5% and 0.0% and 1% growth rate in 2009 - 2011 respectively, and a recovery
starting
4 from 2012.
*Source: Based on Bank of Israel data.
2016
At the Starting Point: Inconsistency
Between Decisions
• The current ceiling on growth of real government
expenditure (1.7%) is inconsistent with a set of
specific programs adopted by the government
and “automatic” growth in budgets.
• The adoption of a new rule should include the
reorganization of commitments so as to make
them consistent with the new rule and include a
mechanism to prevent the emergence of new
gaps.
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Where should the New Rule Take us?
• Our debt/ GDP ratio is relatively high; The
risks we face are relatively high, thus we
should aim at a debt/GDP ratio which is
lower than the standard in developed
economies.
• We should aim at 60% of GDP as an
intermediate target, and continue reducing
the ratio to 50 %, albeit at a slower pace
thereafter.
6
What Should a Rule be Based on?
•
Long term targets that reflect policy goals
regarding:
1. Main fiscal aggregates (debt, expenditure, taxes)
2. The level of government services and redistribution
3. The risks the economy is exposed to
•
•
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The speed at which these targets should be
achieved.
From these, short term operative targets
should be derived.
What are the Attributes of the
Desired Rule?
• Will lead to the target debt ratio within the
decided time frame
• Will facilitate fiscal discipline within the
fiscal process
• Will not lead to a pro-cyclical policy (or
facilitate counter-cyclical policy)
• Will be credible and sustainable
• Will be simple and transparent
• Will be based on variables that are known
8 in real time.
Why Spending Rule?
• Expenditure ceiling is directly controlled by
the government
• Expenditure is not affected unexpectedly, like
the deficit, by changes in economic activity
• A ceiling on spending allows the automatic
stabilizers to operate
• Expenditure ceiling is consistent in the
medium/long term with a debt- ratio target if
average growth is consistent with estimates
and tax reductions are dealt with within the
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rule’s framework
Control, Escape Clauses and
Update mechanisms
• For a deviation of growth over time from
estimates
• For a consistent deviation of tax receipts from
long term relationships with macro-economic
variables
• For extreme circumstances such as war, natural
disasters or extreme world economic conditions
The credibility that has been accumulated allows for
short term deviations, but without a corrective
mechanism it might be eroded.
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The Proposed Rule
• The real growth in government expenditure will be
based on the estimated potential growth, corrected for
the distance between last year’s debt/GDP ratio and
the intermediate target of 60%. The further we are from
the target, the lower will the expenditure growth be.
PEgr = GDP_POTgr - a*((D/Y)t-2*100-60) +2
•
•
•
•
Where PE is government expenditure
GDP_POTgr is the estimated potential growth
D is the public debt and Y is the GDP
The parameter a is a fixed number (say 6%) that
defines the extent of the correction of expenditure
growth as a function of the debt ratio from its target.
When
the debt/GDP reaches 60% it becomes zero.
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Technical aspects of the proposed Rule
• The potential long term growth is based on the
average per-capita 10 year growth rate and the
CBS projected population growth
• Potential long term growth estimate will be
updated every 4 years based on growth in the
previous 10 years.
• The ceiling will refer to overall expenditures
including those of the Social Security, transfers to
the health HMOs and contingent expenditures.
• Expenditures fully financed by foreign
governments will be exempt from the ceiling.
• Interest payments will be calculated according to
the EU(?)/SNA standards
• 2 percent will be added to the calculated ceiling to
compensate for price increase.
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Treatment of Changes in Tax Rates
• The rule is based on a long term target of
reducing the debt/GDP ratio, therefore:
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– To avoid circumventing the spending ceiling,
all tax benefits that are defined as tax
reductions to particular groups or sectors, will
be treated as expenditure and will be subject
to the ceiling
– The Cost of changes in the general tax rates,
beyond those needed to keep constant tax
burden will be offset from the ceiling on
expenditure growth
Macro Economic Scenarios for Analyzing Fiscal
Aggregates Under the Proposed Fiscal Rule
2009
2010
2011
2012
2013
2014
2015
2016
Basic
Scenario
-1.5
1.0
4.5
5.0
4.5
4.0
3.2
3.1
Growth of 4
percent from
2010
-1.5
4.0
4.0
4.0
4.0
4.0
4.0
4.0
Delayed
Recovery
-1.5
0.0
1.0
3.5
6.0
6.0
5.5
3.1
14
*Source: Based on Bank of Israel data.
The Path of Government expenditure
%
(percent of GDP)
42
40
Basic Scenario
Grwoth of 4 percent from 2010
Delayed Recovery
38
36
34
32
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
20
16
20
17
20
18
20
19
20
20
30
15
*Source: Based on Bank of Israel data.
The Path of Deficit
%
(percent of GDP)
4
2
0
-2
-4
-6
Basic Scenario
Grwoth of 4 percent from 2010
Delayed Recovery
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
20
16
20
17
20
18
20
19
20
20
-8
16
*Source: Based on Bank of Israel data.
The Path of the Debt/GDP
%
Basic Scenario
Grwoth of 4 percent from 2010
Delayed Recovery
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
20
16
20
17
20
18
20
19
20
20
100
95
90
85
80
75
70
65
60
55
50
17
*Source: Based on Bank of Israel data.
Thank you
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