Transcript Challenge 3

Introduction
1. Profound political challenges pervade almost
all aspects of life in BH.
2. Resolution of these political problems offers
the greatest promise for achieving greater
efficiency in the provision of public services.
3. Current policies – without the necessary
structural reforms – will accelerate the country
towards a position that is unsustainable.
4. Political elites seem to have a different
priorities.
Major Challenges
1. Improve fiscal policy management by
strengthening the Fiscal Council (FC)
2. Reduce the magnitude of the tax burden,
especially on labor
3. Reshape public expenditures – excessively
concentrated on current spending including
(public wages, pensions and social transfers)
4. Improved the efficiency of spending (esp. health,
education)
Challenge 1:
Improve fiscal policy management
Bosnia and Herzegovina (State-level institutions)
Extra
Budgetary
Funds (35)
Pension (1),
Employment
(11),
Health (11),
Road (11)
Motorway (1)
Federation of BH
Entity Government
Republika Srpska
Entity Government
Cantons
(10)
Municipalities
(79)
Municipalities
(63)
Extra
Budgetary
Funds (6)
Pension,
Employment,
Health,
Child,
Road,
Motorway
Brcko
District
Extra
Budgetary
Funds (2)
Employment,
Health
1. No autonomy of monetary policy
2. Establishing an effective mechanism for
coordinating fiscal policy is, therefore, critical
3. Fiscal Council has a key role to play, but should be
strengthened.
Challenge 1:
Improve fiscal policy management
1.
2.
3.
4.
Improve the Law on Fiscal Council
Get more frequent and timely data
Strengthen the analytical capacity
Take the lead in key fiscal management issues, as
stipulated in the FC Law:
i) public sector pay management;
ii) public investment coordination and management;
iii) social expenditure policies and
iv) public sector procurement.
Challenge 2:
Reduce the magnitude of tax burden
Revenue Structure of General Government (% GDP)
1. VAT reform in 2006
2. Income tax reform
2006-09
3. Social Contributions
unreformed
4. Tax burden high
overall at 38.2 GDP
•
•
•
•
Tax on income: 10% (PIT or CIT)
Tax on consumption: 17% (VAT)
Tax on labor: 41 or 33% (Social contributions)
RESULT: high labor informality (26-36%)
Challenge 2:
Reduce the magnitude of tax burden
1. Broaden the tax base by eliminating non-taxable
exemptions and reduce social contributions to
achieve revenue neutrality.
2. Consider further reductions in health contribution
rates, especially in FBH
3. Replacing forgone with other revenues, namely
excise and higher income taxes.
4. Ensure that any reductions in labor taxes are
balanced with other benefit reductions or other
less distorting revenue increases in order to
preserve fiscal sustainability.
Challenge 3:
Reshape spending
Expenditure of General Government (% GDP)
GG Current Expenditure (% GDP)
1. Large spending by general
government
2. Concentrated on current
expenditure, at the expense
of investment.
3. Not laying foundations for
future growth
4. Public sector wages,
pensions and cash transfers
are main culprits.
Challenge 3:
Reshape spending - Pensions
Dependency Ratio - FBH Pension Fund
1.
2.
3.
4.
Contribution Rates - FBH Pension Fund
High benefits (10.2% GDP).
High dependency ratios.
Low contributor numbers.
Large numbers of early
retirees.
5. Inappropriate scaling and
qualification criteria for
disability benefits.
6. Significant unfunded
“privileged” pensions.
Challenge 3:
Reshape spending - Pensions
1. Pension reform advanced in RS, while stalled in
FBH (complete overhaul needed)
2. Introduce strict curbs on early retirement.
3. Establish actuarial pension reductions for those
who do retire early.
4. Eliminate double-dipping between war-related
benefits and pension fund benefits.
5. Revise the disability benefit formula to provide
higher benefits for the fewer people who will
qualify as disabled.
6. Provide survivor pensions only at retirement age
and withdraw them if remarriage occurs.
Challenge 3:
Reshape spending – Social Transfers
Social Assistance Spending in BH and ECA, % of GDP, 2008-10
BiH 10
*Hungary 08
Croatia 08
*EU 08
Romania 08
Russia 08
*Slovenia 08
Ukraine 08
Belarus 08
Albania 08
*Estonia 08
Serbia 08
*Slovakia 08
Lithuania 08
Kosovo 08
Moldova 08
Bulgaria 08
Georgia 08
Montenegro 08
Armenia 08
FYR Macedonia 08
Azerbaijan 08
*Poland 08
Turkey 08
Kyrgyz Republic 08
Latvia 08
Tajikistan 08
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
4.5%
1. Historically high and
fiscally unsustainable.
2. Also economically
inefficient and socially
inequitable.
3. Dominated by
programs for veterans
and poorly targeted.
4. Entity-level spending
4% GDP. Cantonal and
municipal spending
(up to additional 3%)
Challenge 3:
Reshape spending – Social Transfers
1. Develop effective targeting mechanisms for
veteran benefits.
2. Step up eligibility audit efforts.
3. Diversify the support for veterans who would lose
cash benefits as a result of reforms.
4. Introduce design changes in the social assistance
programs to eliminate work disincentives.
5. Improve the cost-efficiency, transparency and
accountability of benefit administration.
Challenge 3:
Reshape spending – Public Wages
Wage Bill as % of GDP
1. Expenditure on wages
are high (13% GDP) and
unsustainable
2. Have been increasing
faster than GDP and
faster than revenues
3. The growth has been due
Annual Growth Rates of Revenue, Expenditure and Wage Bill
mainly to salary
increases, but also due to
increases in employment.
4. Wages in the public
sector are high compared
to average pay levels
14
12
10
8
6
4
2
0
2007
2008
2009
2010
Challenge 3:
Reshape spending – Public Wages
1. Institute meaningful establishment controls.
2. Reduce the cost of various salary increments:
•
•
•
Abolish discretionary fees
Eliminate universal entitlements to allowances
Restrict allowance eligibility
3. Reduce the number of auxiliary staff by
outsourcing these functions or transferring
these employees to labor law contracts.
4. Increase flexibility in negotiations with public
sector trade unions to avoid disorderly wage
bill cutbacks in the future.
5. Improve coordination in wage bill planning in
the Fiscal Council.
Challenge 4:
Improve Efficiency of Spending
1. Over the longer term the authorities need to
take account of demographic realities.
2. Significant additional fiscal pressures from
rising health and pension costs as the
population ages and from a decline of the
working age population.
3. Declining enrollment rates in elementary and
secondary schools.
4. Need to provide better value-for-money in
health and education.
Challenge 4:
Improve Efficiency - Health
Private Households' Out-of-Pocket Payment on
Health as % of Total Health Expenditure, 2008
Generic Drug Price Differential Between BH and Croatia
1. Expenditure growing
rapidly (2008 -10.3%
GDP), but poor
outcomes.
2. Financing of health
sector is not equitable
nor sustainable
3. 50 percent of those
covered are exempt
from contributing
4. High private out-ofpocket payments
5. High drug costs
Challenge 4:
Improve Efficiency - Health
1. Expand the insurance risk pool related to
hospital and pharmaceutical care.
2. Reduce fragmentation and duplicate functions.
3. Leverage family medicine reforms to increase
Primary Health Care productivity and increase
preventive medicine.
4. Consider hospital financing reforms e.g.
Diagnostic Related Groups.
5. Centralize procurement of drugs to at least the
entity level.
Challenge 4:
Improve Efficiency - Education
1.
2.
3.
4.
Overall spending is not
excessive, but weak reasults
Allocation of spending within
the sector needs refinement and
is affecting efficiency.
Wage expenditures are
crowding out non-wage
spending.
BH’s student performance on
international test is poor
compared to similar countries
with similar amount of
spending
Challenge 4:
Improve Efficiency - Education
1. Introduce per capita financing of schools to
replace the existing the input-based financing
system.
2. Establish an Education Management Information
System. Limit further teacher wage increases.
3. Develop a more decompressed wage structure.
4. Rebalance spending between school levels to
enhance pre-school and tertiary education
5. Address the quality issues in upper secondary
that are at the root of low enrollment rates.
Summary
1. Strengthen institutions for effective decisionmaking
2. Public expenditures are large – especially current
expenditures
3. Reshape the tax burden from labor taxes to other
taxes
4. Service delivery is too-decentralized and should
be transferred at a higher level
5. Public spending needs to provide better valuefor-money in certain sectors