Transcript KOPITS.presentation

Lessons from
the Hungarian “Exception”
George Kopits
ICGFM Winter Conference “PFM in the 21st Century”
Washington, December 5-7, 2011
Outline
• Background
• Broad fiscal trends
• Exception 1.0 (in 2001-09)
• Paradigm change?
• Exception 2.0 (since 2010)
• Implications for sovereign risk
• Conclusion: Lessons
Background
Mixed progress during the transition
• Reforms in the tradable sector
– External liberalization
– Domestic liberalization (incl. financial system)
– Privatization (incl. effective bankruptcy procedures)
• Slow reforms in the non-tradable sector
– Public administration: workforce remained bloated
– Social security system partially reformed
– Tax system partially restructured
• Monetary policy: broadly successful IT regime
• EU membership  moral hazard
Background
Economic performance
• Foreign direct investment: first high, then low
• Swings in external performance
•
• Near crisis in mid-90s, and late 2008
• Disinflation into single digits, but some persistence
• Marked deceleration in economic growth
Background
Real GDP Growth Rate
xxxxxxxxxxxxxxxxxxxxxx
GDP növekedés (év/év)
15
10
5
0
-5
-10
Euró övezet
Csehország
Lengyelország
Magyarország
Szlovákia
Background
R eal G DP per c apita at ppp
(100 = E U27 averag e)
100
90
80
70
60
50
40
30
20
10
0
1995
Sl
CZ
2010
HU
SK
PL
ES
LU
RO
BL
LA
Broad fiscal trends
Distinguishing characteristics
– deficit bias
– time inconsistency
– procyclicality
– debt sustainability problem
– lack of transparency
Broad fiscal trends
G eneral G overnment B alanc e
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
4%
Deficit forecas t of P re-Acces ion and
C onvergence programs s ubmitted 2002-11
P erc ent of G D P
2%
0%
-2%
-4%
-6%
-8%
-10%
-12%
MNB , NG M
2010
2011* 2012* 2013*
Broad fiscal trends
Percent of GDP
Fiscal Stance: Hungary
10
10
8
8
6
6
4
4
2
2
0
0
-2
-2
-4
-4
"Great Moderation"
-6
Crisis
-8
-6
-8
Eurostat
Cyclically adjusted primary deficit
GDP growth
Broad fiscal trends
Percent of GDP
Fiscal Stance: Euro Area
10
10
8
8
6
6
4
4
2
2
0
0
-2
-2
"Great Moderation"
-4
Crisis
-4
-6
-6
-8
-8
Eurostat
Cyclically adjusted primary deficit
GDP growth
Broad fiscal trends
P ublic Debt
85
75
70
65
60
55
50
45
MNB
G ros s Debt
Maas tricht criterion
*
20
12
*
11
20
10
20
09
20
08
20
07
20
06
20
05
20
04
20
03
20
02
20
01
20
00
20
99
19
98
19
97
40
19
P erc ent of G DP
80
Broad fiscal trends
Public Debt
80
70
% of G D P
60
50
40
30
20
10
0
2004
B ulgaria
2005
C zech R epublic
2006
E s tonia
Hungary
2007
L atvia
2008
L ithuania
P oland
2009
R omania
Broad fiscal trends
Lack of transparency
– inconsistent time-series data
– overoptimistic macro-fiscal forecasts
– abusive PPP practices
– distorted accounting for SOEs
– opacity in budgetary procedures
– occasional arrears in expenditures and tax rebates
Exception 1.0 (2001- 09)
Center-left government
Expansionary stance during “Great Moderation”
• government wage hikes
• public pension hikes
• VAT rate cuts
Contractionary stance during crisis (IMF-EU standby)
• wage and pension freeze
• VAT rate increase
• some streamlining of social entitlements
• rules-based fiscal framework
Paradigm change?
Rules-based fiscal framework (FRL Nov. 2008)
• policy rules: expenditure limit
real debt limit
( limit on discretionary deficit)
• procedural rules: pay-go rule
MT budgetary planning
• transparency norms
• independent fiscal institution: Fiscal Council
Paradigm change?
Fiscal Council
• Contribute to goals of fiscal framework
– credibility in fiscal policymaking
– transparency in public finances
– public debt sustainability
• Basic characteristics, functions
– independence (incl. election, tenure of members)
– arm’s length relation, equal access
– decisions by consensus
– surveillance (evaluation, compliance)
Paradigm change?
Fiscal Council: surveillance functions
• Evaluation at aggregate level
• Evaluation at disaggregate level
• Compliance with standards and procedures
• Compliance with fiscal rules
• Communication (government, press, etc.)
Paradigm change?
Fiscal Council: performance
– strong technical staff
– early tail winds (during adjustment program)
– favorable press coverage
– positive feedback from civil society
– no interference from government
– first government complied, second did not
– de facto abolition at end-2011
Exception 2.0 (since 2010)
Center-right government
Major policy (reform?) measures
• flat tax, without exempt threshold
• temporary taxes on selected activities
• record VAT rate (27%)
• nationalization of private pension funds
Institutional changes
• limits on Constitutional Court, on fiscal matters
• political appointment as head of State Audit Office
• attempts at curtailing independence of NBH
• de facto abolition of Fiscal Council
Exception 2.0 (since 2010)
Demise of the Fiscal Council
• Critical assessments by the Council
– changes in accounting rules
– effects of various changes in tax law, pension reform
– forecasts of four-year macro-fiscal outlook
• Reactions by the government
–
–
–
–
–
limited access to information
proposal to drastically cut funding
disbandment of FC staff
narrowing remit of FC to opinion on budget bill
appointment of new FC chair (following resignation of former)
Implications for sovereign risk
Implications for sovereign risk
Comparison with the UK
• Common features
– fiscal sustainability problem
– low policy credibility
– contemporaneous election of center-right governments
• United Kingdom
– clear medium-term fiscal target
– front-loaded adjustment program
– establishment of Office for Budget Responsibility
• Hungary
– mixed and opaque policy signals
– adoption of distortionary stop-gap measures
– abolition of Fiscal Council
Implications: sovereign risk premium
Hung ary
United K ing dom
O
y
ar
be
r
0
0
20
11
20
10
01
0
0
20
1
r2
er
be
nu
em
Ja
ec
em
ct
ob
01
10
01
t2
20
0
10
20
1
20
20
10
10
10
20
20
20
10
r2
us
be
ug
ly
ne
Ju
Ju
pt
em
ov
D
N
Se
A
il
pr
M
ay
A
ch
M
ar
ry
y
ar
ua
nu
Fe
br
Ja
C DS s pread on 10-year g overnment bonds (bps )
Implications:
sovereign default risk premium
400
350
300
250
200
150
100
50
0
Conclusion: Lessons
• “Exception” leads to stagnant activity, long-term
sustainability problem, and vulnerability to crisis
(lacking a natural resource base)
• Government should not succumb to populist instincts
or to moral hazard
• Government ignores financial markets at its peril
• IMF can provide financial and technical assistance,
but policy credibility must be home-grown
• New government must use opportunity to signal
paradigm change and follow up with action
References
Kopits, G., “Monetary and Fiscal Policy from Transition to EU Integration: A
Comparative Assessment” in B.Y. Kim and C. H. Lim, eds., Financial Sector
Reform in Transition Economies (Seoul National University, 2009), pp. 2961.
Kopits, G., “Brussels Can’t Monitor 27 Budgets” The Wall Street Journal
(October 11, 2010)
Kopits, G., “Goulash Populism” The Wall Street Journal (February 25, 2011)
Kopits, G., “Independent Fiscal Institutions: Developing Good Practices” OECD
Journal on Budgeting (November 2011)