Transcript Closing Kosovo*s Energy Deficit

PEMPAL 2016 BCoP PLENARY MEETING
FISCAL RULES FOR EFFECTIVE AND SUSTAINABLE BUDGETING
MINSK, BELARUS
24–26 FEBRUARY 2016
FISCAL RULES
REFLECTIONS ON SUCCESS FACTORS AND
INHERENT CHALLENGES
James A. Brumby
Director
Governance Global Practice
24 February 2016
Policy Challenge: Conflicting Objectives, Misshapen Policies
Long-term
development
objectives
• Growth and
employment
generation
• Macro stability
(counter-cyclical
fiscal policies)
• Long-term debt
sustainability
Fiscal
Short-term
political
objectives
policies
• Elections (political
business cycles)
that risk being
growth-inhibiting,
unsustainable,
anchorless,
ineffective,
pro-cyclical
• Popularity (social
largesse; reform
aversion; highvisibility, low-impact
investments)
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Obvious Response: “Depoliticise Fiscal Policies!”
Conceptually
“ideal” fiscal rule:
Balance budget at
potential GDP
so as to allow for
debt sustainability
and countercyclical policies
during periods of
recessions
(deficits!)
and of booms
(surpluses!).
Difficulty (Impossibility): Estimating and projecting “potential GDP”
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The success of
fiscal rules…
… has largely followed an
intense debate on the
benefits of depoliticising
governments’ economic
decision-making processes—
see, e.g., the blossoming
“political business cycle”
literature and its
unfavourable description of
politicians’ motives and
findings of political
manipulations of the
economy by “opportunistic
politicians”.
From a social-welfare
perspective, these political
manipulations were regarded
sub-optimal.
1991
2014
3Source: IMF.
Fiscal Rules Are (But) Performance Indicators
Fiscal rules are generally understood as “a permanent
constraint on fiscal policy, typically defined in terms of an
indicator of overall fiscal performance” (Kopits and Symansky,
1998), which have been introduced to
(i)
signal commitment to fiscal discipline;
(ii)
contain policy discretion; and
(iii)
prevent pro-cyclical fiscal policies.
Fiscal rules tend to be perceived by capital markets as improving
long-term fiscal perspectives, thus leading to a reduction in
sovereign risk premia and lower interest rates.
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“Useful But Not A Panacea”
Effective designs of fiscal rules need to
i.
reflect authorities’ ownership for, and commitment to,
the corresponding legal constraints (in letter and spirit!);
ii. ensure (credibly) the commitment to medium-/long-term
fiscal discipline;
iii. allow for short-term flexibility and define mechanisms to
deal with exceptional economic circumstances;
iv. be consistent with complementary macro-economic
objectives; and
v. be understandable, implementable, monitorable,
enforceable, and incentive compatible.
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(i) Ownership and Policy Commitment (1/4)
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(i) Ownership and Policy Commitment (2/4)
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(i) Ownership and Policy Commitment (3/4)
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(i) Ownership and Policy Commitment (2/4)
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The Euro Area example illustrates that intrinsic inconsistencies in,
and complex definitions of, fiscal rules weaken the likelihood of
providing the long-term policy anchor of debt sustainability.
(ii) Proper Long-Term Policy Anchors
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(iii) Beyond Basic “Fair Weather” Rules (1/2)
Against this backdrop—and especially importantly for smaller
(post-)transition economies—“politically sustainable” fiscal
rules need to define explicitly
i.
“exceptional economic circumstances” and ways to deal
with them, both as short-term responses and mediumterm corrective adjustments;
ii. lumpy, high-impact “priority investments”, including
criteria that would exempt them (partially) from
applicable rules; and
iii. the ability to “carry over” unused fiscal space from years
with exceptionally favourable conditions or large
privatisation receipts.
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(iii) The Proper Balance of Flexible Rigidities (2/2)
Proper fiscal rules do not substitute for—but complement—
policy-makers’ fiscal responsibility.
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One
(iv) Component of an Overarching Development Strategy
Fiscal rules need to be consistent with a country’s
overarching development objectives:
Intertemporal aspects of “fiscal solvency”: restricting
investments in productive public assets (to limit deficits)
can entail significant costs in terms of a country’s
permanently foregone growth potential:
 early negative cash-flows vs. future returns of public
investments and their impacts on a country’s fiscal
solvency over a longer-term horizon;
 Debt-financed productive expenditure does not
necessarily jeopardise fiscal stability.
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(v) Characteristics of “Good” Fiscal Rules (1/2)
i.
Easily understandable: preference for a single fiscal anchor
aimed at ensuring public debt sustainability rather than a
complex fiscal governance framework!
ii.
Implementable: focus on “fiscal actions” rather than “fiscal
outcomes” (often beyond policy-makers’ control)!
iii. Monitorable: consider the use of “outsourced” monitoring
through some types of “Fiscal Policy Committees” à la Wyplosz
and Eichengreen!
iv. Enforceable: carefully consider options for sanctions
 “ex ante” (at the budget preparation stage) and
 “ex post” (at the budget implementation stage)!
v.
Incentive compatible: ensure constraints to recurrent
expenditure items (such as public sector wages) and focus on
impact-linked prioritisation criteria for capital expenditures!
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(v) Characteristics of “Good” Fiscal Rules (2/2)
In the end, fiscal rules are
(i)
a useful policy instrument defining benchmarks of
prudence and foresight;
(ii) no panacea against politico-fiscal irresponsibility.
For reasons of political sustainability, they need to
(i) enjoy the “ownership” of the entire political spectrum and, as
such, are best anchored in a country’s Constitution;
(ii) be sufficiently simple, difficult to manipulate, easy to monitor,
and embedded in the country’s overall growth and
development strategy.
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One Suggestion For Such A Fiscal Rule
Budgetary Deficit
≤
Public Investments
}
“Golden Rule”
(pro-growth and not
dependent on GDP or
GDP growth estimates)
subject to
Public Debt
≤
Pre-specified Upper Limit
}
… ensuring public
debt sustainability
(with special rules for
“exceptional economic
circumstances”)
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