Transcript Dealing with debt sustainability when exiting the crisis

DG ECFIN
Innovative financing at a global level
Informal meeting of
EU Directors General for Development
Brussels, 9th February 2010
Peter Bekx
Director for International Economic and Financial Affairs
European Commission
The importance of fiscal consolidation
DG ECFIN
Change in debt as a share of GDP – Commission Autumn 2009 forecasts
2007
2011
140%
120%
100%
80%
60%
40%
20%
0%
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FI LV PL CY NL MT ES AT HU DE EU- FR EA- UK PT IE BE IT
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DG ECFIN
Global challenges with budgetary impacts
• Financial stability: the costs of bail-outs
should be paid by the financial sector
• Climate change/Copenhagen Accord:
fast-start of USD 30 billion 2010 to 2012
and the goal of USD 100 billion dollars a
year by 2020 by developed countries to
developing countries
• Development: MDGs, G8 Gleneagles and
EU commitments on scaling up ODA
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DG ECFIN
The role of innovative financing in
addressing these budgetary challenges
• Expenditure: reduction in nonproductive spending tends to have more
long-lasting effects if linked to structural
reforms
• Traditional tax revenues: increases in
rates, in tax bases and in efforts to fight
tax fraud
• Innovative sources of financing:
potential to be further explored
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DG ECFIN
Instruments of innovative financing
• Definition:
public finance that is raised in nontraditional ways; does not include mechanisms
that are exclusively private finance
• Earmarking: can improve political acceptability,
but leads to budgetary inflexibility
• Importance of implementation at global level:
fair burden-sharing and global political
commitment needed; risks of tax evasion by
relocation of economic activities or tax bases
→ Coordination among all relevant key players
(notably G-20) essential, but EU taking on a role
of global leadership could also be an option
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DG ECFIN
Innovative financing related to the financial sector
• Pricing of leverage and risk-taking: a fee on certain
balance sheets positions of financial institutions, with
the revenues being channelled either into a crisis
resolution fund (Sweden) or into the budget (US)
• Financial transaction tax: expected to help stabilise
financial markets by reducing "speculative" trading
• Taxation of bonus payments: expected to reduce
managers' or traders' incentives to take excessive
risks (UK, France)
• Increase in profit taxation: higher rate or surcharge
on corporate income tax in the financial sector
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Innovative financing related to
climate change
Putting a price on greenhouse gases emissions to use leastcost abatement opportunities:
• Cap-and-trade schemes: Revenues from the auctioning of
allowances (e.g. in EU ETS as of 2013)
• Carbon taxes: in the EU as a complement to cap-and-trade
where this is difficult to directly apply to small and diffuse
emission sources; scope for further EU coordination in the
Single Market
• Emissions from international aviation and maritime transport:
Proposals in climate change negotiations; inclusion of aviation
in ETS as of 2012; airline ticket tax by several countries
• Flexible mechanisms of the Kyoto Protocol:
selling/auctioning Assigned Amount Units (AAUs); levy on
CDM projects
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DG ECFIN
Innovative financing for development
Frontloading of public finance and action by tapping the capital
markets:
• International Finance Facility (IFF), IFF for Immunisation, Global
Climate Financing Mechanism
• Targeted bonds: green bonds, diaspora bonds
• IMF Special Drawing Rights (SDRs)
• Debt-for-development swaps (Debt2Health)
Leveraging private finance through public incentives:
• Advance Market Commitments (AMC)
• Tax discounts
• Public-Private Partnerships
• Market-based insurance schemes
• Lotteries
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DG ECFIN
Assessment criteria
1. Potential to raise revenues: serious
budgetary challenges to be addressed
2. Effects on market efficiency: internalisation of
external costs and benefits (“double
dividend”)
3. Effects on equity and income distribution:
affects political acceptability and need for
accompanying social expenditure
4. Administrative and legal aspects: may
complicate feasibility
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DG ECFIN
Potential to raise revenues
• Financial sector: applying Sweden's Stability Fee
in the EU-27 could raise more than €10 billion; FTT
revenue estimates of more than €50 billion
worldwide and of about €20 billion for Europe
• Climate change: auctioning revenues from the EU
ETS could provide nearly €26 billion per year by
2020 (half of this should be used for energy and
climate change purposes); carbon taxes already
raising important revenues of 0.3% to 0.8% of GDP
in several Member States
• Development: existing instruments already deliver
important contributions, but the potential for
significant scaling up might be limited
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DG ECFIN
Effects on market efficiency
• Financial sector: taxing leverage and risk-taking by
financial institutions can foster financial stability by
slowing the build up of excessive risk positions in
balance sheets; FTT may actually increase price
volatility in specific markets by reducing the number
of transactions and liquidity; transactions easier to
relocate
• Climate change: a price on carbon emissions allows
limiting global warming by using the least-cost
opportunities of emission abatement
• Development: frontloading can prevent
substantially higher costs or risks in the future by
acting at an early stage
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DG ECFIN
Effects on equity and income
distribution
• Financial sector: companies are likely to
roll over part of the tax burden to clients
• Climate change: low-income groups
tend to spend more of their income on
transport and energy, possibly implying a
need for compensating social measures
• Development: additional and hidden
burdens on future budgets from
frontloading may create issues of intertemporal distribution if future aid flows
fall
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Administrative and legal aspects
• Financial sector: tax on leverage and risktaking as well as a surcharge on the
corporate income tax easy to administer;
compatibility of FTT with the EU Treaty
provisions of free movement of capital to be
further assessed
• Climate change: concerns about legal
compatibility with WTO rules and
administrative costs of carbon border taxes
• Development: institutional complexity of
some of the mechanisms
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Conclusions
• Significant budgetary challenges in the years ahead give
innovative sources of financing an important role to play
• Global coordination will be essential as isolated action is likely
to be less effective
• Taxing leverage and risk-taking in the financial sector and the
pricing of carbon emissions are of particular interest because of
a possible “double dividend”
• Relevant experiences of innovative financing for development
have some potential of being scaled up, but the revenues are
likely to be more moderate
• Commission will examine the most promising instruments in
further detail and present proposals in due time, taking into
account the importance of both EU and global coordination
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