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Fiscal Consolidation and Public Investment:  Friends, Foes, or Neutral Partners? A Look at Bulgaria and Romania

International Seminar for Experts “The coming enlargement of the the EU” Cicero Foundation October 12-13, 2006 . Fiscal Consolidation and Public Investment:  Friends, Foes, or Neutral Partners? A Look at Bulgaria and Romania . Armin Riess European Investment Bank. Outline.

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Fiscal Consolidation and Public Investment:  Friends, Foes, or Neutral Partners? A Look at Bulgaria and Romania

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  1. International Seminar for Experts “The coming enlargement of the the EU” Cicero Foundation October 12-13, 2006 Fiscal Consolidation and Public Investment:  Friends, Foes, or Neutral Partners? A Look at Bulgaria and Romania Armin Riess European Investment Bank

  2. Outline 1. Motivation – EIB interest 2. General observations (EU 27) • Public debt sustainability (the long run) • Macroeconomic constraints to fiscal policy (the short run) 3. Fiscal consolidation and public investment • Bulgaria • Romania 4. Conclusion

  3. Outline 1. Motivation – EIB interest 2. General observations (EU 27) • Public debt sustainability (the long run) • Macroeconomic constraints to fiscal policy (the short run) 3. Fiscal consolidation and public investment • Bulgaria • Romania 4. Conclusion

  4. Outline 1. Motivation – EIB interest 2. General observations (EU 27) • Public debt sustainability (the long run) • Macroeconomic constraints to fiscal policy (the short run) 3. Fiscal consolidation and public investment • Bulgaria • Romania 4. Conclusion

  5. Public debt in EU-27 (% of GDP), 2006 Maastricht 60% criterion Source: European Commission, Economic Forecast, Spring 2006

  6. Fiscal balance in EU-27 (% of GDP), 2006 Maastricht 3% criterion Source: European Commission, Economic Forecast, Spring 2006

  7. Debt dynamics Change in debt/GDP ratio = fiscal deficit/GDP ratio – nominal GDP growth • debt/GDP ratio

  8. Debt dynamics Change in debt/GDP ratio = fiscal deficit/GDP ratio – nominal GDP growth • debt/GDP ratio Key message: debt accumulation the slower, the • smaller the deficit • higher economic growth

  9. Real GDP growth (in %), 2000-05 Source: European Commission, Economic Forecast, Spring 2006

  10. Fiscal deficit that makes debt/GDP converge to 60% (Maastricht criteria)

  11. Fiscal deficit that makes debt/GDP converge to 60% (Maastricht criteria)

  12. Fiscal deficit that makes debt/GDP converge to 60% (Maastricht criteria)

  13. Fiscal deficit that makes debt/GDP converge to 60% (Maastricht criteria)

  14. Bulgaria: fiscal balance and public debt (in % of GDP) Public debt (right scale) Fiscal balance (left scale) Source: National Statistical Institute (NSI) of Bulgaria; *Projected

  15. Romania: fiscal balance and public debt (in % of GDP) Pubic debt (right scale) Fiscal balance (left scale) Source: IMF; *based on policy measures (1.8% of GDP) relative to initial budget

  16. Outline 1. Motivation – EIB interest 2. General observations (EU 27) • Public debt sustainability (the long run) • Macroeconomic constraints to fiscal policy (the short run) 3. Fiscal consolidation and public investment • Bulgaria • Romania 4. Conclusion

  17. Outline 1. Motivation – EIB interest 2. General observations (EU 27) • Public debt sustainability (the long run) • Macroeconomic constraints to fiscal policy (the short run) 3. Fiscal consolidation and public investment • Bulgaria • Romania 4. Conclusion

  18. Macroeconomic constraints Concerns about • Inflation  internal imbalances • External current account  external imbalances

  19. Macroeconomic constraints Concerns about • Inflation  internal imbalances • External current account  external imbalances

  20. External current account (in % of GDP) Current account balance = Trade balance + … Current account balance = Savings – Investment

  21. External current account (in % of GDP) Current account balance = Trade balance + … Current account balance = Savings – Investment Investment Saving Current account balance Current account balance =

  22. External current account (in % of GDP) Current account balance = Trade balance + … Current account balance = Savings – Investment Investment Saving Current account balance (Savings – Investment) of private sector + fiscal balance Current account balance =

  23. Outline 1. Motivation – EIB interest 2. General observations (EU 27) • Public debt sustainability (the long run) • Macroeconomic constraints to fiscal policy (the short run) 3. Fiscal consolidation and public investment • Bulgaria • Romania 4. Conclusion

  24. Outline 1. Motivation – EIB interest 2. General observations (EU 27) • Public debt sustainability (the long run) • Macroeconomic constraints to fiscal policy (the short run) 3. Fiscal consolidation and public investment • Bulgaria • Romania 4. Conclusion

  25. Bulgaria: contributions to change in fiscal balance (in % of GDP), 2001-05 Change in fiscal balance 3.8 % Decline in public investment 0.2 % Decline in interest payments on public debt 2.1 % Increase in revenue 3.1 % Change in fiscal balance Increase in current expenditure (excl. interest payments) – 1.6 % Source: Bulgarian National Bank

  26. Romania: contributions to change in fiscal balance (in % of GDP), 2001-05 Change in fiscal balance 3.3 % Decline in public investment 0.3 % Decline in interest payments on public debt 3.7 % Change in fiscal balance Decline in current expenditure (excl. interest payments) 1.5 % Decline in revenue 2.2 % Source: IMF

  27. Public investment (% of GDP) Eurozone countries 2005 Source: AMECO (European Commission)

  28. Conclusion • Fiscal policy in BU & RO: macroeconomic stability rather than debt sustainability • Fiscal consolidation has not come at expense of public investment  “neutral partners” • Public investment in BU & RO low compared to NMS-8, but increase possible without deteriorating fiscal balance

  29. International Seminar for Experts “The coming enlargement of the the EU” Cicero Foundation October 12-13, 2006 Fiscal consolidation and public investment: friends, foes, or neutral partners? A look at Bulgaria and Romania Armin Riess (a.riess@eib.org) European Investment Bank

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