Design and application of Fiscal Rules - a comment to Anderson and Minarik -

1. Design and application of Fiscal Rules - a comment to Anderson and Minarik - Matthias Witt German Technical Cooperation (gtz)

2. Comments: Outline • Introduction • The devil’s in the details – Germany’s experiences with Fiscal Rules • Why stick to the rules? A comment on embeddedness • Fiscal Rules – reaking the debt cycle Third World Development?

3. GTZ – Partner for the Future. Worldwide. The Organisation • The German Technical Cooperation (gtz) is a federal enterprise, founded in 1975 and based close to Frankfurt am Main • gtz provides advisory services for political, economic, ecological and social development, thereby promoting complex reforms and change processes • The corporate objective is to improve people´s living conditions on a sustainable basis Our Clients • Major client is the German Federal Ministry for Economic Cooperation and Development • The GTZ also operates commissioned by other German ministries, partner-country governments, and international clients (European Commission, World Bank) Worldwide operations for sustainable development • Activities in 130 countries, 9.400 employees • Resident representatives in 66 countries, mostly in Africa, Asia, Latin America and Eastern Europe

4. The devil‘s in the details – German experiences struggling with fiscal rules • Two different fiscal rules applied • Golden rule in the German Basic Law and European SGP • Design of the national rule • Investment is defined as gross capital formation; no incentive to repay debt during booms • Debt service at 14.5% of recurrent expenditure; implicit debt at 270% of GDP • Help to limit deficit in ad times, fail to boost budget discipline in boom times • Fiscal Rule and the budget process • Cascading budgetary negotiations, no ceilings • Medium-term limits to fiscal discipline • Cost of German unification 17 years ago still considerable • Net transfers to Eastern Germany in 2003 at 6% of recurrent expenditure

5. Why stick to the rules? A note on embeddedness • Credible sanctions raise politicians‘ respect for fiscal discipline • Political sanctions: German voters dislike lack of fiscal discipline • Legal enforcement – independent judgement on government policy • Conclusion: FRs must be transparent, easily understandble, and tight to a strict enforcement process • Harmonisation with monetary policy • Europe: Different economic spaces for fiscal and monetary policy • Way out: creating autonomous fiscal agencies? • Objective: Separate budget execution fom party politics • Examples from India, Malasia, Nigeria etc. show that

6. Fiscal Rules – breaking the debt cycle in the Third World? • Third World Debt currently low priority on the political agenda • Credibility of fiscal rules depends on institutional framework … and political room for manoeuver • Rise of Fiscal rules in Latin America • Structural surplus rule for the budget (Chile) • Commodity Stabilization Funds (Colombia, Chile) • Fiscal Responsibility Laws (Brazil, Argentina, Peru) • Limited experiences with fiscal rules in low income countries • Institutional capacity? • High dependency on international tranfers; aid in average 30-50% of gov‘t expenditure (est.) • Recommendation to SBO: Consider fiscal rules in middle-income countries • Count on promising examples from Latin America • Countries in transition: Central and Eastern Europe • Middle East and Northern Africa

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