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International Experience with Rules - Based Fiscal Frameworks: Practical Issues George Kopits Fiscal Council Republic of Hungary Conference on Fiscal Frameworks Mishkenot Shanamin Jerusalem, May 5 , 2009. Outline. Fundamental questions Preconditions Options, lessons Concluding assessment.

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Outline

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  1. International Experience withRules-Based Fiscal Frameworks:Practical IssuesGeorge KopitsFiscal CouncilRepublic of HungaryConference on Fiscal FrameworksMishkenot Shanamin Jerusalem, May 5, 2009

  2. Outline • Fundamental questions • Preconditions • Options, lessons • Concluding assessment

  3. Experience: Summing Up • Mostly recent experience and “jury is still out” • Basic tests: • compliance over a full economic cycle and political cycle • performance compared to counterfactual • Identification problem, when applied in tandem with monetary rules (inflation targeting, fixed XR) • On balance, performance has been positive

  4. Fundamental Questions • Are current fiscal trends sustainable ? • Are macro costs and risks significant ? • Has society arrived to a “tipping point”? • Is it necessary to wait until a crisis ?

  5. Preconditions Political preconditions for adopting RFF • government commitment, initiatives • formulation and test of concrete proposals • building broad consensus • information flow, debate • feedback from interest groups • preparation of macro-fiscal projections, scenarios

  6. Preconditions Technical preconditions for adopting RFF • Need for transparency • toward full coverage of public sector • approximation of accrual accounting • contingent liabilities, allocation of rev / exp • Strengthening of procedural rules • medium-term budget planning • pay-go principle • Completing critical mass of structural reforms • pensions, health care, taxation, etc.

  7. Major Options, Lessons • type of policy rules • depends on problem ahead • technical feasibility • definition, coverage • final target as goal vs. operational target for control • statutory basis: constitution, law, guideline? • country-specific choice • stringency: strict vs. liberal approach? • credibility, track record, feasibility • reputational sanctions most effective, realistic

  8. Major Options, Lessons • flexibility: automatic stabilizers, discretion? • depends on credibility, technical capacity • scope for contingency fund • avoid asymmetric countercyclical stance • error correction: immediate vs. multiyear? • preferably multiyear correction • surveillance • preferably by independent authority • amendments, suspension • only once credibility has been established • suspension in extraordinary times

  9. Concluding Assessment • RFF is not a panacea or “magic wand” • improves macroeconomic performance • eliminates deficit bias, but not necessarily procyclical bias and composition bias • no more than a framework, provides “trainer wheels” for fiscal discipline • useful commitment technology, signaling device • requires continuous policy adjustments (including reform steps) and vigilance

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