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Innovative fiscal policy in the context of sustainability

Tampere, 9 June 2011 Conference: Trends and Future of Sustainable Development. Innovative fiscal policy in the context of sustainability. Olivér Kovács Research fellow, ICEG European Center Phd-student, University of Debrecen, Doctoral School of Economics. Outline.

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Innovative fiscal policy in the context of sustainability

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  1. Tampere, 9 June 2011 Conference:Trends and Future of Sustainable Development Innovative fiscal policy in the context of sustainability Olivér Kovács Research fellow, ICEG European Center Phd-student, University of Debrecen, Doctoral School of Economics

  2. Outline • The major challenges of the European Union • Fiscalsustainabilityas a necessaryprerequisite • Risks of a debt-crisis • Benevolenteffects of fiscalsustainability • Dominatingconcept of fiscalsustainability • Innovativefiscal policy and thesustainability • The issue of fiscalinstitutionalisations • The case of Finland – Refiningtheconceptofinnovativefiscal policy • Concludingremarks

  3. The major challenges of the European Union • Demographicdimension (sideeffects) • Climatechange • Relativelylowlabour-productivity • Sovereigndebt-crisis

  4. Fiscal sustainability as a necessar prerequisite • A potential definition for fiscal sustainability • What is the real burden? • Without sustainability: Risks of debt-crisis • Domestic dimension • International dimension • Fiscal sustainability: Benevolent effects • Raised awareness on intergenerational solidarity • Better fiscal flexibility (fiscal latitude) • Significantly improved efficiency of automatic stabilisers • Healthier capability to adaptive strategic planning

  5. Dominant consideration of fiscal sustainability • define strict debt-to-GDP rate and deficit targets • use any type of fiscal consolidation to reach the deficit targets (it requires social trust) • Therefore, encourage governments on the one hand • to introduce legislated fiscal rules, • on the other hand to set up independent fiscal bodies with a wide range of authorities (e.g. giving political and legal responsibility, as well) in order to increase the credibility and transparency of fiscal policy, to stimulate social trust, and last but not at all least to have control over the meeting of fiscal rules.

  6. Innovative fiscal policy and the fiscal sustainability • define strict debt-to-GDP rate and deficit targets higher level social, environmental and economic objectives  intelligent manoeuvre • use expenditurebased fiscal consolidations to getpotentialexpansionaryeffect and toreach the deficit targets • encourage governments on the one hand • to introduce legislatedfiscal rules, • on the other hand to set up independent fiscal bodies with limitedauthorities (e.g. notgiving political and legal responsibility, as well), theyarerather consulting than decision making bodies. • Fiscal sustainability needs two characters: • Sustaining • Disruptive

  7. Fiscal positions of the four groups (% of GDP) Group 1: Austria, Belgium, The Netherlands and Slovenia. Group 2: Denmark, Germany, France, Italy, Luxembourg, Sweden and United Kingdom. Group 3: Belgium, Denmark, Germany, Estonia, France, Italy, Lithuania, The Netherlands, Portugal and Sweden. Group 4: Bulgaria, Cyprus, Czech Republic, Finland, Ireland, Latvia, Malta, Poland, Romania, Slovakia.

  8. The case of Finland – Refining the concept of innovative fiscal policy • Whatdidhappen? • I. phase (1985-1990): financialliberalisation and economic boom  overheating • II. phase (1990-1993): financialcrisis, implosion of the SU  depression • III. phase (after 1993): recoverywaspartlygivenbyintelligentfiscal policy • WhatdidFinlanddo? • Predominantly: expenditure side fiscal consolidation • Reducingexpendituresinsocialtransfers, publicsectorwages, salaries (But: pro- and anti-cyclical elements) • Coordinated expansionary fiscal policy: anti-cyclical R&D&I policy • Structural reform • Voluntarilyusedfiscalinstitutionalisation (unlegislatedexpenditureceilingrule, nothavingnewlyestablishedindependentfiscalinstitutionalanchor)

  9. Finland’s fiscal position (% of GDP) (1988-2000)(left axis: real GDP growth, budget balance; right axis: debt-to-GDP ratio) Source: European Commission, Statistics Finland

  10. Cyclically adjusted expenditures and revenues (% of GDP) (1985-2005) Source: European Commission, AMECA database

  11. Functional breakdown of revenues (in % of total taxation) Source: Eurostat

  12. Functional breakdown of expenditures (in % of total expenditures) Source: Eurostat

  13. Total intramural R&D expenditure (GERD) by sectors of performance Source: Eurostat

  14. Labour productivity of the total economy (1980-2003)Value added per employed person, thousand 2002 euro, ppp Source: OECD/STAN, Kaitila et al. (2006)

  15. Conclusion • pro- and anti-cyclical fiscal policy were in tandem; • focus on the evolutionarily developed and mature fields; • Fiscal institutionalisation was not quintessence. • additional resources stemming from the expenditure side fiscal consolidation Expansionary effect Institutionalised fiscalpolicy reform Expenditure-side fiscal adjustment trust/consensus trust/consensus

  16. Thank you for your attention! Olivér Kovács okovacs@icegec.hu

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