1 / 19

Outline

International Experience with Rules - Based Fiscal Frameworks: Design Issues George Kopits Fiscal Council Republic of Hungary Conference on Fiscal Frameworks Mishkenot Shanamin Jerusalem, May 5 , 2009. Outline. Background RFF: key elements Policy rules, procedural rules Transparency

merrill
Download Presentation

Outline

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

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

  2. Outline • Background • RFF: key elements • Policy rules, procedural rules • Transparency • Enforcement • Country experience • Performance

  3. Background Discretionary policy: problems • Time inconsistency • Free rider, common pool problem • Deficit bias • Procyclical bias • Expenditure composition bias • Unsustainable public debt

  4. Background Discretionary policy: economic effects • Domestic imbalance (inflation, crowding out) • External imbalance • Macroeconomic volatility • Low growth rate • Financial crises (currency, bank, debt crises)

  5. Key Elements of RFF • Policy (numerical) rule: permanent constraint on a summary fiscal indicator • Procedural rule: supporting regulation on budget process • Transparency: functional, coverage, time horizon, accounting practices • Enforcement: surveillance, sanctions for non-observance

  6. Types of Policy Rules Budget balance rules • overall balance (incl. deficit limit, min. surplus) • current balance (“golden rule”) • primary balance • operating balance • medium-term, structural, or CA balance

  7. Types of Policy Rules Expenditure rules • primary expenditure limit • discretionary expenditure limit • wage expenditure limit

  8. Types of Policy Rules Debt rules • debt ratio limit • target debt ratio  primary surplus ratio • real debt limit  nominal primary surplus

  9. Types of Policy Rules Debt rules Brazil: convergence to target debt ratio given target debt ratio derive targetprimary surplus ratio

  10. Types of Policy Rules Debt rules Hungary: real debt limit given debt target derive primary surplus target and nominal surplus target (discretionary component)

  11. Major Types of Procedural Rules • medium-term budget planning • pay-go principle for budget proposals • limit on end-year carryover of appropriations • rules on supplementary appropriations

  12. Transparency(wide access to timely information) • broadest coverage of public sector • accounting for extra-budgetary operations • accounting conventions (accrual vs. cash) • forecasts (incl. realistic macro assumptions) • institutional clarity (e.g., government functions, goals; intergovernmental relations, transfers) • contingent liabilities, risk assessment

  13. Enforcement Mechanism • statutory basis: constitution, law, guidelines • implementation: • ex ante targets, ex post realization • escape clauses, contingency funds • surveillance: self, independent authority, other • sanctions: reputational, legal, financial

  14. Criteria for Success • well-defined set of rules • transparency • simplicity • adequacy to accomplish objective • consistency, internally and externally • flexibility with respect to shocks • enforceability • efficiency (that is, no distortionary effects)

  15. Selected Country Practices

  16. Experience: Compliance Good compliance:New Zealand, Brazil*, Bulgaria, Chile, Estonia, Norway, Peru,* Sweden, Canadian provinces, Swiss cantons, some Euro members Mixed compliance:Colombia,* Poland, Euro area (incl. national rules), UK, US states Poor compliance:Argentina,* Ecuador,* Venezuela* Promising start: India,* Switzerland, Mexico, Nigeria,* Hungary*

  17. Experience: Performance In complying countries • investor confidence • moderate real interest rates • relatively low inflation • above-average growth, stability • lower vulnerability to crises • fiscal sustainability • mixed results on external balance

  18. Experience: Performance In complying countries • Creative accounting ? • rarely, not significant • Pro-cyclical effects ? • in some cases where initial structural deficit, high debt ratio, or postponed reforms • Stop-gap measures or reforms ? • in some cases compliance through distortionary measures (composition bias), where reforms postponed

  19. 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, experience has been positive

More Related