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The Stability and Growth Pact and its Reform from the Perspective of the New Member States Gábor Orbán – György Szapáry Magyar Nemzeti Bank 11th Dubrovnik Economic Conference 30 June 2005. Outline. Fiscal consolidation in the run-up to the euro
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The Stability and Growth Pact and its Reform from the Perspective of the New Member States Gábor Orbán – György Szapáry Magyar Nemzeti Bank 11th Dubrovnik Economic Conference 30 June 2005
Outline • Fiscal consolidation in the run-up to the euro • A reformed SGP framework – a different challenge? • Country-specific medium-term objectives • The ageing problem and the SGP • The introduction of fully funded pension pillars
Initial budgetary conditions: Distance from the 3% reference value in the run-up to the euro
As debt ratios are lower and yield convergence is at a more advanced stage...
… so not even high debt countries may afford to rely on the reduction in interest payments.
The reformed SGP • Trade-off: transparency vs. soundness • New SGP: increases complexity but risks softening up EDP • Changes not because of NMS but reform affects them, too • Reforms affecting new member states • Taking more account of country differences in the setting of MTO’s • The treatment of systemic pension reforms
Cyclical effects on the budgets of new member states • Higher output volatility + lower cyclical sensitivity of budgets lower cyclical safety margins, potentially looser medium-term targets
Ageing problem calls for higher present saving • This may take the form of lower government deficits/higher surpluses today – which reduces explicit debt • Or: saving may take place outside government (accumulated in private pension funds) • Only if tax-financing: sum of explicit + implicit is reduced. • In case of debt-financing: explicit debt rises as implicit liabilities are reduced • „Costs” of pension reform are the savings necessary to cope with ageing • Pressure to deduct these costs – compromise: new SGP allows for partial debt financing for 5 years to allow budgetary adjustment to reform
Are fully funded pillars the solution for the ageing problem? • How do these reforms improve sustainability? • Increase savings today – IF transition is tax-financed • Also reduce future deficits as introduction of fully funded pillar partly transforms DB into DC • Desirable features of a fully funded private pillar • Promotes intergenerational equity • Present savings for future pensions cannot be spent elsewhere • Risks of a fully funded private pillar
The Hungarian example: future balances of the pension system
Risks in the pension fund sector • Unsatisfactory performance may generate implicit liabilities • Explicit legal guarantees, or • Political pressure from an interest group growing in size to provide certain minimum replacement rates • What is satisfactory? • A rate of return that sets multi-pillar replacement rates equal to the replacement rate consistent with a sustainable full PAYG. • Hungary: actual real net return is an annual 2% so far! • Operating costs (total fees = 2.4% of total assets and 9.8% of contributions) and incentives/competition may be a problem