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The Swedish Fiscal Policy Council
Swedish Fiscal Policy
The idea of Fiscal Policy Councils
(Committees)
• Offspring from the discussion, originating in the 1980s,
on rules versus discretion (Kydland and Prescott)
• Monetary regime with an independent central bank
• Can the lessons in some form be applied to fiscal policy?
References
Von Hagen and Harden (1994)
Eichengreen, von Hagen and Harden (1995)
Wren-Lewis (1996, 2000, 2002)
Blinder (1997)
Ball (1997)
Business Council of Australia (1999)
Eichengreen, von Hagen and Hausmann (1999)
Seidman (2001)
Wyplosz (2002, 2005, 2008)
Swedish Government Commission on Stabilisation Policy in the Event of Membership in
the Monetary Union (2002)
EEAG (2003, 2004, 2006)
Calmfors (2003a,b, 2005)
Borg (2003)
HM Treasury (2003, 2004)
European Commission (2004)
Jonung and Larch (2004)
Annett, Decressin and Deppler (2005)
IMF (2005)
Ecofin Council
” ”national institutions could play a more prominent role in
budgetary surveillance to strengthen national ownership
through national public opinion and complement the
economic and policy analysis at the EU level”
Different approaches to Fiscal Policy Councils
1. Delegation of decisions to independent Fiscal Policy Committee
- deviation of annual budget target from medium-term
budget objective
- the use of one or serveral fiscal policy instruments as
stabilisation policy tool
2. Policy recommendations from independent Fiscal Policy Council
3. The government should base its budget on the macroeconomic
forecasts of an independent Fiscal Policy Council
Sweden: ex post evaluation, not ex ante evaluation
THE RIKSDAG
(Parliament)
349 members
GOVERNMENT
22 Ministers
The Comittee
on Finance
17 members
The Swedish National
Audit Office
310 employees
The Riksbank
(Central Bank)
400 employees
Swedish Fiscal
Policy Council
8 members
Secretariat
2 employees
Ministry
of Finance
470 employees
The Swedish National
Financial Management
Authority
160 employees
The National Institute
for Economic Research
60 employees
The tasks of the Fiscal Policy Council
1. To evaluate whether fiscal policy meets its objectives:




long-run sustainability
budget surplus target
the expenditure ceiling
stabilisation goals
2. To evaluate whether developments are in line with healthy
sustainable growth and sustainable high employment
3. To monitor the transparency of the government budget proposals
and the motivations for various policy measures.
4. To evaluate the government´s economic forecasts and the quality
of the models they are based on.
To contribute to a better economic policy discussion in general
•
•
Annual report: this year 15 May
More information on www.finanspolitiskaradet.se
The Swedish Fiscal Policy Council
Lars Calmfors, Stockholm University (Chair)
Torben Andersen, University of Aarhus (Vice chair)
Karolina Ekholm, Stockholm University
Per-Ola Eriksson, County governor, former Chair of the
Parliament´s Finance Committee
Martin Flodén, Stockholm School of Economics
Laura Hartman, Office of Labour Market Policy Evaluation
Ann-Sofie Kolm, Stockholm University
Erik Åsbrink, former Minister for Finance
Swedish Fiscal Policy 2008: An Overview
1. Fiscal policy and the fiscal policy framework
2. Macroeconomic forecasts by the Ministry of
Finance
3. Employment policy
4. Reforms in capital and real-estate taxation
5. The government’s basis for decision-making
(memos, models and data)
The main conclusions
• Correct to budget large surpluses for the next few
years
• But the government should consider reformulating
the surplus target
• Reducing the level of unemployment benefits and
lowering the tax on earned income should
increase employment in the long term
• But the financing reform of unemployment
insurance and the real-estate tax reform are
failures
The fiscal policy framework in Sweden
• Long-run sustainability of fiscal policy is the basic objective
• The surplus target (1 percent of GDP over the business cycle) and
the expenditure ceiling for central government are medium-term,
intermediate goals which should facilitate achieving the basic
sustainability objective
• The level of the surplus target should be determined by:
– goals for the redistribution of welfare among generations
– goals for efficiency (tax smoothing)
– precautionary motive
• Expenditure pressures due to the demographic developments
Försörjningskvot, äldrekvot och yngrekvot (procent)
80
70
60
50
40
30
20
10
0
2110
2100
2090
2080
2070
2060
2050
Äldrekvot
2040
2030
2020
2010
2000
1990
1980
1970
1960
1950
1940
1930
1920
1910
1900
Försörjningskvot
Yngrekvot
Anm: Försörjningskvoten anger antalet personer 0-14 år och 65 år och äldre som andel av antalet
personer 15-64 år. Äldrekvoten anger antalet personer som är 65 år och äldre som andel av antalet
personer 15-64 år, medan yngrekvoten anger antalet personer 0-14 år som andel av antalet personer 1564 år.
Källa: SCB.
The government should provide better
motivations for the level of the surplus target
• The relative weights of different motives?
• Discussion of goal conflicts
• Need for generational accounting
- how do various budget outcomes affect the
distribution of welfare among generations?
Need for revisions of the surplus target
• According to the government´s own sustainability
calculations it applies only until 2015
• According to the calculations the surpluses fall after that
and eventually turn into deficits
• The surplus target was introduced in 1997 as part of the
consolidation process after the earlier fiscal crisis
• Larger possibilities to fine tune the target today
• Also need for that if the legitimacy of the target is to be
maintained
General government net lending and its parts
(percent of GDP)
10
5
-5
-10
-15
Offentlig sektor
Staten
Kommunerna
Source: National Institute of Economic Research
Ålderspensionssystemet
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
1987
1986
1985
1984
1983
1982
1981
1980
0
Consolidated general government gross-debt (percent of GDP)
90
80
70
60
50
40
30
20
10
19
70
19
72
19
74
19
76
19
78
19
80
19
82
19
84
19
86
19
88
19
90
19
92
19
94
19
96
19
98
20
00
20
02
20
04
20
06
20
08
0
EU12
Source: OECD Economic Outlook 2007/2
USA
Sverige
Consider a Golden rule
• Consider whether the surplus target should concern
public sector total savings and not just net lending
- total savings is the sum of net lending and net investment
- this is the same as a surplus target for current incomes and
expenditures (a ”driftbudget”)
- the surplus target can discourage public investment
• Appoint a government commission
- theoretical adequacy versus verifiability
- all invesments or only those that provide a pecuniary
return?
- strict rules against possible abuse
- where to draw the line?
- lower bound for the public sector´s financial wealth
Golden rule mathematics
F=T–G–I
(1)
I=N+D
(2)
(1) can be rewritten:
S = F + N = T – (G + D)
Public
sectorsektorns
gross investment
i Sweden,
EU12 and
Den offentliga
bruttoinvesteringar
i Sverige,
EU12(percent
och USA (procent
USA
of GDP)av BNP)
9
8
7
6
5
4
3
2
1
0
2010
2005
USA
2000
1995
1990
1985
1980
1975
1970
Sverige
EU12
Anm: Data för 2007-2008 är prognoser. Data för EU12 före 1991 är exklusive tidigare Östtyskland.
Källa: OECD Economic Outlook 2007/2.
Examples of a golden rule
•
•
•
•
•
UK
Germany
Many American states
Swedish municipalities and regions
Central government in Sweden in the 1950s
– ”driftbudget” for current expenditures and incomes
– ”kapitalbudget” for investment (loan financing)
Improve the accounting of the public sector
economic position
• No reporting in the budget bills of public sector total
wealth (including the capital stock)
• Impossible to get a complete view of the economic
position of the public sector
• Wealth position reported only in the Annual accounts of
the central government
• Add information on public sector total net wealth in next
budget bill
Public
sector
financial
position
and och
wealth
(percent of
GDP) av
Offentlig
sektors
finansiella
ställning
förmögenhet
(procent
BNP)
100
80
Total net wealth
60
Capital stock
40
Financial net position
20
0
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
-20
Financial gross position
-40
-60
-80
Finansiell bruttoställning
Finansiell nettoställning
Kapitalstock
Total nettoförmögenhet
Anm: Data för 2007–2008 är prognoser.
Källa: Konjunkturinstitutet.
Mathematics of debt accumulation
• bt - bt-1 = ft - gt∙bt-1/(1+gt)
• b = f∙(1+g)/g
• b = 0,01∙(1,05)/0,05 = 21 percent
• With annual nominal growth of 5 percent (2 percent inflation and 3
percent real growth), the growth factor tends to reduce the net
financial wealth ratio by approximately 0,05 ∙ 20 percent of GDP = 1
percent of GDP
• Hence a surplus of 1 percent of GDP is required to keep the
financial wealth at 20 percent of GDP
• An increase of the net financial wealth ratio requires larger surpluses
Decomposition of the change in general government financial net
wealth (annual average change in percent of GDP)
Change in net financial wealth
Net lending
Growth factor
Residual
1993-1997
-3,3
-5,3
1,0
1,1
1997-2001
5,8
2,0
0,8
3,1
2001-2006
3,3
0,4
0,1
2,8
Source: Statistics Sweden, National Institute of Economic Research and Swedish Fiscal Policy Council
Monitoring of the surplus target
•
•
Surplus of one percent of GDP over the business cycle
Earlier criticism: what is the length of the cycle?
Three indicators
1. Historical average from 2000
2. Moving seven-year average centered on current year (forercasts
for four years)
3. Structural budget balance
•
•
•
Discretionary judgements regarding cyclical situation
Need for exogenous (independent forecasts)
Unclear how policy will react to different signals from the indicators
Moving average indicator for general government net lending
(percent of GDP)
2
1
0
1996
1997
1998
1999
2000
2001
2002
2003
-1
-2
-3
-4
-5
-6
-7
ex post (faktiskt utfall)
ex ante
Source: Ministry of Finance and National Institute for Economic Research
2004
Different indicators for general government net lending (percent of
GDP)
5,0
4,0
3,0
2,0
1,0
0,0
2001
2002
2003
2004
2005
2006
2007
-1,0
-2,0
-3,0
Löpande genomsnittsindikator
Tillbakablickande indikator
Strukturellt sparande
Justerad tillbakablickande indikator
Source: Ministry of Finance and National Institute for Economic Research
Sustainability
present discounted value of income
= initial net debt + present discounted value of expenditures
S2=0
S2 negative → tax reduction/expenditure rise (and vice versa)
Calculations by the Ministry of Finance
• Tax rules and spending policies are held constant and
demography determines development
• Fiscal policy is sustainable since S2=0
• Pension reform of 1999/2000 reduced pension liabilities
• Transparency:
– Increase in expenditures from 2011 and onward by 5
percent of GDP through a technical adjustment
– Model is poorly documented
– Not much in terms of sensitivity analysis
Public sector financial net wealth (percent of GDP)
500
No technical adjustment
400
300
200
100
0
2000
-100
2010
2020
2030
2040
2050
2060
2070
2080
Budget bill 2008
Source: Ministry of Finance and the Swedish Fiscal Policy Council
2090
Sustainability indicator
and implicit
surplus
target
(percent
of GDP)
Hållbarhetsindikator
(S2) och implicit
överskottsmål
för olika
scenarier
(procent
av BNP)
S2
Minstasustainable
hållbara
Smallest
net lending
finansiella
sparande
år 2009
2009-2015
0,1
-
Budget
Bill teknisk
without technical
BP08
utan
justeringadjustment
-3,8
-0,7
Higherstandard
standard in
public sector
Högre
i offentlig
sektor
-0,4
3,8
Higherstandard
standard in
healthcare
Högre
i vård
och omsorg
-0,3
3,5
Larger effekt
effect of
policy
Större
avemployment
arbetsmarknadsreformer
-4,3
-1,1
Smallereffekt
effect av
of employment
policy
Mindre
arbetsmarknadsreformer
-3,3
-0,5
Reduction in
working hours
Minskning
avmean
arbetstid
-2,1
1,4
Later retirement
Ökning
av pensionsåldern
-5,0
-2,0
Budget Bill 2008
Budgetpropositionen
2008
Källa : Finanspolitiska rådet baserat på Finansdepartementets kalkyler i Budgetpropositionen för 2008.
Wise to run large surpluses over the coming years
• Large surplus today
• Large uncertainty in sustainability calculations gives
strong precautionary motive to have larger surplus than
one percent of GDP until 2015
• Net lending at around one percent of GDP is exactly
sufficient to keep financial wealth constant as a share of
GDP (at 20 percent)
• How large precautionary buffers should be is a political
question
• A natural adjustment is to increase the retirement age as
longevity rises
Fiscal policy as a stabilisation policy tool
• Automatic stabilisers or discretionary fiscal policy
• Earlier: not very clear when discretionary fiscal policy
should be used
• Latest budget bill: improvement
• Monetary policy and automatic stabilisers have main
responsibility for stabilisation
• But there are situations in which discretionary fiscal
policy should be used
- supply-side shocks when inflation and the output gap
move in opposite directions
• Our view: Need for more clear ex ante principles
Change in structural balance and ex-post level of GDP gap (percent
of GDP)
5,0
4,0
3,0
2,0
1,0
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
-1,0
1994
0,0
-2,0
-3,0
-4,0
Förändring i strukturellt budgetsaldo
BNP-gap ex post
Source: Ministry of Finance and National Institute for Economic Research
Låg budgetkänslighet
Faktiskt budgetsaldo
Source: Ministry of Finance
Hög budgetkänslighet
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
6
4
2
0
-2
-4
-6
-8
-10
-12
-14
1993
Actual and estimated net lending with a structural surplus of 2
percent of GDP (percent of GDP)
The stance of fiscal and monetary policy 2001-2007
1,50
2006
2002
0,50
2004
-3,5
-2,5
Fiscal Policy
-1,5
-0,5
-0,50
0,5
2003
2007
1,5
2005
-1,50
2001
-2,50
Monetary policy
Source: Ministry of Finance
Criteria for use of discretionary fiscal policy
Double requirements
1. Large cyclical disturbances – output gap above 2
percent
2. Discretionary fiscal policy must be able to achieve
something more than monetary policy can do (value
added)
Value added of discretionary fiscal policy
1. Limits on interest rate policy
- liquidity trap (zero interest rate bound)
2. Monetary policy cannot simultaneously achieve several
goals
- fear of asset price hikes
- stagflation (fiscal policy does not depreciate the
currency; supply-side effects)
- targeting of non-tradables sectors
- targeting of low-income groups
3. Uncertainty about the effects