Transcript Diapositiva 1 - unibocconi.it

Strenghtening Medium-Term
Fiscal Frameworks
Fabrizio Balassone
Econpubblica – Università Bocconi
Milano, 25 Marzo 2009
MTFF: definition & purpose
definition: set of institutions, procedures and rules governing
(constraining) the development of public finances
over the medium term
purpose:
ensure fiscal discipline (sustainability & stabilization)
and efficient use of resources
work on MTFF combines economics, institutional knowledge and
a fair dose of pragmatism
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Fiscal discipline means...
maintaining a prudent budget balance to:
ensure sustainability of public debt
allow margins to face cyclical fluctuations and
e unforeseeable events taking into account the
degree of debt tolerance
(Kumar & Ter-Minassian, IMF 2007)
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Why budget discipline and efficiency?
fiscal discipline and efficiency maximize public sector (PS)
contribution to economic growth and welfare
fiscal discipline = prerequisite to PS functions
budget constraint is nec. cond. for allocative efficiency
low debt  no financial fragility  margins for stabilization
efficiency + stability  growth  resources for redistribution
NB discipline does not imply efficiency: need accountability
 budget transparency (informed and explicit choices)
 measurability of results (assessment)
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Spreads (Spilimbergo et al. IMF09)
350
Long-Term Government Bond Yield Spread vis-à-vis Germany
300
Greece
250
Ireland
Basis points
200
Portugal
Italy
Austria
Spain
Belgium
Finland
Netherlands
150
100
50
France
0
1/1/07
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3/12/07
5/21/07
7/30/07
10/8/07
12/17/07
2/25/08
5/5/08
7/14/08
9/22/08
12/1/08
2/9/09
The building blocks of a MTFF
1. a stable long-term anchor for the public finances rooted in
some measure of sustainability
2. a simple medium-term “rule” ensuring consistency between
the fiscal stance and the long-term anchor
3. a transparent convention on the headroom to build into the
fiscal balances to deal with adverse circumstances
4. a multi-year budget with top-down preparation and tight
execution procedures
5. mechanisms to ensure prudent forecasts of macroeconomic
and fiscal variables
6. reporting, monitoring, auditing tools to ensure accountability
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OUTLINE
Why discretion needs to be constrained
Issues in building a MTFF (and solutions?)
A few remarks about Italy
Summary
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I. Why Does Discretion Need to Be
Constrained?
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The political economy of budget deficits
opportunistic politicians & naive voters (Puviani, 1903; Buchanan & Wagner,
variation 1:
variation 2:
AEI 77; Buchanan et al., 1986)
myopic politicians (Alesina & Tabellini, RES 1990; Rogoff, AER 1990)
intergenerational distribution (Browning, EI 75;
Tabellini, NBER 90, JPE 91;
Cuckierman & Meltzer, AER 89)
time inconsistency (Kydland & Prescott, JPE 77; Eichengreen et al., OER 99)
common pool (Eichengreen et al., OER 1999; Velasco, 1999)
variation 1: federalism (Buchanan, 1967; Oates, 1979; Weingast et al. JPE81)
variation 2: monetary union (Balassone & Franco, JPFPC02)
strategic use of the budget (Persson & Svensson, QJE 89; Alesina & Tabellini, RES 90;
Tabellini & Alesina, AER 1990)
coalitions & wars of attrition (Roubini-Sachs, EP89; Alesina-Drazen, AER91;
Balassone-Giordano, PC01)
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Some evidence of the propensity to deficit finance
General Government Overall Balance
(in percent of GDP, weighted with GDP at PPP, 76 countries)
0.0
-1.0
-2.0
-3.0
-4.0
-5.0
-6.0
1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005
World
Advanced economies
Developing economies
Sources: WEO database and fund staff calculations.
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It gets worse in good times
“voracity effect”: perverse interaction between abundance of
resources and political economy factors (common pool, myopia…)
(Lane & Tornell, AER 1999; Debrun, Hauner & Kumar, IMF 2007)
growing supporting evidence (asymmetric procyclicality)
(Buti et al. OREP98; Buti & Sapir 1998; Balassone & Francese, TD04 & TD08;
European Commission, 2006)
coming mostly from expenditure
(Kaminsky et al., NBER04; Hercowitz and Strawczynski, RES04; Balassone,
Francese, Zotteri, TD08)
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Can we rely on markets?
Theory
(Bishop et al., 89; Lane, SP 93)
Practice
• No privileged access
• Full information
•
•
• No bail-out
• Timely Signals
• Sensitivity to signals
•
•
•
CB Independence
Issue of information quality remains
(Balassone, Franco, Zotteri, E06)
Credibility of the clause? (IMF97)
Not always (Ferri et al., EN99)
Low and delayed
(Balassone, Franco, Giordano, BI04)
Fitch Ratings (2004) : “15-20 basis points […] is perhaps the most that
could be attributed to credit differentials between AAA and AA euro-area
governments [and] such amounts hardly seem likely to keep a German
finance minister awake at night” (p. 6).
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The quality of information
Italy - 2001 deficit outturn: estimates over time
(as a percentage of GDP)
3.5
3.0
2.5
2.0
1.5
1.0
March
2002
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June
2002
July
2002
February
2003
March
2005
May
2005
March
2006
The quality of information
Greece - 2003 deficit outturn: estimates' over time
(as a percentage of GDP)
6.0
5.5
5.0
4.5
4.0
3.5
3.0
2.5
2.0
1.5
1.0
March
2004a
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March
2004b
May
2004
Sept.
2004
March
2005
Sept.
2005
II. Issues in Building a MTFF
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The broad definition of fiscal discipline
fiscal discipline = prudent budget balance to:
ensure sustainability of public debt
allow margins to face cyclical fluctuations and
unforeseeable events taking into account the
degree of debt tolerance
Problems:
1. defining debt “sustainability”
2. forecasting/measuring the economic cycle and its effects
on the fiscal balance
3. quantifying implications of unforeseeable events
(e.g. contingent liabilities - IMF 2007)
4. estimating the degree of “debt tolerance”
(history? Reinhart, Rogoff & Savastano, NBER 2003)
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Debt sustainability
(Banca d’Italia, 2000, 2004, 2006)
intuition is clear: solvency  debt repayment // but timing?
limt→ dt = 0
moreover, theory says otherwise: “no Ponzi-game”
limt→ dt [(1+)/(1+)]-t = 0  limt→ dt = | d’<(-)
(Blanchard et al. OECD90; McCallum, JPE84)
T<Y still leaves many options!
(Barro JEP89; Kremers JME89, Domar AER44)
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Measuring the effects of the cycle
cyclically adjusted balance (cab)
cab = b - ε 
 = (y-y*)/y*
 =b/(y/y) = (R R/Y - G G/Y – b)  G/Y se R  1 e G  0
(Bouthevillain et al., ECB 2001: EU avg.: 0.9 and -0.2)
problems
different estimation methods return different values of 
estimates of  subject to significant revisions (any method)
estimation of elasticities far from straightforward
is the output gap enough? (composition of output; other variables)
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Dispersion in OG estimates
large in levels, less so in changes
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(Orphanides e Van Norden, RES 2002)
OG estimates: Dispersion and Revisions
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Why the revisions?
Y* (hence CAB) = f (Y past & future) – therefore:
- revisions of forecasts influence the assessment of past outturns
- the effect can be large in the proximity of turning points
Example: 2001 fiscal balances in France and Germany
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Elasticities
data intensive
institutional knowledge vs. econometrics
(reforms)
identification of macroeconomic proxies for tax bases
(e.g. profits)
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Output composition
e.g. exports and domestic demand have different tax implications
(Momigliano & Staderini, BI98; Bouthevillain et al., ECB01; Marino et al., QEF08)
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A pragmatic approach
In sum: theory does not provide full guidance in defining both
the long-term anchor and the medium term rule for a MTFF
Need a pragmatic approach:
 Define “prudent” debt levels
somewhat ad hoc (UK-EU) but not too different from proposals by
theorists (Blanchard ES90, Buiter EP85…)
 Derive corresponding “structural” deficit targets
- based on long-term expenditure projections
- use sensitivity analysis
(sustainability reports – Norway; EPC ageing working group 2006)
 Define medium-term / “over-the-cycle” targets with escape
clauses in the face of unfavorable circumstances
(Sweden; UK code of fiscal conduct; …)
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A few examples
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The design of fiscal rules
Rules = commitment-devices and signaling tools
(they increase the costs of deviating from the target for policymakers and
reduce public’s uncertainty about policymakers’ commitment)
Constrain the bias but mindful not to:
√
introduce excess rigidity and prevent adequate responses
(e.g. let automatic stabilizers play in bad times – balanced budget rule?),
√
force inadequate responses
(e.g. a fiscal contraction in response to a temporary spike in interest rate, or
depreciation of the exchange rate),
√
Let the bias unchecked in specific circumstances
(e.g. allow for procyclical expansions – medium-term/over-the-cycle
formulations like the (old?) SGP and UK code of fiscal conduct)
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Other issues of “design”
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√
some rules are not targeted to fiscal discipline
(golden rule  sustainability)
√
window dressing
(inconsistent deficit/debt indicators – SGP)
√
some rules cannot stand alone
(e.g. expenditure rules)
Expenditure rules
PROS:
provide a stronger link between the long-term anchor and
the multi-annual budget exercise
tackle the bias at source (expenditure)
let (revenue) automatic stabilizers play
BUT
cannot leave the revenue side unchecked
(tax expenditure)
MORE COMPLEX THAN IT SEEMS
what about automatic stabilizers on the expenditure side?
possible exploitation of planning margins?
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Tax expenditures - Sweden
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Exploitation of planning margins - Sweden
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III. Some Remarks about Italy
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The long-term anchor and the fiscal stance
SGP: debt-to-GDP ratio = 60% but when?
(“satisfactory pace” never defined)
Often D/Y<100% targeted in official documents BUT on what
basis?
No sustainability report – setting medium-term deficit target?
(long-term projections only for the EPC AWG)
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The medium-term rule
EU: structural adjustment by ½ percent per year towards
structural balance + free play of automatic stabilizers
Truly endorsed?
No explicit convention about headroom within the target
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As a consequence…. (A)
General Government debt and deficit (% of GDP)
14
140
12
120
10
100
8
80
6
60
4
40
2
20
0
0
1960 1964 1968 1972 1976 1980 1984 1988 1992 1996 2000 2004
Indebitamento netto (as s e s inis tro)
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Debito (as s e des tro)
As a consequence…. (B)
Fonte: Banca d’Italia, Relazione Annuale 2007
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Multi-year budget,
top-down preparation, tight execution
No “true” multi-year budget
(3 years but t+1 and t+2 are forecasts, not binding plans)
No top-down budgeting
(no expenditure ceilings)
Rather lax execution
(no explicit contingency reserve but weak link between
authorizations from the state budget and accounts relevant to the
fiscal targets)
(possibility to use “windfall revenues” to increase expenditure)
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As a consequence….
Contributions to deficit reduction (% PIL)
Deficit reduction mostly from higher revenues and lower interest exp.
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Prudent forecasts - Accountability
Insufficient information on fiscal projections on a current
programs basis & on costing of new legislation
Difficult to assess outturn
No formal assignment of independent assessment
(plus nothing much happens if targets are not met)
Budget and legislation by line-items not programs
Not surprisingly the 2007/2008 spending review found
abundant evidence of inefficiency in the use of public money
(CTSP08)
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A few examples
Ministry of Infrastructures – Regional Offices: staff per billion of assets
(CTSP08)
200
180
160
140
120
100
80
60
40
20
0
La-Ab- Si-Cal
Sa
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CamMo
VeTAAFr
Pu-Ba ER-Ma To-Um
Lo-Li
Pi-VdA
A few examples
0
50000
100000
150000
200000
Ministry of Justice – Prisons:
Expenditure per inmate vs. number of inmates (CTSP08)
0
500
1000
Inmates
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1500
A few examples
Ministry of Justice – Courts:
Elasticity of scale (yertical) vs. Number of Judges (horizontal) –
(CTSP08)
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Education: resources vs. outcomes
An inverse correlation between resources and outcomes
(Montanaro, QEF08)
Proficiency levels (primary
and lower secondary schools
(INValSI)
Teachers per pupils
Darker colors
=
higher values
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Health Services: Resources vs. Activities
Another inverse correlation
(Francese & Romanelli, BI09)
Expenditure per resident (adjusted
for the composition of population)
Darker colors
=
higher values
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Patients’ mobility
IV. Summary and Conclusions
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1. There are significant incentives to fiscal indiscipline
(both theory and evidence)
2. This entails both macro-risks and micro inefficiency
3. MTFFs can help re-engineering incentives and control risks:
they are not a magic wand but one is better-off having them
(issues in design & enforcement)
4. Italy: EU fiscal rules provide a frame but content needs to be
defined at the national level
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1st on the “to-do-list”: Improve Accountability
 “Educate the public”: set credible objectives, openly discussed
and clearly communicated to population at large (e.g.
sustainability reports)
 Ex post reconciliation of changes from one budget to the next
 Parliamentary scrutiny of financial performance
 Range of sanctions for persistent “overspenders”
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What Others Do
EX ANTE
• External scrutiny of economic
assumptions (UK)
• Use of consensus economic
forecast (Canada)
• Independent evaluation of
macroeconomic conditions and
fiscal stance (Sweden)
• Independent fiscal forecasts
(Netherlands)
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EX POST
• Transparent reporting of
fiscal performance (UK, NZ)
• Independent evaluation of
fiscal compliance with
objectives (Sweden)
• Predetermined mechanisms
for addressing deviations
form forecasts (Switzerland)
Medium-term Expenditure Frameworks
Range of Advanced Country Models
DISCIPLINE
COVERAGE
COUNTRY
Soc Sec
Debt
Interest
Local
Gov’t
% of
public
spending
LEVEL OF
DETAIL
TIME
HORIZON
Rolling
or Fixed
Frequency
of Revision
AGGREGATE EXPENDITURE CEILINGS
Finland
Some
No
No
36%
Total
Spending
4
4 fixed
Every 4 years
Netherlands
Yes
No
T’fers
80%
4 Sectors
4
4 fixed
Every 4 years
Sweden
Yes
No
T’fers
64%
Total
Spending
3
2 fixed + 1 rolling
Every year
FIXED MINISTERIAL PLANS
United
Kingdom
No
No
T’fers
59%
25 Depts
3
2 fixed + 1 rolling
Every 3 years
France
No
Yes
No
31%
35 Missions
3
2 fixed + 1 rolling
Every 2 years
Yes
100%
20 Depts
267 Progs
3
Rolling
Every year
ROLLING PROGRAM ESTIMATES
Australia
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Yes
Yes
48
Effective Multi-year Expenditure
Prioritization Mechanisms
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CHARACTERISTIC
DEFINITION
BEST PRACTICE
Centralized
No competing source of
expenditure authority
Australia
Strategic
Assumes policies, laws and
contracts can be changed
Netherlands
Legitimate
Combines “bottom-up” input from
ministries with “top-down”
engagement from politicians
France
Comprehensive
Covers all expenditure over the
whole planning horizon
United Kingdom
Capped
Operates withing a fixed, multi-year
budget constraint
Sweden
Definitive
The final verdict from the “top of
the office”
Finland
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Adjustment Mechanisms:
Managing risks, pressures & shocks in a multi-year system
1. Exclusion
Excluding volatile/non-discretionary items
from the rule celing, such as:
• debt interest
• unemployment benefits
• social security
• earmarked revenues
• local government (own resources)
3. Contingency Reserves
Building contingency margins into
expenditure projections or ceilings:
• Netherlands: 0.25%
• UK: 0.75 – 1%
• Canada: 1.5 – 2%
• Sweden: 1.5 – 2%
• Australia: 1.5 – 5%
2. Adjustment
Adjusting ceilings to accommodate real
economy effects, such as:
• inflation (Netherlands)
• revenue windfalls (Netherlands,
Canada)
4. Budget Architecture
Capacity to absorb shocks:
• max 20-30 main budget headings
• each budget a mixture of discretionary
and non-discretionary items
• maximum flexibility to reallocate
• ministerial contingency reserves
• mandatory savings targets
50
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Once again on public scrutiny
“good finance cannot be attained without
intelligent care on the part of the citizens ...
due equilibrium between income and outlay
will only be found where responsibility is
enforced by the public opinion of an active
and enlightened community”
Charles Bastable (1927)
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