Transcript The Stability and Growth Pact and its Reform from the Perspective of

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
2
Initial budgetary conditions: Distance from the
3% reference value in the run-up to the euro
Deviation from the deficit criterion 4 years prior to euro adoption
8
5.7
6
4.8
2.2
2
1
0.6
0
0
-2
-4
-6
-8
-0.5
-1.9 -2
-0.3
-1.2
-2.4
-2.7 -2.5
-3.6 -3.6
-4.4
1.1
0.5
-2.2
-3.8
-6.3
Au
s
Be tria
lgi
u
Fi m
nla
n
Fr d
G ance
erm
a
G ny
ree
Ire ce
lan
d
Lu
I
xe tal
m y
bo
Po urg
rtu
ga
N Sp l
eth ai
erl n
an
Cz
d
ec Cyp s
h
Re rus
pu
b
Es lic
to
H nia
un
ga
r
La y
Li tvia
th
ua
nia
M
al
Po ta
la
Slo nd
va
Slo kia
ve
nia
% of GDP
4
3
Lower debt ratios:
in 2004 and in the run-up to the euro
Austria
Belgium
Finland
France
Germany
Greece
Ireland
Italy
Luxembourg
Portugal
Spain
Netherlands
Cyprus
Czech
Estonia
Hungary
Latvia
Lithuania
Malta
Poland
Slovakia
Slovenia
5 years prior to EMU
2004
0
20
40
60
80
% of GDP
100
120
140
4
As debt ratios are lower and yield convergence is
at a more advanced stage...
The long term bond yield criterion 3 years prior to assessment
(12-month averages)
Austria
Belgium
Finland
France
Germany
Greece
Ireland
Italy
Luxembourg
Portugal
Spain
The
Cyprus
Czech
Estonia
Hungary
Latvia
Lithuania
Malta
Poland
Slovakia
Slovenia
-2
-1
0
1
2
3
percentage points
4
5
6
7
5
…we may expect smaller fiscal gains from
convergence…
Czech Republic
Luxembourg
Estonia
Latvia
Lithuania
Slovakia
Malta
Cyprus
Slovenia
France
The Netherlands
Ireland
Poland
Austria
Germany
Hungary
Finland
Spain
Belgium
Italy
Greece
Portugal
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
percent of GDP
3.0
3.5
4.0
4.5
5.0
6
… so not even high debt countries may afford
to rely on the reduction in interest payments.
4
3
2
0
-1
-2
-3
1.90 1.86
1.30
0.84 0.81 0.78
0.48 0.29
0.05 0.02
-0.26
-0.67
-0.98
-1.27
-1.59 -1.69 -1.78
-2.34
-4
-5
-6
-4.81
-5.69
-7
Ita
Po ly
lan
d
M
al
Fr ta
a
H nce
un
ga
Au ry
str
Cy ia
pr
us
Sp
a
G in
ree
c
Cz
F
ec inl e
h
Re and
pu
b
Th
e N Slo lic
eth vaki
er a
la
Li nds
th
ua
Be nia
lgi
Po um
rtu
Slo gal
v
G enia
erm
an
Ire y
lan
d
La
tv
i
E
Lu sto a
xe ni
m a
bo
ur
g
percent of GDP
1
2.98 2.78
7
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
8
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
Cyclical Budget
Sensitivity
The Largest Value
of Output Gap
Cyclical Safety
Margin
Minimal
Benchmark
in percent
in percent
in percent
EU-15
0.50
3.83
1.97
-1.03
CEE-8
0.41
4.26
1.68
-1.32
Czech Republic
Estonia
Hungary
Latvia
Lithuania
Poland
Slovakia
Slovenia
0.40
0.41
0.44
0.33
0.33
0.49
0.40
0.45
4.20
4.78
3.65
4.22
6.05
3.87
3.87
3.44
1.70
1.95
1.62
1.39
2.01
1.88
1.55
1.54
-1.30
-1.05
-1.38
-1.61
-0.99
-1.12
-1.45
-1.46
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Ageing is a threat in NMS
EU-15
Old-age Dependency
Ratios (in percent)
2000
2050
25.95
51.40
Total Fertility
Rate
2003
1.57
Austria
Belgium
Denmark
Finland
France
Germany
Greece
Ireland
Italy
Luxembourg
Netherlands
Portugal
Spain
Sweden
United Kingdom
25.20
28.10
24.20
25.90
27.20
26.60
n.a.
19.70
28.80
n.a.
21.90
26.70
27.10
29.40
26.60
58.20
49.50
40.30
50.60
50.80
53.20
n.a.
45.70
66.80
n.a.
44.90
50.90
65.70
46.30
45.30
1.40
1.62
1.72
1.72
1.89
1.31
1.25
1.97
1.26
1.63
1.73
1.47
1.25
1.65
1.64
Czech Republic
Hungary
Poland
21.90
23.70
20.40
57.50
47.20
55.20
1.17
1.30
1.24
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Ageing problem calls for higher
present saving
1. This may take the form of lower government
deficits/higher surpluses today – which reduces
explicit debt
2. 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
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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
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The Hungarian example:
future balances of the pension system
% of GDP
The balance of the government pension fund 2004-2105
% of GDP
-2.5%
-3.0%
-3.0%
-3.5%
-3.5%
Single-pillar system
21
02
-2.5%
20
95
-2.0%
20
88
-2.0%
20
81
-1.5%
20
74
-1.5%
20
67
-1.0%
20
60
-1.0%
20
53
-0.5%
20
46
-0.5%
20
39
0.0%
20
32
0.0%
20
25
0.5%
20
18
0.5%
20
11
1.0%
20
04
1.0%
Multi-pillar system
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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
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Thank you for your
attention!
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