How to Maintain Fiscal Discipline?

- Macro Rules or Spending Rules -

27th OECD/SBO Meeting June 2006 Visiting Fellow Policy Research Institute/Ministry of Finance Japan

HIDEAKI TANAKA

[email protected]

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What I'm going to present .....

1. Based on the analysis by Anderson and Minarik(2006), clarify the characteristics of macro rules and spending rules and the relationship between them.

2. Analyze briefly what happened since the end of 1990s in OECD countries 3. Discuss how to maintain fiscal aggregate discipline 2

1. Major points of the paper

1. Describes major characteristics of deficit rules and spending rules. 2. Concludes relative superiority of spending rules not only from the economic point of view but also political and practical point of view.

3. Proposes the alternative approach to fiscal policymaking in EU.

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2. Background of both rules EMU macro rule Required to measure fiscal positions across countries without manipulation BEA spending rule VS

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Learned from the failure of GRH Fragmentation in the US budget process Lots of problems identified but works not so bad from the historical perspective Succeeded in regulating the behavior of Congress by giving them some discretions

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3. Another criteria to assess rules

Ideal fiscal rules 1.Well-defined 2.Tranparent

3.Simple

4.Flexible

5.Adequate relative to final goal 6.Enforcement

7.Consistent

8.Underpinned by structural reforms EU rules ++ ++ +++ ++ ++ + ++ + BEA rules ++ + + +++ + ++ ++ + 1.Criteria taken from Kopits and Symansky(1998) 2.Evaluation for EU rules done by Buti, Eijffinger and Franco(2003) +++: very good, ++: good, +: fair 3.Evaluation(provisional) for BEA rules done by Tanaka 5

4 . L i m i t a t i o n s o f e a c h r u l e

Macro rules Difficult to manage the actual political process in the budgeting Spending rules Difficult to show the overall fiscal strategy in transparent manner Both are not mutually exclusive in practice 6

5. What happened since the end of 1990s GG Fiscal Balance (OECD Economic Outlook No78)

OECD Average 98 99 - 1.2 - 0.8

00 01 02 03 04 05 0.3 - 1.3 - 3.2 - 4.0 - 3.6 - 3.2

Surplus to deficit : Austria, Germany, Ireland, France, Italy, Luxembourg, Netherlands, Spain, Switzerland, UK, USA Continuously deficit : Czech, Greece, Hungary, Japan, Poland, Portugal, Slovak Continuously surplus : Australia, Belgium, Canada, Denmark, Finland, Korea, Norway, Sweden, NZ, Iceland

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6. Issues in the first half of 2000s

France, Germany, USA, etc 1.Luck of political will 2.Weakness in expenditure control Australia, Sweden, etc 1.Increase of political pressure under budget surplus 2.Insufficiency of risk analysis and control 8

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L e s s o n s f r o m e x p e r i e n c e s

１．Rational of compliance and political commitment A framework to make the gov. commit ２．Institutional design of fiscal rules Combination of macro and spending rule ３．Micro budgeting reform for final objective Use public money efficiently and effectively 9

8. NZ Fiscal Responsibility Act 1994

FRA sets out the principles for formulating fiscal policy in NZ.

1.Follow five principles of responsible fiscal management 2.Publish fiscal intentions and objectives :required reports are Budget Policy Statement and Fiscal Strategy Report 3.Publish a range of reports resulting in a comprehensive set of fiscal information prepared under GAAP(Generally accepted accounting principles) :economic and fiscal updates for the next three years :the half year economic and fiscal update :pre-election economic and fiscal update 4.Refer all fiscal policy reports to a parliamentary select committee Same approaches - Australia: Charter of Budget Honesty Act (1998) UK: Code for Fiscal Stability (1998) 10

9. NZ's experience in fiscal policy making

Fiscal Responsibility Act 1. Political commitment 2. Transparency and accountability Three-year fiscal cap stipulated in CAs 1. Prevention of profligacy 2. Keep annual budgeting along MTFF "FRA, which was introduced at least partly as a contraceptive to MMP, has altered the context within which fiscal debate occur.

Amongst other things, the Act has affected parties' election promises, as these must be demonstrated publicly to fit within realistic parameters" ( Boston and Church, 2002 ) 11

1 0 . C o n c l u s i o n R e m a r k s

Everybody tries to circumvent fiscal rules.

Political and economic environment behind rules vary from time to time. No single rule which will be able to maintain its effectiveness for good.

1. Inform public merits of keeping discipline.

2. Increase the political cost of breaching rules 12