Fiscal Policy Challenges Facing the New Member States in a Period of Large Capital Inflows &...
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Transcript of Fiscal Policy Challenges Facing the New Member States in a Period of Large Capital Inflows &...
Fiscal Policy Challenges Facing the New Member States in a Period of Large Capital
Inflows & Substantial Investment Requirements
Armin RiessEuropean Investment Bank
International Seminar for Experts“Catching up after Enlargement”
Cicero FoundationOctober 14-15, 2004
Main questions
Public debt & fiscal deficits that countries
can “afford”?
Role of public investment and other
expenditure?
Role of balance of payments position
(notably capital inflows)?
What do we need to examine?
Key features of CEE economies
Public debt sustainability
Mixed blessing of capital inflows
Real GDP growth projection (in %), 2004
0
1
2
3
4
5
6
7
CZ SL HU SK PL BU RO ES LA LI
Source: European Commission, Economic Forecast, Spring 2004
EU-15 potential
Long-run CEE growth potential 4-5%
Consumer price inflation (in %), 2004
0
2
4
6
8
10
12
LI PL CZ ES SL LA BU HU SK RO
Source: European Commission, Economic Forecast, Spring 2004
2004 CEE average
EU-15/eurozone target
Public debt in CEE & EU-15 (% of GDP), 2004
Source: European Commission, Economic Forecast, Spring 2004
0
20
40
60
80
100
120LU IR
EU
KD
K FI ESSW
E NL
POR FRA
GER BE
L GR IT ES LA LI RO SL CZ
BU SK PO HU
Maastricht 60% criterion
Key features of CEE economies - Summary -
Real economic growth: CEE > EU15
Inflation: CEE > EU15
Nominal economic growth: CEE > EU15
Public debt: CEE < EU15
Public debt sustainability(ad hoc criteria)
Keep public debt/GDP-ratio constant !
Debt/GDP should converge to 60% (Maastricht) !
Debt/GDP should fall to zero(Stability & Growth Pact) !
Debt dynamics
Change in debt/GDP ratio
= fiscal deficit/GDP ratio
– nominal GDP growth • debt/GDP ratio
Fiscal deficit that leaves debt/GDP unchanged
Nominal GDP growth
4% 5% 7%
Fiscal deficit (in % of GDP)
Debt in % of GDP
20% 0.8% 1.0% 1.4%
40% 1.6% 2.0% 2.8%
60% 2.4% 3.0% 4.2%
Where does public investment fit into this picture?
Fiscal deficit can be higher if …
… public investment is large today, but expected to fall in the future.
Is public investment high in CEE?
Public investment in CEE & EU-15 (% of GDP, 1999-2003 average)
Source: European Commission (2003 Spring Forecast) and IMF (Staff Appraisal Reports)
0
2
4
6
8
UK AT
BE
LG
ER
DK IT FI FR
SWE ES
NL PT GR
IRE LU LI
RO SK PL ES
BU
HU LA SL CZ
EU15 average 2.3%
CEE average 3.9%
What about other public expenditure?
High investment today can justify higher fiscal deficit, but …
… other government expenditure may be low today relative to their future level.
Example: public pension expenditure
Public pension expenditure in selected CEE countries (in % of GDP)
Source: European Commission; Occasional Paper 4, July 2003
0
5
10
15
20
CZ HU LI PO RO SL EU
2000 2050
Public debt sustainability - Summary -
Debt sustainability does not imply the same fiscal deficit for all countries
Some government expenditure (investment) may justify higher fiscal deficits, others (pensions) call for fiscal restraint
Public debt sustainability is one thing, macroeconomic stability is another
Capital inflows (in % of GDP)(2001-2003 average for CEE, peak inflow periods otherwise )
0
2
4
6
8
10
12
14
Source: IMF (Staff Appraisal Reports); Begg et al. (2002)
1987-91
1996-91998-9
Capital inflows & current account deficits(in % of GDP, 2001-2003 average)
-2
0
2
4
6
8
10
12
14
HU PL SL ES BU LI RO LA CZ SK
Source: IMF (Staff Appraisal Reports)
Capital inflowsCurrent account deficit
Why do large capital inflows occur?
Higher returns on physical investment
Expected trend appreciation of currency
(Balassa-Samuelson effect)
Why are capital inflows a mixed blessing ?
What’s good: Investment finance higher growth
Too much of a good thing: Overheating of economy (inflation)
Credit boom & banking sector stability
Excessive currency appreciation & competitiveness
How to cope with large capital inflows?
Banking sector stability
Effective prudential regulation & supervision
Overheating of economy Revaluation of exchange rate/exchange rate
flexibility Fiscal austerity
Source: IMF (Staff Appraisal Reports)
-1
1
3
5
ES BU LI LA SL RO SK CZ HU PL
Hard currency pegs
“Flexible” exchange rates
Fiscal deficit & exchange rate regime (% of GDP, 2001-2003 average)
Conclusion
Fiscal policy assessment requires a
country-by-country approach
Coping with ‘dark side’ of capital flows is
key (fiscal) policy challenge
Fiscal policy challenges other than those
concerning the ‘bottom line’