LESSONS LEARNED: SUCCESSFUL EXAMPLES OF Fiscal Adjustment
-
Upload
international-consortium-on-governmental-financial-management -
Category
Documents
-
view
219 -
download
0
Transcript of LESSONS LEARNED: SUCCESSFUL EXAMPLES OF Fiscal Adjustment
-
7/30/2019 LESSONS LEARNED: SUCCESSFUL EXAMPLES OF Fiscal Adjustment
1/28
LESSONS LEARNED:SUCCESSFUL EXAMPLES OF
FISCAL ADJUSTMENTWilliam Dorotinsky
ICGFM International Conference
May 19, 2013
1
-
7/30/2019 LESSONS LEARNED: SUCCESSFUL EXAMPLES OF Fiscal Adjustment
2/28
Project Background
Timely topic
Extreme fiscal adjustment
At least 8% point improvement in fiscal balance over 5 years
Approach Consulted available literature
Interviewed contemporaneous actors
Comprehensive focus
Policies
Institutional/process reforms
Government strategy
2
-
7/30/2019 LESSONS LEARNED: SUCCESSFUL EXAMPLES OF Fiscal Adjustment
3/28
Countries Reviewed
3
CountryPeriod of
AdjustmentChange in General Govt
Budget Balance (%)
Canada 1993-1998 8.8
Finland 1993-2000 16.0Netherlands 1995-2000 11.2
Sweden 1993-2000 14.8
Thailand 1999-2003
11.1
Turkey 2002-2006 13.9
United Kingdom 1993-2000 9.1
Source: WEO
-
7/30/2019 LESSONS LEARNED: SUCCESSFUL EXAMPLES OF Fiscal Adjustment
4/28
Adjustment Sustainability (1)
4
1.0
3.3
-1.5
0.2
1.0
-2.5-2.3
-3
-2
-1
0
1
2
3
4
Canada Finland Netherlands Sweden Thailand Turkey UK
GeneralGove
rnmentBalance(%o
fGDP)
5 year average after end of adjustment
-
7/30/2019 LESSONS LEARNED: SUCCESSFUL EXAMPLES OF Fiscal Adjustment
5/28
Adjustment Sustainability (2)
5
-8
-6-4
-2
0
2
4
6
8
T T+1 T+2 T+3 T+4 T+5
GeneralG
overnmentBalanc
e(%o
fGDP)
Canada Finland Netherlands Sweden
Thailand Turkey UK
5 year trend after end of adjustment
-
7/30/2019 LESSONS LEARNED: SUCCESSFUL EXAMPLES OF Fiscal Adjustment
6/28
Global Financial Crisis Budget Balance
Country 2005 2006 2007 2008 2009 2010 2011
Canada 1.5 1.6 1.6 0.1 -4.9 -5.6 -4.5
Finland 2.7 4.0 5.3 4.2 -2.7 -2.8 -0.8
Netherlands -0.3 0.5 0.2 0.4 -5.6 -5.1 -5.0
Sweden 1.9 2.2 3.6 2.2 -0.9 -0.2 0.1
Thailand 1.5 2.2 0.2 0.1 -3.2 -0.8 -1.9
Turkey -0.3 0.0 -1.7 -2.4 -5.6 -2.7 -0.3
United
Kingdom-3.3 -2.6 -2.7 -4.9 -10.4 -9.9 -8.7
6
Source: WEO
-
7/30/2019 LESSONS LEARNED: SUCCESSFUL EXAMPLES OF Fiscal Adjustment
7/28
Adjustment Triggers
Market driven
Turkey
Thailand
Finland
Sweden
Canada
United Kingdom
PoliticallyDriven
Netherlands
7
-
7/30/2019 LESSONS LEARNED: SUCCESSFUL EXAMPLES OF Fiscal Adjustment
8/28
Actual Adjustment Triggers
MARKETMexican Peso crisisCanada
MARKETWestern recession in 1990, collapse of FSU,trade shock, banking crisis, devaluation of currencyFinland
POLITICALCampaign pledge to meet Maastricht deficitcriteriaNetherlands
MARKETWestern recession in 1990, trade shock,markets forced Swedish Kroner to devalueSweden
MARKET--Abandonment of dollar peg; instant bankruptcies
in private and financial sectorThailand MARKET--Major upheaval in 2001 affecting stock market,
currency value, banking sector, and FDITurkey
MARKET--Withdrawal from ERM reinforces need to controlfiscal deficitUnited Kingdom
8
-
7/30/2019 LESSONS LEARNED: SUCCESSFUL EXAMPLES OF Fiscal Adjustment
9/28
Power of an Ill-Timed Single Statement
In February 2001, the Turkish Prime Minister uses the
phrase, " This is a cr is is". Within days:
Stock market crashes nearly 40%
Interest rates rise to 3000% Central bank loses $5 billion in defending a crawling peg
exchange rate regime
30% drop in currency value after regime is abandoned
Large amounts of foreign investment withdrawn from theeconomy
9
-
7/30/2019 LESSONS LEARNED: SUCCESSFUL EXAMPLES OF Fiscal Adjustment
10/28
Political Context
Jean Chretien elected with majority government in 1993, re-electedin 1997Canada
Esko Aho led center-right coalition government elected in 1991;
Paavo Lipponen center-left coalition government elected in 1995Finland Wim Kok led center-left coalition government elected in 1994, re-
elected in 1999Netherlands Carl Bildt led centre-right coalition elected in 1991; Ingvar Carlsson
led center-left coalition government elected in 1994; party re-electedin 1998 with Goran Persson as Prime Minister
Sweden
Coalition government led by Chavalit Yongchaiyudh elected in 1996;Thaksin Shinawatra elected in 2001Thailand
Ahmet Necdet Sezer elected president in 2000; Recep TayyipErdoan elected as president with strong majority in 2003Turkey
John Major re-elected with majority government in 1992; Tony Blairelected in 1997 with majority governmentUnited Kingdom
10
Two Patterns: Newly elected vs. mid-term govts
-
7/30/2019 LESSONS LEARNED: SUCCESSFUL EXAMPLES OF Fiscal Adjustment
11/28
Adjustment Pattern: Institutional Reforms
AdjustmentTrigger
Immediate
InstitutionalReforms
Canada Netherlands Sweden
Finland United Kingdom
Mid-Adjustment
InstitutionalReformsSolidified
Thailand Turkey
11
-
7/30/2019 LESSONS LEARNED: SUCCESSFUL EXAMPLES OF Fiscal Adjustment
12/28
Adjustment Strategies
Communication
Fiscal goals
Re-definition of government Spending review process
Future competitiveness
Broad based public sector reforms
12
-
7/30/2019 LESSONS LEARNED: SUCCESSFUL EXAMPLES OF Fiscal Adjustment
13/28
Communication
Public - societal exercise
CanadaA New Framework for Economic Policy
Finland Presidential report on employment
Turkey "Turkish Transition to a Strong EconomyProgram
Markets
Forecasts made transparent to markets
Canada
Sweden
13
-
7/30/2019 LESSONS LEARNED: SUCCESSFUL EXAMPLES OF Fiscal Adjustment
14/28
Sweden: Sharing the Pain
Sweden reduced compensation of Politicians
Symbolic savings, not worth a lot of money, but sends a
strong message about the government's will and the gravity
of the situation
14
-
7/30/2019 LESSONS LEARNED: SUCCESSFUL EXAMPLES OF Fiscal Adjustment
15/28
Role of Fiscal Goals
Early victories and measurable progress
Establishes credibility
Citizens tolerance for pain
Markets mid-term sustainability
Amended and strengthened by new governments
Finland, Thailand, Turkey
15
CAN FIN NL SWE THAI TURK UK
Goal 3% 70% 3% 0% 60% 6.5% 0%
Of deficit debt deficit deficit debtprimarysurplus
deficit
Within 3 years 4 years 4 years 1 year 4 years
-
7/30/2019 LESSONS LEARNED: SUCCESSFUL EXAMPLES OF Fiscal Adjustment
16/28
Re-Definition of Government
Canada (Program Review) Serving the public interest;
Necessity of government involvement, as opposed to the private sector;
Appropriateness of federal role, as opposed to other levels of govt;
Scope for public and private sector partnerships;
Scope for increased efficiency; Affordability
United Kingdom Embraces Public Private Partnerships
Turkey
Limit the role and reach of government General deregulation of the economy
Thailand in 2nd stage Dual Track Policy government as engine of growth, yet sustainable
Establishment of safety net medical, housing, etc.
Expansive policy in agricultural sector, local development, and SMEs
16
-
7/30/2019 LESSONS LEARNED: SUCCESSFUL EXAMPLES OF Fiscal Adjustment
17/28
Formal Spending Review Process
Netherlands
Broad review by quasi-independent committee
Canada
Program review led by Minister of Finance
United Kingdom
Fundamental Expenditure Review led byTreasury
17
-
7/30/2019 LESSONS LEARNED: SUCCESSFUL EXAMPLES OF Fiscal Adjustment
18/28
Spending review process evolution
Netherlands Broad review continues--one year prior to every election
by quasi-independent committee
Canada
Program review evolves into an MTEF United Kingdom
Comprehensive spending review continues to occurperiodically
Finland/Sweden Not initially as comprehensive but evolves into MTEF Thailand/Turkey
Post adjustment implementation of MTEF
18
-
7/30/2019 LESSONS LEARNED: SUCCESSFUL EXAMPLES OF Fiscal Adjustment
19/28
Future Competitiveness
Turkey general deregulation of economy, many SOEsremoved from government support
Finland unemployment key concern
Sweden subsidized child care, education, and activelabor market policies, shielded from cuts
Thailand in 2nd stage government as an engine ofgrowth; promote exports by public investments throughchoice and concentration
19
-
7/30/2019 LESSONS LEARNED: SUCCESSFUL EXAMPLES OF Fiscal Adjustment
20/28
Expenditure / Revenue Mix
80 / 20Canada
Primarily expenditureFinland
Primarily expenditureNetherlands
53 / 47Sweden
Primarily expenditureThailand 70 / 30Turkey
50 / 50United Kingdom
20
-
7/30/2019 LESSONS LEARNED: SUCCESSFUL EXAMPLES OF Fiscal Adjustment
21/28
Expenditure Policy Changes
21
Expenditure PolicyChange
CAN FIN NL SWE THAI TURK UK
Across the board
vs. targetedTargeted Targeted Targeted Targeted
Across the
Board
initially
Targeted Targeted
Individual transfers Reduced n/aNot
exempt Reduced Reduced n/a Reduced
Intergovernmental
transfersReduced
Formula
changedReduced n/a n/a n/a Capped
Wage bill
19%
down-
sizing
Reduced
greatly
Incentive
to leave or
retire
Tied to
productivi
ty
Reduced
Hiring
Caps,
attrition
Zero
growth
Pensions Yes Yes n/a n/a n/a n/a
Raised
retirement
age for
women
Privatization Yes Yes n/a n/a Planned Initiated Yes/PPP
-
7/30/2019 LESSONS LEARNED: SUCCESSFUL EXAMPLES OF Fiscal Adjustment
22/28
Finland: Constitutional Amendment
Greater flexibility Constitutional amendment in June 1993 allowed permanent
savings decisions on statutory appropriations (entitlements) to bemade with a simple majority in Parliament (as opposed to two-
thirds) Proved to be of crucial importance in getting government
expenditure under control
22
-
7/30/2019 LESSONS LEARNED: SUCCESSFUL EXAMPLES OF Fiscal Adjustment
23/28
Revenue Policy Changes
23
Revenue Policy
ChangeCanada Finland NL Sweden Thai Turkey UK
No significant
changeX
One time measure X
Permanent
measureX X X X X
Consumption tax X X X X X
Income tax X X X
Corporate tax X X X X
-
7/30/2019 LESSONS LEARNED: SUCCESSFUL EXAMPLES OF Fiscal Adjustment
24/28
Institutional / Process Reforms
24
Reform CAN FIN NL SWE THAI TUR UK
Institutionalize spending reviews X X X
Use of Committees X X X
Greater discretion /
accountability to line ministries
X X X X X X X
Conservative macroeconomicforecasts
X X X2 X2 X
Medium-term frameworks X X X X X2 X2 X
Contingency reserve X X X
Offset required for new policyinitiatives
X X
Debt management X X
Comprehensiveness of budget X
Revenue administration X X
-
7/30/2019 LESSONS LEARNED: SUCCESSFUL EXAMPLES OF Fiscal Adjustment
25/28
Empowering MoF
Netherlands:
The Ministry of Finance has authority to unilaterally impose higherlocal tax rates on the citizens of sub-national governments that fail
to live within their budget allocations.
25
-
7/30/2019 LESSONS LEARNED: SUCCESSFUL EXAMPLES OF Fiscal Adjustment
26/28
Lessons (1)
Sustained commitment and leadership Strong Minister of Finance (or equivalent) in all countries
Focus on building credibility Markets
Society Manage expectations and be consistent in messages
5 year + exercise
Adjustment package Comprehensiveness is important shared burden
Speed - short time frame as longer targets cross political events Front load the pain tolerance has a limited life
Empowerment of fiscal actors Greater role for MoF
Use of quasi-independent fiscal bodies
26
-
7/30/2019 LESSONS LEARNED: SUCCESSFUL EXAMPLES OF Fiscal Adjustment
27/28
Lessons (2)
Good practices
Prudence in forecasting
Clear rules on managing an unexpected surplus
Ensure major programs are not indexed to inflation
Transparency of budgeting process
New policy initiatives offset with funding from existing programs
Avoid undermining future competitiveness
Protect education, labor force participation
Sustainability Institutional / process reform
Size of adjustment constrains ability to restore cuts
Can be politically rewarding
27
-
7/30/2019 LESSONS LEARNED: SUCCESSFUL EXAMPLES OF Fiscal Adjustment
28/28
Questions?