Public Finance Sustainability and the Role of Independent ... · The IFIs (Independent Fiscal...
Transcript of Public Finance Sustainability and the Role of Independent ... · The IFIs (Independent Fiscal...
![Page 1: Public Finance Sustainability and the Role of Independent ... · The IFIs (Independent Fiscal Institutions) 26 Source: Designing effective independent fiscal institutions, Lisa von](https://reader034.fdocuments.in/reader034/viewer/2022050422/5f90fd4e2c24573be658da1b/html5/thumbnails/1.jpg)
Public Finance Sustainability and the Role
of Independent Fiscal Institutions
Miguel St. Aubyn
Executive member- Conselho das Finanças Públicas – Portugal
All opinions expressed here are my own and do not reflect the official position of any institution.
Porto, 11 November 2019
![Page 2: Public Finance Sustainability and the Role of Independent ... · The IFIs (Independent Fiscal Institutions) 26 Source: Designing effective independent fiscal institutions, Lisa von](https://reader034.fdocuments.in/reader034/viewer/2022050422/5f90fd4e2c24573be658da1b/html5/thumbnails/2.jpg)
Summary
Part A – Public Finance Sustainability
- Sustainability – what is it?
- Public debt time path
- Public finance risks
- An ideological question?
- The budgetary process and sustainability – the short and long
term
Parte B - The IFIs (Independent Fiscal Institutions)
- Some characteristics of IFIs
- IFIs in the European Union
- The Portuguese Public Finance Council
2
![Page 3: Public Finance Sustainability and the Role of Independent ... · The IFIs (Independent Fiscal Institutions) 26 Source: Designing effective independent fiscal institutions, Lisa von](https://reader034.fdocuments.in/reader034/viewer/2022050422/5f90fd4e2c24573be658da1b/html5/thumbnails/3.jpg)
Part A
Public Finance Sustainability
![Page 4: Public Finance Sustainability and the Role of Independent ... · The IFIs (Independent Fiscal Institutions) 26 Source: Designing effective independent fiscal institutions, Lisa von](https://reader034.fdocuments.in/reader034/viewer/2022050422/5f90fd4e2c24573be658da1b/html5/thumbnails/4.jpg)
Sustainability – what is it?
4
Public Finances are sustainable:
if the expenditure plans, i.e. if the expenditure assumed in the present including all commitments in the
future, can be effectively realised, without failing to comply with the obligations relating to the public
debt assumed in the meantime
Some important implications:
1. the expenditure assumed shall correspond to a revenue plan enabling a stable, non-explosive
trajectory for public debt
2. The internalisation of the notion of sustainability implies guidance of the political decision for the
calculation of cost impacts and intertemporal benefits
3. the financial sustainability of the State is something that depends on the past, contemporary
decisions, but also on what will happen in the future
![Page 5: Public Finance Sustainability and the Role of Independent ... · The IFIs (Independent Fiscal Institutions) 26 Source: Designing effective independent fiscal institutions, Lisa von](https://reader034.fdocuments.in/reader034/viewer/2022050422/5f90fd4e2c24573be658da1b/html5/thumbnails/5.jpg)
Public debt time path
5
Debt at the end of the year = Debt at the beginning of the year + Expenses - Revenues + Deficit/Debt
adjustments
- Budget balance
Debt change = - Budget balance + Deficit/debt adjustments
Debt change = Interest-free expenses + interest paid - Revenues + Deficit/debt adjustments
Total spending
Interest paid ≈ interest rate x debt
![Page 6: Public Finance Sustainability and the Role of Independent ... · The IFIs (Independent Fiscal Institutions) 26 Source: Designing effective independent fiscal institutions, Lisa von](https://reader034.fdocuments.in/reader034/viewer/2022050422/5f90fd4e2c24573be658da1b/html5/thumbnails/6.jpg)
Public debt sustainability
6
https://www.imf.org/external/datamapper/GG_DEBT_GDP@GDD/PRT
![Page 7: Public Finance Sustainability and the Role of Independent ... · The IFIs (Independent Fiscal Institutions) 26 Source: Designing effective independent fiscal institutions, Lisa von](https://reader034.fdocuments.in/reader034/viewer/2022050422/5f90fd4e2c24573be658da1b/html5/thumbnails/7.jpg)
Public debt sustainability
7
The trajectory of public debt is usually expressed as a percentage of GDP.
Variables that affect this trajectory:
- GDP growth rate
- interest rate
- the initial value of public debt
-revenue and public expenditure (primary budget balance)
- deficit-debt adjustments
![Page 8: Public Finance Sustainability and the Role of Independent ... · The IFIs (Independent Fiscal Institutions) 26 Source: Designing effective independent fiscal institutions, Lisa von](https://reader034.fdocuments.in/reader034/viewer/2022050422/5f90fd4e2c24573be658da1b/html5/thumbnails/8.jpg)
8
Public finance risks and sustainability
![Page 9: Public Finance Sustainability and the Role of Independent ... · The IFIs (Independent Fiscal Institutions) 26 Source: Designing effective independent fiscal institutions, Lisa von](https://reader034.fdocuments.in/reader034/viewer/2022050422/5f90fd4e2c24573be658da1b/html5/thumbnails/9.jpg)
9
Public finance risks and sustainability
![Page 10: Public Finance Sustainability and the Role of Independent ... · The IFIs (Independent Fiscal Institutions) 26 Source: Designing effective independent fiscal institutions, Lisa von](https://reader034.fdocuments.in/reader034/viewer/2022050422/5f90fd4e2c24573be658da1b/html5/thumbnails/10.jpg)
10
1) Macroeconomic risks
- economic growth
- economic cycles (recessions)
2) Revenue risks
3) Risks on expenditure
- Pension
-Health
4) Contingent responsibilities
- financial sector
-guarantees granted, public-private partnerships and the public companies
Public finance risks and sustainability
![Page 11: Public Finance Sustainability and the Role of Independent ... · The IFIs (Independent Fiscal Institutions) 26 Source: Designing effective independent fiscal institutions, Lisa von](https://reader034.fdocuments.in/reader034/viewer/2022050422/5f90fd4e2c24573be658da1b/html5/thumbnails/11.jpg)
11
Public finance risks and sustainability
![Page 12: Public Finance Sustainability and the Role of Independent ... · The IFIs (Independent Fiscal Institutions) 26 Source: Designing effective independent fiscal institutions, Lisa von](https://reader034.fdocuments.in/reader034/viewer/2022050422/5f90fd4e2c24573be658da1b/html5/thumbnails/12.jpg)
12
Using a binomial distribution and assuming that the probability of recession is independent each year,
it is concluded that the probability of the Portuguese economy being in recession at a given point in
any five-year period is approximately 55%.
Public finance risks and sustainability
![Page 13: Public Finance Sustainability and the Role of Independent ... · The IFIs (Independent Fiscal Institutions) 26 Source: Designing effective independent fiscal institutions, Lisa von](https://reader034.fdocuments.in/reader034/viewer/2022050422/5f90fd4e2c24573be658da1b/html5/thumbnails/13.jpg)
Mozambique - population age structure
13
![Page 14: Public Finance Sustainability and the Role of Independent ... · The IFIs (Independent Fiscal Institutions) 26 Source: Designing effective independent fiscal institutions, Lisa von](https://reader034.fdocuments.in/reader034/viewer/2022050422/5f90fd4e2c24573be658da1b/html5/thumbnails/14.jpg)
Brazil - population age structure
14
![Page 15: Public Finance Sustainability and the Role of Independent ... · The IFIs (Independent Fiscal Institutions) 26 Source: Designing effective independent fiscal institutions, Lisa von](https://reader034.fdocuments.in/reader034/viewer/2022050422/5f90fd4e2c24573be658da1b/html5/thumbnails/15.jpg)
Portugal - population age structure
15
![Page 16: Public Finance Sustainability and the Role of Independent ... · The IFIs (Independent Fiscal Institutions) 26 Source: Designing effective independent fiscal institutions, Lisa von](https://reader034.fdocuments.in/reader034/viewer/2022050422/5f90fd4e2c24573be658da1b/html5/thumbnails/16.jpg)
16
Public finance risks and sustainability
![Page 17: Public Finance Sustainability and the Role of Independent ... · The IFIs (Independent Fiscal Institutions) 26 Source: Designing effective independent fiscal institutions, Lisa von](https://reader034.fdocuments.in/reader034/viewer/2022050422/5f90fd4e2c24573be658da1b/html5/thumbnails/17.jpg)
17
Public finance risks and sustainability
![Page 18: Public Finance Sustainability and the Role of Independent ... · The IFIs (Independent Fiscal Institutions) 26 Source: Designing effective independent fiscal institutions, Lisa von](https://reader034.fdocuments.in/reader034/viewer/2022050422/5f90fd4e2c24573be658da1b/html5/thumbnails/18.jpg)
18
Public finance risks and sustainability
![Page 19: Public Finance Sustainability and the Role of Independent ... · The IFIs (Independent Fiscal Institutions) 26 Source: Designing effective independent fiscal institutions, Lisa von](https://reader034.fdocuments.in/reader034/viewer/2022050422/5f90fd4e2c24573be658da1b/html5/thumbnails/19.jpg)
19
Public finance risks and sustainability
![Page 20: Public Finance Sustainability and the Role of Independent ... · The IFIs (Independent Fiscal Institutions) 26 Source: Designing effective independent fiscal institutions, Lisa von](https://reader034.fdocuments.in/reader034/viewer/2022050422/5f90fd4e2c24573be658da1b/html5/thumbnails/20.jpg)
An ideological question?
20
Two erroneous ideas on the sustainability of public finances:
1) Concern about sustainability leads to the reduction of the state's social role and the choice for private
supply
2) Concern about sustainability does not allow the use of fiscal policy to deal with recessive periods
![Page 21: Public Finance Sustainability and the Role of Independent ... · The IFIs (Independent Fiscal Institutions) 26 Source: Designing effective independent fiscal institutions, Lisa von](https://reader034.fdocuments.in/reader034/viewer/2022050422/5f90fd4e2c24573be658da1b/html5/thumbnails/21.jpg)
Experiência portuguesa de consolidação orçamental
21
![Page 22: Public Finance Sustainability and the Role of Independent ... · The IFIs (Independent Fiscal Institutions) 26 Source: Designing effective independent fiscal institutions, Lisa von](https://reader034.fdocuments.in/reader034/viewer/2022050422/5f90fd4e2c24573be658da1b/html5/thumbnails/22.jpg)
Fiscal consolidation in Portugal
22
![Page 23: Public Finance Sustainability and the Role of Independent ... · The IFIs (Independent Fiscal Institutions) 26 Source: Designing effective independent fiscal institutions, Lisa von](https://reader034.fdocuments.in/reader034/viewer/2022050422/5f90fd4e2c24573be658da1b/html5/thumbnails/23.jpg)
23
Fiscal consolidation in Portugal
![Page 24: Public Finance Sustainability and the Role of Independent ... · The IFIs (Independent Fiscal Institutions) 26 Source: Designing effective independent fiscal institutions, Lisa von](https://reader034.fdocuments.in/reader034/viewer/2022050422/5f90fd4e2c24573be658da1b/html5/thumbnails/24.jpg)
24
There are incentives that can lead to the bias towards the deficit and the growth of public debt
(temporal inconsistency of fiscal policy):
- immediate gain, future costs
- annual character of budgetary decisions
- election cycle
- short termism
The budgetary process and sustainability – the short and the long term
![Page 25: Public Finance Sustainability and the Role of Independent ... · The IFIs (Independent Fiscal Institutions) 26 Source: Designing effective independent fiscal institutions, Lisa von](https://reader034.fdocuments.in/reader034/viewer/2022050422/5f90fd4e2c24573be658da1b/html5/thumbnails/25.jpg)
Part B
The IFIs (Independent Fiscal
Institutions)
![Page 26: Public Finance Sustainability and the Role of Independent ... · The IFIs (Independent Fiscal Institutions) 26 Source: Designing effective independent fiscal institutions, Lisa von](https://reader034.fdocuments.in/reader034/viewer/2022050422/5f90fd4e2c24573be658da1b/html5/thumbnails/26.jpg)
26
Source: Designing effective independent fiscal institutions, Lisa von Trapp and Scherie Nicol, OECD
Some characteristics of IFIs
![Page 27: Public Finance Sustainability and the Role of Independent ... · The IFIs (Independent Fiscal Institutions) 26 Source: Designing effective independent fiscal institutions, Lisa von](https://reader034.fdocuments.in/reader034/viewer/2022050422/5f90fd4e2c24573be658da1b/html5/thumbnails/27.jpg)
27
What do IFIs do?
1. Long-term sustainability analysis
2. Responsibility for macroeconomic budgetary forecasts
3. Responsibility for monitoring compliance with budgetary rules
4. Direct support to parliament in the budget analysis
5. Policy cost assessment
6. Assessment of the cost of electoral programs
![Page 28: Public Finance Sustainability and the Role of Independent ... · The IFIs (Independent Fiscal Institutions) 26 Source: Designing effective independent fiscal institutions, Lisa von](https://reader034.fdocuments.in/reader034/viewer/2022050422/5f90fd4e2c24573be658da1b/html5/thumbnails/28.jpg)
28
Independence of IFIs: the Portuguese case
![Page 29: Public Finance Sustainability and the Role of Independent ... · The IFIs (Independent Fiscal Institutions) 26 Source: Designing effective independent fiscal institutions, Lisa von](https://reader034.fdocuments.in/reader034/viewer/2022050422/5f90fd4e2c24573be658da1b/html5/thumbnails/29.jpg)
29
Independence of IFIs: the Portuguese case
![Page 30: Public Finance Sustainability and the Role of Independent ... · The IFIs (Independent Fiscal Institutions) 26 Source: Designing effective independent fiscal institutions, Lisa von](https://reader034.fdocuments.in/reader034/viewer/2022050422/5f90fd4e2c24573be658da1b/html5/thumbnails/30.jpg)
30
Independence of IFIs: the Portuguese case
![Page 31: Public Finance Sustainability and the Role of Independent ... · The IFIs (Independent Fiscal Institutions) 26 Source: Designing effective independent fiscal institutions, Lisa von](https://reader034.fdocuments.in/reader034/viewer/2022050422/5f90fd4e2c24573be658da1b/html5/thumbnails/31.jpg)
31
Independence of IFIs: the Portuguese case
![Page 32: Public Finance Sustainability and the Role of Independent ... · The IFIs (Independent Fiscal Institutions) 26 Source: Designing effective independent fiscal institutions, Lisa von](https://reader034.fdocuments.in/reader034/viewer/2022050422/5f90fd4e2c24573be658da1b/html5/thumbnails/32.jpg)
32
Independence of IFIs: the Portuguese case
![Page 33: Public Finance Sustainability and the Role of Independent ... · The IFIs (Independent Fiscal Institutions) 26 Source: Designing effective independent fiscal institutions, Lisa von](https://reader034.fdocuments.in/reader034/viewer/2022050422/5f90fd4e2c24573be658da1b/html5/thumbnails/33.jpg)
33
Independence of IFIs: the Portuguese case
![Page 34: Public Finance Sustainability and the Role of Independent ... · The IFIs (Independent Fiscal Institutions) 26 Source: Designing effective independent fiscal institutions, Lisa von](https://reader034.fdocuments.in/reader034/viewer/2022050422/5f90fd4e2c24573be658da1b/html5/thumbnails/34.jpg)
34
The CFP delivers an opinion on the macroeconomic projections underlying the budget
programmes. It recently issued a qualified endorsement concerning the macroeconomic
forecasts of the draft budget plan for 2020.
https://www.cfp.pt/en/publications/state-budget/cfp-issues-a-qualified-endorsement-to-the-macroeconomic-
forecasts-underlying-the-draft-budgetary-plan-for-2020
Independence of IFIs: the Portuguese case