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Outline

International Experience with Rules - Based Fiscal Frameworks: Design Issues George Kopits Fiscal Council Republic of Hungary Conference on Fiscal Frameworks Mishkenot Shanamin Jerusalem, May 5 , 2009. Outline. Background RFF: key elements Policy rules, procedural rules Transparency

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Outline

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  1. International Experience withRules-Based Fiscal Frameworks:Design IssuesGeorge KopitsFiscal CouncilRepublic of HungaryConference on Fiscal FrameworksMishkenot Shanamin Jerusalem, May 5, 2009

  2. Outline • Background • RFF: key elements • Policy rules, procedural rules • Transparency • Enforcement • Country experience • Performance

  3. Background Discretionary policy: problems • Time inconsistency • Free rider, common pool problem • Deficit bias • Procyclical bias • Expenditure composition bias • Unsustainable public debt

  4. Background Discretionary policy: economic effects • Domestic imbalance (inflation, crowding out) • External imbalance • Macroeconomic volatility • Low growth rate • Financial crises (currency, bank, debt crises)

  5. Key Elements of RFF • Policy (numerical) rule: permanent constraint on a summary fiscal indicator • Procedural rule: supporting regulation on budget process • Transparency: functional, coverage, time horizon, accounting practices • Enforcement: surveillance, sanctions for non-observance

  6. Types of Policy Rules Budget balance rules • overall balance (incl. deficit limit, min. surplus) • current balance (“golden rule”) • primary balance • operating balance • medium-term, structural, or CA balance

  7. Types of Policy Rules Expenditure rules • primary expenditure limit • discretionary expenditure limit • wage expenditure limit

  8. Types of Policy Rules Debt rules • debt ratio limit • target debt ratio  primary surplus ratio • real debt limit  nominal primary surplus

  9. Types of Policy Rules Debt rules Brazil: convergence to target debt ratio given target debt ratio derive targetprimary surplus ratio

  10. Types of Policy Rules Debt rules Hungary: real debt limit given debt target derive primary surplus target and nominal surplus target (discretionary component)

  11. Major Types of Procedural Rules • medium-term budget planning • pay-go principle for budget proposals • limit on end-year carryover of appropriations • rules on supplementary appropriations

  12. Transparency(wide access to timely information) • broadest coverage of public sector • accounting for extra-budgetary operations • accounting conventions (accrual vs. cash) • forecasts (incl. realistic macro assumptions) • institutional clarity (e.g., government functions, goals; intergovernmental relations, transfers) • contingent liabilities, risk assessment

  13. Enforcement Mechanism • statutory basis: constitution, law, guidelines • implementation: • ex ante targets, ex post realization • escape clauses, contingency funds • surveillance: self, independent authority, other • sanctions: reputational, legal, financial

  14. Criteria for Success • well-defined set of rules • transparency • simplicity • adequacy to accomplish objective • consistency, internally and externally • flexibility with respect to shocks • enforceability • efficiency (that is, no distortionary effects)

  15. Selected Country Practices

  16. Experience: Compliance Good compliance:New Zealand, Brazil*, Bulgaria, Chile, Estonia, Norway, Peru,* Sweden, Canadian provinces, Swiss cantons, some Euro members Mixed compliance:Colombia,* Poland, Euro area (incl. national rules), UK, US states Poor compliance:Argentina,* Ecuador,* Venezuela* Promising start: India,* Switzerland, Mexico, Nigeria,* Hungary*

  17. Experience: Performance In complying countries • investor confidence • moderate real interest rates • relatively low inflation • above-average growth, stability • lower vulnerability to crises • fiscal sustainability • mixed results on external balance

  18. Experience: Performance In complying countries • Creative accounting ? • rarely, not significant • Pro-cyclical effects ? • in some cases where initial structural deficit, high debt ratio, or postponed reforms • Stop-gap measures or reforms ? • in some cases compliance through distortionary measures (composition bias), where reforms postponed

  19. Experience: Summing Up • Mostly recent experience and “jury is still out” • Basic tests: • compliance over a full economic cycle and political cycle • performance compared to counterfactual • Identification problem, when applied in tandem with monetary rules (inflation targeting, fixed XR) • On balance, experience has been positive

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