The advantages and dangers of deficit reduction: the role of fiscal rules and budgetary institutions
Commentary on: Joaquin Ayuso-i-Casals, Servass Deroose, Elena Flores and Laurent Moulin (Editors), Policy Instruments for Sound Fiscal Policies. Fiscal Rules and Institutions, Palgrave MacMillan, Hampshire and New York, 2009
http://us.macmillan.com/policyinstrumentsforsoundfiscalpolicies
The tsunami of economic downturn is revealing a stunning decline in the English public finances: the government deficit has increased fivefold in a year, the deficit and more than two digits as a percentage of GDP and public debt will drag it to levels that can easily exceed the 60% of GDP.
budget in this changing context, marked by the asymmetric impact of the economic crisis in the European Union countries, it is convenient and useful to ask for the role they have played and should play in the future, both in terms of economic growth and crisis and recession, fiscal rules and institutions budget of each country and the common form taken by the EU.
The book edited by Joaquim Ayuso, Servaas Deroose, Elena Flores and Laurent Moulin, Directorate General for Economic and Financial Affairs European Commission) entitled "Policy Instruments for Sound Fiscal Policies", published by Palgrave Macmillan in late of 2009 provides an excellent opportunity to review the role of budgetary rules and institutions both from the standpoint of economic theory from the empirical point of view.
This book has its origins in the Workshop of the Directorate General for Economic and Financial Affairs of the EC held in Brussels on 24 November 2006. The time has not dulled the issues discussed in this workshop but have added today. Although at that time had not yet glimpsed the devastating impact of economic crisis on most public accounts of EU countries, the lessons to be learned from the experience in implementing fiscal rules and budgetary institutions is and will be essential to help the accounts of nation states to better manage the impact of the economic cycle.
The aim of this book consists of contributions that review the status of theoretical and applied knowledge on economic incentives related to (i) changes and reforms in the rules of the annual budget cycle, (ii) the application of numerical fiscal rules, permanent limitations of fiscal policy in terms of budget performance indicators-summary of macro-variables on public or deficit , expenditure, revenue or debt, and (iii) the creation or reform of national budgetary institutions through independent agencies that can take care of the macroeconomic projections for the purpose of estimating revenues and expenditures, or recommendations on fiscal policy .
The underlying concern in most chapters of the book lies in learning budgetary experience of the past characterized by the trend towards deficit and the pro-cyclical fiscal policy in order to improve understanding of the causes and strengthen the Treaty and the excessive deficit procedure. Or policy instruments to support the improvement of incentives in a sustainable budget management can be classified into two groups or approaches. One is the approach based on improving budgetary institutions-contract approach-(rules, procedures and institutional framework). The other is the approach that privileges the delegation of fiscal policy in independent instuticiones-delegation approach.
The book is structured in four different parts in its scope and ambition. In the first part, we analyze the causes of the trend of budget deficit and whether the extent of fiscal rules and budgetary institutions have been effective in encouraging fiscal discipline in each country. The second part of the book, marking a normative character, is devoted to the analysis of the desirable conditions that must follow the rules and institutions for efficient management of the deficit depending on the level of fiscal decentralization.
The third part of the book is intended to study the incentives of institutional reforms on the creation or modification of discretionary incentives public decision-makers in fiscal policy. In the latter part of the book presents two interesting case studies by analyzing the rules and institutions in Sweden and Belgium.
Krogstrup and Wyplosz (Chapter 2) to assess the risk that the deficit reduction policies of fiscal policy becoming pro-cyclical. These authors present a model in which the application of numerical fiscal rules applied to the unadjusted budget balance are not optimal and may even worsen the fiscal results in terms of welfare, and numerical restrictions may be socially optimal when combined institutions adequately budget that encourage productive spending. Consideration of the cyclically adjusted budget balance in the Stability and Growth Pact of 2005 and the consideration of the medium-term debt are on the appropriate line and reduce the risk of inducing pro-cyclical policies.
Broesens and Wierts (Chapter 4) show the existence of surpluses in the public accounts are related to a smaller number of spending ministries, political stability, strict fiscal rules and greater transparency in fiscal policy. In addition, the aging of the population helps to explain why some countries have a surplus and other no.
In the second part, Halleberg, Strauch and von Hagen (Chapter 6) analyzed empirically the impact of fiscal rules and budgetary procedures on public finances in the EU15 countries between 1985 and 2004. The results of these authors provide useful guidelines for assessing the effectiveness of the measures of contractual or based on delegation: a more centralized budget, lower debt, the delegation of decisions on the economy ministry contributes to lower government debt one-party or no political competition colaición, the contract rate approach measures that impose restrictions and contribute more multi-annual targets fiscal discipline in countries with coalition governments scattered and internal competition.
Hodson (Chapter 7) contradicts the observation that countries have taken steps to delegate are the worst compliant with the Stability and Growth Pact (SGP) compared with those who take contractual measures: all countries, both those of a type and the other, have failed to meet the medium-term objectives of the SGP, and also there is a trend to the adoption of numerical rules by all countries.
The third part of the book, Balassone, Franco and Zotteri (Chapter 9) discusses the suitability of the so-called "Rainy Day Funds (RDF)" employees in various states of the United States since the seventies to the EU countries. The RDF are simply accumulate in a fund surpluses in the boom years that can be stored for use in years of budget problems, while maintaining the balance BUDGETARY. The authors suggest that the RFD is not useful to change the incentives of the non-adherent PEC. RFD not yet being a good option for countries with high deficits, it could serve to mitigate the rigidity of the constraint of 3% of EU public deficits.
Chapter 10, Ayuso, González, Moulin and Turrini provide a description of the numerical fiscal rules (rules on stock and debt, expenses and income) applied in 25 EU countries and analyze their influence on budgetary outcomes. This chapter, which perhaps is the core of the contribution of the book, uses a proprietary database covering the period 1990-2005. The adoption of numerical fiscal rules has been a growing phenomenon in most countries: less than 20 rules in 1990 has spent nearly 70 in 2005, 30% of the rules applicable to other central and local governments 30% . Half of these rules are multiannual. However, it is still fairly small number of studies that have analyzed the effectiveness of these policies at national states. Lower deficits are associated with numerical fiscal rules that affect a larger proportion of public sector budget and the presence of control and punishment mechanisms of compliance also contribute to improved fiscal performance.
The fourth and last part of this book discuss in detail the advantages and disadvantages prespuestario Swedish model (Chapter 14) and the Belgian budget process (Chapter 15).
The main virtue of the book edited by Ayuso et al subject of this review is to provide a comprehensive review of state economic knowledge on the effects of the reforms in budget systems of EU countries based on the adoption of numerical fiscal rules and the delegation of certain criteria or tax decisions independent agencies helping to facilitate a more informed and rigorous discussion on necessary incentives for more efficient management and balanced medium to long term sustainability of public finances.
At one stage in the current economic downturn, spending more than you enter is used to help maintain economic activity and helps the drop in revenue is not higher. However, the high stimulus English tax is not the main source of fiscal imbalance in English: the European Commission has estimated that in 2009 the primary structural deficit (which will still be beating the recession) is 8.2%.
If public expenditure is used productively and efficiently, our children will be richer and have greater well-being. Then, they will have problems to deal with debt and this will represent a smaller proportion of their wealth. In the medium and long term, the cost of the deficit depends on the quality of spending: what is spent (composition), results are achieved (effectiveness) and the cost of achieving these performance (efficiency).
We have evidence that the composition of public expenditure is relevant to predict the effects of spending on growth: infrastructure and education, and partly health, promote growth. However, not enough direct spending productively, if expenditure is high and the results achieved are low, the efficiency of public spending is low and public finances are not sustainable in the long term. Herein lies the Achilles heel of the English public finances as their level of efficiency is the lowest in the eurozone.
A report by the European Commission last July says that the quality of English public spending in five of six categories of spending (education, R & D, infrastructure, public order and security and general services) is poor, being only good in health services. On average, the quality of English public spending is among the lowest in the eurozone countries. Public infrastructure have a high level of spending and poor results. In education, the level of spending is not the highest, but the results are poor. R & D spending is low but with very low efficiency. In universities, very poor results despite having a high number of staff, resulting in a significant inefficiency.
there is no time for excuses designed to further delay the urgent measures of independent evaluation of the efficiency of spending programs and reforms based on their results.
0 comments:
Post a Comment