Fiscal Targets Research Articles

The effects of fiscal targets in a monetary union: a Multi-Country Agent-Based Stock Flow Consistent model

We present an Agent Based-Stock Flow Consistent Multi-Country model of a Monetary Union to analyze the impact of a change in the fiscal regime of member countries, modeled as a permanent change in the deficit-to-gross domestic product (GDP) target that governments are committed to comply. Simulations are performed under three scenarios, differentiated by the number of countries considered (2, 6, 10). The parametric configuration employed yields economically reasonable values for the dynamics and relative dimension of key variables, broadly comparable with historical data and available stylized facts. Our policy experiments show that fiscal expansions generally allow to improve the dynamics of real GDP, labor productivity, and employment, though being generally associated with higher levels of public debt. Conversely, permanent fiscal contractions always exert strong recessionary effects, exacerbate real GDP volatility, and tend to be self-defeating in the long run. In scenarios where the Monetary Union includes a greater number of countries and the common market is bigger, fiscal austerity raises—rather than decreasing—average public debt-to-GDP ratios. We show that this is mainly related to a raise of debt-to-GDP in poorer and less productive countries mirrored by a reduction of their net foreign asset position.

Globalization and Multifaceted Welfare State Attitudes: Evidence from South Korea

How does economic globalization influence individuals’ welfare attitudes? We part ways with the literature whose focus has been on identifying the losers and exploring whether and to what extent they demand government compensation. By intersecting two dimensions of globalization perceptions – (1) winners and losers and (2) national and individual effects –, we propose four types of citizens: collective winner, lone winner, lone loser, and collective loser. We argue that the typology allows us to systematically explore how economic globalization provokes three widely-discussed, distinctive motives behind welfare demand: insurance-seeking, equality-seeking as well as compensation-seeking. We examine our theoretical expectations with the case of South Korea, where we survey social spending preferences under different hypothetical scenarios of fiscal constraint and recipient targeting. We find consistent support for the insurance-seeking motive: lone winners who see potential risks of economic globalization are most likely to support welfare spending as an attempt to insure against the vagaries ex-ante. Our findings have implications for the direction of welfare state development under globalization.

Фіскальні ризики та фіскальне таргетування в системі управління державними фінансами за умов інституціональної невизначеності

Фіскальні ризики та фіскальне таргетування в системі управління державними фінансами за умов інституціональної невизначеності

Structural reforms in the euro area: a Greek view

Events in recent years have put the European economic integration project and the euro under pressure. The main cause of the euro crisis is loss of competitiveness, particularly on the periphery of the Economic and Monetary Union. To reverse this, Union members must promote structural reforms that increase long-term employment, productivity and external competitiveness. The successful implementation of reforms, however, requires sufficient public support, which in turn presupposes measures that support demand during the implementation of reforms. To that end, important steps include taking an expenditure-based approach to fiscal adjustment and the introduction of the European Deposit Insurance Scheme. And for Greece in particular, the set of necessary steps includes taking ownership of reforms, the downward revision of fiscal targets, and medium- and long-term measures of debt relief conditional upon meeting fiscal/reform targets. Finally, the stability of the euro hinges on the moderation of all fiscal and external imbalances across all member states, regardless of whether these imbalances are apparent or not.

On the Determinants of Fiscal Non-Compliance: An Empirical Analysis of Spain's Regions

This paper proposes an empirical framework that distinguishes between voluntary and involuntary compliance with fiscal deficit targets on the basis of economic, institutional and political factors. The framework is applied to Spain’s Autonomous Communities (regions) over the period 2002-2015. Fiscal non-compliance among Spain’s regions has proven persistent. It increases with the size of growth forecasting errors and the extent to which fiscal targets are tightened, factors not fully under the control of regional governments. Non-compliance also tends to increase during election years, when vertical fiscal imbalances become accentuated, and market financing costs subside. Strong fiscal rules have not shown any significant impact on containing fiscal noncompliance. Reducing fiscal non-compliance in multi-level governance systems such as Spain’s requires a comprehensive assessment of inter-governmental fiscal arrangements that looks beyond rules-based frameworks by ensuring enforcement procedures are politically credible.

Accounting for Uncertainty in Public Debt Targets

AbstractWe use a semi‐structural fan‐chart approach to measure the changing nature of uncertainty for public debt targets in New Zealand. We find that economic and fiscal factors dominate the uncertainty landscape over the 3 year and longer time horizons. The near term tends to be dominated by non‐fundamental factors, such as measurement errors, that are typically outside of reasonable policy responses. We conclude that medium‐term fiscal targets are better placed to support macroeconomic stability than short‐term targets. We also quantify the fiscal buffers that may be needed to offset some of the future uncertainty, if policy‐makers choose to do so. The analysis is intended to support contingency planning in fiscal management and communication strategy of fiscal targets.

Risk of Disability, Old-age and Death: Pension Sustainability in Colombia

This paper concludes that the sustainability of the public “pay-as-you-go” pension regime in Colombia (RPM) looks fragile and is threatened by massive transfers from the private “defined contributions” regime (RAIS) to the RPM. The fiscal deficit of the RPM could be rising from 140% of GDP (in NPV) to 228% of GDP during the next three decades on account of the migration of close to nine million retirees moving to the RPM. Pressure to the fiscal budget will increase towards 90% of GDP (in NPV) as a result of the pension shortfall, making it very difficult to comply with a fiscal target of 4% of GDP per year. In addition, the life annuities’ market is quite shallow in Colombia due to: i) the State guarantee of a pension equivalent to 100% of a legal-minimum-wage (1 LMW); which in turn is fully indexed to annual inflation; and ii) the risk of assuming longer periods of pension enjoyment via judicial sentences (elevating the current expectations of 20-25 year period of enjoyment). Limiting the pension guarantee to 50-75% of a LMW, allowing for life-annuities recalculation, and decreasing the cost-margin of insurance companies would help place the Colombian life annuities market in a more financially sustainable path.

The Effects of Fiscal Targets in a Currency Union: A Multi-Country Agent Based-Stock Flow Consistent Model

We present an Agent-Based Stock Flow Consistent Multi-Country model of a Currency Union to analyze the impact of changes in the fiscal regime of member countries, that is permanent changes in the deficit-to-GDP targets that governments commit to comply. Simulations are performed under three scenarios differentiated for the number of member countries. Though we did not try to estimate empirically the parameters of the model, the configuration employed for our artificial Currency Union yields economically reasonable values for the dynamics of key economic variables, broadly comparable with historical data and available stylized facts, in particular referred to the Euro Area which constitutes the natural point of reference for our work. Our policy experiments show that fiscal expansions generally allow to improve the dynamics of real GDP, labor productivity, and employment, though being associated to higher levels of public debt. On the contrary, permanent fiscal contractions have always strong recessive effects and tend to be self-defeating when the Currency Union includes a higher number of countries and international trade between member countries is more prominent, exacerbating real GDP volatility both in the short and long run. The observed increase of average debt-GDP ratios in these scenarios seems to be mainly attributable to the raise of public debt-to-GDP in poorer and less productive countries, which is mirrored by a reduction of the countries’ net foreign asset position. In the conclusions we discuss current limitations of the model and we sketch out the future lines of development.

A Tradeoff between the Output and Net Foreign Asset Effects of Pension Reform

We use an overlapping generations model of a small open economy with perfect capital mobility to evaluate the long-term effects of pension reforms on output and net foreign assets. We compare reforms that achieve similar fiscal targets and show the existence of a tradeoff. Reforms that increase the retirement age have an expansionary effect on output, but a small (and oftentimes) negative effect on the net foreign asset position. In contrast, reforms that cut pension benefits improve the net foreign asset position but reduce output. Only mixed reforms that increase the retirement age and cut pension benefits sufficiently can boost both output and net foreign assets.

On the Determinants of Fiscal Non-Compliance: An Empirical Analysis of Spain's Regions

This paper proposes an empirical framework that distinguishes voluntary from involuntary compliance with fiscal deficit targets on the basis of economic, institutional, and political factors. The framework is applied to Spain’s Autonomous Communities (regions) over the period 2002-2015. Fiscal noncompliance among Spain’s regions has shown to be persistent. It increases with the size of growth forecast errors and the extent to which fiscal targets are tightened, factors not fully under the control of regional governments. Non-compliance also tends to increase during election years, when vertical fiscal imbalances accentuate, and market financing costs subside. Strong fiscal rules have not shown any significant impact in containing fiscal non-compliance. Reducing fiscal non-compliance in multilevel governance systems such as the one in Spain requires a comprehensive assessment of intergovernmental fiscal arrangements that looks beyond rules-based frameworks by ensuring enforcement procedures are politically credible.

On the Determinants of Fiscal Non-Compliance: An Empirical Analysis of Spain's Regions

This paper proposes an empirical framework that distinguishes between voluntary and involuntary compliance with fiscal deficit targets on the basis of economic, institutional and political factors. The framework is applied to Spain’s Autonomous Communities (regions) over the period 2002-2015. Fiscal non-compliance among Spain’s regions has proven persistent. It increases with the size of growth forecasting errors and the extent to which fiscal targets are tightened, factors not fully under the control of regional governments. Non-compliance also tends to increase during election years, when vertical fiscal imbalances become accentuated, and market financing costs subside. Strong fiscal rules have not shown any significant impact on containing fiscal noncompliance. Reducing fiscal non-compliance in multi-level governance systems such as Spain’s requires a comprehensive assessment of inter-governmental fiscal arrangements that looks beyond rules-based frameworks by ensuring enforcement procedures are politically credible.

Nigerias Fiscal Health: An Analysis of Budget Process, Systems and Trends [2014 ? 2016

Nigeria is an oil dependent economy which faced a lot of economic and political challenges between the periods under review, such as increased broad money supply, fall in the value of money market assets, decline in the unpaid FGN Bonds, unfavorable exchange rates, fall in oil prices, and the May 2015 general elections, amongst others. Nigeria’s fiscal stance was thus threatened, and it is in light of these that the paper, uses interactions between expenditure, revenue, debts, and deficits trends, to compute indices that capture its fiscal health. The study found that using compounded annual growth rates (CAGR), certain sectors with high CAGRs (Interior, Transport, Finance, Science & Technology, and Health) seemed to be prone to high fiscal mismanagement. Also, conservativeness in applying debt instruments are unavailable, and such measures are not tied to growth; revenue from increased taxation are not matched with requisite infrastructure; and debts are not adequately tied to capital projects, as established in Fiscal Responsibility Act. Amidst several, few recommendations are undoubtedly notable mainly; that overhead costs revealed in several line-items and are marked up should be eradicated; and huge recurrent expenditure, mainly personnel cost (about 75% of the total budget) mostly visible as remuneration “in kind” should be strictly removed from the line items and programmes at MDA level. Thus, Nigeria’s government should maintain expenditure ceilings; create solidified link between policy and budget; establish realistic fiscal targets and indicators; and allow more public participation in budget process.

Guatemala

This paper discusses key findings of the Fiscal Transparency Evaluation report on Guatemala. Guatemala has transparency practices that achieve the ratings of basic, good, and advanced regarding three-quarters of the principles established in the IMF’s Fiscal Transparency Code. The wealth of information available and the systems in place related to the public sector’s execution of its budget, finances, and accounts allow for easy access by the population to an impressive volume of fiscal data. However, there is much room for improvement in the area of fiscal transparency. Establishing a new fiscal pact in which the medium-term fiscal targets are defined would help create fiscal predictability and ensure that the major challenges of social and economic development are met.

Fiscal Consolidation in India : The Way Forward

The magnitude of fiscal deficit has always been a cause of concern for policy makers in India. The first step towards fiscal consolidation in India began with implementation of the Fiscal Responsibility and Budget Management (FRBM) Act, 2003 and Fiscal Regulatory Legislation (FSL). Further, the Twelfth Finance Commission proposed incentives for State Governments in order to bring in fiscal discipline at the state level. This paper examined the long term profile and impact of high fiscal deficit, consequent debt to GDP ratio, and the need for fiscal consolidation in India. It also presented the reasons behind non- attainment of the fiscal targets set under the FRBM bill. The paper aimed to contribute to the policy debate on fiscal consolidation in India.

Risk of Disability, Old-Age and Death: Pension Sustainability in Colombia

This document concludes that the sustainability of the RPM (Pay-as-you-go, defined benefits public regime) looks fragile and is threatened by massive transfers from the RAIS (defined contributions private regime) to the RPM. The fiscal deficit of the RPM could be rising from 140% of GDP (in NPV) to 228% of GDP during the next three decades on account of the migration of close to 9 million retirees towards the RPM. With this, budgetary pressure will increase as close to 90% of GDP (in NPV) as a result of the pension shortfall, making it very difficult to comply with the fiscal target of not exceeding the current budgetary allocation of 4% of GDP annually.In addition, the life annuities’ market is quite shallow in Colombia due to: i) the State guarantee of a pension equivalent to 100% of a legal-minimum-wage (1 LMW); which in turn is fully indexed to the annual inflation; and ii) the risk of assuming longer periods of pension enjoyment via judicial sentences (elevating the current expectations of 20-25 year period of enjoyment). Limiting the pension guarantee to 50-75% of a 1 LMW, allowing for life-annuities recalculation, and decreasing the cost-margin of insurance companies would help place the Colombian life annuities market in a more sustainable financial path.

Analyzing and Managing Fiscal Risks - Best Practices

Comprehensive analysis and management of fiscal risks can help ensure sound fiscal public finances and macroeconomic stability. This has been underscored by the global financial crisis and the more recent collapse in commodity prices, which starkly illustrate the vulnerability of public finances to risk. Indeed, over the past quarter century, governments experienced on average an adverse fiscal shock of 6 percent of GDP once every 12 years, with some of the largest stemming from financial crises. Countries need a more complete understanding of these potential threats to their fiscal position. Existing fiscal risk disclosure and analysis practices tend to be incomplete, fragmented, and qualitative in nature. A more comprehensive and integrated assessment of the potential shocks to government finances, in the form of a fiscal stress test, can help policymakers simulate the effects of shocks to their central forecasts and their implications for government solvency, liquidity, and financing needs. Comprehensive, reliable, and timely fiscal data covering all public entities, stocks, and flows are a necessary foundation for such analysis. Countries should also enhance their capacity to mitigate and manage fiscal risks. Fiscal risk management practices are often blunt, ad hoc, and too focused on imposing limits on the creation of exposures. Countries need to expand their toolkits for fiscal risk management and adopt the use of instruments to transfer, share, or provision for risks. In doing so, countries need to weigh the possible benefits from reducing their exposure to shocks against the financial and other costs of the policies that may be needed. Finally, countries should make greater use of probabilistic forecasting methods when setting long-run objectives and medium-term targets for fiscal policy. The paper illustrates how simple probabilistic tools can be used to map the uncertainty around medium-term trajectories for public debt. In combination with fiscal stress tests, these tools can provide valuable information regarding the probabilities that a country will stay within the debt ceilings embedded in their fiscal rules. The Fund is playing an important role in supporting improvements in fiscal risk analysis and management among its members. This includes technical assistance in constructing public sector balance sheets; developing institutions and capacity to identify specific fiscal risks and to quantify their potential impact; undertaking fiscal stress tests; and integrating risks into the design of medium-term fiscal targets.

Is There Flexibility in the European Semester Process? Exploring Interactions between the EU and Member States within Post-Crisis Socio-Economic Governance

Post-crisis EU socio-economic governance has introduced new features to the coordination process, mainly aimed at better national compliance with EU fiscal and economic targets. Accordingly, these new measures have been labelled as ‘stricter’ or ‘strengthened’ economic governance. While stricter economic governance implies less flexibility in the coordination process, the question is the degree to which this has indeed been the case. Do the EU and the member states still have the leeway to develop alternative policies, to learn from practice or to suggest new targets? This contribution answers this question in view of important socio-economic dossiers: unemployment, wages and pensions. These are all topics in the European Semester’s Stability and Growth Pact (SGP), Macro-economic imbalances procedure (MIP), and Europe 2020 Strategy. The contribution analyses EU-level steering within the European Semester, as well as the reactions of four member states to EU targets between 2009 and 2014: France, Germany, Poland and Spain. Overall, both the EU level coordination and the member state response show that, on the one hand, coordination has become more strict, and on the other hand, the flexibility for members states to develop alternative policies has remained part of the socio-economic coordination process.

From Containment to Rationalization: Increasing Public Expenditure Efficiency in France

Achieving France’s medium-term fiscal targets will require significant expenditure efforts. This paper identifies areas where there is scope for increasing expenditure efficiency, with a view to achieving higher quality and more sustainable fiscal consolidation. The methodology is based on a triple benchmarking. First, the level of public expenditure in different categories is compared to other European countries. Second, the impact of spending is assessed against other European countries. Third, the input mix is analyzed to understand what components are responsible for the level of spending and for the quality of outcomes This is done for various categories of spending and policies. Based on these results, the paper then provides policy options for expenditure reform in each of these areas, drawing on successful reform episodes in other countries.

From Containment to Rationalization: Increasing Public Expenditure Efficiency in France

Achieving France’s medium-term fiscal targets will require significant expenditure efforts. This paper identifies areas where there is scope for increasing expenditure efficiency, with a view to achieving higher quality and more sustainable fiscal consolidation. The methodology is based on a triple benchmarking. First, the level of public expenditure in different categories is compared to other European countries. Second, the impact of spending is assessed against other European countries. Third, the input mix is analyzed to understand what components are responsible for the level of spending and for the quality of outcomes This is done for various categories of spending and policies. Based on these results, the paper then provides policy options for expenditure reform in each of these areas, drawing on successful reform episodes in other countries.

From Containment to Rationalization: Increasing Public Expenditure Efficiency in France

Achieving France’s medium-term fiscal targets will require significant expenditure efforts. This paper identifies areas where there is scope for increasing expenditure efficiency, with a view to achieving higher quality and more sustainable fiscal consolidation. The methodology is based on a triple benchmarking. First, the level of public expenditure in different categories is compared to other European countries. Second, the impact of spending is assessed against other European countries. Third, the input mix is analyzed to understand what components are responsible for the level of spending and for the quality of outcomes This is done for various categories of spending and policies. Based on these results, the paper then provides policy options for expenditure reform in each of these areas, drawing on successful reform episodes in other countries.