Long-term Sustainability Of Public Finances Research Articles

Testing Fiscal Sustainability in Bosnia And Herzegovina

Considering contemporary economic trends and the importance of fiscal policy instruments for ensuring macroeconomic stability, the research focuses on fiscal sustainability. Accordingly, special attention is paid to the empirical approach to fiscal sustainability, where the central question in considering the long-term sustainability of public finances is the concept of intertemporal budget constraint. The potential cointegrating relationships between public revenues and public expenditures, which represent the basic condition for fiscal sustainability, were tested on the example of Bosnia and Herzegovina. Testing the cointegration of time series was performed using the Engle-Granger two-step procedure and then using the Johansen procedure based on the VAR model. Finally, based on the above, the results of the fiscal sustainability analysis of Bosnia and Herzegovina were summarized, which are relevant for defining macro-fiscal goals and development-oriented policies.

IMPLEMENTATION OF THE “GOLDEN RULE” IN THE FISCAL MECHANISM FOR REGULATING INVESTMENT PROCESSES IN UKRAINE

Introduction. After the global financial and economic crisis, which led to the deterioration of fiscal stability, the growth of the budget deficit and public debt in many countries, ensuring the quality and long-term sustainability of public finances is one of the priority areas of fiscal policy. In this context, the implementation of the “golden rule” becomes especially relevant. Such a rule makes it possible to release state investments from the corresponding target indicators of the budget deficit. Accordingly, fiscal policy is being modernized, which will provide more opportunities for budgetary maneuvering and public investment. The purpose of the article is to reveal the content, advantages and disadvantages, as well as the peculiarities of the implementation of the “golden rule” in the fiscal mechanism for regulating investment processes in Ukraine. Results. It was found that the “golden rule” provides for public borrowing only for the purpose of investing in projects that will pay off in the future, as well as financing current budget expenditures at the expense of taxation. The advantages and disadvantages of the implementation of the “golden rule” in the fiscal mechanism for regulating investment processes are determined. Modified versions of the “golden rule” are considered: the “limited golden rule” proposed by the European Fiscal Council and the “asymmetric golden rule” substantiated by scientists. The ways of introducing the “golden rule” into domestic fiscal practice are outlined. Conclusions. The need to implement the “golden rule” into the fiscal mechanism for regulating investment processes in Ukraine is clarified. The creation of the Agency for State Investment Management in the context of the “golden rule” is substantiated. It is proposed to apply a more flexible approach to the formation of the budget deficit in the transitional post-war period before the full implementation of the “golden rule” in Ukraine. It is advisable to direct further scientific research to the search for alternative options for increasing the efficiency of public investments under the conditions of compliance with fiscal stability.

Vztah mezi saldem hospodaření a dluhem vládních institucí

The relation between government deficit and debt is not straightforward and draws intensive attention of users and analysts. In reality, surplus balances can accompany increasing debt even in the long term. The objective of the paper is thus to scrutinize, by analysing international data, the closeness of both aggregates, which is essential for assessment of the long-term sustainability of public finances. The text explains factors entering between both macroeconomic indicators, as they are currently defined. Furthermore, the text discusses alternatives to currently defined debt and their closeness to the government final balance. The development of indicators is analysed using data for the Czech Republic. Within the data availability constraints, an international comparison of balance sheet indicators is presented.

TAX REFORMS FOR THE DEVELOPMENT OF FISCAL SPACE

A reduction of the tax burden on corporate income in order to stimulate drivers of economic development has become the important issue of tax reform in many countries in recent decades. Tax competition forces national governments to take well-balanced solution on increasing outward and domestic investments as well as ensuring the fiscal capacity of the budget to cope with urgent socio-economic problems under enhancing fiscal risks. The purpose of the article is to assess the impact of tax reforms, addressing reducing the corporate income tax burden, on the fiscal space and investment processes in the EU countries and Ukraine, to establish directions of improvement of the tax system in Ukraine and other transition economies in order to spur the expansion of fiscal space. The research subject covers tax policy settings that shape fiscal space development. Research methodology. In accordance with the purpose of the article, the research methods are set as follows: abstract-logical; systemic analysis; analysis and synthesis; graphical method. Findings. By summing up theoretical ideas on the issue of feasibility of cutting corporate income tax, we have arrived at the conclusion that this measure has a significant impact on the improvement of tax competitiveness of the national economy. The gain from its application is confirmed by the best practices of many European countries. The results of the tax reform in Ukraine have proved that a traditional approach to the choice of tax issues – in contrast with developed economies – do not comply with theoretical provisions on increasing the competitiveness of the national economy and fostering investments. This is conditional on the specific tax effects in Ukraine due to the restriction of the key economic freedoms (investment, financial, property rights protection and judicial effectiveness) needed for successful entrepreneurship, as well as of a high rate of corruption, which increases the costs of business activity. Such effects include, in particular, a drop of tax revenues in the short and long term while reducing the level of corporate income taxation; a high level of tax evasion, capital outflow instead of expanding investment in the national economy. It is argued that the emphasis while carrying out tax reforms and expanding fiscal space in transition economies considering the specific effects of changing corporate income tax provisions, should be made on ensuring the long-term sustainability of public finances through measures of budget adjustments aimed at avoidance shifting the existing fiscal problems on future generations; harmonization of national tax legislation with the EU regulations and prevention of tax evasion; increasing the financial capacity of enterprises by introducing targeted innovation tax incentives, which will gain higher competitiveness of the country in the world markets and as a result facilitate the growth of the country’s future revenue receipts.

Barriers and facilitators to extended working life: a focus on a predominately female ageing workforce

AbstractMany countries are reforming their pension systems so people stay in work for longer to improve the long-term sustainability of public finances to support an increasing older population. This research aimed to explore the factors that enable or inhibit people to extend working life (EWL) in a large United Kingdom-based retail organisation. Semi-structured interviews were carried out with a purposive sample (N = 30): 15 employees aged ⩾60 and 15 supervisors supporting these employees. Older workers were predominately female, reflecting the gender profile of the older workers in the organisation. Older workers and supervisors reported that key facilitators to EWL were good health, the perception that older workers are of value, flexibility and choice, the need for an ongoing conversation across the lifecourse, the social and community aspect of work as a facilitator to EWL and the financial necessity to EWL. Perceived barriers to EWL included poor health, negative impacts of work on health, and a lack of respect and support.

Budget Support for Active Aging Processes in the Context of the Sustainability of Public Finances

The article is devoted to the problems of budget support of active aging processes and sustainability of public finances of Ukraine. This problem is urgent because of the accelerating pace of demographic aging, cross-country migration, limited budgetary resources, which in their totality increase the burden on the younger generation, create financial risks for the government and households. This problem remains out of research focus in spite of the rising need to increase budget expenditures, maintain the long-term sustainability of public finances, enforce new regulatory measures on the labor market and the health care system, provide social and educational services, and reduce the poverty among the elderly. New approaches to citizen support should be in line with the European norms, which, in their totality, contribute to the active longevity of the population, reduction of the tax burden, relief of the pressure on the next generations and continuity between generations.
 The financial support of social services provided to the elderly is analyzed, with identifying its problematic aspects. In order to improve approaches to financing social services, a Matrix of Choice of Social Services for Active Aging and Forms of Financing is constructed. To expand the sources of funding for active aging processes, it is proposed to introduce co-financing of selected social projects by government and businesses.
 It is substantiated that the Sustainable Development Goals, as well as the provisions of the Active Aging Strategy, should be consistent and taken into consideration in formulating social and budgetary policies that need to be based on the targets of the Active Aging Index.
 In order to implement the budget mechanism “money goes after a person”, aimed to enhance the targeting of social assistance programs, amendments to the Budget Code of Ukraine, the Economic Code of Ukraine, the Laws of Ukraine “On social services”, “On improving the accessibility and quality of health care in rural areas” are proposed. Recommendations on using the compensatory mechanisms to enhance the ability of the government to provide the adequate financial support for active aging without breaking the sustainability of public finances are elaborated.

Assessing the Impact of Tax Reforms on the Long-Term Sustainability of Public Finances

The article is devoted to the methodological aspects of assessing the impact of tax reforms on the sustainability of public finances. The low impact of numerous tax changes during 2003–2017 in Ukraine aimed at reducing the tax burden, improving the investment climate, led to a narrowing of fiscal space, a decrease in government investment, and a curtailment of enterprise investment. The problem of assessing the direct and indirect effects of tax reforms in terms of changes in tax rates and tax base, tax revenue structure, tax benefits, on public finances and the finances of economic entities in the short and long term remains insufficiently investigated. The task is to identify the relationship between tax policy changes that are taking place within the framework of tax reforms, the economic behavior of economic entities, and their impact on the sustainability of public finances.
 The article identifies trends in the development of taxation in the EU, which create the conditions for activation of the factors of development of innovative, competitive economy, in particular, the reduction of corporate income tax rates and personal income tax while expanding the tax base, increasing consumption taxes on property. The methodological support of the assessment of tax reforms of EU countries is summarized and the conclusion is made about the possibility of its application in Ukraine. Changes in the share of various taxes in the total amount of tax revenues are analyzed. The reasons and the financial consequences of the tax effects in Ukraine established in the EU countries were found to be associated with a reduction in corporate income tax rates and a compulsory social contribution (lower rates do not reduce tax revenues and increase the budgetary income in the medium term). Indicators and models that can be used to assess tax reforms aimed at improving tax competitiveness (reducing tax rates), as well as reforms to ensure economic growth (redistribution of tax burden and tax incentives - tax innovation benefits) are identified. It is proposed to supplement this list with indicators: the level of investment of the institutional sectors of the economy, the investment rate, the level of profitability, the global innovation index.
 Proposals on adjusting the directions of tax development in Ukraine have been elaborated.

Efficiency changes in long-term care in OECD countries: A non-parametric Malmquist Index approach

Future demographic projections indicate that long-term care (LTC) demand will put significant pressures on the long-term sustainability of public finances. Efficiency gains could potentially compensate for increasing LTC expenditures. Nevertheless, among the factors that drive LTC expenditures, efficiency, or productivity discussions have received little attention. This paper provides the first analysis of the efficiency levels of LTC for a subset of OECD countries. In doing so, the study adopts a non-parametric approach and performs a Data Envelopment Analysis (DEA). The results of the DEA show that average efficiency scores have a slight tendency to increase. There was a 0.1% increase in productivity in the provision of LTC between 2009 and 2014, which mainly resulted from an increase in technological change. However, the slight increase in efficiency is insufficient to offset fiscal pressures led by the increasing number of LTC beneficiaries and amount spent on LTC. The second stage Tobit analysis results further indicate that the productivity of LTC provision does not differ across countries with different public LTC financing arrangements.

Features of formation of the state budget security

Relevance of the research topic. Socio-economic development, which is the main task and simultaneously an instrument for ensuring the effective functioning of the country and increasing the well-being of its population, is directly dependent on the effectiveness of fiscal policy. The choice of forms, methods and models of budget regulation allows to achieve the achieved results by allocation and redistributing the gross domestic product according to the priorities of ensuring economic growth. However, at the present stage, the danger of destructive influence on the budget system of endogenous and exogenous factors of influence increases. Thus, the analysis and characterization of the main approaches to the formation of the state budget security and determination of its increase the directions in the conditions of the country's transformation fiscal system and the limited financial resources are relevant. Formulation of the problem. Budgetary security as a component of the country's financial and economic security reflects the ability to effectively use financial resources accumulated in centralized and decentralized funds to ensure the country's financial stability, opportunities for expanded reproduction and social development. That is why it is expedient to determine the main threats to budget security, the degree of their impact on economic dynamics and possible options for their minimization. Analysis of recent research and publications. The work of foreign scientists is devoted to the study of the formation and assessment of the country's budget security: S. Blancart, J. Buchanan, J. Golden, R. Kelly, A. Rotfeld, A. Pigou, R. Dornbusch, J. Stiglitz, A. Hansen and others. Theoretical and practical contribution to the assessment of the budget regulation role of the socio-economic development and ensuring a sufficient level of its budgetary security of domestic scientists was made by O. Vasilik, V. Geyts, V. Gorbulin, A. Gritsenko, L. Lysyak, I. Lukyanenko, V. Oparin, S. Pirozhkov, V. Fedosov, I. Chugunov, S. Yuri and others. Selection of unexplored parts of the general problem. Highlighting issues become relevant in the face of increasing integration processes and financial globalization. It is important to develop the institutional framework for budget security, the expansion the system factors and indicators that characterize it, in accordance with international requirements and standards. Setting the task, the purpose of the study. The task of the study is to analyze the budget security characteristics. The aim of the study is to reveal the methodological and practical provisions of the formation Ukraine budget security in the context of the institutional modernization of the economy and to determine the directions of its increase by means of fiscal regulation. Method or methodology for conducting research. The article uses a set of methods and approaches of scientific knowledge, among which it is worth noting: systemic, structural, comparative, statistical, analysis and synthesis, synthesis and scientific abstraction. Presentation of the main material (results of work). The features of the formation of the country's budget security are determined. The main indicators of the functioning of the budget system of Ukraine are characterized and the degree of their influence on the level of budget security and socio-economic development is determined. The directions of increasing budget security in the context of institutional modernization of the economy are substantiated. The field of application of results. Organization and conduct of research on the formation and improvement of the budget security. Conclusions according to the article. The country's budget security is one of the main indicators of the level of development of the financial system. Providing long-term sustainability of public finances, balancing social and economic development is a priority task of state authorities. The main indicators of Ukraine's budget security show that there are destabilizing factors, but effective budget regulation will minimize their negative impact on the pace of economic growth. It is advisable to increase the level of budgetary discipline, improve medium-term budget planning and forecasting, form an effective strategy for managing public debt and budget deficit.

Fiscal sustainability under the conditions of emerging longevity economy

The article investigates the influence of the growing public expenditures on health caused by the demographic aging of the population, on the stability of public finances in the context of the establishment of the "longevity economy". The author conducts a scenario based assessment of the sustainability of public finances in Ukraine in the medium and long term, based on the calculation of the fiscal gap indicator. In particular, investigated the "stress effect" of the changes in the indicators of macroeconomic development and the fiscal position on the sustainability of public finances under the condition of realization of the historical scenario. The author proves a significant influence of demographic aging of Ukraine's population on the sustainability of public finance. It is determined that in the long term there will be a fundamental transformation of the "spending profile" in the health care by sex-age groups, which, for example, is due to a shift in consumption of these expenditures by the population of older age groups and their increased share. The author substantiates the necessity to expand the fiscal space for fulfilling the normative requirements of the Ukrainian legislation on health financing based on the calculation of the necessary structural primary balance to overcome the fiscal gap, which is proposed to be used as one of the benchmarks for the implementation of fiscal policy in order to attain medium and long-term sustainability of public finances for a given period of .fiscal adjustment. It is proposed: to monitor and control the pace and the growth factors of health care expenditures in the medium and long-term; to develop indicators for assessing the fiscal space for healthcare with due regard to potential change in the demographic structure of the population; to assess the transformation of the fiscal space to finance the health care in the context of the establishment of the longevity economy while respecting the sustainability of the system of public finances.

Performance audit in public institutions in the Czech Republic

Public economics examine the influence of the state on economic equality and efficiency, and on conduction of business entities in connection with the various tax systems and individual behavior in private consumption. Long-term sustainability of public finances is in the interests of society as a whole and therefore is interesing for scientific research worldwide. From a budgetary perspective, the public economy in the Czech Republic is characterized mainly by the state budget, 6,249 municipal budgets and 14 budgets of local government units. These all units are together subject to annual statutory audit, which mainly represents the analysis of the system of the audit informative and monitoring indicators. Analyzed data and indicators were obtained from sources of Czech Statistical Institute and Czech Ministry of Finance with the follow use of absolute and relative indicators applied for each size group of public budget entity. On this basis the paper suggests possible changes and consolidation of municipal and local government budgets in the Czech Republic.

Pension Funds and Financial Markets: Evidence from the New EU Member States

The recently established pension funds in the new EU Member States face investment risks that stem from a challenging macroeconomic environment, including, inter alia, volatile inflation and shallow domestic capital markets. The question arises whether a move to funded pension system in such a volatile economic environment always increases the long-term sustainability of public finances. Against this background, this paper surveys the main challenges for pension systems and public finances in the new EU Member States and provides evidence on pension fund performance in recent years. We conclude that in some of these countries the limited diversification of assets, the impact of high inflation as well as the financial market turmoil may have indeed reduced the positive impact of systemic pension reforms on fiscal sustainability.

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A Challenge for the G20: Globally Stipulated Debt Brakes and Transnational Independent Fiscal Supervisory Councils

Debt-to-GDP ratios have grown to unprecedented levels in many industrialized economies. This requires disciplined consolidation efforts which are, however, supposed to come now at the wrong time with the economic recovery being fragile. The countries forming the G20 need to make sure the long-term sustainability of public finances. Not least, this is indispensable in order to avoid a further spreading of the sovereign debt crisis. Against this background, we call for a global debt brake following the Swiss or German example which should be agreed upon in Cannes in early November 2011. The agreement on the debt brake should be binding – in contrast to previous expressions made at the G20-level to reduce government debt, as, for example, the Seoul Action Plan is lacking any binding character. Therefore, the debt brakes should be fixed in national constitutions and monitored by independent transnational fiscal councils. The fiscal councils could be located at the European Stability Mechanism (ESM) and the International Monetary Fund (IMF) and should conduct a regular evaluation of national budget plans in order to ensure that they meet the requirements stipulated by the debt brake. Through this global monitoring process, an early warning system could be developed with the aim to avoid sovereign debt crises and the resulting contagion risks among highly indebted countries in the future. In an economic and political environment which is characterized by large uncertainties concerning economic prospects and the fear of a potential spreading of the sovereign debt crisis, a global debt brake in combination with an independent transnational supervisory council would send a credible signal that a reduction of sovereign debt to sustainable levels is not further delayed into the future. Moreover, a well-designed debt brake ensures that the general government budget is balanced over the business cycle. Consequently, it is a more efficient instrument than the former Stability and Growth Pact for the Eurozone which in fact stipulated a ceiling for the budget deficit, but whose requirements regarding budget surpluses in good times were insufficient. This asymmetry is eliminated by those debt brakes which are in force in Switzerland and Germany. The new fiscal policy framework thus leaves enough room for discretionary fiscal policy and the workings of automatic stabilizers in an economic downturn.

Symposium on Global Financial Crisis and Public Finances

This symposium discusses the role of public finances and management in the on-going policy initiatives for economic stabilization and stimulation across countries and regions at differing levels of development, and analyzes the impact of policy initiatives on the medium-term fiscal discipline and long-term sustainability of public finances.

Asymmetric Fiscal Dynamics and the Significance of Fiscal Rules for EMU Public Finances

Since the onset of the international financial and economic downturn, the issue of the sustainability of public finances has strongly repositioned itself at the center of economic policy debates, as a number of chronic fiscal ailments for many EMU countries still need to be effectively addressed for they pose new challenges for future economic policy. In this work we take stock of the fiscal situation in the EMU and attempt to dissect some of the most salient aspects of fiscal performance for a number of member states during the last decade, by concentrating on the evolution of key fiscal variables in a unified framework of analysis. We focus on the asymmetric evolution of public finances, in order to assess whether this has been the outcome of discretionary measures (including the massive stimulus packages as a response to the crisis) and the effects of automatic stabilizers or also due to poor fiscal management and lack of fiscal discipline within the existing institutional framework. The analysis is then taken a step further by estimating the requirements for long-term sustainability of public finances in the EMU member states in our sample. Within this context, the issue of the effectiveness of existing rules and institutions is addressed, as institutional arrangements are crucially related to fiscal performance. We conclude by highlighting the importance of adopting a cohesive and enabling framework for public finance stabilization and adjustment purposes. Our view is that since the root causes of fiscal problems in the Eurozone are diverse, responding to the diversity of fiscal challenges in a symmetric way i.e. applying a ‘one-size fits all’ EMU strategy, may prove sub-optimal for individual country fiscal sustainability objectives. In fact, fiscal policy responses will inevitably be asymmetric. This asymmetric evolution of public finances puts into question the sustainability objective and thus convergence of the EMU as a whole.

The Flip Side of the Coin: The Consequences of the European Budgetary Projections on the Adequacy of Social Security Pensions

The Ageing Working Group (AWG) assesses the long-term sustainability of public finances by presenting a set of public expenditure projections for all Member States, including projections on pensions. These projections are based on demographic forecasts and agreed assumptions on key economic variables. The adequacy and sustainability of pensions are, however, two sides of the same coin and a full assessment of pensions therefore requires integration. This paper applies the dynamic micro-simulation model MIDAS to assess the consequences of the AWG projections and assumptions on the future adequacy of public pensions in Belgium, Germany and Italy. A comparison of the simulation results suggests that the impact of the parametric pension reform in Belgium and Germany and the systemic reform in Italy on (re) distribution and the risk of low-income go in the same direction, but that the magnitudes differ. Indeed, the impact is stronger in Italy than in Belgium and Germany. In the latter especially, important changes safeguarding the sustainability of the pension system seem to have had a relatively small impact on the risk of low-income among pension benefit recipients in particular.

Fiscal Sustainability and Structural Reforms – Incorporating Labour Supply Responses in Long-Term Modelling

In general the issue of long-term sustainability of public finances is assessed given current policy and behavior. Future demographic pressure on public expenditure must then be met by either pre-funding, reductions in public welfare systems or tax increases. In this paper we explore a third strategy. By incorporating endogenous labor supply responses into the modelling framework, structural reforms (i.e. tax cuts) may be simulated in a more realistic way than in a purely static framework. In this way demographic pressure can be dealt with through structural reforms as well as through consolidation strategies. Our simulations suggest that, at least in the Swedish case, strategic tax cuts might serve as an important path to improved fiscal sustainability. This leads us to the conclusion that policies aimed at providing incentives should also be taken into consideration when analyzing the long-term sustainability of public finances.

A Simple Proposal for a “Debt-Sensitive Stability Pact”

The main rationale for fiscal policy rules is the concern for long-term sustainability of public finances, that in a monetary union may affect the other members. Among many other criticisms, the Stability and Growth Pact (SGP) has been seen as contradictory or incomplete because it focuses on deficit rather than debt, the main indicator of public finances' soundness. Furthermore, the few references to debt that were present in the treaties and related regulations are essentially ignored in actual practices. Some of the reform proposals that came out lately have addressed the issue and tried to embed a debt criterion in the Pact. We review these proposals and put forward our own proposed modification: the deficit ratio countries should target is weighted by their relative debt. With respect to the other proposals taking into account debt, our own has the advantages of simplicity, symmetry, and low arbitrariness. To make it politically acceptable to high debt countries, nevertheless, could require to set the targets, at least initially, at level higher than the Maastricht criteria. Zusammenfassung Das Hauptargument für fiskalpolitische Regeln ist die Berücksichtigung der langfristigen Nachhaltigkeit der öffentlichen Finanzen, die in einer Währungsunion andere Mitgliedstaaten berührt. Neben anderen Punkten wird am Stabilitäts- und Wachstumspakt (SWP) kritisiert, dass er widersprüchlich oder unvollkommen sei, da der Fokus auf dem Defizitkriterium liegt und nicht auf dem Schuldenstand. Die in den Verträgen zu findenden wenigen Verweise auf den Schuldenstand werden praktisch ignoriert. Einige spät veröffentlichte Reformverschläge tragen allerdings dem Schuldenstandskriterium Rechnung und versuchen, dies in den SWP aufzunehmen. Im vorliegenden Aufsatz wird vorgeschlagen, das Defizitkriterium mit dem Schuldenstand zu gewichten. Der Vorschlag ist einfach, symmetrisch und nicht arbiträr. Um den Vorschlag für Länder mit hohem Schuldenstand attraktiv zu machen, müssten zumindest zu Beginn die Ziele für sie über dem Maastricht-Kriterium liegen dürfen.

Fiscal Policy: Coordination, Discipline and Stabilisation

The framework for fiscal policy coordination in EMU has been in effect for three years. The experience gained shows that the rule-based approach provides in principle a feasible solution for policy coordination among a large number of heterogeneous countries whose joint interest is to safeguard the credibility of the common monetary policy and smooth functioning of the EMU. At the same time, the experience indicates that the current set of rules and procedures laid down in the Maastricht Treaty and Stability and Growth Pact (SGP) suffer from complexity, lack of transparency and asymmetric incentives. The paper discusses the rationale for fiscal policy coordination in the monetary union in general and emphasises the role of fiscal rules and multilateral surveillance in ensuring discipline and long-term sustainability of public finances. The paper also considers incentive problems arising from the asymmetric nature of the SGP and weak interaction between national policy-making and EU-level policy commitments. As a possible remedy, the paper proposes complementing the SGP with medium-term expenditure rules for central governments and balanced budget requirements for lower levels of government.