Innovative fiscal policy in the context of sustainability Olivér Kovács Research fellow, ICEG...

Innovative fiscal policy in the context of sustainability

Olivér KovácsResearch fellow, ICEG European CenterPhd-student, University of Debrecen, Doctoral School of Economics

Tampere, 9 June 2011 Conference: Trends and Future of Sustainable Development

Outline

1. The major challenges of the European Union2. Fiscal sustainability as a necessary prerequisite

Risks of a debt-crisis Benevolent effects of fiscal sustainability Dominating concept of fiscal sustainability Innovative fiscal policy and the sustainability

3. The issue of fiscal institutionalisations4. The case of Finland – Refining the concept of

innovative fiscal policy5. Concluding remarks

The major challenges of the European Union

Demographic dimension (side effects)

Climate change

Relatively low labour-productivity

Sovereign debt-crisis

A potential definition for fiscal sustainability What is the real burden?

Without sustainability: Risks of debt-crisis Domestic dimension International dimension

Fiscal sustainability: Benevolent effectsRaised awareness on intergenerational solidarityBetter fiscal flexibility (fiscal latitude)Significantly improved efficiency of automatic stabilisersHealthier capability to adaptive strategic planning

Fiscal sustainability as a necessar prerequisite

Dominant consideration of fiscal sustainability

define strict debt-to-GDP rate and deficit targets use any type of fiscal consolidation to reach the deficit

targets (it requires social trust) Therefore, encourage governments on the one hand

to introduce legislated fiscal rules, on the other hand to set up independent fiscal bodies

with a wide range of authorities (e.g. giving political and legal responsibility, as well) in order to increase the credibility and transparency of fiscal policy, to stimulate social trust, and last but not at all least to have control over the meeting of fiscal rules.

Innovative fiscal policy and the fiscal sustainability

Fiscal sustainability needs two characters: • Sustaining• Disruptive

define strict debt-to-GDP rate and deficit targets higher level social, environmental and economic objectives intelligent manoeuvre

use expenditure based fiscal consolidations to get potential expansionary effect and to reach the deficit targets

encourage governments on the one hand to introduce legislated fiscal rules, on the other hand to set up independent fiscal bodies with

limited authorities (e.g. not giving political and legal responsibility, as well), they are rather consulting than decision making bodies.

Fiscal positions of the four groups (% of GDP)

Group 1: Austria, Belgium, The Netherlands and Slovenia. Group 2: Denmark, Germany, France, Italy, Luxembourg, Sweden and United Kingdom. Group 3: Belgium, Denmark, Germany, Estonia, France, Italy, Lithuania, The Netherlands, Portugal and Sweden. Group 4: Bulgaria, Cyprus, Czech Republic, Finland, Ireland, Latvia, Malta, Poland, Romania, Slovakia.

The case of Finland – Refining the concept of innovative fiscal policy

What did happen?I. phase (1985-1990): financial liberalisation and economic boom overheatingII. phase (1990-1993): financial crisis, implosion of the SU depressionIII. phase (after 1993): recovery was partly given by intelligent fiscal policy

What did Finland do?Predominantly: expenditure side fiscal consolidation

Reducing expenditures in social transfers, public sector wages, salaries (But: pro- and anti-cyclical elements)Coordinated expansionary fiscal policy: anti-cyclical R&D&I policy

Structural reformVoluntarily used fiscal institutionalisation (unlegislated expenditure ceiling rule, not having newly established independent fiscal institutional anchor)

Finland’s fiscal position (% of GDP) (1988-2000)(left axis: real GDP growth, budget balance; right axis: debt-to-GDP ratio)

Source: European Commission, Statistics Finland

Cyclically adjusted expenditures and revenues (% of GDP) (1985-2005)

Source: European Commission, AMECA database

Functional breakdown of revenues (in % of total taxation)

Source: Eurostat

Functional breakdown of expenditures (in % of total expenditures)

Source: Eurostat

Total intramural R&D expenditure (GERD) by sectors of performance

Source: Eurostat

Labour productivity of the total economy (1980-2003)Value added per employed person, thousand 2002 euro, ppp

Source: OECD/STAN, Kaitila et al. (2006)

Conclusion pro- and anti-cyclical fiscal policy were in tandem; focus on the evolutionarily developed and mature fields;

Fiscal institutionalisation was not quintessence. additional resources stemming from the expenditure side

fiscal consolidation

Institutionalised fiscalpolicy

trust/consensus

Expenditure-side fiscal

adjustment

Expansionary effect

trust/consensus

reform

Thank you for your attention!

Olivér Kovácsokovacs@icegec.hu