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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
