1 fiscal rules uri gabai national economic council prime minister office 5 may 2009
TRANSCRIPT
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Fiscal Rules
Uri Gabai
National Economic Council Prime Minister Office
5 May 2009
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Government Debt
Source: Bank of Israel, Apr. 2009
Israel’s General Government Debt(% of GDP)
3
Government Debt: Israel vs. OECD
General Government Debt, OECD countries (% of GDP, 2007)
Source: OECD Economic Outlook 83 & Bank of Israel, Apr. 2008
4
Fiscal Rules in Israel – Brief History 1992: Deficit targets set
1992-2004: Poor adherence to fiscal rules, though created a
“psychological effect”
2003 Economic Plan included:
Expenditure ceilings of 1% per annum , later changed to
1.7% + “Boxes”
Declining deficit path (from 4% down to 1% GDP)
2008 Budget Fiscal Rules:
1.7% Expenditure ceiling
1% Deficit Target
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National Economic
Council’s Model
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Current Fiscal Rules – why revise?
On one hand,
High success in fiscal constraining and debt reduction
On the other hand,
Rules are not derived from long-term explicit targets
Rules haven’t been fully implemented – “boxes”…
Rigidity facing changing reality
Danger of overshooting in the decline of G/Y
Invites pressures, risk of uncontrolled change, inability to provide public goods necessary for growth
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Background for Setting Targets – International Comparison, 2008
Simple Averages
* Data for 2006
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Fiscal goals for the next decade
1. Decreasing the debt to GDP ratio to OECD standards. Specifically:
Lowering the debt ratio to 60%
of GDP by 2020
2. Supplying public goods adequately
3. Subject to the above – moderate
decrease in the tax burden
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The model in a nutshell
The expenditure ceiling will be determined each year by a clear
formula – the product of two factors:
GDP’s growth environment
Distance from the target debt/GDP ratio
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The model – basic assumptions
First Assumption: In steady state –expenditures should grow proportionally to the GDP growth
This will enable supporting the growing demand for public goods
Hence, the expenditure ceiling should be “related” to the GDP growth rate
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The model – basic assumptions
Second Assumption: expenditures should be either mildly countercyclical or acyclical
The main countercyclical effect is achieved by
letting taxes behave as “automatic stabilizers”
Hence, expenditures should be a function
of the growth environment
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The model – basic assumptions
Third Assumption: The strength of the relation between expenditures and GDP growth should depend on the “distance” from the debt target
Specifically, The rule should become less restrictive (i.e. closer to the growth environment)
as we approach the debt target and vice versa
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The model
expenditure
ceiling
Growth
environment
“restraint parameter”
- Distance from target
Which Growth?
Multi-year average
Which target?
Debt/GDP ratio – 60%
*1 targetfromdist ttt YG
Expenditure ceiling
restraint
parameter
Growth Environment
X
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The model
expenditure
ceiling
Growth
environment
“restraint parameter”
- Distance from target
Which Growth?
Multi-year average
Which target?
Debt/GDP ratio – 60%
*1 targetfromdist ttt YG
Expenditure ceiling
restraint
parameter
Growth Environment
X
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Restraint parameter -
*1
*t
t
d d
d
current
Debt/GDP ratio
The distance in % from the debt
target
restraint parameter
Debt / GDP
target
= 1-
t
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Restraint parameter -
80 601 1 0.33 0.67
60t
current
Debt/GDP ratio
The distance in % from the debt
target
restraint parameter
Debt / GDP
target
= 1-
t
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Restraint parameter -
60 601 1 0 1
60t
current
Debt/GDP ratio
The distance in % from the debt
target
restraint parameter
Debt / GDP
target
= 1-
t
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The model
expenditure
ceiling
Growth
environment
“restraint parameter”
- Distance from target Which Growth?
Multi average growth
Which target?
Debt/GDP ratio – 60%
*1 targetfromdist ttt YG
Expenditure ceiling
restraint
parameter
Growth Environment
X
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Growth environment
The Israeli economy is very dynamic – the variance of growth rates is relatively high
So, how can we determine the growth environment?
On the one hand, we should consider the growth rate of the long term – multi year average.
On the other hand, some weight should be given to recent growth rates, as they may better represent the “current” growth level.
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Determining the Growth environment
10 ( , 1)*
2t t
t
Y YY
Growth environment- average of the growth rates
in:
Short term growth
Long term growth
Average of growth rates in the
last 10 years*
Average of growth rates in current
and previous year
*Updates every 5 years
*2009
3.8% 4.7%4.2%
2Y
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For 2009:
4.2 x 0.67 = 2.8
For 2010:
2.6 x 0.70 = 1.8
Computing the expenditure ceiling
The formula:
growth environme
nt
restraintparamete
r
XExpenditur
eceiling
=
expenditure ceiling - the following years
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cyclicality of the fiscal rule – which growth to take?
Hypothetical growth path 2008-2020
Long and short
term growth
Long term
growth only
exp .ceiling
GDP growth
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Fiscal Policy - summary
1. Determining the expenditure ceiling each year according to the formula presented here
2. Maintaining low deficit – 1% over the business cycle
3. tax policy will be determined subject to these policy tools
4. Determining escape clauses for extreme situations
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Thank you!
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Selected Countries: Australia, Belgium, Canada, France, Germany, Italy, Japan,
NZ, Spain, Sweden, UK, USA
GDP growth rates, Israel and selected
countries
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