fiscal crisis in europe and central asia

8/9/2019 Fiscal Crisis in Europe and Central Asia

1/42

in Europe and Central AsiaA Stock-Taking Exercise

Presentation at CASEJune 17th, 2010

Luca Barbone

1

Fiscal crisis?


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IfI

were reborn,Iwould like to be reincarnated as the BondMarket

(James Carville, former advisor to President Clinton)

6/17/20102


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Main points

3

1. Before the crisis, deficits and debt were falling across theregion. Fiscal policies improved on many fronts;

2. But in the latter half of the decade, pre-crisis, buoyantrevenues led to less fiscal restraint and a postponementof some needed reforms;

3. During the crisis, fiscal policy responses differed in theeast and westy Reliance on automatic stabilizers in most countriesy Fiscal stimulus programs in resource-rich economies.

4. After the crisis, fiscal adjustment priorities will be evenmore differentiatedy Education and infrastructure needs high in much of regiony Social insurance expenditure too high in Central and SouthernEuropey Increasing efficiency, for example by reducing energy subsidies in

middle-income Former Soviet Uniony Withdrawing stimulusy Revisiting tax policy?


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5

Backdrop

Emerging Europe and Central Asia hit harderthan other developing regions by global crisis

Southern Eurozone countries hit hard

Growth and fiscal prospects for the region arebleaker than for others

The region also has a daunting climate actionagenda particularly for EU accessioncountries


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-8

-6

-4

-2

0

2

4

6

8

10

12

Africa Developing Asia Latin America Middle East Europe andCentral Asia

average 2005-2008 2009 average 2010-2013

Worst fiscal performance among

regions

6

Fiscal Balance, Percentage of GDP (2005-2013)


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-8

-6

-4

-2

0

2

4

6

8

10

Africa Developing Asia Latin America Middle East Europe andCentral Asia

average 2005-2008 2009 average 2010-2013

Weakest growth prospects

7

Real GDP Growth, Annual percentage rate (2005-2013)


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8

Before the crisis

Revenues rose rapidly as trade andconsumption based tax collections increased

Spending rose almost as fast in aggregate, butsteady as share of GDP

Fiscal balances improved across theregion, with a few exceptions (Hungary andGeorgia)

But budgeting and spending efficiency did notimprove as much


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Revenues rose

9

Steady increase as share of GDP, but aggregateincreased from $700bn in 2000 to $1.2 trillion in 2007

General Government Revenue, 2000-2007 (% of GDP)

20

25

30

35

40

45

2000 2001 2002 2003 2004 2005 2006 2007

EU-10 S.E. Europe + Turkey Oil Exporting CIS

Other CIS Emerging Asia Latin America


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Spending up almost as much

10

Steady as a share of GDP, but rose in aggregate from $700billion to $1.1 trillion

General Government Spending, 2000-2007 (% of GDP)

20

25

30

35

40

45

50

2000 2001 2002 2003 2004 2005 2006 2007

EU-10 S.E. Europe + Turkey Oil Exporting CIS



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Fiscal balances got better

11

Spending increased in east, more controlled in the west

Composition of changes in the fiscal balance, 2000-2007 (% GDP)

-4

-2

0

2

4

6

8

10

EU-10 S.E. Europe + Turkey Oil Exporting CIS Other CIS

Expenditure Revenue Balance


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Revenue efficiency improved

13

Efficiency of revenue mobilization increased

Source: World Bank Country Policy and Institutional Assessments; measure of the Efficiencyof Revenue Mobilization, 1999-2008

2.0

2.5

3.0

3.5

4.0

4.5

5.0

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

EU10 SE Europe + Turkey Oil Exporting CIS



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Some managed budgets a bit

better but uneven performance

14Source: World Bank Country Policy and Institutional Assessments; measure of the Quality ofBudgetary and Financial Management, 1999-2008

Public financial and budget management improved less

2.5

3.0

3.5

4.0

4.5

5.0

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

EU10 SE Europe + Turkey Oil Exporting CIS



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15

During the Crisis

Government revenues fell everywhere, butmore in the east

Public spending rose as a share ofGDP, but stable in aggregate

Fiscal balances deterioratedeverywhere, but more in the east

Oil and gas exporters implemented fiscalstimulus programs, but exit unclear


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All relied on automatic stabilizers

16

Contributions of changes in deficits, 2008-2009, % of GDP, median values

Only ECAs oil exporters implemented discretionaryfiscal stimulus programs

-7

-6

-5

-4

-3

-2

-1

0

1

EU-10 S.E. Europe +Turkey

Oil ExportingCIS

Other CIS EU-15 EAP LCR

Change in fiscal stance Automatic stabilizers Fiscal balance (change from 2008)


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The crash of2008/09: Macroeconomic developments

affected the fiscal situation via different channels

y Countries where the financial sector was hard hit experienced immediate

strain on the Treasury and GDP growth (Latvia, Hungary, Russia)

y Oil exporters were hard hit by the decline in world oil prices and the

change in demand (Russia, KZ, Azerbaijan, Turkmenistan). Fiscal revenues:

e.g. export taxes took a big hity Very open countries (such as the EU10+) suffered from the dramatic

decline in trade and this affected revenues linked to GDP and trade

y Remittances fell leading to a large decline in consumption (e.g. Moldova)

and related tax revenues


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y Automatic stabilizers, where in existence, went to work

y Rigidities or unwise policy choices came back to haunt some countries:

Romania, Ukraine, Serbia, Latvia, Hungary (wages and salaries or pensions/pension

indexation).

y Countries, fearing rising debt levels (or a negative impact on the exchange rate) had to

adjust expenditure plans downwards and expenditure allocations within the budget.

Capital expenditures an easy target

y A few countries raised expenditures or held them constant in nominal terms:

Kazakhstan, Russia, Georgia, Bulgaria, Moldova

y Few countries had nominal declines: Latvia (09), Croatia (09), Hungary (09)

The crash of08/09: on the public expenditure side


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Public Expenditure (in % ofGDP)

30

35

40

45

2006 2007 2008 2009 2010

ECA Wide EU10+Croatia+Turkey

LLMIC (less AZE and TKM) Oil & Gas Exporting Countries (weighted mean)

Data source: ECA Regional Tables

1/ Oil Exporting mean does not include Turkmenistan prior to 2004

Means, across ECA and by country groups 1/Expenditure (in % of GDP)


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-5

0

5

10

15

20

2006 2007 2008 2009 2010

ECA Wide EU10+Croatia+Turkey

LLMIC (less AZE and TKM) Oil & Gas Exporters Group (weighted mean)

Data source: WEO

Means, across all ECA and by country groupsExpenditure Growth, y-o-y, real

Public Expenditures, Real growth


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Discretionary spending varied

21

Tax relief, financial sector support and expandedunemployment insurance benefits most common

Wage Bill

Constraints

Public

Works

IncreasedSocial

Transfers

Expansion ofUnemployment

Benefits

Limits on

Pensions

FinancialSector

Support

InvestmentExpenditure

Cuts

Tax

Reductions

Belarus X X X

Croatia X

Czech Rep X X X X

Estonia X X

Kazakhstan X X X

Poland X X X X

Russia X X X X

Slovenia X X

Turkey X X X X X

Ukraine X X


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Bigfiscal imbalances emerged

22

Contributions of changes in deficits in 2007-2010, share of GDP

Expenditures responsible for rising deficits everywhere;big revenue declines in SE Europe and parts of the CIS

-15

-10

-5

0

5

10


Expenditure Revenue Balance


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And public debt has grown

23

Projected public debt, % of GDP

Public debt in Central and Southern Europe, and thenon-oil rich CIS will be close to 40 percent in 2010

0

5

10

15

20

2530

35

40

2008 2009p 2010p

EU10

0

5

10

15

20

25

30

35

40

2008 2009p 2010p

S.E. Europe + Turkey

05

10152025303540

2008 2009p 2010p

Oil Exporting CIS

pre-crisis projection

05

10152025303540

2008 2009p 2010p

Other CIS

latest projections


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24

After the crisis

Growth projected not to recover to pre-crisislevels

Pressures to increase spending

Projected divergence in spending andrevenue trends within the region


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Lower growth post-crisis

25

Projected economic growth rates, before and after crisis

GDP growth in 2010 will be about 5 percentage pointslower than what was expected before the crisis

-8

-6-4

-2

0

2

46

8

2008 2009p 2010p

EU10

-8

-6-4

-2

0

2

46

8

2008 2009p 2010p

S.E. Europe + Turkey

-8-6-4-202468

2008 2009p 2010p

Middle-income CIS

pre-crisis projection

-8-6-4-202468

2008 2009p 2010p

Low-income CIS

latest projection


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More pressure to reform pensions

26

ECAs spending on social security resembles that inwealthier countries

Source: World Bank staff and OECD Social Expenditure Database.

0

2

4

6

8

10

12

14

16

OECD Europe &Central Asia

Middle East Latin America East Asia South Asia

Social Safety Nets Social Insurance

Spending on social assistance and insurance, % of GDP; most data from 2000 to 2003


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More pressure to invest in

education

27

More enterprises are complaining that the skills ofworkers are becoming an obstacle for business

Source: BEEPS200

5 &200

8; percentage of firms indicating that skills andeducation of available workers is some form of constraint on business.

0

10

20

30

40

50

60

70

80

90

Middle Income CIS Low/Lower MiddleIncome CIS

SE Europe EU10

2005 2008


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More pressure to invest in

infrastructure

28Source: BEEPS 2005 & 2008; percentage of firms indicating that Electricity is some

form of constraint to business

More enterprises are complaining that electricity isbecoming an obstacle for doing business

0

10

20

30

40

50

60

70

80

Middle Income CIS EU10 Low/Lower MiddleIncome CIS

SE Europe

2005 2008


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Divergence in region growing

29

Forecasted Adjustments (2009 to 2013)

EU-10 adjustments will resemble those in middleincome countries in East Asia and Latin America

-8

-7

-6

-5

-4

-3

-2

-1

0

1

2

EU-10 S.E. Europe +Turkey

Oil ExportingCIS

Other CIS EAP LCR

Expenditure Revenue


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Fiscal Developments in Some European countries

troubling: (PIGS)

6/17/201030

37.0

39.0

41.0

43.0

45.0

47.0

49.0

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

GG

EXPENDITURE, %G

DP (G

DP-weighted average)

34.0

35.0

36.0

37.0

38.0

39.0

40.0

41.0

42.0

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

GGREVENUE, %GDP (GDP-weighted average)

-14.0

-12.0

-10.0

-8.0-6.0

-4.0

-2.0

0.0

2.0

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

GG BALANCE, % GDP (GDP-weighted average)

45.0

50.0

55.0

60.0

65.0

70.0

75.0

80.0

85.0

90.0

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

GGGROSS DEBT, %GDP (GDP-weighted average)

Source: Eurostat, EC Economic Forecast, Spring 2010


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Greece: One of the Weakest

6/17/201031

4.0

4.5

5.0

5.5

6.0

6.5

7.0

7.5

8.0

80.0

90.0

100.0

110.0

120.0

130.0

140.0

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Gross Debt Interest (Right Axis)

GREECE: GGGROSS DEBT AND INTEREST, % GDP

-16.0

-14.0

-12.0

-10.0

-8.0

-6.0

-4.0

-2.0

0.0-14

-12

-10

-8

-6

-4

-2

0

2

4

6

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

GDP Growth GG Balance

GREECE: GDP GROWTH AND GG BALANCE, % GDP

(Right Axis)

43.0

44.0

45.0

46.0

47.0

48.0

49.0

50.0

51.0

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

GREECE: GG EXPENDITURE, % GDP

36.0

37.0

38.0

39.0

40.0

41.0

42.0

43.0

44.0

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

GREECE: GG REVENUE, % GDP

Source: Eurostat, EC Economic Forecast, Spring 2010


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Western Europe

6/17/201032

43.0

44.0

45.0

46.0

47.0

48.0

49.0

50.0

51.0

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

GG

EXPENDITURE, %G

DP (G

DP-weighted average)

42.0

42.5

43.0

43.5

44.0

44.5

45.0

45.5

46.0

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

GGREVENUE, %GDP (GDP-weighted average)

-8.0

-7.0

-6.0

-5.0

-4.0-3.0

-2.0

-1.0

0.0

1.0

2.02000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

GG BALANCE, % GDP (GDP-weighted average)

55.0

60.0

65.0

70.0

75.0

80.0

85.0

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

GGGROSS DEBT, %GDP (GDP-weighted average)

Source: IMF World Economic Outlook, April 2010


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Eurozone versus Non-Eurozone

6/17/201033

40.0

42.0

44.0

46.0

48.0

50.0

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Eurozone Rest of Western Europe

GG EXPENDITURE, % GDP

35.0

40.0

45.0

50.0

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011


GGREVENUE, % GDP

-8.0

-6.0

-4.0

-2.0

0.0

2.0

4.0

6.0

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011


GG BALANCE, % GDP

35.0

40.0

45.0

50.0

55.0

60.0

65.0

70.0

75.0

80.0

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011


GGGROSS DEBT, % GDP

Source: IMF World Economic Outlook, April 2010


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34

Fiscal consolidation

Current external situation not promisingwith Eurozone developments

Requires making social sector reform apriority in many countries

Requires reducing energy subsidies inmuch of the former Soviet Union

Requires exit strategies from fiscal stimulusin oil and gas exporting countries


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Post-crisis pressures

35

y Slower growth likely for most economies

y Possibility of longer period of uncertainty- Greece andothers

y Many governments will be fiscally weakery Public debt levels will be higher after the crisis, additional

tax potential unclear

y More pressure to address climate change

yPressure on emerging Europe to mitigate, on Eurasiancountries to adapt


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Elements ofhigh quality fiscal

consolidationsy Crisis related. Evidence points to crisis-related origins of high

quality fiscal adjustments (World Bank 2007, OECD 2007, IMF

2007).

y

Implication: Begin reforms nowy Expenditure focused. Spending efficiency efforts more

growth-enhancing when recurrent expenditures are targeted

rather than capital spending.

y Implication: Target social spending and public wage bill

yIncrementally implemented. Realistic frameworks and goodpublic financial management systems to set priorities and

enforce adjustment.

y Implication: Improve budgetary and public financial management

policies36


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Social benefits and wage bills

are high in the west

37

0

5

10

15

20

25

30

35

40


Compensation of employees Use of goods and services Interest

Subsidies Grants Social benefits

Net capital investment Other expense

Economic Classification of Expenditures, 2008

Social spending and employee compensationdominates the budget


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Energy subsidies are big in the

east

38

Energy is priced below cost in much of the formerSoviet Union

Source: ERRA Tariff Database; weighted average electricity tariffs forresidential consumers in 2008, US$ cents / KWh

Long-run marginal generation cost

(6.5-7.5 cents per KWh)


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39

Addendum: Poland

y Fiscal deficits steadily fell from more than 6 to less than 2percent ofGDP between 2003 and 2007

y This despite shift to funded public pensions that costs about 3.0percent of GDP annually

y Revenues fell marginally from 40 to 39 percent ofGDPbetween 2007 and 2009

y Poland only country in the EU to avoid recession

y Fiscal deficit rose from 2 to 4 to 7 percent in2007, 2008, and 2009, and expected to be greater than 6

percent in 2010y Government spending rose from 42 to 45 percent of GDP

between 2007 and 2009, and expected to be 46.5 percent in2010


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Poland: measures

y Euro adoption objectives and desire to conform tonational public debt ceiling driving reformsy Aim to lower deficit to 3 percent of GDP by 2012

y Social spending is high relative to other countries

y Social sector spending is 26 percent of GDPy Ratio is down from 29 percent in 2003

y Fiscal consolidation can be done through three bigticket items:y Social security benefit tightening and chnaging indexation: 1.2

percent of GDPy Public wage bill controls: 0.8 percent of GDPy Education funding to reflect demographics: 0.5 percent.


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Poland: Social sector reforms

41

Note: Spending on pensions, education and health, and assistance

Social spending levels varied between 20 and 40percent of GDP in the European Union in 2003-2007


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Conclusion

y Before the crisis: Between 2000 and 2007, buoyant

revenues allowed spending increasesimproved fiscal

balances masked greater inflexibility.

y During the crisis: Revenues fell in much of the

region, spending was steadied by automatic stabilizers in

most and stimulus spending in a fewfiscal balances

deteriorated.

y After the crisis: Crisis made fiscal reform prioritiesclearer and more differentiatedfiscal futures could

diverge even more after 2010 depending on pace of fiscal

consolidation.

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fiscal crisis in europe and central asia

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