lessons learned: successful examples of fiscal adjustment

7/30/2019 LESSONS LEARNED: SUCCESSFUL EXAMPLES OF Fiscal Adjustment

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LESSONS LEARNED:SUCCESSFUL EXAMPLES OF

FISCAL ADJUSTMENTWilliam Dorotinsky

ICGFM International Conference

May 19, 2013

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Project Background

Timely topic

Extreme fiscal adjustment

At least 8% point improvement in fiscal balance over 5 years

Approach Consulted available literature

Interviewed contemporaneous actors

Comprehensive focus

Policies

Institutional/process reforms

Government strategy

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Countries Reviewed

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CountryPeriod of

AdjustmentChange in General Govt

Budget Balance (%)

Canada 1993-1998 8.8

Finland 1993-2000 16.0Netherlands 1995-2000 11.2

Sweden 1993-2000 14.8

Thailand 1999-2003

11.1

Turkey 2002-2006 13.9

United Kingdom 1993-2000 9.1

Source: WEO


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Adjustment Sustainability (1)

4

1.0

3.3

-1.5

0.2

1.0

-2.5-2.3

-3

-2

-1

0

1

2

3

4

Canada Finland Netherlands Sweden Thailand Turkey UK

GeneralGove

rnmentBalance(%o

fGDP)

5 year average after end of adjustment


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Adjustment Sustainability (2)

5

-8

-6-4

-2

0

2

4

6

8

T T+1 T+2 T+3 T+4 T+5

GeneralG

overnmentBalanc

e(%o

fGDP)

Canada Finland Netherlands Sweden

Thailand Turkey UK

5 year trend after end of adjustment


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Global Financial Crisis Budget Balance

Country 2005 2006 2007 2008 2009 2010 2011

Canada 1.5 1.6 1.6 0.1 -4.9 -5.6 -4.5

Finland 2.7 4.0 5.3 4.2 -2.7 -2.8 -0.8

Netherlands -0.3 0.5 0.2 0.4 -5.6 -5.1 -5.0

Sweden 1.9 2.2 3.6 2.2 -0.9 -0.2 0.1

Thailand 1.5 2.2 0.2 0.1 -3.2 -0.8 -1.9

Turkey -0.3 0.0 -1.7 -2.4 -5.6 -2.7 -0.3

United

Kingdom-3.3 -2.6 -2.7 -4.9 -10.4 -9.9 -8.7

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Source: WEO


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Adjustment Triggers

Market driven

Turkey

Thailand

Finland

Sweden

Canada

United Kingdom

PoliticallyDriven

Netherlands

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Actual Adjustment Triggers

MARKETMexican Peso crisisCanada

MARKETWestern recession in 1990, collapse of FSU,trade shock, banking crisis, devaluation of currencyFinland

POLITICALCampaign pledge to meet Maastricht deficitcriteriaNetherlands

MARKETWestern recession in 1990, trade shock,markets forced Swedish Kroner to devalueSweden

MARKET--Abandonment of dollar peg; instant bankruptcies

in private and financial sectorThailand MARKET--Major upheaval in 2001 affecting stock market,

currency value, banking sector, and FDITurkey

MARKET--Withdrawal from ERM reinforces need to controlfiscal deficitUnited Kingdom

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Power of an Ill-Timed Single Statement

In February 2001, the Turkish Prime Minister uses the

phrase, " This is a cr is is". Within days:

Stock market crashes nearly 40%

Interest rates rise to 3000% Central bank loses $5 billion in defending a crawling peg

exchange rate regime

30% drop in currency value after regime is abandoned

Large amounts of foreign investment withdrawn from theeconomy

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Political Context

Jean Chretien elected with majority government in 1993, re-electedin 1997Canada

Esko Aho led center-right coalition government elected in 1991;

Paavo Lipponen center-left coalition government elected in 1995Finland Wim Kok led center-left coalition government elected in 1994, re-

elected in 1999Netherlands Carl Bildt led centre-right coalition elected in 1991; Ingvar Carlsson

led center-left coalition government elected in 1994; party re-electedin 1998 with Goran Persson as Prime Minister

Sweden

Coalition government led by Chavalit Yongchaiyudh elected in 1996;Thaksin Shinawatra elected in 2001Thailand

Ahmet Necdet Sezer elected president in 2000; Recep TayyipErdoan elected as president with strong majority in 2003Turkey

John Major re-elected with majority government in 1992; Tony Blairelected in 1997 with majority governmentUnited Kingdom

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Two Patterns: Newly elected vs. mid-term govts


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Adjustment Pattern: Institutional Reforms

AdjustmentTrigger

Immediate

InstitutionalReforms

Canada Netherlands Sweden

Finland United Kingdom

Mid-Adjustment

InstitutionalReformsSolidified

Thailand Turkey

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Adjustment Strategies

Communication

Fiscal goals

Re-definition of government Spending review process

Future competitiveness

Broad based public sector reforms

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Communication

Public - societal exercise

CanadaA New Framework for Economic Policy

Finland Presidential report on employment

Turkey "Turkish Transition to a Strong EconomyProgram

Markets

Forecasts made transparent to markets

Canada

Sweden

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Sweden: Sharing the Pain

Sweden reduced compensation of Politicians

Symbolic savings, not worth a lot of money, but sends a

strong message about the government's will and the gravity

of the situation

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Role of Fiscal Goals

Early victories and measurable progress

Establishes credibility

Citizens tolerance for pain

Markets mid-term sustainability

Amended and strengthened by new governments

Finland, Thailand, Turkey

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CAN FIN NL SWE THAI TURK UK

Goal 3% 70% 3% 0% 60% 6.5% 0%

Of deficit debt deficit deficit debtprimarysurplus

deficit

Within 3 years 4 years 4 years 1 year 4 years


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Re-Definition of Government

Canada (Program Review) Serving the public interest;

Necessity of government involvement, as opposed to the private sector;

Appropriateness of federal role, as opposed to other levels of govt;

Scope for public and private sector partnerships;

Scope for increased efficiency; Affordability

United Kingdom Embraces Public Private Partnerships

Turkey

Limit the role and reach of government General deregulation of the economy

Thailand in 2nd stage Dual Track Policy government as engine of growth, yet sustainable

Establishment of safety net medical, housing, etc.

Expansive policy in agricultural sector, local development, and SMEs

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Formal Spending Review Process

Netherlands

Broad review by quasi-independent committee

Canada

Program review led by Minister of Finance

United Kingdom

Fundamental Expenditure Review led byTreasury

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Spending review process evolution

Netherlands Broad review continues--one year prior to every election

by quasi-independent committee

Canada

Program review evolves into an MTEF United Kingdom

Comprehensive spending review continues to occurperiodically

Finland/Sweden Not initially as comprehensive but evolves into MTEF Thailand/Turkey

Post adjustment implementation of MTEF

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Future Competitiveness

Turkey general deregulation of economy, many SOEsremoved from government support

Finland unemployment key concern

Sweden subsidized child care, education, and activelabor market policies, shielded from cuts

Thailand in 2nd stage government as an engine ofgrowth; promote exports by public investments throughchoice and concentration

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Expenditure / Revenue Mix

80 / 20Canada

Primarily expenditureFinland

Primarily expenditureNetherlands

53 / 47Sweden

Primarily expenditureThailand 70 / 30Turkey

50 / 50United Kingdom

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Expenditure Policy Changes

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Expenditure PolicyChange

CAN FIN NL SWE THAI TURK UK

Across the board

vs. targetedTargeted Targeted Targeted Targeted

Across the

Board

initially

Targeted Targeted

Individual transfers Reduced n/aNot

exempt Reduced Reduced n/a Reduced

Intergovernmental

transfersReduced

Formula

changedReduced n/a n/a n/a Capped

Wage bill

19%

down-

sizing

Reduced

greatly

Incentive

to leave or

retire

Tied to

productivi

ty

Reduced

Hiring

Caps,

attrition

Zero

growth

Pensions Yes Yes n/a n/a n/a n/a

Raised

retirement

age for

women

Privatization Yes Yes n/a n/a Planned Initiated Yes/PPP


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Finland: Constitutional Amendment

Greater flexibility Constitutional amendment in June 1993 allowed permanent

savings decisions on statutory appropriations (entitlements) to bemade with a simple majority in Parliament (as opposed to two-

thirds) Proved to be of crucial importance in getting government

expenditure under control

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Revenue Policy Changes

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Revenue Policy

ChangeCanada Finland NL Sweden Thai Turkey UK

No significant

changeX

One time measure X

Permanent

measureX X X X X

Consumption tax X X X X X

Income tax X X X

Corporate tax X X X X


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Institutional / Process Reforms

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Reform CAN FIN NL SWE THAI TUR UK

Institutionalize spending reviews X X X

Use of Committees X X X

Greater discretion /

accountability to line ministries

X X X X X X X

Conservative macroeconomicforecasts

X X X2 X2 X

Medium-term frameworks X X X X X2 X2 X

Contingency reserve X X X

Offset required for new policyinitiatives

X X

Debt management X X

Comprehensiveness of budget X

Revenue administration X X


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Empowering MoF

Netherlands:

The Ministry of Finance has authority to unilaterally impose higherlocal tax rates on the citizens of sub-national governments that fail

to live within their budget allocations.

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Lessons (1)

Sustained commitment and leadership Strong Minister of Finance (or equivalent) in all countries

Focus on building credibility Markets

Society Manage expectations and be consistent in messages

5 year + exercise

Adjustment package Comprehensiveness is important shared burden

Speed - short time frame as longer targets cross political events Front load the pain tolerance has a limited life

Empowerment of fiscal actors Greater role for MoF

Use of quasi-independent fiscal bodies

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Lessons (2)

Good practices

Prudence in forecasting

Clear rules on managing an unexpected surplus

Ensure major programs are not indexed to inflation

Transparency of budgeting process

New policy initiatives offset with funding from existing programs

Avoid undermining future competitiveness

Protect education, labor force participation

Sustainability Institutional / process reform

Size of adjustment constrains ability to restore cuts

Can be politically rewarding

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Questions?

lessons learned: successful examples of fiscal adjustment

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