Fiscal Rules in OECD and PEMPAL countries Jaehyuk CHOI / Policy Analyst Budgeting and Public Expenditure Division Public Governance Directorate Feb 2016

I.Outline of OECD Budget Survey II.Main Survey results on Fiscal Rules III.Fiscal Policy Response to the financial crisis IV.Key Findings and Recommendations Content

Outline of Budget Survey

 To create an international comparative database  OECD survey : Two previous surveys in 2003 and 2007 and recent survey executed in 2012/2013 (33 countries)  Regional Survey: PEMPAL + Asia + Latin America  PEMPAL Survey (2013/2014) : 13 countries –Albania, Azerbaijan, Belarus, Bosnia and Herzegovina, Croatia, Kyrgyz Republic, Macedonia, Montenegro, Russian Federation, Serbia, Tajikistan, Turkey, Uzbekistan OECD Budget Survey

Structure of Budget Survey Central/federal level General Information Fiscal Rules MTEF Top-down budgeting techniques Capital budgeting Relaxing Central Input Controls Budgeting Transparency Main Areas Budget cycle

 Adoption of fiscal rules : Usage, type and design Budget balance (deficit/surplus, nominal, cyclically-adjusted balance) Debt (nominal, debt/GDP) Expenditure (nominal, real, growth, expenditure/GDP) Revenue (restrictions on revenue allocation, taxes/GDP)  Features of fiscal rules Legal basis (international treaty or primary vs. secondary legislation) Flexibility during fiscal crisis Enforcement procedures in case of non compliance Survey on Fiscal rules

Main Survey Results on Fiscal Rules

1. Adoption of Fiscal rules : Using rules  OECD: 82% 94%, PEMPAL: 54%

1. Adoption of Fiscal Rules: Using rules  Average Number: OECD , PEMPAL 2.7  Frequent Number: OECD 4 & 5, PEMPAL 2 & 3

1. Adoption of Fiscal rules : Type of rules  Budget balance rules and Debt rules are the mostly adopted fiscal rules in OECD and PEMPAL  Expenditure rules in OECD: 27% 64%,

2. Design of Rules: (1) Budget Balance rules  OECD: 43% specific budget balance as a % of GDP, 42% in cyclically-adjusted terms  PEMPAL: 50% specific budget balance as a % of GDP

2. Design of Rules: (2) Debt rules  OECD 43%, PEMPAL 50% establishes a ceiling of debt in a level or as a % of GDP

2. Design of Rules: (3) Expenditure Rules  OECD 46%, PEMPAL 50% expenditure ceiling in nominal terms

2. Design of Rules: (4) Revenue Rules  OECD 40%, PEMPAL 67% imposes constraints on the allocation of higher revenues in good time

3. Legal basis of Fiscal Rules  OECD 79%, PEMPAL 95% of fiscal rules are based in legislation and international treaty

4. Flexibility during the crisis  Most Fiscal rules (budget balance, debt and expenditure) of OECD are flexible during the crisis

5. Enforcement mechanisms  OECD 85%, PEMPAL 69% have enforcement mechanisms for fiscal rules

Fiscal Policy Responses to the financial crisis

1. General government debt  Average gross debt has risen from 80% of GDP in 2007 to 118% by 2013 General government debt as a percentage of GDP in OECD countries

2. Fiscal policy course  : Active fiscal policy phase  : Stabilising fiscal policy phase  : Progressive fiscal consolidation phase Structural fiscal balances in OECD countries

3. Future fiscal consolidation needs OECD countries have achieved a considerable amount of fiscal consolidation However, still a significant gap left to attain a debt ratio of 60%

4. The role of Fiscal Rules  Fiscal Rule play a determining role in the setting of fiscal policy (17 countries) ‘Debt brake rules’ have played a key role : Switzerland, Germany, Austria  Deemphasize fiscal targets as government prioritizes growth (3 countries)  The government or parliament sets medium term fiscal plans (9 countries)

5. Development in Fiscal Rules in the crisis EU’s fiscal framework reforms since 2011 Germany adopted a ‘debt brake rule’ in 2009 replacing the former ‘golden rule’ UK announced plan to adopt a budget surplus law which will require a budget surplus when the economy is growing  The global financial crisis has spurred a rethink of the fiscal framework and the role to be played by fiscal rules and fiscal targets

Key Findings and Recommendations

Key Findings and Recommendations (1)  More PEMPAL countries need to consider adopting Fiscal Rules in order to pursue fiscal sustainability and economic stabilisation Only a half PEMPAL countries use fiscal rules  Developing a well-designed fiscal framework using fiscal rules and targets that are suitable to country- specific macroeconomic circumstances is a key Business cycle, trade openness and exposure to financial developments should be considered. A debt threshold can be different by the income level of the country

Key Findings and Recommendations (2)  Fiscal Rules should be designed in a manner to achieve two objectives: i) anchoring expectations around a prudent debt level ii) macroeconomic stabilisation Combining budget balance rule and expenditure rule can be considered  Fiscal Rules should be made simpler and clearer, if possible, to enhance compliance Swiss and German ‘debt brake rules’ have been effective in fiscal management

Key Findings and Recommendations (3)  Fiscal rules can be designed with ‘lesser pro- cyclicality’ by using rules with cyclically adjusted terms and well defined escape clauses  The incentive mechanism could be designed to run a prudent counter cyclical fiscal policy in good times in order to have sufficient fiscal room in bad times To address cyclical shocks, ‘Rainy Day Funds (stabilisation funds)’ have been introduced for sub- national governments in some countries (Sweden, U.S.)

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