Fiscal Risks in OECD countries Identification, Management and Mitigation Jaehyuk CHOI / Policy Analyst Budgeting and Public Expenditure Division Public Governance Directorate June 2016

Content A Framework for thinking about Fiscal Risk Mini Survey of IFIs Findings from “The State of Public Finances 2015” Future Work

A Framework for thinking about Fiscal Risk

A Framework for Fiscal Risks Fiscal Risks are factors that cause the deviation of fiscal outcomes from budget estimates or other projections Main Fiscal Risk factors General Risks Pension Funds PPPs: risk sharing arrangements Bank & Financial sector risks Liabilities & Guarantees: SNGs, SOEs Exceptional events: natural disasters Demographic factors Budgetary forecast errors Economic forecast errors Fiscal vulnerabilities: oil prices Fiscal policy bias Asset bubbles Specific Risks

A Framework for Fiscal Risks Identifying, Managing and Mitigating Fiscal Risks Identifying Risks Accumulation of long-term reserve fund Accumulation of medium-term stabilisation fund Parliamentary approval of explicit risks Fiscal rules to constrain unduly pro-cyclical fiscal policies Adoption of prudent low-debt levels Statement of fiscal risks Long-term sustainability report Independent assessment of risks Managing Risks Mitigating Risks Long-term sustainability reforms: pension eligibility Pricing: charging for guarantees, mandatory insurance Risk sharing mechanism Expenditure stability: caps, cash ceilings Credible repudiation by government of implicit liabilities

Mini Survey of IFIs (2014)

1. General Fiscal Risks Forecasting errors & Vulnerability to shocks are highly relevant

2. Specific Fiscal Risks Financial sector, liabilities & guarantees and demographic pressures are highly relevant

3. Risk Management Tools: How effective? Long-term reserve fund, Fiscal rules, long-term sustainability reform are effective strategies

Findings from “The State of Public Finances 2015”

1. Fiscal State: Public 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

1. Fiscal State: Fiscal Balance Fiscal balance worsened from -1.5% of GDP in 2007 to -8% in 2009 and recovered -3.7% in 2014 General government fiscal balance as a percentage of GDP in OECD countries

2. Fiscal Policy Course 2012-2014: Progressive fiscal consolidation phase Balance between expenditure and revenue measures Structural fiscal balances in OECD countries Nature of fiscal consolidation

3. Development in Fiscal Rules The global financial crisis has spurred a rethink of the fiscal framework 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 when the economy is growing Fiscal Rules play a determining role in the setting of fiscal policy in many OECD countries

4. Development in IFIs Credibility of fiscal objectives can be enhanced by IFIs in OECD: (2008) 9 (2014) 25 Technical economic function Macro economic forecasts Calculating the structural fiscal balance Public transparency & accountability Engage with the budgetary process Policy costings Inform policy development and debate among politicians and public Fiscal watchdog Inform policy development and debate among politicians and public Policy advice Broader fiscal policy comment and advice

5. Sub-national government (SNG) Budgetary Governance Adopted a range of tools and mechanisms to keep SNGs in check Rainy Day Funds (Stabalisation Funds) Smooth out cyclical revenue Inter-governmental coordination body All governments act in a coordinated manner Fiscal Rules Budget balance, debt, expenditure rules Expenditure efficiency initiative Improve efficiency on health, public sector spending

6. Summary Wide range of Fiscal Risk management strategies Key Tools: Fiscal rules, Long-term reserve funds, long- term sustainability reforms IFIs can support credibility of fiscal objectives Lessons from SNGs: Rainy Day Funds to smooth out cyclical revenue can play an important role

Future Work

Future work Fiscal risk is a key theme for OECD SBO As fiscal space scaled down after financial crisis, fiscal risks become more important issue OECD is studying various issues on fiscal risks Long-term Fiscal Sustainability Managing disaster risks Toolkit on Budget Transparency

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