International Experience with Rules-Based Fiscal Frameworks: Practical Issues George Kopits Fiscal Council Republic of Hungary Conference on Fiscal Frameworks Mishkenot Shanamin Jerusalem, May 5, 2009

Outline Fundamental questions Preconditions Options, lessons Concluding assessment

Experience: Summing Up Mostly recent experience and “jury is still out” Basic tests: compliance over a full economic cycle and political cycle performance compared to counterfactual Identification problem, when applied in tandem with monetary rules (inflation targeting, fixed XR) On balance, performance has been positive

Fundamental Questions Are current fiscal trends sustainable ? Are macro costs and risks significant ? Has society arrived to a “tipping point”? Is it necessary to wait until a crisis ?

Preconditions Political preconditions for adopting RFF government commitment, initiatives formulation and test of concrete proposals building broad consensus information flow, debate feedback from interest groups preparation of macro-fiscal projections, scenarios

Preconditions Technical preconditions for adopting RFF Need for transparency toward full coverage of public sector approximation of accrual accounting contingent liabilities, allocation of rev / exp Strengthening of procedural rules medium-term budget planning pay-go principle Completing critical mass of structural reforms pensions, health care, taxation, etc.

Major Options, Lessons type of policy rules definition, coverage depends on problem ahead technical feasibility definition, coverage final target as goal vs. operational target for control statutory basis: constitution, law, guideline? country-specific choice stringency: strict vs. liberal approach? credibility, track record, feasibility reputational sanctions most effective, realistic

Major Options, Lessons flexibility: automatic stabilizers, discretion? depends on credibility, technical capacity scope for contingency fund avoid asymmetric countercyclical stance error correction: immediate vs. multiyear? preferably multiyear correction surveillance preferably by independent authority amendments, suspension only once credibility has been established suspension in extraordinary times

Concluding Assessment RFF is not a panacea or “magic wand” improves macroeconomic performance eliminates deficit bias, but not necessarily procyclical bias and composition bias no more than a framework, provides “trainer wheels” for fiscal discipline useful commitment technology, signaling device requires continuous policy adjustments (including reform steps) and vigilance