Public spending reforms Czech Republic April 8, 2013 Zuzana Šmídová, OECD

Lecture outline What is public spending/why does it need reform Fiscal sustainability and frameworks Main spending items: -Pensions -Healthcare 1

What is public spending? 2 Provision of public goods Security, Infrastructure, Education, Healthcare Social benefits (pensions, unemployment benefits, housing benefits, …)

How much do governments spend? 3 General government expenditure, % of GDP, 2012

How much do they collect? 4 General government receipts, % of GDP, 2012

Ageing populations 5

Declining labour force at unchanged policies 6

How to make public expenditure more efficient? Fiscal policy framework Public finance/Budget management and control Public pensions reform Public healthcare reform

Czech public finance development

Fiscal policy challenges … Election cycle Myopia Mandatory expenditures Pro-cyclicality 9

… and solutions Stability and Growth Pact (EU) and its latest upgrade Fiscal compact: deficit below 3%, structural deficit 1%, debt below 60% of GDP. Fiscal councils (e.g. UK, Sweden, Ireland… CR) and other wise men/advisory bodies (e.g. Netherlands’ CPB, Australia’s Productivity commission) 10

Fiscal rules – popular choice? 11

Current proposal for a constitutional debt brake Constitutional law on budgetary responsibility In the Parliament, &CT=821&CT1=0 (Budgetary committee) &CT=821&CT1=0 60% of GDP debt brake with ‘alarm’ thresholds at 45%, 48%, 5o% Debt limit on sub-central governments Fiscal council appointed by the Parliament 12

Budget management and control Transparency ( A citizen’s guide to state budget) - _sr_vladni_navrh_zakona.html, _sr_vladni_navrh_zakona.html Ex-post assessment of policies (systematic assessment based on performance indicators) Tax expenditures (3.1% GDP) - e.g. tax deductable interest rate of mortgages, …

Public procurement ( saving of 2.5% GDP?) - investment, purchase of private sector services Sub-central governments (regions, municipalities) - how many layers of government? Management of state assets - state owned enterprises ( ČEZ, Lesy, ČSA, airport, Ceske Drahy …) Supreme control office (NKÚ, 14 Budget management and control

Average population per municipality , thousands

Pension reform Public pension systems – consumption smoothing/distribution of income over life-cycle Increasing the statutory age of retirement (today: 61, 60; born in 1990: 69 yrs) Strengthening the link between the contributions and benefits – but only up to a point

Pension reform Motivation to remain active/working longer Diversification of savings - introduction of a new (second) pillar : –PAYG (pay-as- you-go) defined benefit –funded defined contribution (second pillar, “state contribution”) –funded defined contribution (third pillar, employer contribution, state contribution) 17

Expenditure on healthcare, 2010 or latest

Healthcare reforms Analysis of OECD countries healthcare systems (Joumard et al., 2010) – no one “perfect/most efficient” healthcare system Rising expenditure – both demography but also progress/innovation Demand management (fees, soft/hard-gate keeping) Mutli-insurer system - “imitating competition”- govn’t to set and oversee the rules of the game

Literature Kumar et al, Fiscal Rules: Anchoring Expectations for Sustainable Public Finances, IMF, December 2009 Rogoff K., Bertelsmann I.J., Rationale for fiscal policy councils: Theory and evidence Johansson, Å. et al. (2013), “Long-Term Growth Scenarios”, OECD Economics Department Working Papers Health at a glance Europe 2012, OECD Publishing OECD Economic Surveys: Czech Republic 2011, OECD Publishing 20