Design and application of Fiscal Rules - a comment to Anderson and Minarik - Matthias Witt German Technical Cooperation (gtz)

Public Finance Reform Comments: Outline Introduction The devil’s in the details – Germany’s experiences with Fiscal Rules Why stick to the rules? A comment on embeddedness Fiscal Rules – reaking the debt cycle Third World Development?

Public Finance Reform GTZ – Partner for the Future. Worldwide. The Organisation The German Technical Cooperation (gtz) is a federal enterprise, founded in 1975 and based close to Frankfurt am Main gtz provides advisory services for political, economic, ecological and social development, thereby promoting complex reforms and change processes The corporate objective is to improve people´s living conditions on a sustainable basis Our Clients Major client is the German Federal Ministry for Economic Cooperation and Development The GTZ also operates commissioned by other German ministries, partner-country governments, and international clients (European Commission, World Bank) Worldwide operations for sustainable development Activities in 130 countries, employees Resident representatives in 66 countries, mostly in Africa, Asia, Latin America and Eastern Europe

Public Finance Reform The devil‘s in the details – German experiences struggling with fiscal rules Two different fiscal rules applied Golden rule in the German Basic Law and European SGP Design of the national rule Investment is defined as gross capital formation; no incentive to repay debt during booms Debt service at 14.5% of recurrent expenditure; implicit debt at 270% of GDP Help to limit deficit in ad times, fail to boost budget discipline in boom times Fiscal Rule and the budget process Cascading budgetary negotiations, no ceilings Medium-term limits to fiscal discipline Cost of German unification 17 years ago still considerable Net transfers to Eastern Germany in 2003 at 6% of recurrent expenditure

Public Finance Reform Why stick to the rules? A note on embeddedness Credible sanctions raise politicians‘ respect for fiscal discipline Political sanctions: German voters dislike lack of fiscal discipline Legal enforcement – independent judgement on government policy Conclusion: FRs must be transparent, easily understandble, and tight to a strict enforcement process Harmonisation with monetary policy Europe: Different economic spaces for fiscal and monetary policy Way out: creating autonomous fiscal agencies? Objective: Separate budget execution fom party politics Examples from India, Malasia, Nigeria etc. show that

Public Finance Reform Fiscal Rules – breaking the debt cycle in the Third World? Third World Debt currently low priority on the political agenda Credibility of fiscal rules depends on institutional framework … and political room for manoeuver Rise of Fiscal rules in Latin America Structural surplus rule for the budget (Chile) Commodity Stabilization Funds (Colombia, Chile) Fiscal Responsibility Laws (Brazil, Argentina, Peru) Limited experiences with fiscal rules in low income countries Institutional capacity? High dependency on international tranfers; aid in average 30-50% of gov‘t expenditure (est.) Recommendation to SBO: Consider fiscal rules in middle-income countries Count on promising examples from Latin America Countries in transition: Central and Eastern Europe Middle East and Northern Africa

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