1 Regional Fiscal Overview Anton Marcinčin Bratislava, April 07, 2009 FNSt

2 NMS are low revenues... GG Revenues are not high (perhaps with the exception of Hungary and Slovenia)

3...and low expenditures countries GG Expenditures are not high (with the exception of Hungary, and perhaps the Czech Republic and Slovenia)

4 with mostly pro-cyclical fiscal policies GG balance differs from the surplus in Estonia to the high deficit in Hungary

5 Lower tax revenues

6 and low labor taxes Implicit tax on labor is generally lower than in EU15 but in the Czech Republic, Hungary and Slovenia

7 Public indebtedness is very low but in Hungary and perhaps also in Poland

8 Outline Framework –Crisis and the spending mood –Falling revenues Early data: this is not a temporary fall of demand –Expect public finance deterioration –Expect higher taxes –Call for another round of reforms

9 Deeper crisis, more spending (and more indebtedness) The logic: –The economic slowdown or recession calls for interventions –Monetary policy does not work –Therefore, big emphasis on the fiscal policy But there is a difference between wise fiscal policy and unwise (though popular) spending –Help domestic demand (1 st pillar of European Economic Recovery Plan, EERP) –Does it supplement or contradict usual fiscal goals? –Moral hazard: someone will take over your problems

10 Fiscal policy as usual “Old-fashioned” goal: macroeconomic stability –Sustainable output growth –Sustainable public finances –External balance –Price stability – coordination with the monetary policy “Old-fashioned” roles of fiscal policy – where the collective is preferred to the individual action –Justice and defense –Social affairs –Competition, fair business environment, let market work Means: efficient and effective public finance management, public administration, structural reforms... (2 nd pillar of EERP)

11 Popular fiscal policy Reform fatigue, although the time for changes is now Consumption subsidies are not means tested; risking lack of funds for real social programs Expenditures: taking over problems of borrowers, low taxes, low social (and health) contributions, low profits of state owned enterprises... Moral hazard

12 Rational fiscal policy This would be OK, if –the crisis was not too deep –the crisis would not last for too long Instead, the fiscal policy should –help strengthening fundaments of the economy by improving business and living environments, starting with public sector reforms –improve and finance reasonable social safety net

13 The crisis will be deep and long Convergence programs of December 2008 are the history GDP 4Q2008: slow down and recession, prospects for growth recovery are not good Budget revenues

14 Convergence Programs (Dec.2008) Fiscal stimuliGDP’09Fiscal’09GDP’10Fiscal’10 BulgariaCut CG spending by 10%, plan budget surplus at 3% GDP Czech RepublicExtra spending of CZK39bn, tax cuts – or, redistribution of tax burden EstoniaDepletion of accumulated fiscal reserves HungaryFiscal consolidation since 2006, IMF- EC-WB rescue package LithuaniaExpenditure cuts LatviaIMF-led rescue package, 7% of GDP fiscal consol. in 2009, VAT rate increase Poland

15 EC (Jan’09): fiscal balance deterioration Source: WB RER February 2009

16 4Q2008: output contraction ECB (Feb’09): GDP growth in EA -3.2% to -2.2% in % to 0.7% in 2010

17 Falling revenues: CG Budget Slovakia (% of budgeted expenditures)

18 WB February 2009 EU10 policymakers’ options are limited. Monetary easing is constrained in a number of countries, and almost all of these countries have little to no room for fiscal stimulus because of financing and budgetary constraints. Instead, governments will need to focus on other measures to stabilize the financial sector and on better quality of spending to deliver core services and provide safety nets to the most vulnerable within tight expenditure envelopes.

19 Conclusion Calm fiscal policy –Get away from large subsidies of spending and wrong decisions –Concentrate on fundamentals –Reconsider how to use EU funds Higher expenditures and lower revenues will result in higher deficits, more expensive debt and higher taxes in the future. However, compared to the other EU countries, NMS may still maintain their comparative advantages