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

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

3. A Framework for thinking about Fiscal Risk

4. 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

5. 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

6. Mini Survey of IFIs (2014)

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

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

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

10. Findings from
“The State of Public Finances 2015”

11. 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

12. 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

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

14. 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

15. 4. Development in IFIs
Credibility of fiscal objectives can be enhanced by IFIs in OECD: (2008) (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

16. 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

17. 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

18. Future Work

19. 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

20. THANK YOU !