1. 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

2. Outline Fundamental questions Preconditions Options, lessons
Concluding assessment

3. 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

4. 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 ?

5. 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

6. 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.

7. 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

8. 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

9. 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