1. Innovative fiscal policy in the context of sustainability Olivér Kovács Research fellow, ICEG European Center Phd-student, University of Debrecen, Doctoral School of Economics Tampere, 9 June 2011 Conference: Trends and Future of Sustainable Development

2. Outline 1. The major challenges of the European Union 2. Fiscal sustainability as a necessary prerequisite  Risks of a debt-crisis  Benevolent effects of fiscal sustainability  Dominating concept of fiscal sustainability  Innovative fiscal policy and the sustainability 3. The issue of fiscal institutionalisations 4. The case of Finland – Refining the concept of innovative fiscal policy 5. Concluding remarks

3. The major challenges of the European Union  Demographic dimension (side effects)  Climate change  Relatively low labour-productivity  Sovereign debt-crisis Environmental Social Economic

4. A potential definition for fiscal sustainability  What is the real burden? Without sustainability: Risks of debt-crisis  Domestic dimension  International dimension Fiscal sustainability: Benevolent effects Raised awareness on intergenerational solidarity Better fiscal flexibility (fiscal latitude) Significantly improved efficiency of automatic stabilisers Healthier capability to adaptive strategic planning Fiscal sustainability as a necessar prerequisite

5. Dominant consideration of fiscal sustainability  define strict debt-to-GDP rate and deficit targets  use any type of fiscal consolidation to reach the deficit targets (it requires social trust)  Therefore, encourage governments on the one hand  to introduce legislated fiscal rules,  on the other hand to set up independent fiscal bodies with a wide range of authorities (e.g. giving political and legal responsibility, as well) in order to increase the credibility and transparency of fiscal policy, to stimulate social trust, and last but not at all least to have control over the meeting of fiscal rules.

6. Innovative fiscal policy and the fiscal sustainability Fiscal sustainability needs two characters: Sustaining Disruptive  define strict debt-to-GDP rate and deficit targets  higher level social, environmental and economic objectives  intelligent manoeuvre  use expenditure based fiscal consolidations to get potential expansionary effect and to reach the deficit targets  encourage governments on the one hand  to introduce legislated fiscal rules,  on the other hand to set up independent fiscal bodies with limited authorities (e.g. not giving political and legal responsibility, as well), they are rather consulting than decision making bodies.

7. Fiscal positions of the four groups (% of GDP) Group 1: Austria, Belgium, The Netherlands and Slovenia. Group 2: Denmark, Germany, France, Italy, Luxembourg, Sweden and United Kingdom. Group 3: Belgium, Denmark, Germany, Estonia, France, Italy, Lithuania, The Netherlands, Portugal and Sweden. Group 4: Bulgaria, Cyprus, Czech Republic, Finland, Ireland, Latvia, Malta, Poland, Romania, Slovakia.

8. The case of Finland – Refining the concept of innovative fiscal policy What did happen? I. phase (1985-1990): financial liberalisation and economic boom  overheating II. phase (1990-1993): financial crisis, implosion of the SU  depression III. phase (after 1993): recovery was partly given by intelligent fiscal policy What did Finland do? Predominantly: expenditure side fiscal consolidation Reducing expenditures in social transfers, public sector wages, salaries (But: pro- and anti-cyclical elements) Coordinated expansionary fiscal policy: anti-cyclical R&D&I policy Structural reform Voluntarily used fiscal institutionalisation (unlegislated expenditure ceiling rule, not having newly established independent fiscal institutional anchor)

9. Finland’s fiscal position (% of GDP) (1988-2000) (left axis: real GDP growth, budget balance; right axis: debt-to-GDP ratio) Source: European Commission, Statistics Finland

10. Cyclically adjusted expenditures and revenues (% of GDP) (1985-2005) Source: European Commission, AMECA database

11. Functional breakdown of revenues (in % of total taxation) Source: Eurostat

12. Functional breakdown of expenditures (in % of total expenditures) Source: Eurostat

13. Total intramural R&D expenditure (GERD) by sectors of performance Source: Eurostat

14. Labour productivity of the total economy (1980-2003) Value added per employed person, thousand 2002 euro, ppp Source: OECD/STAN, Kaitila et al. (2006)

15. Conclusion  pro- and anti-cyclical fiscal policy were in tandem;  focus on the evolutionarily developed and mature fields;  Fiscal institutionalisation was not quintessence.  additional resources stemming from the expenditure side fiscal consolidation Institutionalised fiscal policy trust/ consensus Expenditure- side fiscal adjustment Expansionary effect trust/ consensus reform

16. Thank you for your attention! Olivér Kovács okovacs@icegec.hu