Fiscal Reforms in the New Fiscal Reforms in the New Members StatesMembers States
Seminář Seminář strategie hospodářské politiky strategie hospodářské politiky a udržitelnost veřejných financía udržitelnost veřejných financíSmilovice, 2.- 4. května 2005Smilovice, 2.- 4. května 2005
Ondřej Schneider, Jan ZápalOndřej Schneider, Jan ZápalCharles UniversityCharles University
Ondřej Schneider and Jan Zápal, May 2005Ondřej Schneider and Jan Zápal, May 2005 22
OutlineOutline I. HypothesisI. Hypothesis
• 2 groups of countries2 groups of countries II. EvidenceII. Evidence
• Basic factsBasic facts• Reform effortsReform efforts• Evidence from PEPs & CoPrsEvidence from PEPs & CoPrs• SustainabilitySustainability• ConsolidationsConsolidations
III. ConclusionIII. Conclusion
I. HypothesisI. Hypothesis
Ondřej Schneider and Jan Zápal, May 2005Ondřej Schneider and Jan Zápal, May 2005 44
I. HypothesisI. Hypothesis 2 groups of countries?2 groups of countries?
• Large government (46-52% of GDP)Large government (46-52% of GDP)Cyprus, Czech Republic, Hungary,Cyprus, Czech Republic, Hungary,Malta, Poland, SloveniaMalta, Poland, Slovenia
• Small(ish) government (36-38% of GDP)Small(ish) government (36-38% of GDP)Estonia, Latvia, Lithuania,Estonia, Latvia, Lithuania,Slovakia (since 2003)Slovakia (since 2003)
Ondřej Schneider and Jan Zápal, May 2005Ondřej Schneider and Jan Zápal, May 2005 55
Large governmentLarge government
General government expenditure in % of GDP
35
40
45
50
55
1999 2000 2001 2002 2003 2004 2005 2006
EUR-15 CY CZ HU MT PL SI
Ondřej Schneider and Jan Zápal, May 2005Ondřej Schneider and Jan Zápal, May 2005 66
Small(ish) governmentSmall(ish) government
General government expenditure in % of GDP
30
35
40
45
50
55
60
1999 2000 2001 2002 2003 2004 2005 2006
EUR-15 EE LV LT SK
Ondřej Schneider and Jan Zápal, May 2005Ondřej Schneider and Jan Zápal, May 2005 77
I. HypothesisI. Hypothesis 2 groups of countries?2 groups of countries?
• in the breach of SGP – in the breach of SGP – Excessive deficit procedure (EDP)Excessive deficit procedure (EDP)Cyprus, Czech Republic, Hungary, Malta, Cyprus, Czech Republic, Hungary, Malta, Poland, SlovakiaPoland, Slovakia
• compliant with SGP (non EDP)compliant with SGP (non EDP)Estonia, Latvia, Lithuania, SloveniaEstonia, Latvia, Lithuania, Slovenia
Ondřej Schneider and Jan Zápal, May 2005Ondřej Schneider and Jan Zápal, May 2005 88
EDPEDP
General government budget deficit in % of GDP
-14
-12
-10
-8
-6
-4
-2
0
2
1999 2000 2001 2002 2003 2004 2005 2006
EUR-15 CY CZ HU MT PL SK
Ondřej Schneider and Jan Zápal, May 2005Ondřej Schneider and Jan Zápal, May 2005 99
non EDPnon EDP
General government budget deficit in % of GDP
-6
-4
-2
0
2
4
1999 2000 2001 2002 2003 2004 2005 2006
EUR-15 EE LV LT SI
Ondřej Schneider and Jan Zápal, May 2005Ondřej Schneider and Jan Zápal, May 2005 1010
HypothesisHypothesis Grouping very robust:Grouping very robust:
• The „bad“ always are: Cyprus, Czech The „bad“ always are: Cyprus, Czech Republic, Hungary, Malta, PolandRepublic, Hungary, Malta, Poland
• The „good“ always are: Estonia, Latvia, The „good“ always are: Estonia, Latvia, LithuaniaLithuania
• Only Slovenia manages big government Only Slovenia manages big government and low debtand low debt
• Only Slovakia manageOnly Slovakia managedd to cut government to cut government expenditures massively (but runs deficit)expenditures massively (but runs deficit)
II. EvidenceII. Evidence
Ondřej Schneider and Jan Zápal, May 2005Ondřej Schneider and Jan Zápal, May 2005 1212
Basic factsBasic facts Indirect Indirect ttaxesaxes Direct taxesDirect taxes
% of GDP % of GDP
12
13
14
15
1994 1996 1998 2000 2002 2004 2006 2008
EDP countries non EDP countries EUR-15
7
9
11
13
15
1994 1996 1998 2000 2002 2004 2006 2008
EDP countries non EDP countries EUR-15
Ondřej Schneider and Jan Zápal, May 2005Ondřej Schneider and Jan Zápal, May 2005 1313
Basic factsBasic facts Social contributionsSocial contributions
% of GDP
10
12
14
16
1994 1996 1998 2000 2002 2004 2006 2008
EDP countries non EDP countries EUR-15
Ondřej Schneider and Jan Zápal, May 2005Ondřej Schneider and Jan Zápal, May 2005 1414
Basic factsBasic facts Employees’ Employees’
compensationcompensation Collective Collective
consumptionconsumption
% of GDP % of GDP
9
10
11
12
13
1994 1996 1998 2000 2002 2004 2006 2008
EDP countries non EDP countries EUR-15
8
9
10
11
12
1994 1996 1998 2000 2002 2004 2006 2008
EDP countries non EDP countries EUR-15
Ondřej Schneider and Jan Zápal, May 2005Ondřej Schneider and Jan Zápal, May 2005 1515
Basic factsBasic facts Social transfersSocial transfers InvestmentInvestment
% of GDP % of GDP
2
3
4
5
1994 1996 1998 2000 2002 2004 2006 2008
EDP countries non EDP countries EUR-15
20
22
24
26
28
30
1994 1996 1998 2000 2002 2004 2006 2008
EDP countries non EDP countries EUR-15
Ondřej Schneider and Jan Zápal, May 2005Ondřej Schneider and Jan Zápal, May 2005 1616
Evidence from PEPs & CoPrsEvidence from PEPs & CoPrs Pre-Accession Economic Programme Pre-Accession Economic Programme
(PEP)(PEP)• 20012001• 20022002• 20032003
Convergence ProgrammeConvergence Programme(CoPr)(CoPr)• Spring Spring 20042004• Autumn Autumn 20042004
Ondřej Schneider and Jan Zápal, May 2005Ondřej Schneider and Jan Zápal, May 2005 1717
PEP 01
PEP 02
PEP 03
CoPr - spring 04CoPr - autumn 04
-12
-10
-8
-6
-4
-2
02000 2001 2002 2003 2004 2005 2006 2007 2008
PEP 01 PEP 02 PEP 03 CoPr - spring 04 CoPr - autumn 04
Evidence from PEPs & CoPrsEvidence from PEPs & CoPrs
Malta, General government budget deficit in % of GDP
Ondřej Schneider and Jan Zápal, May 2005Ondřej Schneider and Jan Zápal, May 2005 1818
-12
-10
-8
-6
-4
-2
02000 2001 2002 2003 2004 2005 2006 2007 2008
PEP 01 PEP 02 PEP 03 CoPr - spring 04 CoPr - autumn 04
Evidence from PEPs & CoPrsEvidence from PEPs & CoPrs
Revisions
Increased speed
Malta, General government budget deficit in % of GDP
Ondřej Schneider and Jan Zápal, May 2005Ondřej Schneider and Jan Zápal, May 2005 1919
SustainabilitySustainability Benchmark primary deficitBenchmark primary deficit
((rr--yy))..bb• rr ... real interest rate ... real interest rate• yy ... real growth of output ... real growth of output• bb ... debt to GDP ratio ... debt to GDP ratio
Actual primary deficit based on 2000-2004Actual primary deficit based on 2000-2004
Sustainability gapSustainability gap as a difference as a difference
Ondřej Schneider and Jan Zápal, May 2005Ondřej Schneider and Jan Zápal, May 2005 2020
SustainabilitySustainability
-6
-5
-4
-3
-2
-1
0
1
2
Unsu
stai
nabl
e / S
usta
inab
le
Sustainability gap, 2000-2004 data
% of GDP
Ondřej Schneider and Jan Zápal, May 2005Ondřej Schneider and Jan Zápal, May 2005 2121
Growth accountingGrowth accounting
Growth effect
Monetary policyeffect
Net fiscal effort
Observed reduction of deficit Composition of reduction
Ondřej Schneider and Jan Zápal, May 2005Ondřej Schneider and Jan Zápal, May 2005 2222-1,5
-1
-0,5
0
0,5
1Growth accountingGrowth accountingRe
stric
tive
/ Exp
ansio
nary
Net fiscal effort, 2000-2004 data
% of GDP
Ondřej Schneider and Jan Zápal, May 2005Ondřej Schneider and Jan Zápal, May 2005 2323
ConsolidationsConsolidations Definition of consolidationDefinition of consolidation
Successful
Not successful
t t + 1 t + 2 t + 3 t + 4
1 % of GDP in initial year
General government primary budget deficit in % of GDP
Ondřej Schneider and Jan Zápal, May 2005Ondřej Schneider and Jan Zápal, May 2005 2424
ConsolidationsConsolidations
-0,52-0,52-0,16-0,16-0,54-0,54-0,44-0,44-0,50-0,50-4,50-4,500,140,144,624,62Not
Not
succ
essf
ulsu
cces
sful
-0,30-0,30-0,25-0,25-1,58-1,58-1,85-1,85-1,50-1,50-7,70-7,70-2,20-2,205,455,45
Succ
essf
ulSu
cces
sful
Inve
stm
ent
Inve
stm
ent
Subs
idie
sSu
bsid
ies
Socia
l So
cial
trans
fers
trans
fers
Empl
oyee
s’ Em
ploy
ees’
com
pens
atio
nco
mpe
nsat
ion
Colle
ctiv
e Co
llect
ive
cons
umpt
ion
cons
umpt
ion
Tota
l To
tal
expe
nditu
reex
pend
iture
Tota
l To
tal
reve
nue
reve
nue
Defic
it De
ficit
redu
ctio
nre
duct
ion
% of GDP
Ondřej Schneider and Jan Zápal, May 2005Ondřej Schneider and Jan Zápal, May 2005 2525
-0,52-0,52-0,16-0,16-0,54-0,54-0,44-0,44-0,50-0,50-4,50-4,500,140,144,624,62Not
Not
succ
essf
ulsu
cces
sful
-0,30-0,30-0,25-0,25-1,58-1,58-1,85-1,85-1,50-1,50-7,70-7,70-2,20-2,205,455,45
Succ
essf
ulSu
cces
sful
Inve
stm
ent
Inve
stm
ent
Subs
idie
sSu
bsid
ies
Socia
l So
cial
trans
fers
trans
fers
Empl
oyee
s’ Em
ploy
ees’
com
pens
atio
nco
mpe
nsat
ion
Colle
ctiv
e Co
llect
ive
cons
umpt
ion
cons
umpt
ion
Tota
l To
tal
expe
nditu
reex
pend
iture
Tota
l To
tal
reve
nue
reve
nue
Defic
it De
ficit
redu
ctio
nre
duct
ion
Successful consolidations reduce Successful consolidations reduce deficit moredeficit more
ConsolidationsConsolidations
% of GDP
Ondřej Schneider and Jan Zápal, May 2005Ondřej Schneider and Jan Zápal, May 2005 2626
ConsolidationsConsolidations
-0,52-0,52-0,16-0,16-0,54-0,54-0,44-0,44-0,50-0,50-4,50-4,500,140,144,624,62Not
Not
succ
essf
ulsu
cces
sful
-0,30-0,30-0,25-0,25-1,58-1,58-1,85-1,85-1,50-1,50-7,70-7,70-2,20-2,205,455,45
Succ
essf
ulSu
cces
sful
Inve
stm
ent
Inve
stm
ent
Subs
idie
sSu
bsid
ies
Socia
l So
cial
trans
fers
trans
fers
Empl
oyee
s’ Em
ploy
ees’
com
pens
atio
nco
mpe
nsat
ion
Colle
ctiv
e Co
llect
ive
cons
umpt
ion
cons
umpt
ion
Tota
l To
tal
expe
nditu
reex
pend
iture
Tota
l To
tal
reve
nue
reve
nue
Defic
it De
ficit
redu
ctio
nre
duct
ion
Successful consolidations Successful consolidations do not rely on revenue do not rely on revenue increasesincreases
% of GDP
Ondřej Schneider and Jan Zápal, May 2005Ondřej Schneider and Jan Zápal, May 2005 2727
ConsolidationsConsolidations
-0,52-0,52-0,16-0,16-0,54-0,54-0,44-0,44-0,50-0,50-4,50-4,500,140,144,624,62Not
Not
succ
essf
ulsu
cces
sful
-0,30-0,30-0,25-0,25-1,58-1,58-1,85-1,85-1,50-1,50-7,70-7,70-2,20-2,205,455,45
Succ
essf
ulSu
cces
sful
Inve
stm
ent
Inve
stm
ent
Subs
idie
sSu
bsid
ies
Socia
l So
cial
trans
fers
trans
fers
Empl
oyee
s’ Em
ploy
ees’
com
pens
atio
nco
mpe
nsat
ion
Colle
ctiv
e Co
llect
ive
cons
umpt
ion
cons
umpt
ion
Tota
l To
tal
expe
nditu
reex
pend
iture
Tota
l To
tal
reve
nue
reve
nue
Defic
it De
ficit
redu
ctio
nre
duct
ion
Successful Successful consolidations rely on consolidations rely on expenditure cutsexpenditure cuts
% of GDP
Ondřej Schneider and Jan Zápal, May 2005Ondřej Schneider and Jan Zápal, May 2005 2828
-0,52-0,52-0,16-0,16-0,54-0,54-0,44-0,44-0,50-0,50-4,50-4,500,140,144,624,62Not
Not
succ
essf
ulsu
cces
sful
-0,30-0,30-0,25-0,25-1,58-1,58-1,85-1,85-1,50-1,50-7,70-7,70-2,20-2,205,455,45
Succ
essf
ulSu
cces
sful
Inve
stm
ent
Inve
stm
ent
Subs
idie
sSu
bsid
ies
Socia
l So
cial
trans
fers
trans
fers
Empl
oyee
s’ Em
ploy
ees’
com
pens
atio
nco
mpe
nsat
ion
Colle
ctiv
e Co
llect
ive
cons
umpt
ion
cons
umpt
ion
Tota
l To
tal
expe
nditu
reex
pend
iture
Tota
l To
tal
reve
nue
reve
nue
Defic
it De
ficit
redu
ctio
nre
duct
ion
Successful Successful consolidationconsolidation
s rely on s rely on painful painful
expenditure expenditure cutscuts
ConsolidationsConsolidations
% of GDP
Ondřej Schneider and Jan Zápal, May 2005Ondřej Schneider and Jan Zápal, May 2005 2929
-0,52-0,52-0,16-0,16-0,54-0,54-0,44-0,44-0,50-0,50-4,50-4,500,140,144,624,62Not
Not
succ
essf
ulsu
cces
sful
-0,30-0,30-0,25-0,25-1,58-1,58-1,85-1,85-1,50-1,50-7,70-7,70-2,20-2,205,455,45
Succ
essf
ulSu
cces
sful
Inve
stm
ent
Inve
stm
ent
Subs
idie
sSu
bsid
ies
Socia
l So
cial
trans
fers
trans
fers
Empl
oyee
s’ Em
ploy
ees’
com
pens
atio
nco
mpe
nsat
ion
Colle
ctiv
e Co
llect
ive
cons
umpt
ion
cons
umpt
ion
Tota
l To
tal
expe
nditu
reex
pend
iture
Tota
l To
tal
reve
nue
reve
nue
Defic
it De
ficit
redu
ctio
nre
duct
ion
... and less on investment... and less on investment
ConsolidationsConsolidations
% of GDP
Ondřej Schneider and Jan Zápal, May 2005Ondřej Schneider and Jan Zápal, May 2005 3030
Planned consolidationsPlanned consolidations
--11,,2727--33,,535311,,75755,285,28Consolidations Consolidations
post EU post EU accession - accession -
plannedplanned
--00,8,844--55,,4141--00,,535344,,8686Consolidations Consolidations
pre EU pre EU accession - accession -
realizedrealized
Employees’ Employees’ compensationcompensation
Total Total expenditureexpenditure
Total Total revenuerevenue
Deficit Deficit reductionreduction
% of GDP
Ondřej Schneider and Jan Zápal, May 2005Ondřej Schneider and Jan Zápal, May 2005 3131
Planned consolidationsPlanned consolidations
--11,,2727--33,,535311,,75755,285,28Consolidations Consolidations
post EU post EU accession - accession -
plannedplanned
--00,8,844--55,,4141--00,,535344,,8686Consolidations Consolidations
pre EU pre EU accession - accession -
realizedrealized
Employees’ Employees’ compensationcompensation
Total Total expenditureexpenditure
Total Total revenuerevenue
Deficit Deficit reductionreduction
Post EU accession Post EU accession consolidations aim consolidations aim for deeper deficit for deeper deficit reductionreduction
% of GDP
Ondřej Schneider and Jan Zápal, May 2005Ondřej Schneider and Jan Zápal, May 2005 3232
Planned consolidationsPlanned consolidations
--11,,2727--33,,535311,,75755,285,28Consolidations Consolidations
post EU post EU accession - accession -
plannedplanned
--00,8,844--55,,4141--00,,535344,,8686Consolidations Consolidations
pre EU pre EU accession - accession -
realizedrealized
Employees’ Employees’ compensationcompensation
Total Total expenditureexpenditure
Total Total revenuerevenue
Deficit Deficit reductionreduction Post EU Post EU
accession accession consolidations consolidations rely heavily on rely heavily on revenue revenue increasesincreases
% of GDP
Ondřej Schneider and Jan Zápal, May 2005Ondřej Schneider and Jan Zápal, May 2005 3333
--11,,2727--33,,535311,,75755,285,28Consolidations Consolidations
post EU post EU accession - accession -
plannedplanned
--00,8,844--55,,4141--00,,535344,,8686Consolidations Consolidations
pre EU pre EU accession - accession -
realizedrealized
Employees’ Employees’ compensationcompensation
Total Total expenditureexpenditure
Total Total revenuerevenue
Deficit Deficit reductionreduction Post EU Post EU
accession accession consolidations consolidations
rely less on rely less on expenditure expenditure
cutscuts
Planned consolidationsPlanned consolidations
% of GDP
Ondřej Schneider and Jan Zápal, May 2005Ondřej Schneider and Jan Zápal, May 2005 3434
--11,,2727--33,,535311,,75755,285,28Consolidations Consolidations
post EU post EU accession - accession -
plannedplanned
--00,8,844--55,,4141--00,,535344,,8686Consolidations Consolidations
pre EU pre EU accession - accession -
realizedrealized
Employees’ Employees’ compensationcompensation
Total Total expenditureexpenditure
Total Total revenuerevenue
Deficit Deficit reductionreduction
... ... but bureaucrats will but bureaucrats will not be happynot be happy
Planned consolidationsPlanned consolidations
% of GDP
Ondřej Schneider and Jan Zápal, May 2005Ondřej Schneider and Jan Zápal, May 2005 3535
Reform effortsReform efforts NMS differ in their reform effortsNMS differ in their reform efforts Main reforms: pensions, health care, tax, Main reforms: pensions, health care, tax,
fiscal decentralisation, budgetary rules and fiscal decentralisation, budgetary rules and proceduresprocedures
Most reform minded: Estonia, SlovakiaMost reform minded: Estonia, Slovakia
Almost no reforms: Hungary, Czech RepublicAlmost no reforms: Hungary, Czech Republic
Ondřej Schneider and Jan Zápal, May 2005Ondřej Schneider and Jan Zápal, May 2005 3636
Reform effortsReform efforts Pension system reformsPension system reforms
19991999PolandPoland
20052005SlovakiaSlovakia20002000SloveniaSlovenia
--MaltaMalta19981998HungaryHungary20042004LithuaniaLithuania20012001LatviaLatvia20022002EstoniaEstonia--Czech RepublicCzech Republic--CyprusCyprus2. pillar introduction 2. pillar introduction
III. ConclusionIII. Conclusion
Ondřej Schneider and Jan Zápal, May 2005Ondřej Schneider and Jan Zápal, May 2005 3838
Ranking fiscal policiesRanking fiscal policies 14 criteria14 criteria
• Reform effortsReform efforts• Consolidation successConsolidation success• Sustainability gapSustainability gap• Dependency ratiosDependency ratios• EDPEDP• RevisionsRevisions• ... etc.... etc.
Ondřej Schneider and Jan Zápal, May 2005Ondřej Schneider and Jan Zápal, May 2005 3939
Ranking fiscal policiesRanking fiscal policiesSub-index no.1Sub-index no.1
Reform effortsReform efforts Pension reformPension reform Health care Health care
reformreform Fiscal stanceFiscal stance ConsolidationConsolidation
RankRankSlovakiaSlovakia 1010EstoniaEstonia 99SloveniaSlovenia 88LatviaLatvia 77MaltaMalta 66LithuaniaLithuania 55PolandPoland 44CyprusCyprus 33HungaryHungary 22Czech Czech RepublicRepublic
11
Ondřej Schneider and Jan Zápal, May 2005Ondřej Schneider and Jan Zápal, May 2005 4040
Ranking fiscal policiesRanking fiscal policiesSub-index no.2Sub-index no.2
Ageing impactAgeing impact Dependency Dependency
ratioratio FertilityFertility Room to rise taxRoom to rise tax DiscretionDiscretion
RankRankEstoniaEstonia 1010CyprusCyprus 99SlovakiaSlovakia 88LatviaLatvia 77LithuaniaLithuania 66HungaryHungary 55PolandPoland 44SloveniaSlovenia 33MaltaMalta 22Czech Czech RepublicRepublic
11
Ondřej Schneider and Jan Zápal, May 2005Ondřej Schneider and Jan Zápal, May 2005 4141
Ranking fiscal policiesRanking fiscal policiesSub-index no.3Sub-index no.3
Fiscal functionsFiscal functions StabilizationStabilization Fiscal stanceFiscal stance ConsolidationConsolidation
RankRankMaltaMalta 99EstoniaEstonia 99SlovakiaSlovakia 88SloveniaSlovenia 77LithuaniaLithuania 66CyprusCyprus 44LatviaLatvia 44PolandPoland 33Czech Czech RepublicRepublic
22
HungaryHungary 11
Ondřej Schneider and Jan Zápal, May 2005Ondřej Schneider and Jan Zápal, May 2005 4242
Ranking fiscal policiesRanking fiscal policiesSub-index no.4Sub-index no.4
Past behaviorPast behavior EDPEDP RevisionsRevisions SpeedSpeed SustainabilitySustainability Fiscal stanceFiscal stance StabilizationsStabilizations
RankRankEstoniaEstonia 1010LatviaLatvia 77LithuaniaLithuania 77SloveniaSlovenia 77SlovakiaSlovakia 66CyprusCyprus 55HungaryHungary 44MaltaMalta 33PolandPoland 22Czech Czech RepublicRepublic
11
Ondřej Schneider and Jan Zápal, May 2005Ondřej Schneider and Jan Zápal, May 2005 4343
Ranking fiscal policiesRanking fiscal policiesOVERALL INDEXOVERALL INDEX RankRankEstoniaEstonia 1010SlovakiaSlovakia 99LatviaLatvia 88LithuaniaLithuania 77CyprusCyprus 66SloveniaSlovenia 55PolandPoland 44HungaryHungary 33MaltaMalta 22Czech RepublicCzech Republic 11
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