State of Public Finances 2015: Restoring, Consolidating, Growing

Ronnie Downes Deputy Head – Budgeting & Public Expenditures

Senior Budget Officials, Rome – 11 June 2015

Part of continuum of OECD and SBO analysis

Taking Stock of Public Finances

3

• country experiences of fiscal policy management? – Not just “consolidation” and “correction” – Not just 2013-15, but over entire period of the crisis

• challenges? – Not just fiscal – thematic, cross-governmental, ‘budgetary governance’

• collating and presenting country cases • can we go further: “Lessons from the crisis?”

Approach

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• Country questionnaire – Details of scale and nature of consolidation – Broad “budgetary governance” aspects

• Collection and presentation of findings • Distillation of policy messages

Context: OECD Economic Outlook

• Slow, lack-lustre recovery – range of uncertain risks • No easy solution to challenges of fiscal correction

Fiscal balance 2007-2014

Structural fiscal balance 2007-2014

-20

-15

-10

-5

0

5

10

% 2013 2009 2007 2014

Gross debt 2007-2014

Country clusters: a bird’s eye view 2007-2014

Tax-Expenditure split, 2013-14

(i) Low or no consolidation needs

public finances: consolidation2007 2010 2014 needs

Norway

Korea

Turkey –

Switzerland ▌Luxembourg – – ▌New Zealand – – – – ▌▌▌Chile

Denmark – – – ▌Estonia –

Germany – – –

Mexico – – ▌Czech Republic – – – – – – –

(ii) Moderate-to-high consolidation needs

public finances: consolidation2007 2010 2014 needs

Sweden – – ▌▌▌Finland – – – – ▌▌▌Australia – – – – – ▌▌Slovenia – – – – – – – – ▌▌▌Belgium – – – – – – ▌▌▌Canada – – – – – – – ▌▌Ireland – – – – – – ▌▌Austria – – – – – – – – – ▌▌Netherlands – – – – – ▌▌▌Slovak Republic – – – – – ▌▌Poland – – – – – – – – – ▌▌Hungary – – – – – – – – – – – ▌▌

(iii) Very high consolidation needs

public finances: consolidation2007 2010 2014 needs

Japan – – – – – – – – – – – ▌▌▌▌France – – – – – – – – – – ▌▌▌▌United Kingdom – – – – – – – – – – ▌▌▌▌United States – – – – – – – – – – ▌▌▌▌Italy – – – – – – – – – ▌▌▌Greece – – – – – – – – – – – ▌▌▌▌Portugal – – – – – – – – – – ▌▌▌▌Spain – – – – – – – ▌▌▌▌

The moral of this story…?

• Healthy pre-crisis, healthy post-crisis • Weak pre-crisis, weak post-crisis…

• But what is ‘healthy’?

– Refinement of analysis based on structural balance – Is structural balance a ‘real-time’ tool for policy-makers?

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Fiscal rules and fiscal objectives

Euro area / European

Compact

Clear Domestic Rule

Commonwealth model

National model

Hybrid model

Fiscal rules and fiscal objectives

• EU rules – more “binding”, or just more complex? – Is the fiscal path clearly laid out? Tests lie ahead

• Simple rules – Simple results – Switzerland, Germany – Complex results? - Sweden

• “Commonwealth” model – Stabilisation over the cycle – Australia, NZ, Canada – Focal point for medium-term consolidation – UK

• Which comes first: Fiscal Virtue or Fiscal Rules?

Independent Fiscal Institutions

2008 2014

Established IFI role

Limited / new IFI role

No IFI role

Independent Fiscal Institutions - functions

• Technical – e.g. structural fiscal balance

• Policy costings – quality of election-time debate

• Transparency and accountability – esp. parliament

• Fiscal watchdog – counterpart to Fiscal Rules

• Fiscal policy comment, advice and/or critique

– Should an IFI enter into “political territory?”

Protecting economic growth

fiscal stimulus / relaxed stance

fiscal stimulus + structural reforms

structural reforms + fiscal correction

Involving parliaments and citizens

• Half of OECD countries have some progress to report • None (but US) can report “strong engagement”

• Progress includes:-

– “citizen’s budgets” – Web portals – open budget data – Phone / tablet apps – Some civic engagement initiatives

• Note: “citizen literacy” (and “parliament literacy”) seem

to be related to performance-budgeting shortcomings

Sub-national government (SNG) finances

• SNG debt is 13% of GDP (UWA) or 23.8% (WA) – Special chapter of the State of Finances 2015 report

• Major “fiscal risk” issue tackled by ‘federal’ countries – Fiscal rules – Coordination bodies and procedures – Expenditure efficiency initiatives (esp. health sector) – ‘Rainy day funds’ – effective for cyclical stabilisation

• Why not used more at national level?

Human Resource Management – budget impacts

number of HR reforms per country, 2008-2013

Human Resource Management – reform ‘bundles’

average no. of HR reforms per bundle per country, 2008-2013

Public employment ‘downsizing’

changes in Central Public Admin. employment levels, 2008-2013

Qualitative conclusions on HRM reforms

• Austerity-related workplace measures can adversely affect workplace attitudes – Job satisfaction, trust in leadership

• Positive side-effects – More scope for strategic workforce / HRM planning

• Need for balance between – “technical” HRM (cost-reduction, efficiency) and – “behavioural” HRM (motivation, competences,

employee engagement)

Intensity of budget reform

intensive / broad-based reforms

moderate / focused reforms

no significant reform activity

Key areas of budget reform

• Performance-related budgeting • Medium-term frameworks • Spending review • Evaluation focus • Top-down budgeting

• “Outliers” (or “Pioneers”?)

– Welfare spending cap – UK – Gender budgeting - Austria – Inter-generational equity principle - NZ

Preliminary conclusions?

• Counter-cyclical fiscal policy – now an imperative – but the existing tools, incentives seem inadequate

• Fiscal rules: simpler and clearer – but how to instil a culture of compliance, enforcement?

• IFIs are a potential positive factor – but where on the spectrum from technical to critical?

• MTBFs / MTEFs are a potential positive factor – but only as a way of operationalising a fiscal target / rule

• Can national budget practices learn from SNGs? – “Rainy day funds” as a complement to fiscal targets / rules

• Not enough attention to multi-dimensional budget reform – OECD Budgetary Governance Recommendation – a point of reference

• The way to balance growth with fiscal correction is…?

Next steps for State of Public Finances 2015

• Additional analysis on structural balance – Refine the narrative on “country clusters”, cyclicality of fiscal

policy and growth-supportive policies – Possible further analysis on efficacy of fiscal rules

• Additional analysis on tax/spending responses over time • Scope for additional country comments until 30 June

– e.g. update the tables on budget reform, growth strategy • “Policy Conclusions” chapter to be refined in light of SBO

discussion

• Publication: early autumn 2015