Economic  Policy  #03   Fiscal  Policy   Fiscal  Policy   •  Concepts  and  measurements   •  Theories:  keynesian  vs.  neo-­‐classical  view   •  FP  during  crisis   •  Public  debt   –  measurement   –  debt  and  deficit  dynamics   –  how  to  reduce  the  debt  burden   •  Fiscal  rules   EP#03  Fiscal  Policy   2   Concepts  and  measurements  #1   Fiscal  policy  (FP)  contains  decisions  regarding  taxes  and   public  spending.     The  noHon  of  FP  usually  refers  to  its  stabiliza(on  func(on  –   changes  in  taxes  and  public  expenditures  for  purposes  of   dampening  the  fluctuaHons  of  the  economic  cycle  –   theoreHcally  inspired  by  J.M.  Keynes.     Toward  the  end  of  the  20th  century  theoreHcal  and   empirical  doubts  surfaced  about  the  effecHveness  of  FP.     Now  in  many  countries  the  key  point  of  FP  is  public  debt   sustainability.       EP#03  Fiscal  Policy   3   EP#03  Fiscal  Policy   4   CS.  Public  expenditures  in  various   countries   EP#03  Fiscal  Policy   5  ! 4! GDP – reports the second best result behind Slovakia among V4 countries. Moreover, aggregated outlays for the compensation of general government employees are the lowest ones among compared countries. However, the ratio of mandatory expenditures on total general government expenditures is stable and very high, which lowers a possibility of the Czech public finance to react on macroeconomic shocks. Table 1: International comparison – public expenditures (2006 – 2014) Public expenditures / GDP 2006 2007 2008 2009 2010 2011 2012 2013 2014 EU28 45,6 44,9 46,5 50,3 50,0 48,5 49,0 48,6 48,1 EA 46,0 45,3 46,5 50,6 50,5 49,0 49,6 49,5 49,1 Czech Republic 40,8 40,0 40,2 43,6 43,0 42,4 43,8 41,9 42,0 Germany 44,6 42,7 43,5 47,4 47,2 44,6 44,2 44,3 43,9 Hungary 51,9 50,2 48,9 50,8 49,8 49,9 48,7 49,8 50,1 Poland 44,7 43,1 44,4 45,2 45,9 43,9 42,9 42,2 41,8 Slovakia 38,5 36,1 36,7 43,8 42,0 40,6 40,2 41,0 41,8 Note: ESA methodology. Data source: Eurostat. The structure of general government revenues of the Czech Republic is displayed in the graph number 3. The highest volume of revenues (37 %) is generated by social Concepts  and  measurements  #2   Public  budget  is  a  document  that  specifies  the  origin  and   volume  of  both  income  ("receipts")  and  intended  spending   over  a  certain  horizon  (usually  a  year).       •  Receipts:  income  from  direct  and  indirect  taxaHon,  social   contribuHons,  income  from  public  assets  or  from   provision  of  public  services  and,  possibly,  disposal  of   public  assets.   •  Spending:  defense,  police,  jusHce,  educaHon,  research,   support  to  the  economy,  social  policy,  health,  foreign   policy,  development  assistance,  etc.     •  Budgets  for  different  levels  of  government,  ciHes  to   central  government.       EP#03  Fiscal  Policy   6   Various  degrees  of  centralizaHon   Fig.  RaHo  of  local  to  general  government  expenses  and  revenues   Various degrees of centralization 55 65 75 ShareinExpenses DK ESP SWZ CAN Ratio of local to general government expenses and revenues (in %) 4 5 15 25 35 45 5 15 25 35 45 55 65 75 ShareinExpenses Sharein Revenues Source: InternationalMonetary Fund,Government Finance Statistics. AUS GR NZ LUX PT BEL AUT IRL FR NOR CZ SWE ICL HUN UK POL IT FIN NL GER Bénassy-Quéré, Economic Policy, 2012-13 Source:  Bénassy-­‐Quéré  (2012)   EP#03  Fiscal  Policy   7   EP#03  Fiscal  Policy   8   Budget  imbalance   Budget  balance  =  income  –  expenditures:  surplus  (+)  or   deficit  (-­‐)   •  Financial  (overall)  balance  (=  net  lending):  including  net   interest  payments   •  Primary  balance:  excluding  net  interest  payments   •  Cyclically-­‐adjusted  (structural)  balance:  excluding   cyclical  balance  =>  FP  stance   •  Underlying  (structural)  fiscal  balance:  cyclically  adjusted   fiscal  deficits  adjusted  for  one-­‐off  operaHons     EP#03  Fiscal  Policy   9   CS.  Public  deficits  and  GDP  growth  in   the  Czech  Republic   EP#03  Fiscal  Policy   10   would follow a colloquium of distinguished institutions from public sector (ministries, national bank…), private sector (banks, consultant firms) and academia (universities), both domestic one and foreign one. Graph 5: Fiscal rule proposal Data source: Ministry of Finance and the Czech Statistical Office, Czech Republic. On the graph above, there is a GDP growth (dark curve) and the real deficit of the Czech public finance (red columns). Especially between 2002 and 2007, the fiscal policy was not respecting the economic cycle. The implementation of proposed fiscal EP#03  Fiscal  Policy   11   BOX Změny cyklického a strukturálního deficitu v zemích OECD 20 Zdroj: Burda a Wyplosz (2013) Fig.  Changes  from  2008  to  2010  in  actual  and  cyclically  adjusted  budget  balances,   20  OECD  countries  (%  of  GDP)   EP#03  Fiscal  Policy   12   Keynesian  view   •  Keynesian  mul?plier     •  LimitaHons:   –  slope  of  supply  curve     –  crowding-­‐out  (interest  rate,  exchange  rate)     –  Ricardian  equivalence     The Keynesian view • Keynesian multiplier • Limitations Price Effect of an expansionary fiscal policy 27 • Limitations – Slope of supply curve – Crowding-out (interest rate, exchange rate) – Ricardian equivalence Production Demand Supply E1 E2 Bénassy-Quéré, Economic Policy, 2012-13 EP#03  Fiscal  Policy   13   Neo-­‐classical  view   •  complete  crowding  out  or  ricardian  equivalence   •  supply  rigidity:  price  flexibility,    raHonal  expectaHons   The Neo-classical view rowding out (vertical or flexible exchange erfect capital r ricardian e price supply e AND/OR dity: price flexibility, pectations. production demand The Keynesian view n multiplier ns Price Effect of an expansionary fiscal policy ns f supply curve ng-out (interest rate, ge rate) an equivalence Production Demand Supply E1 E2 EP#03  Fiscal  Policy   14   Supply-­‐side  effects  of  FP   •  Directs:  posiHve  for  (most)  tax  cuts,  negaHve  for  (some)   spending  cuts     •  Permanent  spending  cuts  also  signal  lower  taxes  in  the   future,  thereby  they  have  supply-­‐side  effects     •  ComposiHon  of  fiscal  adjustments  majers   upply-side effects of fiscal policies cts: positive for (most) tax negative for (some) ding cuts price supply Supply-side effects of a tax cut manent spending cuts also al lower taxes in the re, thereby they have ply-side effects mposition of fiscal stments matter price output demand supply EP#03  Fiscal  Policy   15   DiscreHonary  FP  vs.  automaHc   stabilizers   Discre?onary  FP  includes  changes  in  government  spending   and  taxaHon  that  need  specific  approval  (usually  requires   legislaHve  acHon)  =>  risk  of  Hme  lags.     Automa?c  stabilizers  increase  (decrease)  budget  deficits   during  Hmes  of  recessions  (booms)  without  specific  new   legislaHon  =>  no  Hme  lags:  e.g.  unemployment  insurance   program,  progressive  income  taxes.   EP#03  Fiscal  Policy   16   FP  during  the  2008-­‐09  crisis   •  Arguments  in  favor  of  2009  sHmulus:   –  risk  of  depression   –  ineffecHveness  of  monetary  policy  (transmission  through   financial  system  clogged,  in  addiHon  to  zero  bound)   •  ExcepHonal  effecHveness  of  fiscal  policy  because  of:   –  general  excess  supply   –  excess  savings  and  flight  to  safety  resulHng  in  ultra-­‐low   bond  rates   –  focus  of  agents  on  short-­‐term  horizon,  credit  constraints   –  symmetric  character  of  shocks,  therefore  gains  from   coordinated  acHon   EP#03  Fiscal  Policy   17   to  be  conHnued…   EP#03  Fiscal  Policy   18