Irish Fiscal Advisory Council

The government announced the establishment of the Irish Fiscal Advisory Council (IFAC) on July 7, 2011. The IFAC is mandated to provide an assessment of:
(i) the soundness of official macro-fiscal forecasts;

(ii) the appropriateness of the fiscal stance (including the government’s stated medium-term budgetary objective); and

(iii) the consistency between budgetary plans and fiscal rules (the latter are to be specified in a Fiscal Responsibility Bill by year-end).

The IFAC will submit, at least three times a year, written reports to the Minister for Finance, which will automatically be communicated to the Oireachtas within 24 hours. This effectively means that the IFAC’s reports are published with the Minister having advance notice of their content. There are no restrictions, otherwise, on the Council’s communication with the public.

The IFAC comprises five members, appointed by the Minister for Finance for initial tenures of two to four years. The members will serve in a voluntary capacity, assisted by a small secretariat including full-time economist staff. The Council has been allocated initial funding for the remainder of 2011.

Among the range of fiscal councils in Europe, the IFAC appears most similar to the Swedish Fiscal Policy Council, both in terms of mandate and funding. For instance, the IFAC is charged with assessing, rather than producing, the official macro-fiscal forecasts, which explains its relatively modest resources compared with say, the U.K.’s Office for Budget Responsibility

-Ireland: Third Review Under the Extended Arrangement - Staff Report

We Promise to Obey IMF and adopt a Fiscal Responsibility Law

Ireland's Letter of Intent;

We are preparing institutional reform of the budget system taking into account anticipated reforms of economic governance at the EU level. A reformed Budget Formation Process will be put in place. Furthermore, we will introduce a Fiscal Responsibility Law which will include provision for a medium-term expenditure framework with binding multiannual
ceilings on expenditure in each area by end-July 2011 (structural benchmark). A Budget Advisory Council, to provide an independent assessment of the Government’s budgetary position and forecasts will also be introduced by end-June 2011 (structural benchmark). These important reforms will enhance fiscal credibility and anchor long-term debt sustainability.

CATO Balances the Budget

Downsizing the Government

Sri Lanka Budget 2011

Skimming through Sri Lanka budget speech;

-I undertook a Pre Budget Review of all 25 districts and provincial level work. I wish to share some evidence of progress. Sri Lanka’s poverty which was 15.2 percent in 2006 has declined to 7.6 percent in 2010. Most important development is that poverty in rural areas has declined from 15.7 percent to 7.6 percent while in the estate areas, it has declined from 32 percent to 9.2 percent. We will direct our strategies to reduce poverty below 5 percent within the next 5 years...

-All island unemployment which was 7.2 percent in 2005 has dropped to 5.8
percent by 2009. In addition, earnings of our farmers and the labour force have increased. In 2005, farmers could not secure even Rs.10 for a kilo of paddy they produced. We managed to maintain it in the range of Rs. 24 – 28 per kilo.

-Our country is ranked first in the world in the health and survival indicators, sixth in the political empowerment indicators and among the top 20 in the world in gender equality indicators as well as a location attractive for outsourcing. Our performance in education and health is above average.

-The export potential of value added, branded exports has been estimated in excess of US$ 5 billion over the medium term.

-Tourism should be a billion dollar business. Although
tourist arrivals have picked up and expected to be around 600,000 this year, earnings from tourism shows only a moderate increase. This is largely because the industry as a whole is underpriced. Therefore, I propose to impose a levy of US$ 20 per bed on all five star hotels which charge a room rate that is less than US$ 125 per night from January 2011 in order to compel all hotels to charge better rates.

-We must get ready to facilitate 2.5 million high spending tourists by 2016. Tourists must see our richness and diversity. Over the next few years the capacity of this industry need to be tripled from the current level of around 15,000 rooms.

-Sri Lanka is fast emerging as a niche global destination attracting outsourcing of IT and BPO services. It has become the fifth largest exporter. At present, the country is ranked seventh among the 50 best emerging global cities that attract outsourcing...The Government has launched various programs to increase ICT literacy to 75 percent by 2016.Our aim is to make this industry a US$ 2 billion export activity by 2016.

-our key goal in this decade of development is to improve our productivity by 5-6 percent per annum.

-SriLankan Airline and Mihin Lanka will be expanded with new aircrafts to increase the fleet to 30 by 2012. I propose to exempt SriLankan and Mihin Lanka from all taxes for a period of 10 years to strengthen the two enterprise

-nearly 3 million Sri Lankans are engaged in overseas employment.
The remittance income to the country is expected to be nearly US$ 4 billion this year. However, there is no proper social security system for these people when they reach old age. Therefore, I propose to set up an Overseas Employees’ Pension Fund (OEPF).

-My attempt in this Budget is to sustain our achievements and manage future risks in our economy. We have achieved an economic growth rate of near 8 percent. Inflation has stabilized at around 6 percent. Poverty has come down to 7.6 percent and unemployment to 5 percent. These are all achievements within 5 years. This argues well in favour of our development strategy. The Central Bank has built up US$7 billion reserves. Our banking system has a further US$ 1.5 billion. So the economy has sufficient external assets. All these are achievements that all of us must be proud of. A low rate of inflation of around 5-6 percent, economic growth rate of around 7-8 percent and a society free from poverty are our medium term targets.

-raising income beyond US$ 4,000 per capita is not the only objective in our strategy. People need equitable opportunities to enjoy such high income.

For Discussion: How do you rate this budget speech?

Related:
Budget Speech 2011

2011 budget to introduce fiscal reforms

"The 7.5 percent budget deficit target should be achieved comfortably
as the expenditure would be the same like last year and the revenue is
picking up," Jayasundera said. He said economic growth would be close
to 7 percent, as earlier forecast.

"The reserves are more than the IMF target. I am optimistic of the IMF
releasing both the third and fourth tranche together," he said.

Jayasundara said he expects tourism revenue to grow to $1 billion
annually from its present $400 million, and foreign direct investment
to boom to $1.5-2 billion annually from around $600 million now.

He said foreign investment inflows should put upward pressure on the
rupee currency. "I see a higher probability for appreciation than
depreciation," he said.

The six areas where the budget speech has to deliver

Core public goods are international relations, defence, police and judiciary. These are the foundations of civilised existence. They are pure public goods in that everyone benefits when these are done properly. When law and order conditions are good, a new born child benefits from these without imposing any new cost upon the country.

You Too Can Fix the Budget

Budget Puzzle: You Fix the Budget

O.K., You Fix the Budget

Fiscal Space

Interesting staff policy note from the Fund on Fiscal Space.

Selling Reforms- Ukraine case

In my view, the case rests on three pillars.

First, Ukrainian leaders have to explain to the citizens why the pre-crisis economic model was not sustainable and what the risks are of delaying adjustment. They need to explain that reforms are needed to avoid loading future generations with debts they cannot repay. Ukraine's public debt ratio was very low before the crisis at 12% of GDP. It will reach close to 40% by the end of 2010. Unless a plan is presented that stops the increase, financing the current deficit will be impossible. The result of inaction would be further devaluation, higher inflation, and further strains on the banking sector. The costs of inorderly adjustment on the common man through reduced real wages and rising unemployment would be much higher than the increases in the monthly utility bill.

Second, to the population at large, reforms need to be presented as a balance of sacrifice. You cannot ask citizens to pay more for utilities and to accept a reduction in pension benefits, if parliamentarians, judges, military officers and high ranking officials still benefit from categorical privileges, early retirement schemes, free housing and many other benefits. Expenditure cuts, which are necessary, are also a hard sell when tax loopholes persist, be it through VAT exemptions that have inflated producer profits but failed to keep end-user prices down, double taxation treaties (such as the one with Cyprus) that facilitate profit tax avoidance, or the Simplified Tax System for individual entrepreneurs that creates inequities across tax payers and erodes the tax base. More generally, a credible plan to improve governance and reduce corruption is key if reforms are to overcome their bad image.

Third, the vulnerable need to receive reassurance that they will be protected. Ukraine has the infrastructure and the resources to deliver targeted social assistance to the poor. However, existing well targeted programs remain underfunded, while poorly targeted benefits gobble up the bulk of social transfer spending. Reallocating funds from poorly to well-targeted programs will allow the poor to be protected at no fiscal cost.

-Selling reforms: On the need for balance in achieving the necessary fiscal consolidation in Ukraine

Efficiency what?

Efficiency savings: in recent years there has been a concerted drive to reduce the costs in commodities like electricity, to professionalise property management and to make more use of shared services. Here there is a question about control – how far should control be centralised or devolved
to best make efficiency savings. Striking the right balance is difficult, but
possible, as the Institute’s recent work on IT makes clear. The second question is about how such savings translate into cash coming out of the system – to be credible it must be clear which budgets have been reduced in anticipation of these savings, and therefore which ones have to make up any shortfall should the projected efficiencies not be realised.

Source: Undertaking a fiscal consolidation: A guide to action. Institute for Government

Related:
Mark Robsinson reviews the report;

Politics are also the reason why the real tough work required for a successful fiscal consolidation usually takes within the first two budgets after a change of government. If this doesn’t happen, the sense of urgency amongst voters dissipates. Political support for consolidation falls away rapidly, with the electorate falling prey to what the London-based Institute for Government calls – in its interesting recent report Undertaking a Fiscal Consolidation – “consolidation fatigue”.

Why is growth stronger in expenditure-driven corrections?

Interesting recent paper;

Goldman Sachs Global Economics, Commodities and Strategy Research- Limiting the Fall-Out from Fiscal Adjustment (via Irish Economy blog)

In a review of every major fiscal correction in the OECD since 1975, we find that decisive budgetary adjustments that have focused on reducing government expenditure have (i) been successful in correcting fiscal imbalances; (ii) typically boosted growth; and (iii) resulted in significant bond and equity market outperformance. Tax-driven fiscal adjustments, by contrast, typically fail to correct fiscal imbalances and are damaging for growth....

In a landmark paper in the mid-1990s, the economists Alberto Alesina and Roberto Perotti found that economic growth fared much better during large fiscal corrections that were (i) decisive rather than gradual and (ii) relied on reductions in current government spending, rather than cuts in public-sector investment or higher taxes.

Creating More Fiscal Space in Good Times

One of the lessons from recent crisis, according to the Fund;

A key lesson from the crisis is the desirability of fiscal space to run larger fiscal deficits when needed. There is an analogy here between the need for more fiscal space and the need for more nominal interest rate room, argued earlier. Had governments had more room to cut interest rates and to adopt a more expansionary fiscal stance, they would have been better able to fight the crisis. Going forward, the required degree of fiscal adjustment (after the recovery is securely under way) will be formidable, in light of the need to reduce debt against the background of aging-related challenges in pensions and health care. Still, the lesson from the crisis is clearly that target debt levels should be lower than those observed before the crisis. The policy implications for the next decade or two are that, when cyclical conditions permit, major fiscal adjustment is necessary and, should economic growth recover rapidly, it should be used to reduce debt-to-GDP ratios substantially, rather than to finance expenditure increases or tax cuts.

The recipe to create additional fiscal space in the years ahead and to ensure that economic booms translate into improved fiscal positions rather than procyclical fiscal stimulus is not new, but it acquires greater relevance as a result of the crisis. Medium-term fiscal frameworks, credible commitments to reducing debt-to-GDP ratios, and fiscal rules (with escape clauses for recessions) can all help in this regard. Similarly, expenditure frameworks based on long-term revenue assessments help limit spending increases during booms. And eliminating explicit revenue earmarking for prespecified budget purposes would avoid automatic expenditure cuts when revenues fall. A further challenge, as governments come under greater pressure to display improved deficit and debt data and are tempted to provide support to ailing sectors through guarantees or off-budget operations, is to ensure that all public sector operations are transparently reflected in fiscal data and that well-designed budget processes reduce policymakers’ incentives to postpone needed adjustment.

Related;
The Case For Higher Inflation

I would add, however, that there’s another case for a higher inflation rate — an argument made most forcefully by Akerlof, Dickens, and Perry (pdf). It goes like this: even in the long run, it’s really, really hard to cut nominal wages. Yet when you have very low inflation, getting relative wages right would require that a significant number of workers take wage cuts. So having a somewhat higher inflation rate would lead to lower unemployment, not just temporarily, but on a sustained basis.

Where Does the Public Sector End and the Private Sector Begin?

Where Does the Public Sector End and the Private Sector Begin?;

Summary: The boundary between the public and private sectors can be defined on the basis of ownership of institutional units. Nonmarket government-owned entities and corporations that are owned or controlled by government units belong to the public sector. “Economic ownership” is more important than majority ownership. Joint ventures, public-private partnerships, and social insurance funds (including for public employees) can be unambiguously allocated to the public or private sector on the basis of international public sector accounting standards. Boundary problems within the public sector are just as acute as those between the public and private sectors, mainly because of ambiguities in distinguishing “market” from “nonmarket” activities.

Assorted Fiscal

Fiscal Reforms That Work

Public Investment and Public-Private Partnerships

Guidelines for Fiscal Adjustment

Fiscal Adjustment for Stability and Growth

Unproductive Public Expenditures: A Pragmatic Approach to Policy Analysis

Whither Intergenerational Equity

via Mark J. Perry

Model Fiscal Rules

The empirical and theoretical literature has identified the key characteristics of a model fiscal rule. The rule should be as follows:
• Well-defined: indicator, institutional coverage, specific escape clauses:
- Overall balance preferred over current balances as investment expenditure suffers from both conceptual and measurement weaknesses;
-Public sector rather than general government (to include off-budget operations and the cost of quasi-fiscal activities of public enterprises; however, it may be desirable to exclude the social security system as assets cover future contingent liabilities).
• Transparent: accounting, forecasting, and institutional arrangements.
• Adequate: contain inflation (limits on borrowing from the central bank), reduce remaining external vulnerabilities (limits on budget deficit), sustainability of public-debt-to-GDP ratio (limits on government debt, or a minimum primary surplus).
• Consistent: criteria need to be internally consistent and with other macroeconomic or policy rules (inflation targeting).
• Simple: appeal to legislature and public.
• Flexible: accommodate external shocks by allowing room for automatic stabilizers and discretionary policies to work (i.e., use of structural primary surplus rule or balanced-budget rules over a medium-term horizon).
• Enforceable: constitutional or legal statutes, perhaps with penalties; independent fiscal councils.
• Efficient: the rule should prevent structural one-off measures (frequent adjustment in tax rates); a fiscal rule should be a catalyst for fiscal reforms that ensure sustainability.

-FISCAL POLICY DURING DOWNTURNS AND THE PROS AND CONS OF ALTERNATIVE FISCAL RULES, chapter in
Philippines: Selected Issues

Tanzania Civil Service reform experience

Reform efforts in this area started in 1991 with the Civil Service Reform Program (CSRP). This program, implemented between 1991 and 1999, was designed to reduce the size of both the civil service and the wage bill to contain costs while strengthening managerial capacity and improving the organizational structure. The main achievements were a decline in the number of central government personnel from a peak of 355,000 in 1992 to 264,000 by 1998/99 (Figure 11); better control over employment levels using a personnel database and a computerized payroll system (the wage bill exceeded budget by 40 percent in 1994 but by only 2 percent in 1999); and recomposition of the aggregate wage bill by rationalizing and decompressing the pay structure and consolidating allowances into basic salaries.

The next stage of reform, the Public Service Reform Program (PSRP), spanned 2000–07. The focus changed to improving delivery of public services. While improvements were made in some areas, progress was slow. Positive areas included the introduction of a performance management system and more decentralized policy making. However, poor service delivery persists in many areas, accountability remains weak, and there are limited value-for-money assessments. The PSRP sought to adjust salary scales to attract and retain qualified staff. For this purpose, it incorporated the medium-term pay policy, which had been adopted by the government in 1999, aimed at gradually increasing civil servant remuneration over the following five years, as well as enhancing the salaries of key professional, technical, and managerial personnel. The policy envisaged a gradual increase in the wage bill of about half a percentage point of GDP by 2003/04, together with a further decline in the size of the civil service. Its implementation was uneven, but the significant wage increase introduced with the 2006/07 budget (reflecting in part a consolidation of allowances previously recorded separately from wages) put remunerations close to the targeted level. Even so, retaining quality staff remains challenging. A further substantial salary increase was granted in 2008. At the same time, the wage bill increased by more than originally envisaged, as the government recalibrated its employment strategy to achieve the MDGs and substantially expanded the hiring of education and health workers.

To enhance performance and accountability and better align its operations with MKUKUTA, a second phase of the PSRP has recently been launched. It emphasizes building the capacity of government entities to formulate policies; decentralizing human resources processes and systems; retaining quality staff through adequate remuneration and incentives; institutionalizing performance management systems; and increasing public sector accountability. The government is still aggressively hiring teachers and health care workers to address pressing social needs. A revised Medium Term Pay Policy is under preparation.

-Tanzania: The Story of an African Transition

The Role for Counter-Cyclical Fiscal Policy in Singapore

The Role for Counter-Cyclical Fiscal Policy in Singapore

Summary: Singapore's policymakers have often used fiscal policy as a counter-cyclical tool. Empirical results based on a structural autoregression framework suggest that fiscal policy can be used for demand management, although the impact may be somewhat short lived. The short-lived impact could reflect a number of factors, including the absence of credit-constrained economic agents, a high propensity to save among households, monetary focus on price stability, and leakages due to economic openness. Notwithstanding, fiscal policy should still play a key stabilizing role in the current downturn given the downside risks to growth and the vast fiscal space.

The big correction in Latvia

An interesting Box from IMF's Republic of Latvia: Request for Stand-By Arrangement - Staff Report;

Latvia’s consolidation is relatively large. With the general government’s structural primary balance improving by 14 percent of GDP between 2009 (constant policy scenario) and 2012, Latvia’s fiscal consolidation plans would fall among the largest consolidation episodes in comparable countries during the past two decades, along with Denmark, Finland, Greece, New Zealand, or Sweden. Latvia’s consolidation is twice larger than Lithuania’s 1999-2003 adjustment motivated by EU accession. Similar results are obtained if one focuses on the primary balance of the central government.

The consolidation will need to be sustained over 3-5 years. Successful consolidations tend to be gradual, spanning over a period of time that allows savings from structural reforms to materialize. Long consolidation episodes include Japan in the 1980’s and Finland, New Zealand, Sweden, the United Kingdom and the United States in the 1990’s. Latvia’s consolidation is front-loaded, with three quarter of the structural adjustment happening in the first year versus 40 percent on average in comparable countries. However, articulated around the medium-term objective of meeting the Euro adoption criteria, Latvia’s consolidation plan is expected to last three to five years, with savings from major structural reforms materializing progressively over 2010-2013.

Latvia’s approach is expenditure heavy yet more balanced than the average. The composition of consolidations is a crucial determinant of their success. Expenditure-based consolidations tend to be associated with deeper structural reforms increasing government productivity—more important than its size in ensuring sustainable growth and development—and to be eventually more successful. Revenue-based adjustments have a greater risk of reversal in industrial economies, but can be sustained when associated with tax policy or administration reforms, particularly in emerging market and developing countries. Latvia’s consolidation is relatively expenditure-heavy, with 60 percent of the adjustment coming from expenditure cuts, but more balanced than the average.

Clear medium-term objectives, strong political leadership and mobilization of public support will be key. Consolidations tend to be more successful when perceived by markets and the population at large as durable and sustainable. In many European countries in the 1990s, consolidations were justified by the objective of the Euro adoption, which is also the case for Latvia. On the other hand, most consolidations tend to be led by new governments and under a broad consensus. Latvia’s Parliamentary elections in 2010 represent a risk.

Selected sources: “Experience with Large Fiscal Adjustments”, Occasional Paper No. 246; “Fiscal consolidation: Lessons from past experiences”, OECD, 2007; “Fiscal Adjustments: Determinants and Macroeconomic Consequences”, IMF WP 07/178, Kumar et al., 2007.