Quote of the Day- On the Quality of Budget Speeches

The budget speech was additionally turned into a management tool by Yashwant Sinha. Every sentence of the budget speech is put into a spreadsheet, responsibility for implementation is assigned, and quarterly reports are produced about progress of implementation. Through this, the budget speech has become the workplan of government for the year. What gets announced in the budget speech tends to get done. Few things get done in the year other than what is announced in the budget speech.

- Ajah Shah, Which type of budget speech is this?

How to Praise a Finance Minister

"The observed resilience of the Mauritian economy is a testimony to the positive impact of the reforms carried out since 2006, which favoured economic diversification and adaptation at the same time that it created fiscal space for expansionary macroeconomic policies and other innovative, timely, temporary and targeted responses to cushion the crisis impact".

-World Bank, Mr Fabiano Bastos, quoted in the Budget Speech

The art of cutting budgets

Governor Corzine Discusses New Jersey State Budget Proposals (podcast)

Related;
The FY 2010 Budget Address;

The global recession took a further toll on our revenues, so we have cut almost $4 billion in baseline spending from this year's budget. But before we cut, we made a value-based judgment to take some things off the table...

Now, let's lay out the numbers in basic terms. This fiscal year, which runs through June, the state will take in about $30 billion - about $3 billion less than we originally planned. In the coming FY 2010, we're projecting base revenues of only $28.5 billion.

Even with important help from the federal government -- the declining revenue meant we had to make deep cuts in spending to balance the 2010 budget. With respect to budget cuts, there are two ways to compare the numbers: in absolute terms - as I just outlined - or in terms that reflect baseline growth. In absolute terms, we need to cut $3 billion to bring this budget into balance. In baseline growth, we need to find a "staggering" $7 billion in spending and revenue solutions. As you all can appreciate, baseline growth is a more practical measure of the state's budget gap.

Baseline numbers include increases that are mandated by statute, contract, and the courts - contractual wage increases, for instance. A baseline comparison also includes increases in health care and energy costs, supplemental school funding, debt service and court-mandated actions that increase child-welfare expenses.

A family sitting around the kitchen table understands the real pressures in baseline growth. Their health care costs are going up every year their energy costs soared in 2009 and the cost of nearly everything else - from food, to child care, to college tuition - continues to rise. The state budget is no different....

That still leaves a $5 billion gap in the budget, which we have attacked with $4 billion in cuts to programs, rebates, pension payments, and state worker salaries, In all, over 850 line items in the budget have been cut. The largest cuts will come from reductions in a scaling back of homestead rebates by $500 million, and reducing by another $500 million payments to the pension fund....

With the talent, the work ethic, and the strong character of our people, New Jersey will lead the way. I believe in our common desire to do what is right. I hope and expect to see that spirit reflected in the final budget, a budget that values children, seniors, and the most vulnerable, and asks a little more from the rest of us.

For Discussion: What do you think of the budget speech? What does he mean by baseline growth?

How do you rate a Finance Minister?

Finance Minster Dr Ezra Suruma has been honoured as the best finance minister in Africa for the year 2008 by The Banker magazine.

The Banker, established in 1926, is a UK based global intelligence financial magazine that investigates, exposes and passes expert comment on critical developments in the global banking sector. The Banker is published monthly and its ninth Year of the Awards were sponsored by Qatar Financial Centre.

An article in the January edition of the magazine described Dr Suruma as a minister who has overseen a year of strong growth in the face of a series of economic head winds....

Acting Secretary to the treasury Keith Muhakanizi said - at the award giving ceremony on February 9 at Serena Hotel - that Uganda had a consistent economic growth but came out to perform strongly in 2007/08.
“Our real market GDP shot to a record 9.8 per cent fuelled by a robust expansion in the construction, telecom and services sector,” he said...

Mr Muhakanizi said this had been complimented with cautious micro-economic policies rated the best in the world and opting for a private sector led economy that granted Uganda a global B+ placing it among the best economies in Africa...

The criterion for the assessment of the Bank of the Year Awards is conducted among 148 countries and the result is built around detailed questionnaires provided by banks.

This year 740 banks from 150 countries submitted questionnaires to Financial Times Magazine. Peter said their global judging team reflects not only on the latest results, growth rates and performance data over the period contained in the questionnaires but also analyses all available material examining technology, acquisitions and key strategic developments.

According to the Magazine, Uganda scored highly having kept inflation under 7 per cent from 6.8 per cent in 2007. Banks remained well capitalised with an average ratio of liquid assets to deposits of 51 per cent - which saw foreign banks flock into the market - and deposits increased by 26 per cent.

-Suruma named Africa’s finance minister

via IMF's PFM blog.

For Discussion: How do you rate a finance minister? By GDP growth, fiscal space, public debt? I say have a look at the budget speech.

From Suruma's latest budget speech;

Mr. Speaker, I have now come to the end of this year's budget speech. I have put on record Uganda's rate of economic growth which averaged 8.9 percent in real terms in the last three years (10.3 percent in Financial Year 2005/06, 7.4 percent in Financial Year 2006/07 and 8.9 percent in Financial Year 2007/08). I am sure that you Mr. Speaker and honorable members deserve to be congratulated that during your tenure of office our country registered the highest rate of economic growth ever recorded in our history….

Mr. Speaker, the world has marveled for long at the achievements of the Asian tigers.. I hope you will permit me Mr. Speaker to express the hope that the world will soon recognize that there are also .African tigers. and Uganda is certainly one of them....

Mr. Speaker, I would have wished to do better. Indeed during the past several months I have had to bear and absorb attacks and angry protests of many Members of Parliament, Ministers and Heads of Departments who wanted and deserved more money than they got. I am sure we all recognize and understand that this is not a personal matter. These are the real sacrifices we must collectively bear to transform Uganda from poverty to prosperity. I therefore want to ask for forgiveness and understanding from so many people whose requests I have not been able to address adequately in this budget. I ask you to be patient and remember that even in our homes we cannot provide for every single need and desire that our families may want.

The Stimulus in Brief

President Obama delivers Your Weekly Address;

No one policy or program will solve the challenges we face right now, nor will this crisis recede in a short period of time. But if we act now and act boldly; if we start rewarding hard work and responsibility once more; if we act as citizens and not partisans and begin again the work of remaking America, then I have faith that we will emerge from this trying time even stronger and more prosperous than we were before.

Related;
www.recovery.gov

Barack Obama’s Prose Style

Three Questions

1. In assessing risk in financial models, how effective are current modeling methodologies in incorporating model error or model uncertainty? Specifically, have these models appropriately captured the implications for underlying statistical relationships of the impacts of aggregate shocks?
2. Do we have adequate tools and methodologies to stress test these models? This is particularly challenging in the area of consumer credit portfolios and their dependence on expected loss distributions.
3. How should we evaluate the trade-off, if any, between undertaking policy interventions aimed at combating short-run financial instability and the potential financial market distortions and moral hazard that could result from those interventions?

-Importance of Financial Econometrics for Financial Innovation and Financial Stability

Assorted Research

Inflation Targeting and Real Exchange Rates in Emerging Markets;

We examine the inflation targeting (IT) experiences of emerging market economies, focusing especially on the roles of the real exchange rate and the distinction between commodity and non-commodity exporting nations. In the context of a simple empirical model, estimated with panel data for 17 emerging markets using both IT and non-IT observations, we find a significant and stable response running from inflation to policy interest rates in emerging markets that are following publically announced IT policies. By contrast, central banks respond much less to inflation in non-IT regimes. IT emerging markets follow a "mixed IT strategy" whereby both inflation and real exchange rates are important determinants of policy interest rates. The response to real exchange rates is much stronger in non-IT countries, however, suggesting that policymakers are more constrained in the IT regime--they are attempting to simultaneously target both inflation and real exchange rates and these objectives are not always consistent. We also find that the response to real exchange rates is strongest in those countries following IT policies that are relatively intensive in exporting basic commodities. We present a simple model that explains this empirical result.

What is a Company Really Worth? Intangible Capital and the "Market to Book Value" Puzzle

"What is a company really worth?" is a question asked repeatedly during the recent financial crisis. Attention has been focused on short-term valuation issues, like the "mark-to-market" controversy. Sorting out these issues is complicated by the fact that the market puts a value on shareholder equity that is consistently more than twice the reported book value of a company. Numerous observers have pointed to the absence of most intangible assets from financial statements as an important source of this puzzle. We use Compustat financial data for 617 R&D intensive firms to test this possibility. We find that conventional book value alone explains only 31 percent of the market capitalization of these firms in 2006, and that this increases to 75 percent when our estimates of intangible capital are included. The debt-equity ratio also falls from 1.46 to 0.61. These findings suggest that financial reports tend to substantially understate the long-run intrinsic value of corporate America.

Bankruptcy: Past Puzzles, Recent Reforms, and the Mortgage Crisis

Improving Educational Outcomes for Poor Children


Dealing with the Financial Turmoil: Contingent Risks, Policy challenges, and the Role of the IMF

Volcker's remarks at World Bank Integrity Day

Paul Volcker at World Bank;

And my experience in writing reports is the connection between writing a report, reaching a conclusion, and having some implementation that is never very clear--until I came to the World Bank. Now, I'd like to think that this report, which really does read fairly well, that we produced a little more than a year ago has gone so far in its implementation in the Bank.

I was struck particularly by Bob's emphasis on trust, which is part of my usual speeches in a somewhat different context, because trust is important in this area, but it's important, and we are reminded so much, in financial markets now. I never thought I would live to see the day when the biggest banks in the world were unable or unwilling to deal with each other for more than overnight and sometimes not even overnight for some feeling of distrust as to what might happen.

And it's not just distrust in financial markets or the private financial markets that in some ways is so striking and has so complicated this current situation. What is really disturbing is the sense of distrust in governments, and I will give you an illustration of that.

When the United States Government says it will protect this or that kind of company, or it will protect these or those securities, it doesn't bring forth a response in terms of trading or in terms of pricing that you might expect if they really trusted the statement.

What do we see here? We see an erosion, I think, in trust in government, and I'm talking now of the United States Government, but it's probably applicable more broadly. There has been survey after survey in the United States, and one of these surveys asks the same question over the decades, and one of the standing questions is: Do you trust your government to do the right thing most of the time? That doesn't sound like the most difficult test to make--do the right thing most of the time, like 51 percent. The answer is 20 percent trust the government to do the right thing most of the time. Somebody told me the latest annual survey showed something less than 20 percent. That is what we are suffering from, I think, in a wider context than just corruption.

But let me say that a couple nights ago, Jim Wolfensohn was celebrating his 75th birthday--he's a young fellow, but it reminded me--and he spoke proudly of his going to the World Bank and his work with the World Bank, but it was just a little more than ten years ago when he made that speech where he mentioned the word "corruption" and said that was an important challenge for the World Bank, a "cancer on development." It was one paragraph in his speech, and obviously, this problem has gone on for some time, but I have not heard a more eloquent exposition of the point than you all just heard a few minutes ago from Bob Zoellick, and I'm glad I came to hear it.

I was handed by Leonard some remarks I made when we issued this report--I had no idea it went on for so many pages--but what I noticed with gratification was that there was a lot of underlining of particular points. Now, when you see a report like that underlined, it is one of two things. If it's underlined for emphasis, that's fine; if it's underlined with a big question mark in the margin or an exclamation point or two, or "That's dumb," that's another thing. I didn't see one question mark in the margin, Leonard, for which I am very grateful.

You know, it is timely and a pleasure for me to be here particularly when the new members of the Advisory Board are here. We consider that one of our critical recommendations. Why do we consider it so critical? Because this whole record, as I'm sure you realize, has been a bit of a struggle for the Bank in kind of acclimating itself to the importance of corruption and infusing it through the operations. And we had a feeling that to make sure the message got through and continued, having an outside group to oversee from two dimensions--one is to kind of keep interest, keep a little fire on, as to the importance of this subject, but also to provide some confidence that had not been there earlier that the program would be carried out in a fair, sensible, effective way, respecting the rights and conditions that are appropriate.

So I think from both directions, we thought that at least for the time being, this kind of outside group had a very important role to play, and I'm glad to see the kind of people who have accepted responsibility. I had a chance to work with Mark Pieth, who isn't here, on an earlier investigation in the United Nations, and he is, added to the talent you see before you and the experience you see before you, a man who has had very long experience, incredible experience, in the anti-corruption area.

Now, I am told--Mr. Daboub keeps me in track of these things, and he proudly calls me up every few months to say "We have adopted another recommendation"--you've got them all adopted now, with a couple that I know are still in process, and that's terrific, because it's not often that somebody in my position who has written a report can actually see it implemented in a substantial kind of way.

Now, it is also true--and I think Bob has addressed this point--that I'll never forget that one of the retired or ex-senior officials of the World Bank, commenting on a draft of our report, said the most important part was not those 18 recommendations or whatever, the specific recommendations--it was the kind of tone that was argued in the first ten pages. He said it's the first ten pages of the report that are really important and whether this whole kind of ethic and effort suffuses the operation generally. And I hope, and from what I hear, that that is beginning to take place and is taking place in a large organization where it is sometimes difficult to change.

I noticed in these remarks I made a year ago that I started off by saying something about the challenge before the World Bank, the sense that it was in not quite a crisis but a point of difficulty because what the World Bank was doing in supplying capital to developing countries has to some degree in many cases been superseded by private markets, and the World Bank had a smaller proportion of the whole, and whether it had the same leverage that it had earlier was questioned by a lot of people, I think rightly. But it's remarkable how that has changed in the past year. In the midst of financial crisis, suddenly, the deficiencies of the private market, the discontinuities of the private market, the lack of confidence that I mentioned are very apparent, and the potential for an institution in which people do have confidence, confidence in integrity and confidence in its competence, has suddenly become very important again in dealing with this, what is now a worldwide crisis, not just of economics but of confidence.

I am struck in that connection that while it's evident that the role of the Bank is risen and restored, I might say, during this period, it is very difficult to almost read the daily press without reading stories about corruption and how corruption is affecting development and how corruption is unfortunately undermining some of the trust I talked about in my own country and other developed countries, but it is really crucial, I think, as part of the development process, and that is becoming better and better understood, not just because of the--well, partly because of the crisis--that some of the cases of flagrant corruption are so evident, beyond anything the World Bank is doing, but its conflict with development and dealing with this crisis has become very evident.

So I just want to--I can't say it with the same eloquence--but the remarks that Bob just made about the critical role of integrating this effort about corruption into your operations and into your attitudes and into your performance seems to me if anything much reinforced from what we were able to say a year or two ago.

I can't tell you the degree to which this institution, which in some sense is a small part of the world economy important as it is, and the way you approach these problems will send a signal to other development institutions internationally and nationally, and I think the critical importance of that should not be forgotten. And I suspect that what has been going on in this institution is already affecting to some degree what other institutions are doing in this area, and I look at the World Bank to take a leadership role in making sure that happens, because it does have the respect of other development institutions and I think the respect of world leaders generally.

So I think I will cease and desist at that point and wish Leonard well in developing relationships with the rest of the Bank.

That other crucial recommendation that we made for the Oversight Board, the other one was that this isn't going to work unless the Management of the Bank itself takes responsibility for the anti-corruption program and for implementing the reforms that are proved necessary in particular countries as revealed by the investigations of INT. And to the extent that is happening, and I believe it is, I think the foundation is being laid for this institution assuming and maintaining the kind of leadership role that it really had earlier and can be strengthened and reinforced today in the midst of what is the biggest financial crisis of my lifetime, and my lifetime has been fairly long, so that covers a considerable range of activities.

Volcker Panel Full Report

Quote of the Day

But if we’re going to make the investments we need, we must also be willing to shed the spending we don’t. In these challenging times, when we are facing both rising deficits and a sinking economy, budget reform is not an option. It is an imperative. We cannot sustain a system that bleeds billions of taxpayer dollars on programs that have outlived their usefulness, or exist solely because of the power of a politician, lobbyist, or interest group. We simply cannot afford it.

This isn’t about big government or small government. It’s about building a smarter government that focuses on what works. That is why I will ask my team to think anew and act anew to meet our new challenges. We will go through our federal budget -- page by page, line by line -- eliminating those programs we don’t need, and insisting that those we do operate in a sensible cost-effective way.

-Remarks of President-elect Barack Obama

Would Fiscal Policy defense work?

IMF's John Lipsky at UCLA Economic Forecasting Conference;

Fiscal policy provides a second line of defense. It has played a role in the United States already and automatic stabilizers are appropriately providing support elsewhere in other advanced economies. In many emerging economies, fiscal policy will have to play a supportive role to monetary policy in helping to bring down inflation.

Fiscal policy is broadly appropriate across the advanced economies, but room for maneuver is limited given the need for medium-term fiscal consolidation in many of these countries. However, support for the financial sector inevitably will involve budgetary costs that must be taken into account in considering policy alternatives.

In emerging economies where inflation remains a problem, fiscal policy should play a more supportive role in restraining demand growth and easing inflation pressures. In particular, greater restraint on spending growth would be helpful as a complement to tighter monetary policy.

Direct intervention is the third line of defense. It has become obvious that direct fiscal intervention is going to be needed in the United States and elsewhere in order to attain the goals of removing distressed assets from financial institutions' balance sheets, and in recapitalizing the financial system where appropriate.

In this context, we welcomed the decisive actions taken by the U.S. authorities to shore up the GSEs, providing crucial support for the U.S. housing market, the banking system, and the broader economy. Over the longer term, a deep restructuring of the GSEs remains essential to restore market discipline, minimize fiscal costs, and limit systemic risks for the future. Ultimately the conflict of private ownership and public policy objectives within the GSEs' former business model needs to be resolved.

The challenge of removing distressed assets from financial institutions' balance sheets currently is front and center, with the US authorities' TARP proposal currently being examined by Congress. The discussions of the TARP have underscored the myriad difficult judgments that have to be made in order to make such a program a success. It is possible that similar challenges will be faced by other advanced economy authorities in the coming months. Earlier this year, the IMF proposed a solution based on long-term swaps of mortgage securities for government bonds. The advantage of such an approach is that it provides near-term relief for bank balance sheets, while ultimately leaving the underlying credit risk with the banks, rather than the taxpayers. In any case, the current discussions also have underscored the importance that moral hazard issues play in direct fiscal intervention in resolving financial sector crises.

More broadly, efforts aimed at alleviating systemic risks, including notably the provision of support to key financial institutions, will require sound judgment. For example, the current market strains to some degree reflect solvency risks. underscoring the need for a systematic and comprehensive approach to deal with distressed assets of failed institutions and in the financial sector more broadly.

In these circumstances, the key is to strike the right balance between safeguarding present financial stability and limiting future moral hazard. This task is by no means an easy one, but the consequences—either in the short- or longer-term—would be severe if the pendulum swings too far in either direction.

Obama supports zero-based budgeting?

Now, many of these plans will cost money, which is why I've laid out how I'll pay for every dime: by closing corporate loopholes and tax havens that don't help America grow.

But I will also go through the federal budget line by line, eliminating programs that no longer work and making the ones we do need work better and cost less, because we cannot meet 21st-century challenges with a 20th-century bureaucracy.

-Barack Obama's Speech at the Democratic National Convention

Related;
Arnold Kling's Campaign Season Pledge;

1. That no politician will end America's consumption of foreign oil. Ever.

2. That no politician will figure out a way to bring the bottom half of America's children up to the level where they can benefit from a college education.

3. That no politician will figure out a way to make American health care--meaning virtually unlimited access to specialists and technology--affordable for everyone.

4. That no politician will alter the trends in technology and family structure that are driving the distribution of income and wealth.

5. That no politician will produce a sustainable fiscal outlook without trimming future Social Security and Medicare benefits. (I might have ended the previous sentence simply by putting a period after "outlook")

6. That no politician needs to create jobs. There is always too much work to be done. The problem is never to create jobs. The problem is for individuals to adapt their abilities to ever-changing job opportunities.

7. That no politician will be able to articulate an economic difference between moving labor or goods from country X to country Y and moving labor or goods from Maryland to Virginia.