Global Practices in Fiscal Rule Performance
Performance of Fiscal Rules
Macro-Fiscal Management Global Practice
Emilia Skrok, Jan Gaska
World Bank
2
Outline
1.
Setting the scene
2.
Presence and compliance with FRLs
3.
Performance of fiscal rules and lessons
from international experience
F
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4
•
Small NMS are characterized by more
procyclical fiscal policy th
a
n
the
EU and
non- EU,
•
Interestingly, in the non-EU countries
smaller countries are les
s
cyclical
,
•
Bulgaria shows a bit higher spending
procyclicality than
the
EU average.
Procyclicality of fiscal policy (understood as a correlation
between cyclical part of government expenditures and
output gap)
Presence, compliance and performance of fiscal rules:
L
essons from international experience
5
Use of national fiscal rules is rising in all countries, with a
faster pace in
the
EU
6
Incidence of national fiscal rules: they are more common in EU countries as
compared to non-EU, driven by use of fiscal rules in
EU15. Size does not
matter for the presence of fiscal rules globally.
7
•
Non-EU
countries tend to adopt
less
fiscal rules than
EU
countries (
90
%
vs
61
%)
,
•
NMS tend to adopt less fiscal rules
than
EU15
countries (
85
% and
93
%
respectively)
;
•
There is no statistically significant
difference between frequency of
adoption of FRs between smaller
and bigger countries.
D
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y
,
(
2
0
1
5
)
Source
: IMF, 201
7
Significant drop in compliance of budget balance and debt rules around the
global financial crisis, while compliance with expenditure rules has been higher
since the crisis
8
W
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s
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,
2
0
0
0
-
2
0
1
5
EU countries and in particular NMS show significantly higher compliance
with fiscal rules than the rest of the world
9
•
N
o significant differences in compliance
between emerging and advanced
countries (emerging countries show
marginally better compliance ratio)
•
Average compliance rates in 2000-15 in
EU countries were higher than in the rest
of the world (71% vs 63%)
•
This was due to the compliance of NMS,
which was significantly higher than the
compliance of old EU.
A
v
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a
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c
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e
)
Compliance is related to “fiscal institutions”, e.g. coverage of the
rule and enforcement framework
10
•
Link between the strength of a fiscal rule
(measured by Fiscal Responsibility Index) and
its compliance exists but is not very strong.
•
But individual components of the Fiscal
Responsibility Index have positive and
significant effects on compliance.
•
Main factors favouring compliance are (
based
on probit model):
a.
Coverage of the rule (as defined in the
IMF FAD database) –the broader the
coverage, the better for budget balance
rule and debt rule compliance.
b.
Enforcement procedures (for budget
balance rule compliance).
A
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v
a
r
i
a
b
l
e
Presence of expenditure rules reduces spending procyclicality, the
strongest
impact
if combined with enforcement mechanism
11
1.
P
r
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t
r
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s
.
•
Stabilizing capacities of expenditure rules could be enhanced by
the
presence of a
fiscal institution (such as
fiscal council or sovereign wealth fund).
•
Compliance with expenditure rule do not impact spending cyclicality in statistically
significant way
C
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Note: the solid fill indicates statistical significance
Balance and Debt rules improve fiscal sustainability, compliance with balance
budget rules increases the impact
12
•
Compliance with budget balance
rule gives much better results than
the presence of this rule without
compliance
•
For debt rule impact on fiscal
sustainability there is little difference
between compliance and presence
of debt rule (this may reflect a
design of the debt rule)
•
Presence and compliance of
expenditure rule do not have
statistically significant impact on
sustainability (in line with
expectation).
T
h
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Note: the solid fill indicates statistical significance
2
.
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a
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t
i
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f
u
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c
t
i
o
n
•
Two fiscal rules – balance and debt rules - improve fiscal sustainability (increase
the
response of primary balance to change in debt)
•
These rules increase the reaction of primary balance to change in debt by 0.6 – 0.8
percentage points of GDP per each 10 percentage points increase in debt.
Combination of rules produces positive impact on fiscal sustainability, in
particular expenditure rule + debt rule after the crisis
13
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R
s
Note: the solid fill indicates statistical significance
•
Combination
of
fiscal rules after the crisis, in particular DR+ER and DR+BBR
proved to provide a greater anchor for debt sustainability
•
This two combinations increases the reaction of primary balance to change in
debt by 1.5 – 1.8 percentage points of GDP per each 10 percentage points
increase in debt.
Conclusions
14
•
The mere presence of a fiscal rule does not guarantee its effectiveness.
•
EU countries, and especially NMS, have higher compliance with fiscal rules
than the rest of the world.
•
A strong institutional and policy framework improves compliance with fiscal
rules.
•
Countries that adopt and adhere to fiscal rules have improved fiscal
balances and enhanced debt-sustainability indicators
•
Adopting and complying with expenditure rules tend to reduce expenditure
procyclicality.
•
Combining rules intensifies their positive impact on debt sustainability.
Thank You
Supporting Slides
Relation between fiscal rules and economic
size has not been assessed…
17
Main Findings of LAC study
18
•
Smaller countries have business cycles with particular characteristics: GDP is more volatile, cycles are
asymmetric with deeper contractions and more procyclical fiscal policy.
•
Due to prevalence of fixed exchange rate regimes in small countries fiscal policy is even more critical for
these countries.
•
Fiscal rules (FRs) can be an important tool in this regard. The analysis of FRs across countries shows that
having FRs improves several fiscal outcomes.
•
FRs are less common in small countries (as compared to big ones), DRs and BBRs are the most common
globally, but use of ERs has been on rise.
•
There is no difference in compliance between small and large countries, BUT small LAC have significantly
lower compliance.
•
In the case of small countries the most complied rule is DRs (79%), although compliance on ERs is on the
rise. The same is true for LAC with strong increase of compliance with ERs.
•
Presence of ERs reduces spending procyclicality, the strongest impact if combined with enforcement
mechanisms (e.g., fiscal council). Presence of the combination of fiscal rules after the crisis, in particular
DRs+ERs and DRs+BBRs enhance debt sustainability
S
m
a
l
l
e
r
c
o
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r
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-
E
U
19
Volatility of GDP and Private Consumption Growth
and of Fiscal Balance changes,
GDP and
gross national savings
growth, 2000-1
7
EU uses more national FRLs of each kind than the rest of the world. NMS use
less BBRs and ERs than EU15 countries, but more DRs.
20
Source
: IMF, 2015
Differences regarding presence of fiscal rules by type of rule, region
and size of the country, 201
5
•
EU countries use more
national BBRs and ERs than
other parts of the world. The
difference in use of national
DRs is much smaller.
•
If compared to EU15, NMS use
less of national ERs and BBRs
(but not significantly), but
much more DRs.
•
Size does not matter for use
of
BBRs, but small countries tend
to use less of ERs and DRs.
The combination of rules are used more in the EU, in particular in NMS than in
other countries. Smaller countries ten
d
to use 2+ rules less often…
21
•
The most common combination of rule globally is BBR plus DR, followed by BBR plus ER.
Same
is true
for EU.
•
EU countries use more combination of rules (BBR + DR , BBR+ER, DR+ER) than other countries, though
differences are not statistically significant.
•
However, when NMS are compared with EU15, they use more the combination of rules, though only
in case of BBR+DR the difference is statistically significant.
•
Interestingly, EU15 use less BBR+DR combination that non-EU countries.
Source
: IMF, 2015
Differences regarding presence of fiscal rules by type of rule, region and size of the country, 201
5
Overall compliance of bigger (above median) an
d
smaller (below median)
countries is similar, though smaller countries are more compliant with BBRs
while bigger with ERs
22
Compliance var
ies
according to rule
and
regio
n
23
•
The most complied rule globally is
DR (77%) and the least complied
BBR (55%)
•
The most complied rule in EU is DR
(81%), the least complied BBR
(58%) – only slightly above
respective compliance rates in
other regions.
•
The most complied rule in NMS is
DR (94%), the least complied BBR
(56%).
•
No big difference in compliance
with ER across countries.
Budget Balance Rule (BBR)
Debt Rule (DR)
Expenditure
Rule (
E
R)
The study explores the implementation and impact of fiscal rules on macro-fiscal management, focusing on international experiences. It discusses the presence and compliance with fiscal rules, highlighting differences in pro-cyclicality among small and large countries. The rise in adoption of national fiscal rules, particularly in the EU, is noted, emphasizing variations in rule implementation across regions and country sizes.
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Presentation Transcript
Performance of Fiscal Rules Macro-Fiscal Management Global Practice Emilia Skrok, Jan Gaska World Bank
Outline 1. Setting the scene 2. Presence and compliance with FRLs 3. Performance of fiscal rules and lessons from international experience 2
Fiscal developments in the EU stand out globally Change in government net lending (2000-2017) Change in government debt (2000-2017) 30 5 20 4 10 3 0 2 -10 1 -20 0 -30 -1 -40 -2 -50 -3 -4 -60 world total non-EU EU (incl. NMS) NMS Bulgaria world total non-EU EU (incl. NMS) NMS Bulgaria below median above median below median above median 3
But fiscal policy in small NMS is more pro-cyclical than in bigger countries, EU and the rest of the world Procyclicality of fiscal policy Small NMS are characterized by more procyclical fiscal policy than the EU and non- EU, 0.9 0.8 0.7 0.6 0.5 Interestingly, in the non-EU countries smaller countries are less cyclical, 0.4 0.3 0.2 0.1 Bulgaria shows a bit higher spending procyclicality than the EU average. 0 world total non-EU EU (incl. NMS) NMS Bulgaria output gap vs. cycl. comp. of gov exp. below median above median Procyclicality of fiscal policy (understood as a correlation between cyclical part of government expenditures and output gap) 4
Presence, compliance and performance of fiscal rules: Lessons from international experience Presence Compliance Performance 5
Use of national fiscal rules is rising in all countries, with a faster pace in the EU Any national rule (excluding supranational rules) 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 above median below median non-EU new EU EU15 6
Incidence of national fiscal rules: they are more common in EU countries as compared to non-EU, driven by use of fiscal rules in EU15. Size does not matter for the presence of fiscal rules globally. Non-EU countries tend to adopt less fiscal rules than EU countries (90% vs 61%), Differences regarding presence of fiscal rules by region and size of the country, (2015) Any rule NMS tend to adopt less fiscal rules than EU15 countries (85% and 93% respectively); 1 N:15 p:0.3 N:28 p:0 0.9 N:13 p:0.3 0.8 N:28 p:0.39 N:68 p:0.39 0.7 N:68 p:0 0.6 0.5 There is no statistically significant difference between frequency of adoption of FRs between smaller and bigger countries. 0.4 0.3 0.2 0.1 0 below median above median EU non-EU new EU EU15 Source: IMF, 2017 7
Significant drop in compliance of budget balance and debt rules around the global financial crisis, while compliance with expenditure rules has been higher since the crisis Whole sample: compliance by type of rule (compliance/all rules), 2000-2015 100 90 80 70 60 50 40 30 20 10 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 ER BBR DR 8
EU countries and in particular NMS show significantly higher compliance with fiscal rules than the rest of the world Average compliance, 2000-15, by region and size of the country (any type of rule) No significant differences in compliance between emerging and advanced countries (emerging countries show marginally better compliance ratio) 1 N:123 p:0.02 0.9 N:383 p:0.01 N:299 p:0.3 0.8 Average compliance rates in 2000-15 in EU countries were higher than in the rest of the world (71% vs 63%) 0.7 0.6 N:260 p:0.02 0.5 N:644 p:0.3 N:628 p:0.01 0.4 This was due to the compliance of NMS, which was significantly higher than the compliance of old EU. 0.3 0.2 0.1 0 EU EU15 non-EU new EU emerging advanced 9
Compliance is related to fiscal institutions, e.g. coverage of the rule and enforcement framework Average Fiscal Responsibility Index for different values of compliance variable Link between the strength of a fiscal rule (measured by Fiscal Responsibility Index) and its compliance exists but is not very strong. But individual components of the Fiscal Responsibility Index have positive and significant effects on compliance. Main factors favouring compliance are (based on probit model): a. Coverage of the rule (as defined in the IMF FAD database) the broader the coverage, the better for budget balance rule and debt rule compliance. b. Enforcement procedures (for budget balance rule compliance). 0.7 0.6 N:68 t:-2.04 p:0.04 N:216 t:1.93 p:0.05 0.5 N:170 t:-1.93 p:0.05 N:182 t:2.62 p:0.01 0.4 N:50 t:-2.62 p:0.01 0.3 N:157 t:2.04 p:0.04 0.2 0.1 0 DR BBR ER 10
Presence of expenditure rules reduces spending procyclicality, the strongest impact if combined with enforcement mechanism 1. Procyclicality Expenditure rule reduces procyclicality of government expenditure. The effect is reduced (but still significant) for small countries. Stabilizing capacities of expenditure rules could be enhanced by the presence of a fiscal institution (such as fiscal council or sovereign wealth fund). Compliance with expenditure rule do not impact spending cyclicality in statistically significant way Coefficients of FRLs impact on 10-year Procyclicality of Government Expenditure 0.0397 0 0.5 0.0172 -0.088 -0.5 -0.479 -0.546 -1 -0.726 -0.754 -1.5 -1.511 -2 -2.5 -3 -3.065 -3.5 11 Note: the solid fill indicates statistical significance
Balance and Debt rules improve fiscal sustainability, compliance with balance budget rules increases the impact 2. Primary balance reaction function Two fiscal rules balance and debt rules - improve fiscal sustainability (increase the response of primary balance to change in debt) These rules increase the reaction of primary balance to change in debt by 0.6 0.8 percentage points of GDP per each 10 percentage points increase in debt. The values for coefficients (reaction of primary balance to changes in debt) for different measures of fiscal rules Compliance with budget balance rule gives much better results than the presence of this rule without compliance For debt rule impact on fiscal sustainability there is little difference between compliance and presence of debt rule (this may reflect a design of the debt rule) Presence and compliance of expenditure rule do not have statistically significant impact on sustainability (in line with expectation). 0.10 0.08 0.06 0.04 0.02 0.00 -0.02 BBR presence BBR DR presence DR ER presence ER compliance compliance compliance Note: the solid fill indicates statistical significance 12
Combination of rules produces positive impact on fiscal sustainability, in particular expenditure rule + debt rule after the crisis Combination of fiscal rules after the crisis, in particular DR+ER and DR+BBR proved to provide a greater anchor for debt sustainability This two combinations increases the reaction of primary balance to change in debt by 1.5 1.8 percentage points of GDP per each 10 percentage points increase in debt. The values for coefficients (reaction of primary balance to changes in debt) for presence of different types of FRs 0.2 0.15 0.1 0.05 0 -0.05 -0.1 -0.15 BBR&DR BBR&DR after crisis BBR&ER BBR&ER after crisis DR&ER DR&ER after crisis Note: the solid fill indicates statistical significance 13
Conclusions The mere presence of a fiscal rule does not guarantee its effectiveness. EU countries, and especially NMS, have higher compliance with fiscal rules than the rest of the world. A strong institutional and policy framework improves compliance with fiscal rules. Countries that adopt and adhere to fiscal rules have improved fiscal balances and enhanced debt-sustainability indicators Adopting and complying with expenditure rules tend to reduce expenditure procyclicality. Combining rules intensifies their positive impact on debt sustainability. 14
Relation between fiscal rules and economic size has not been assessed 17
Main Findings of LAC study Smaller countries have business cycles with particular characteristics: GDP is more volatile, cycles are asymmetric with deeper contractions and more procyclical fiscal policy. Due to prevalence of fixed exchange rate regimes in small countries fiscal policy is even more critical for these countries. Fiscal rules (FRs) can be an important tool in this regard. The analysis of FRs across countries shows that having FRs improves several fiscal outcomes. FRs are less common in small countries (as compared to big ones), DRs and BBRs are the most common globally, but use of ERs has been on rise. There is no difference in compliance between small and large countries, BUT small LAC have significantly lower compliance. In the case of small countries the most complied rule is DRs (79%), although compliance on ERs is on the rise. The same is true for LAC with strong increase of compliance with ERs. Presence of ERs reduces spending procyclicality, the strongest impact if combined with enforcement mechanisms (e.g., fiscal council). Presence of the combination of fiscal rules after the crisis, in particular DRs+ERs and DRs+BBRs enhance debt sustainability 18
Smaller countries have slower growth rates and higher volatility (not true for NMS and the EU) EU shows slower but a more stable growth and fiscal position than non-EU GDP and gross national savings growth, 2000-17 Volatility of GDP and Private Consumption Growth and of Fiscal Balance changes, 0.07 0.3 0.06 0.25 0.05 0.2 0.04 0.15 0.03 0.1 0.02 0.05 0.01 0 0 NMS NMS EU (incl. NMS) EU (incl. NMS) non-EU non-EU world total world total Bulgaria Bulgaria NMS NMS NMS EU (incl. NMS) EU (incl. NMS) EU (incl. NMS) non-EU non-EU non-EU world total world total world total Bulgaria Bulgaria Bulgaria GDP growth Gross national savings growth GDP growth Gross national savings growth Change in fiscal balance as a pct. Of GDP below median above median below median above median 19
EU uses more national FRLs of each kind than the rest of the world. NMS use less BBRs and ERs than EU15 countries, but more DRs. Differences regarding presence of fiscal rules by type of rule, region and size of the country, 2015 EU countries use more national BBRs and ERs than other parts of the world. The difference in use of national DRs is much smaller. Budget balance rule Debt rule N:15 p:0.31 1 1 N:28 p:0.4 N:13 p:0.01 N:68 p:0.22 N:28 p:0 0.8 0.8 N:68 p:0.34 N:28 p:0.34 N:68 p:0.4 0.6 0.6 N:68 p:0 N:13 p:0.31 0.4 0.4 N:15 p:0.01 N:28 p:0.22 0.2 0.2 0 0 If compared to EU15, NMS use less of national ERs and BBRs (but not significantly), but much more DRs. EU EU15 EU EU15 non-EU non-EU below median new EU below median new EU above median above median Expenditure rule 1 Size does not matter for use of BBRs, but small countries tend to use less of ERs and DRs. 0.8 N:15 p:0.2 0.6 N:28 p:0.02 N:13 p:0.2 N:68 p:0.29 0.4 N:28 p:0.29 N:68 p:0.02 0.2 0 Source: IMF, 2015 EU EU15 non-EU below median new EU above median 20
The combination of rules are used more in the EU, in particular in NMS than in other countries. Smaller countries tend to use 2+ rules less often The most common combination of rule globally is BBR plus DR, followed by BBR plus ER. Same is true for EU. EU countries use more combination of rules (BBR + DR , BBR+ER, DR+ER) than other countries, though differences are not statistically significant. However, when NMS are compared with EU15, they use more the combination of rules, though only in case of BBR+DR the difference is statistically significant. Interestingly, EU15 use less BBR+DR combination that non-EU countries. Differences regarding presence of fiscal rules by type of rule, region and size of the country, 2015 BBR+DR ER+DR 1 1 0.8 0.8 N:13 p:0.02 0.6 0.6 N:28 p:0.19 N:13 p:0.12 0.4 0.4 N:68 p:0.34 N:28 p:0.34 N:68 p:0.19 N:28 p:0.17 N:68 p:0.23 N:15 p:0.02 0.2 0.2 N:15 p:0.12 N:68 p:0.17 N:28 p:0.23 0 0 Source: IMF, 2015 EU non-EU below median above median new EU EU15 below median above median EU non-EU new EU EU15 21 -0.2 -0.2
Overall compliance of bigger (above median) and smaller (below median) countries is similar, though smaller countries are more compliant with BBRs while bigger with ERs Budget balance rule Any rule 100 100 90 90 80 80 70 70 60 60 50 50 40 40 30 30 20 20 10 10 0 0 below median above median below median above median Debt rule Expenditure rule 100 100 90 90 80 80 70 70 60 60 50 50 40 40 30 30 20 20 10 10 0 0 below median above median below median above median 22
Compliance varies according to rule and region Budget Balance Rule (BBR) 1 Debt Rule (DR) The most complied rule globally is DR (77%) and the least complied BBR (55%) 1 N:106 p:0 0.9 N:63 p:0.03 0.9 0.8 N:146 p:0.33 N:296 p:0.33 0.7 0.8 0.6 0.7 0.5 N:43 p:0.03 N:312 t:1.03 p:0.23 N:107 p:0.39 0.6 N:39 p:0.39 The most complied rule in EU is DR (81%), the least complied BBR (58%) only slightly above respective compliance rates in other regions. 0.4 N:188 p:0.24 N:106 t:-1.03 p:0.23 0.3 0.5 N:188 p:0 N:109 p:0.24 0.2 0.4 0.1 0.3 0 advanced EU non-EU emerging old EU new EU 0.2 0.1 0 advanced EU15 EU non-EU emerging new EU Expenditure Rule (ER) N:84 p:0.37 The most complied rule in NMS is DR (94%), the least complied BBR (56%). N:21 p:0.38 N:131 p:0.34 1 0.9 0.8 0.7 0.6 0.5 N:144 p:0.37 N:144 p:0.34 N:110 p:0.38 No big difference in compliance with ER across countries. 0.4 0.3 0.2 0.1 0 advanced EU old EU non-EU emerging new EU 23
