Fisc scal al fram amework rks an and fisc scal al sustai ainability ty in the N Nor ordics cs Lars Calmfors Webinar 3 April 2020 Nordregio, Swedish Fiscal Policy Council and Nordic Council of Ministers
My p pres esen entation on • ”Current” fiscal situation • Fiscal rules • Fiscal-policy monitoring • Fiscal sustainability analyses
Fi Fiscal balance, perc rcent nt of of GD GDP
Fi Fiscal balance, perc rcent nt of of GD GDP
Ge Gener eral gover ernmen ent net et financial wealth, perc rcent nt of of GD GDP
Ge Gener eral gover ernmen ent net et financial wealth, perc rcent nt of of GD GDP
Ge Gener eral gover ernmen ent consol olidated ed gross debt, perc rcent nt of of GD GDP
Fi Fisc scal rules es • Fiscal-balance targets/constraints • Government debt targets • Expenditure ceilings • Economic results of local governments
Fiscal-balance Fiscal-balance Subsector fiscal Adjustment Escape clause constraint general target general targets government government Denmark Structural deficit Structural Municipal sector, 0.5% of GDP Exceptional 0.5% of GDP balance 2025 regional sector annually circumstances Finland Structural deficit Structural Central 0.5% of GDP Exceptional 0.5% of GDP balance 2023 government, annually circumstances municipal sector, social-security funds Iceland Actual deficit 2.5% Actual surplus Municipal sector Deviation during 3 of GDP over five-year years is possible period Norway Structural deficit Structural deficit for mainland can vary over the Norway = expected business cycle return of wealth fund Sweden 1/3% of GDP 0.4–0.5% of GDP Adjustment over business annually should take cycle: structural- cyclical situation balance target into account
Debt rules Iceland: Debt ceiling of 30% of GDP Sweden: (Maastricht) debt anchor of 35% of GDP
Expendi nditur ure cei eilings Sector Scope Time Type Compulsory Escape clause action Denmark Central Interest Four years Expenditure in Overdraft must Yes government: payments, ahead real terms be compensated operating investment unless taxes are expediture and expenditure raised; sanctions transfers and unem- against Municipalities ployment- municipalities and regions: related and regions operating expenditure expenditure excluded Finland Central Interest Four years Expenditure in Not legally Yes government payments, ahead real terms binding, but no financial violations investment and cyclically dependent expenditure excluded Sweden Central Interest Three years Expenditure in Government No government payments ahead nominal terms must act against excluded overdrafts
Bu Budget rules es for or individual ual municipalities/regions Budget-balance Adjustment Sanctions/actions requirements Denmark Borrowing only for some Reduction of government investment expenditure grants; government intervention Finland Ex-ante budget balance Accumulated deficits to Negotiations with be covered within four government; forced years mergers Iceland Ex-ante budget balance Maximum debt: 150% of Government intervention; regular revenues forced mergers Norway Ex-ante budget balance Deficit to be covered Government intervention within two years Sweden Ex-ante budget balance Deficit to be covered None within three years
Conclusions on fiscal framewo works • Denmark has the strictest fiscal framework (in addition to EU rules) - law-based - tough expenditure ceilings - possibilities to sanction local governments • Norway has the least strict framework (and no EU rules) - not law-based - no expenditure ceilings • But rules have been complied with in both Denmark and Norway - political consensus more important than formal rules?
Fi Fiscal counc ncils Denmark Finland Iceland Norway Sweden Fiscal Council Economic Economic Policy Fiscal Council Fiscal Policy Council Council(s) Council Legal basis Law regarding Government Budget law Government the council(s) regulation regulation Other National Audit Konjunkturinsti- monitoring Office tutet, Ekonomi- institutions styrningsverket, Riksrevisionen Remit Fiscal policy, Fiscal policy, Fiscal policy Fiscal policy, other economic other economic (growth, employ- policy, policy and ment and income environmental economic-policy distribution as well policy institutions as policy transparency) Own models and Yes Not yet No No forecasts
Denmark Finland Iceland Norway Sweden Link to budget process Evaluation of Report after main govern- spring fiscal ment policy policy bill; public documents in hearing in the parliamentary finance budget process committee Media coverage Large Large ? Large Qualifications Knowledge in Scientific Knowledge on Scientific economics; in public finances; competence in expertise; in practice PhD for chair, economics or practice university university practical university professors degree for economic-policy professors others expirience Appointment Proposal from Proposals from Proposal from Proposal from procedure council economics Prime Minister nomination departments and parliament, committee: and Academy respectively heads of govern- of Finland ment bodies and politicians Secretariat 20-25 persons 2 persons 0 person 5 persons
Conclusions on Nor Nordic fiscal counc ncils • Resources not commensurate with remits – Iceland, Finland and probably also Sweden • No budget autonomy as recommended in OECD guidelines • Strong rea l standing but weak formal guarantees for independence - potential risks • No fiscal council in Norway - not in line with strong corporatist tradition – “Norwegian model”
Sustaina nabl ble public finances • ”The ability of a government to service its debt at any point of time” • The intertemporal budget constraint must be fullfilled - current net financial wealth at least equal to present value of all future primary deficits (shares of GDP) - current net debt at most equal to present value of all future primary surpluses (shares of GDP) • The path for the primary balance must be”economically and politically feasible” • Difficult to judge - current government cannot make binding commitments on the part of future governments • Basic assumption: interest rate > growth rate
Sustaina nabi bility of of curr rrent fiscal policy Unchanged policy • Constant tax rates • Transfer levels to households rise in proportion to wages - but pensions follow the rules in the pension system • Collective public consumption rises in proportion to GDP or population • Expenditure per user on individual public consumption in various socioeconomic groups rises in proportion to wages
Other er imp mpor ortant assumpti tions • Lower productivtiy growth in welfare services than in goods production • Constant wage share in the private sector • Same wage increase in private and in public sector • Gradual normalisation of interest-growth differential • Unchanged employment rate and average working time in various socioeconomic groups • Some form of healthy ageing
Sustaina nabi bility indicators rs • S2 indicator - the immediate and permanent strengthening of the primary balance as a share of GDP which would exactly fulfill the intertemporal budget constraint – and stabilise net debt at some level • S1 indicator - the immediate and permanent strengthening of the primary balance as a share of GDP which implies that a certain debt ratio (ratio of net financial wealth to GDP) is reached in a given year • Developments of net financial wealth and debt as ratios of GDP
The S2 indicator Advantages Disadvantages • Information on fiscal sustainability • Too much information squeezed condensed into one metric into one metric? • Allows comparisons between paths • The exact path matters and countries - dangerous with large deficits in the near future even with large projected surpluses in a distant future • S2 = 0 can imply very different long-run wealth and debt ratios
The S1 indicator • Which debt ratio should be targeted? - 60% of GDP as in EU rules? - appropriate safety margin to 60%? - own debt target (35% of GDP as in Sweden)? - safety margin to critical level? - how determine critical level? • Maastricht debt or net financial wealth?
Ol Old-age ge dependency rati tio (65+ a as a share of 20 20– 64) 4), per percen ent
Oldest st-age ge dependency cy ra ratio (80 80+ a as s share of 20 20-64), per percen ent
Fisca cal sustain inabilit ility analyses ses • Denmark - Ministry of Finance - The Economic Council(s) - (DREAM) • Finland - Ministry of Finland - Bank of Finland - (ETLA) - (Economic Policy Council) • Norway - Ministry of Finance - (Statistics Norway) • Sweden - Ministry of Finance - National Institute of Economic Research - ((Fiscal Policy Council))
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