LESSONS LEARNED: SUCCESSFUL EXAMPLES OF FISCAL ADJUSTMENT

William Dorotinsky ICGFM International Conference May 19, 2013

Project Background
Timely topic

Extreme fiscal adjustment At least 8% point improvement in fiscal balance over 5 years
Approach Consulted available literature Interviewed contemporaneous actors Comprehensive focus Policies Institutional/process reforms Government strategy

Countries Reviewed
Country Canada Finland

Period of Adjustment
1993-1998 1993-2000

Change in General Govt Budget Balance (%)

8.8 16.0

Netherlands
Sweden Thailand Turkey United Kingdom
Source: WEO

1995-2000
1993-2000 1999-2003 2002-2006 1993-2000

11.2
14.8 11.1 13.9 9.1

Adjustment Sustainability (1)

5 year average after end of adjustment
4
3.3 General Government Balance (% of GDP)

3 2 1 0
Canada Finland Netherlands Sweden Thailand Turkey UK 1.0 0.2 1.0

-1 -2 -3
-1.5 -2.5 -2.3

Adjustment Sustainability (2)

5 year trend after end of adjustment
General Government Balance (% of GDP)

8 6 4 2 0 -2 T T+1 T+2 T+3 T+4 T+5

-4 -6
-8 Canada Thailand Finland Turkey Netherlands UK Sweden

Global Financial Crisis Budget Balance

Country 2005 2006 2007 2008 2009 2010 2011

Canada
Finland Netherlands Sweden Thailand Turkey United Kingdom
Source: WEO

1.5
2.7 -0.3 1.9 1.5 -0.3 -3.3

1.6
4.0 0.5 2.2 2.2 0.0 -2.6

1.6
5.3 0.2 3.6 0.2 -1.7 -2.7

0.1
4.2 0.4 2.2 0.1 -2.4 -4.9

-4.9
-2.7 -5.6 -0.9 -3.2 -5.6 -10.4

-5.6
-2.8 -5.1 -0.2 -0.8 -2.7 -9.9

-4.5
-0.8 -5.0 0.1 -1.9 -0.3 -8.7

Adjustment Triggers

Market driven
Turkey

Politically Driven

Thailand
Finland Sweden Canada United Kingdom
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Netherlands

Actual Adjustment Triggers

Canada
MARKETMexican Peso crisis MARKETWestern recession in 1990, collapse of FSU, trade shock, banking crisis, devaluation of currency POLITICALCampaign pledge to meet Maastricht deficit criteria MARKETWestern recession in 1990, trade shock, markets forced Swedish Kroner to devalue MARKET--Abandonment of dollar peg; instant bankruptcies in private and financial sector MARKET--Major upheaval in 2001 affecting stock market, currency value, banking sector, and FDI MARKET--Withdrawal from ERM reinforces need to control fiscal deficit

Finland
Netherlands

Sweden
Thailand

Turkey
United Kingdom

Power of an Ill-Timed Single Statement

In February 2001, the Turkish Prime Minister uses the phrase, "This is a crisis". Within days: Stock market crashes nearly 40% Interest rates rise to 3000% Central bank loses $5 billion in defending a crawling peg exchange rate regime 30% drop in currency value after regime is abandoned Large amounts of foreign investment withdrawn from the economy

Political Context
Two Patterns: Newly elected vs. mid-term govts

Canada Finland Netherlands Sweden Thailand Turkey

Jean Chretien elected with majority government in 1993, re-elected in 1997 Esko Aho led center-right coalition government elected in 1991; Paavo Lipponen center-left coalition government elected in 1995 Wim Kok led center-left coalition government elected in 1994, reelected in 1999 Carl Bildt led centre-right coalition elected in 1991; Ingvar Carlsson led center-left coalition government elected in 1994; party re-elected in 1998 with Goran Persson as Prime Minister Coalition government led by Chavalit Yongchaiyudh elected in 1996; Thaksin Shinawatra elected in 2001 Ahmet Necdet Sezer elected president in 2000; Recep Tayyip Erdoan elected as president with strong majority in 2003 John Major re-elected with majority government in 1992; Tony Blair elected in 1997 with majority government

United Kingdom

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Adjustment Pattern: Institutional Reforms

Adjustment Trigger

Immediate Institutional Reforms

Canada Netherlands Sweden Finland United Kingdom

Mid-Adjustment Institutional Reforms Solidified

Thailand Turkey

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Adjustment Strategies
Communication

Fiscal goals
Re-definition of government Spending review process Future competitiveness Broad based public sector reforms

12

Communication
Public - societal exercise Canada A New Framework for Economic Policy Finland Presidential report on employment Turkey "Turkish Transition to a Strong Economy Program Markets Forecasts made transparent to markets Canada Sweden

13

Sweden: Sharing the Pain

Sweden reduced compensation of Politicians Symbolic savings, not worth a lot of money, but sends a strong message about the government's will and the gravity of the situation

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Role of Fiscal Goals

Early victories and measurable progress

Establishes credibility Citizens tolerance for pain Markets mid-term sustainability

Amended and strengthened by new governments Finland, Thailand, Turkey
CAN Goal Of Within 3% deficit 3 years FIN 70% debt NL 3% deficit SWE 0% deficit THAI 60% debt 1 year TURK 6.5% primary surplus UK 0% deficit 4 years

4 years 4 years

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Re-Definition of Government
Canada (Program Review) Serving the public interest; Necessity of government involvement, as opposed to the private sector; Appropriateness of federal role, as opposed to other levels of govt; Scope for public and private sector partnerships; Scope for increased efficiency; Affordability United Kingdom Embraces Public Private Partnerships Turkey Limit the role and reach of government General deregulation of the economy Thailand in 2nd stage Dual Track Policy government as engine of growth, yet sustainable Establishment of safety net medical, housing, etc. Expansive policy in agricultural sector, local development, and SMEs

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Formal Spending Review Process

Netherlands
Broad review by quasi-independent committee

Canada
Program review led by Minister of Finance

United Kingdom
Fundamental Expenditure Review led by

Treasury

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Spending review process evolution

Netherlands Broad review continues--one year prior to every election by quasi-independent committee Canada Program review evolves into an MTEF United Kingdom Comprehensive spending review continues to occur periodically Finland/Sweden Not initially as comprehensive but evolves into MTEF Thailand/Turkey Post adjustment implementation of MTEF
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Future Competitiveness
Turkey general deregulation of economy, many SOEs

removed from government support Finland unemployment key concern Sweden subsidized child care, education, and active labor market policies, shielded from cuts Thailand in 2nd stage government as an engine of growth; promote exports by public investments through choice and concentration

19

Expenditure / Revenue Mix

Canada
80 / 20 Primarily expenditure

Finland
Netherlands

Primarily expenditure
53 / 47

Sweden
Thailand

Primarily expenditure
70 / 30

Turkey

United Kingdom 50 / 50
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Expenditure Policy Changes

Expenditure Policy Change Across the board vs. targeted CAN FIN NL SWE THAI TURK UK Across the Targeted Targeted Targeted Targeted Board Targeted initially n/a Not exempt Reduced Reduced n/a n/a Hiring Caps, attrition n/a Targeted

Individual transfers Reduced Intergovernmental transfers Wage bill Reduced 19% downsizing Yes

Reduced Capped Zero growth

Formula Reduced n/a n/a changed Incentive Tied to Reduced to leave or productivi Reduced greatly retire ty Yes n/a n/a n/a

Pensions

Raised retirement age for women

Yes/PPP

Privatization

Yes

Yes

n/a

n/a

Planned

Initiated

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Finland: Constitutional Amendment

Greater flexibility
Constitutional amendment in June 1993 allowed permanent

savings decisions on statutory appropriations (entitlements) to be made with a simple majority in Parliament (as opposed to twothirds) Proved to be of crucial importance in getting government expenditure under control

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Revenue Policy Changes

Revenue Policy Change No significant change One time measure Permanent measure Consumption tax Income tax Corporate tax X X X X X X X X X X Canada Finland NL X X X X X X X X X Sweden Thai Turkey UK

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Institutional / Process Reforms

Reform CAN Institutionalize spending reviews X X Use of Committees Greater discretion / accountability to line ministries Conservative macroeconomic forecasts Medium-term frameworks Contingency reserve Offset required for new policy initiatives Debt management Comprehensiveness of budget Revenue administration X X X X X X FIN NL X X X X2 X SWE THAI TUR UK X X X

X X X

X X2 X

X X X2 X

X2

X X

X X X X X 24

Empowering MoF
Netherlands:
The Ministry of Finance has authority to unilaterally impose higher local tax rates on the citizens of sub-national governments that fail to live within their budget allocations.

25

Lessons (1)
Sustained commitment and leadership Strong Minister of Finance (or equivalent) in all countries Focus on building credibility Markets Society Manage expectations and be consistent in messages 5 year + exercise Adjustment package Comprehensiveness is important shared burden Speed - short time frame as longer targets cross political events Front load the pain tolerance has a limited life Empowerment of fiscal actors Greater role for MoF Use of quasi-independent fiscal bodies
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Lessons (2)
Good practices Prudence in forecasting Clear rules on managing an unexpected surplus Ensure major programs are not indexed to inflation Transparency of budgeting process New policy initiatives offset with funding from existing programs Avoid undermining future competitiveness Protect education, labor force participation Sustainability Institutional / process reform Size of adjustment constrains ability to restore cuts Can be politically rewarding
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Questions?
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