Design and application of Fiscal Rules a comment to Anderson and Minarik

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Design and application of Fiscal Rules - a
comment to Anderson and Minarik -

• Matthias Witt
• German Technical Cooperation (gtz)

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Comments Outline

• Introduction
• The devils in the details Germanys
  experiences with Fiscal Rules
• Why stick to the rules? A comment on embeddedness
  
• Fiscal Rules reaking the debt cycle Third World
  Development?

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GTZ Partner for the Future. Worldwide.

• The Organisation
• The German Technical Cooperation (gtz) is a
  federal enterprise, founded in 1975 and based
  close to Frankfurt am Main
• gtz provides advisory services for political,
  economic, ecological and social development,
  thereby promoting complex reforms and change
  processes
• The corporate objective is to improve peoples
  living conditions on a sustainable basis
• Our Clients
• Major client is the German Federal Ministry for
  Economic Cooperation and Development
• The GTZ also operates commissioned by other
  German ministries, partner-country governments,
  and international clients (European Commission,
  World Bank)
• Worldwide operations for sustainable development
• Activities in 130 countries, 9.400 employees
• Resident representatives in 66 countries, mostly
  in Africa, Asia, Latin America and Eastern Europe

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The devils in the details German experiences
struggling with fiscal rules

• Two different fiscal rules applied
• Golden rule in the German Basic Law and European
  SGP
• Design of the national rule
• Investment is defined as gross capital formation
  no incentive to repay debt during booms
• Debt service at 14.5 of recurrent expenditure
  implicit debt at 270 of GDP
• Help to limit deficit in ad times, fail to boost
  budget discipline in boom times
• Fiscal Rule and the budget process
• Cascading budgetary negotiations, no ceilings
• Medium-term limits to fiscal discipline
• Cost of German unification 17 years ago still
  considerable
• Net transfers to Eastern Germany in 2003 at 6 of
  recurrent expenditure

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Why stick to the rules? A note on embeddedness

• Credible sanctions raise politicians respect
  for fiscal discipline
• Political sanctions German voters dislike lack
  of fiscal discipline
• Legal enforcement independent judgement on
  government policy
• Conclusion FRs must be transparent, easily
  understandble, and tight to a strict enforcement
  process
• Harmonisation with monetary policy
• Europe Different economic spaces for fiscal and
  monetary policy
• Way out creating autonomous fiscal agencies?
• Objective Separate budget execution fom party
  politics
• Examples from India, Malasia, Nigeria etc. show
  that

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Fiscal Rules breaking the debt cycle in the
Third World?

• Third World Debt currently low priority on the
  political agenda
• Credibility of fiscal rules depends on
  institutional framework and political room for
  manoeuver
• Rise of Fiscal rules in Latin America
• Structural surplus rule for the budget (Chile)
• Commodity Stabilization Funds (Colombia, Chile)
• Fiscal Responsibility Laws (Brazil, Argentina,
  Peru)
• Limited experiences with fiscal rules in low
  income countries
• Institutional capacity?
• High dependency on international tranfers aid in
  average 30-50 of govt expenditure (est.)
• Recommendation to SBO Consider fiscal rules in
  middle-income countries
• Count on promising examples from Latin America
• Countries in transition Central and Eastern
  Europe
• Middle East and Northern Africa

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• Thank you!
• For more information on gtz please visit us
• www.gtz.de/public-finance