Assessing the fiscal stance in the euro area : The Commission's methodology

Transcription

1 Assessing the fiscal stance in the euro area : The Commission's methodology Eloïse Orseau ECFIN C1 - Fiscal policy and surveillance 10 th meeting of the Network of public finance economists in public administration 2 March 2016 Copyright rests with the author. All rights reserved.

2 Outline Motivation: institutional and macroeconomic context Methodology: measurement and assessment criteria Analysis and findings based on the 2015 autumn forecast in the PFR Issues and envisaged methodological improvements

3 Motivation: why assess the fiscal stance? Two Pack (Regulation (EU) 473/2013 Art. 7(4)) Requires the Commission to "make an overall assessment of the budgetary situation and prospects in the euro area as a whole", based on "the national budgetary prospects and their interaction across the area" The Commission shall also, "as appropriate, outline measures to reinforce the coordination of budgetary ( ) policy at the euro-area level" Five Presidents' Report Reinforce the foundations of EMU, including by moving "towards a Fiscal Union that delivers both fiscal sustainability and fiscal stabilisation" Current focus on the fiscal stance due to constraints on monetary policy Monetary policy currently constrained at the zero lower bound Fiscal policy in a better position to stabilise the economy than in normal times, given the amplification of the expansionary impact of fiscal stimulus by low real interest rates Coordination would help taking better into account the fiscal spillovers across euro area countries

4 Methodology: starting point and timeline What was missing: - a consistent definition of the fiscal stance and indicators to measure it - transparent, quantified criteria to assess it Analysis conducted within the rules of the SGP; analytical, descriptive approach, not normative Timeline: - October 2015: presentation by the Commission of a tentative methodology and discussion in committees (EWG-A and EWG) - December 2015: analysis of the fiscal stance according to the revised methodology in the PFR : Further work on the methodology

5 Methodology in the 2015 PFR Measurement: what indicators and why? Indicators used in the PFR: ΔSPB, ΔSB and DFE Different focuses: comparability with SGP requirements (SB), comparability with S1 (SPB), calculations using the fiscal multiplier (SPB), assessment of fiscal effort (DFE) Assessment: defining transparent, simple criteria Two separate criteria: long-term sustainability of public finances and short-term economic stabilisation The illustrative calculations are a basis for discussion Comparisons: Sustainability needs vs. stabilisation needs Needs vs. projections

6 Methodology in the 2015 PFR Estimating sustainability needs Principle: Structural fiscal adjustment required to put or maintain debt on a sustainable path Indicator: Measured by the S1 indicator, i.e. the improvement in the structural primary balance in to bring the debt ratio to 60% in (Advantages of S1: existing indicator, includes the costs of ageing populations) Illustrative quantification: 25% of the total effort assumed to be achieved in the first year Estimating stabilisation needs Principle: Ensuring that the output gap is closed at a sufficiently rapid pace Indicator: Fiscal stimulus (or consolidation) necessary to achieve the envisaged reduction of the output gap Illustrative quantification: Reduction of the output gap by 25% to 50% in one year (range)

7 Analysis in the 2015 PFR: sustainability needs Euro area Member States with a negative OG in 2015 Member States with a positive OG in broadly neutral fiscal stance EA LU DE NL SK CY AT ES IT SI FI BE PT FR EL EE LV LT MT IE Change in the SPB implied by sustainability needs

8 Analysis in the 2015 PFR: sustainability vs stabilisation needs Euro area Member States with a negative OG in 2015 Member States with a positive OG in broadly neutral fiscal stance (-3.1) EA LU DE NL SK CY AT ES IT SI FI BE PT FR EL EE LV LT MT IE -1.5 Change in the SPB consistent with a reduction of the OG by 25% Change in the SPB consistent with a reduction of the OG by 50% Change in the SPB implied by sustainability needs

9 Analysis in the 2015 PFR: needs vs. forecasts Euro area Member States with a negative OG in 2015 Member States with a positive OG in broadly neutral fiscal stance (-3.1) EA LU DE NL SK CY AT ES IT SI FI BE PT FR EL EE LV LT MT IE -1.5 Change in the SPB consistent with a reduction of the OG by 25% Change in the SPB consistent with a reduction of the OG by 50% Change in the SPB in the Commission forecast Change in the SPB implied by sustainability needs

10 Main findings in the 2015 PFR Broad compatibility of sustainability and stabilisation objectives in normal times Tensions rising if stronger sustainability needs or more ambitious stabilisation targets Differences across Member States in terms of: - needs - budgetary room for manœuvre to address both needs - priorities (more or less tilted towards stabilisation) Implications: - Possibility of tensions between stabilisation needs for the euro area and national stabilisation needs - Stimulus tends to be feasible in countries that do not need it and needed in countries that do not have the fiscal scope to implement it

11 Conceptual and methodological issues Indicators of fiscal effort, cycle and sustainability Uncertainties related to estimates of the output gap and the structural balance in real time, also affecting S1 Putting needs together The balance between the two objectives varies with time and economic conditions: difficulty to get a composite indicator Aggregation of countries The analysis assumes the same multipliers (large uncertainty) The meaningfulness of compounding fiscal adjustments by different governments is not clear (no central decision + countries have different fiscal room for manoeuvre, therefore a certain fiscal stance does not have the same meaning in all MS) No spillovers included currently in the analysis, only a mechanical aggregation of national fiscal stances

12 Way forward with the methodology Improving indicators For symmetry: range (25%-50%) for the sustainability needs Complement the OG by the number of consecutive years with a positive or negative OG? Complement S1 with Debt Sustainability Analysis and distance to the MTO? When do needs become more pressing? Introduce non-linearities? Aggregation Integrate spillovers and contagion effects in the analysis

13 Conclusion: main messages Analysis of the fiscal stance in the euro area, in line with the Two Pack, and in a context of impaired monetary policy Assessment of the projected fiscal stance against two transparent and separate criteria: sustainability and stabilisation needs Main findings: - In many cases, fiscal policy can address both needs at the same time at least partially, but tensions can exist - There can also be tensions between individual country needs and euro area needs - The EA fiscal stance is currently slightly tilted towards stabilisation Still work in progress, and methodology to be refined

14 Thank you

15 Background slides

16 Total fiscal adjustment needed in according to the S1 indicator (as % of GDP) Source: Commission services. S1 ("2015 scenario") Initial budgetary position Gap to the debtstabilizing primary balance Cost of delaying adjustment Due to Debt requirement Ageing costs BE DE EE IE EL ES FR IT CY LV LT LU MT NL AT PT SI SK FI EA

17 Change in the SPB implied by stabilisation and sustainability needs and in the Commission forecast (as % of GDP) STABILISATION NEEDS Change in the SPB consistent with a reduction of Change in the SPB consistent with a reduction of Source: Commission services. SUSTAINABILITY NEEDS Change in the SPB implied by the sustainability needs Change in the SPB in 2016 (ΔSPB baseline ) COMMISSION FORECAST OG in 2015 ΔOG in 2016 (ΔOG baseline ) Recalculated ΔOG in 2016 with ΔSPB=0 (ΔOG ) the OG by 25% the OG by 50% EA LU DE NL SK CY AT ES IT SI FI BE PT FR EL EE LV LT MT IE