Recovery and Challenges in Eastern Europe OECD - 7th annual meeting of Senior Budget Officials from Central, Eastern and South-Eastern European countries (CESEE) Zagreb, Croatia, 3 June - 1 July 211 Franziska Ohnsorge, Head of Macro Unit, EBRD May 18 211 1 European Bank for Reconstruction and Development www.ebrd.com
Pre-crisis fiscal positions were weaker than typically acknowledged -1 1-5 5 Source: EBRD staff calculations based on IMF World Economic Outlook Database. Domestic demand booms disguised underlying structural deficits with inflated revenues Structural balance < actual balance EST AZE KAZ BGR MNE RUS LVA GEO SVN MKD CZEMDA LTU ARMHRV BLR UKR SRB SVK POL ROM ALB Structural balance > HUN actual balance -1-5 5 1 Structural balance (% GDP)
Change in fiscal expenditure, 23-7 (% of GDP) Source: IMF World Economic Outlook, EBRD staff calculations. Pre-crisis fiscal policy was pro-cyclical In many countries, revenue increases were passed through into expenditure hikes. 25 2 ARM 15 GEO 1 TJK MDV UKR 5 LIT KGZ BIH TUN ROM ALB EST BEL KAZ MOR SRB EGY HUNLAT MNT SVN HRV BGR MON POL TKM AZE UZB RUS -5 SVK CZE FYR TUR -1-1 -5 5 1 15 Change in fiscal revenues, 23-7 (% of GDP)
Change in GG debt (% of GDP) Fiscal rules/spending constraints did not prevent pre-crisis debt buildup During upswings, fiscal rules are weak; They restrict fiscal policy in the downturn (e.g. Poland 211/12?) 4 2-2 -4-6 -8..2.4.6.8 1. Alesina index (subindex: debt constraints) Source: Alesina, Hausmann, Hommes, Stein (1996), OECD Budget Practices and Procedures Database (28).
Tremendous fiscal consolidation since the crisis Without sharp fiscal consolidation early on in 29 and, deficits would have widened into double digits in the Baltics and Romania. Deficits and Consolidation Measures 15 1 5-5 -1-15 -2 (% of GDP) Actual deficit Consolidation measures Deficit without measures -25 LAT LIT ESTSRBGREROMHUNALB BiH HRVUKRMDVFYRBGRMNETURPOLRUS Source: IMF Regional Economic Outlook Europe, May 211. IMF staff reports for Greece. EBRD staff estimates for Turkey,
Latvia Lithuania Estonia Serbia Ireland Greece Romania Hungary Albania Source: IMF Regional Economic Outlook for Europe, May 211. IMF staff reports for Ireland, Greece. EBRD staff Bosnia & Croatia Ukraine Moldova Macedonia, Bulgaria Montenegro Turkey Poland Russia More is underway Fiscal consolidation is mostly complete in EBRD region (in contrast to Eurozone periphery). Deficits and Consolidation Measures (% of GDP) 2 15 1 29-1 211-12 5-5 -1
Latvia Lithuani Estonia Serbia Ireland Greece Romania Hungary Albania Bosnia & Croatia Ukraine Moldova Macedo Bulgaria Montene Turkey Poland Russia Consolidation was mainly expenditurebased In often deep recessions, revenue-based consolidation would have been difficult. 2 15 1 5-5 -1 Fiscal Consolidation Measures, 29-12 (% of GDP) Revenues Expenditures Source: IMF Regional Economic Outlook for Europe, May 211. IMF staff reports for Ireland, Greece. EBRD staff
Share of expenditurebased measures Share of expenditurebased measures Better fiscal institutions were loosely associated with more expenditure-based policy The exceptions was the extreme consolidation effort in Latvia What matters: control over budget execution. 4 3 LAT GRE LIT 2 IRE ROM RUS 1 UKR TUR BIH MDV -1 HRV HUNPOL -2.2.4.6.8 Alesina Index 4 3 2 1-1 -2 TUR BIH HRV GRE MDV POL HUN LIT IRE LAT RUS ROM UKR.2.4.6.8 1 Alesina Subindex: Budget execution
Expenditure-based consolidation (% of rev. consolidation) Degree of front loading (29-1 consolidation % of 29-14 consolidation) In more decentralized fiscal systems consolidation started earlier 1.4 1.2 1.8.6.4.2 LAT ROM EST UKR LIT SRB IRE BIH GRE MDV 8 85 9 95 1 Share of central govt. revenues (% of general govt. rev., avg 26-8) but was not necessarily more expenditure-based 8 6 SRB 4 EST LAT LIT GRE 2 ROM IRE UKR MDV POL FYR BIH -2-4 8 85 9 95 1-6 Share of central govt. revenues (% of general govt. rev., avg 26-8)
Typical consolidation measures Revenue measures VAT hikes (Baltics, Slovakia, Hungary [5%], Poland, Serbia, Romania, Bulgaria, Croatia, Greece, Ireland) Excise tax hikes (EU members, Serbia, Montenegro, Ukraine, Russia) Pillar II pension contributions cuts (Romania, Baltics, Hungary [diversion of funds], Poland, Slovakia, Albania, Bulgaria) Cuts in tax exemptions/ expenditures (Slovakia, Hungary, Romania, Baltics, Ireland, Greece, Albania) Expenditure measures Public sector salaries / employment cuts (salary cuts: Romania 25%, Lithuania 1-12%, Latvia 15-2%, Greece 3/15, Ireland 14%, BIH 15%, Serbia 1%; wage bill cuts: Slovakia 1%, Slovenia 14%, Estonia 15%, Bulgaria 3%, Montenegro 8%, Croatia, Hungary, Poland, Serbia 1%) Pension cuts (Romania 15%, Hungary 1/13, Latvia 15% (overturned), Lithuania, Estonia, Greece) Welfare payment cuts (Romania, Lithuania, Slovakia, Hungary, Ireland) Public investment program (Estonia, Slovakia) Source: OECD Fiscal Consolidation ; IMF staff reports; EBRD staff estimates.
Latvia Lithuania Estonia Serbia Ireland Romania Greece Hungary Bosnia & Croatia Albania Ukraine Macedonia, Bulgaria Moldova Montenegro Turkey Poland Russia Impact of fiscal consolidation: delayed recovery Sharp downturns in 29 were mainly private sector driven. But fiscal consolidation slowed recovery in as private sector began to grow. 1 Contribution to Real GDP Growth, over 28 (%) 5-5 -1-15 -2 Other Fiscal consolidation Overall growth EBRD staff calculations. Based on two-year multiplier of 1 for expenditure measures,.75 for revenue measures.
Slovenia Ukraine Russia Romania Lithuania Slovakia Hungary Bulgaria Latvia Estonia Poland BiH Germany Poland Slovenia Slovakia Japan Armenia Portugal Italy Moldova Albania Spain Czech Russia Azerbaijan Lithuania Belarus Ireland Bulgaria Greece Ukraine Tunisia Kazakhstan Turkey Estonia Serbia Latvia Kyrgyzstan Mongolia Romania Morocco Hungary Has consolidation been enough? CESEE need to run to stand still 15 13 11 9 7 5-1 13-3 With population aging similar to some advanced economies, aging-related cost are set to rise substantially over next 1-2 years longterm entitlement reform and/or more fiscal consolidation needed. Breakdown in projected increase in age-related spending in CEE and other selected sovereigns, 25 (in % of GDP) Longterm care Health Pensions 16 14 12 1 8 6 4 2 Change in Old Age Dependency Ratio (%) 22-3 -2 Source: Marko Mršnik, The Impact Of Population Ageing On Sovereign Ratings For Central And Eastern European Sovereigns Source: ILO, UN.
Conclusions Pre-crisis domestic demand disguised weak underlying fiscal positions Pre-crisis fiscal policy was typically procyclical Although a few EBRD countries (commodity exporters, Turkey, Poland) were able to implement a fiscal stimulus in 29, most countries underwent a severe fiscal contraction. The fiscal contraction was typically: Frontloaded (possibly more so in more decentralized systems) Expenditure-based (possibly more so where control over budget execution was better) Coming to an end Didn t cause the deep 29 recessions but slowed the recovery Even this fiscal consolidation may not be sufficient to offset rising agingrelated cost, especially in EU member countries and Balkans.