Fiscal rules in Lithuania Algimantas Rimkūnas Vice Minister, Ministry of Finance of Lithuania 3 June, 2016
Evolution of National and EU Fiscal Regulations Stability and Growth Pact (SGP) Maastricht Treaty SGP Reform 1992 Six-Pack 1997 2005 Fiscal Compact 2011 Financial Indicators of the State budget and Municipal Budgets Law on the 1991 Budget Structure 1990 Law on Fiscal Discipline Two-Pack 2012 EC Comm. on SGP Flexibility 2013 2015 Constitutional Law on the Implementation of the Fiscal Treaty 2007 2014 2
Comparison of Fiscal Aggregates Limited by National and EU Legislation Fiscal aggregate Regulated by EU legislation Regulated by national legislation General Government structural balance General Government nominal balance General Government expenditure growth General Government debt Subsector debt, guaranteed debt and change in debt liabilities Subsector nominal and (or) structural balances 3
Although Set of Fiscal Rules Appears Complex. If to add-up national government s subsectors rules complexity increases Source: IMF report on EU fiscal rules 4
the EU Fiscal Reforms Have Positive Impact on Fiscal Outcomes General Government balance, EU, % GDP 0,0-1,0-2,0-3,0-4,0-5,0-6,0-7,0-8,0 Stability and Growth Pact SGP reform Six Pack Two Pack 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 General Government debt, EU, % GDP 100 90 80 70 60 50 40 30 20 10 0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Source: Eurostat. EU average based on number of EU members at a particular year. EU average debt for up to 1999 the Euro zone figures due to absent data for the whole EU. 5
Challenges of Fiscal Rules Application (I) Structural balance Expenditure growth: two rules (National and EU) Methodological differences Output gap Differences in scope Expenditure growth Exceptions for application One-offs Dependence on past results Valuation of investments, discretionary revenue measures, etc. 6
Potential GDP Calculation and Respective Disputes of Calculations Both at the Core of Fiscal Rules Shorter forecast horizon determines slower potential output growth per cent 3,5 3,0 2,5 2,0 1,5 1,0 0,5 0,0 Potential output growth rate according to the MoF economic development scenario (March 2016) using different length of time series 2,1 2,0 2,5 2,3 2,7 2,5 3,0 2,8 3,1 3,1 2014 2015 2016 2017 2018 2019 Potential output, calculated according to longer time series of the economic development scenario Potential output, calculated according to shorter time series of the economic development scenario % of potential output 1,2 1,0 0,8 0,6 0,4 0,2 0,0-0,2 Output gap according to the MoF economic development scenario (March 2016) using different length of time series 1,1 1,0 0,2 0,3 0,3-0,1 0,7 0,1 0,1 0,1 2014 2015 2016 2017 2018 2019 Output gap, calculated according to longer time series of the economic development scenario Output gap, calculated according to shorter time series of the economic development scenario 7
Challenges of Fiscal Rules Application (II) Structural balance Expenditure growth: two rules (National and EU) Methodological differences Output gap Differences in scope Expenditure growth limit size Exceptions for application One-offs Dependence on past results Valuation of investments, discretionary revenue measures, etc. 8
More Space for Expenditure Growth If Structural Reforms Are Being Implemented In 2016 Lithuania used an exception for pension reform Stability program of Lithuania for 2016 addresses EC to approve the New Social Model as a structural reform exception within SGP rules EU regulation The EC evaluates the structural reform correspondence with EU SGP requirements Structural reforms must meet these criteria: Effect on public finance sustainability growth Effect on economic potential growth Independent valuation analysis on effects Regulations have to be adopted Expenditure on structural reforms cannot exceed 0.5 % GDP 9
Factual Deficit in 2015 in Lithuania was the Lowest Since Restoration of the Independence MTO for 2016-2018 is set at 1 % GDP structural general government deficit Based on assessment of the Stability Programme and taking into account the Commission 2016 spring forecast Lithuania is expected to comply with the provisions of the Stability and Growth Pact General Government balance, %GDP Structural General Government balance, % GDP 0,0-1,0-2,0-3,0-4,0-5,0-6,0-7,0-8,0-9,0-10,0-0,3-0,8-3,1-9,1-6,9-8,9-3,1-2,6-0,7-0,2-0,8 0,0 0-0,2-0,4-0,6-0,8-1 -1,2 2015* 2016** 2017** 0-0,5-0,7 Structural GG balance, % GDP MTO Source: Eurostat, Ministry of Finance calculations 10
Fiscal Outcomes in EU 2015 General Government balance 2015, % GDP Luxembourg Germany Estonia Sweden Lithuania Czech Republic Romania Cyprus Austria Latvia Malta Netherlands Hungary Bulgaria Denmark Ireland Belgium Italy Poland Finland Slovenia Slovakia Croatia France Portugal United Kingdom Spain Greece Source: Eurostat -7,2-4,4-4,4-5,1-0,2-0,4-0,7-1 -1,2-1,3-1,5-1,8-2 -2,1-2,1-2,3-2,6-2,6-2,6-2,7-2,9-3 -3,2-3,5 0 1,2 0,7 0,4-8 -6-4 -2 0 2 Change in General Government expenditure 2015, p.p. GDP Greece Slovakia Estonia Romania Hungary Lithuania Finland Malta Czech Republic Latvia Denmark Germany France Poland Italy United Kingdom Austria Luxembourg Croatia Spain Belgium Sweden Netherlands Slovenia Bulgaria Portugal Ireland Cyprus -8,6-0,2-0,3-0,3-0,4-0,5-0,7-0,7-0,7-0,9-0,9-1,2-1,2-1,2-1,3-1,3-1,9-1,9-3,4-3,5 1,5 1,2 0,9 0,3 0,2 0,1 4,6 3,7-10 -5 0 5 10
Government Debt at the Manageable Level General Government Debt, % of GDP 50 45 42.7 43.3 40 35 30 41.1 40 39.9 38.1 39 35.7 25 20 15 10 5 0 2015 2016 2017 2018 2019 Debt without prefunding Debt including prefunding Source: Ministry of Finance 12
Responsible Fiscal Policy Results in Higher Credit Ratings and Lower Interest Expenditure 2,0 1,8 General Government interest expenditure % GDP 1,6 1,8 1,4 1,6 1,5 1,2 1,0 0,8 1,4 1,3 1,0 0,9 0,6 0,4 0,2 0,0 2013 2014 2015 2016 p. 2017 p. 2018 p. 2019 p. Source: Ministry of Finance 13
Pending National Challenges: Public Finance Quality Enhancement Better tax revenue administration More effective and efficient public expenditure More communication to society on where tax revenue is spent 43,0 41,0 39,0 37,0 35,0 33,0 31,0 29,0 27,0 25,0 Tax Revenue to GDP Ratio, % of GDP 41,2 41,5 40,7 39,2 39,4 39,9 40,0 39,6 39,3 39,2 39,7 38,7 39,0 39,3 39,3 39,2 39,6 39,9 40,0 38,5 38,5 38,9 35,1 33,5 32,5 31,3 31,4 31,6 31,7 31,7 31,7 30,7 30,1 29,3 29,5 30,4 30,4 30,9 29,2 30,6 28,7 29,5* 27,9 28,7 28,7 28,9 28,0 27,8 28,1 28,4 28,1 28,0 27,5 27,6 27,3 27,4 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 EU-28 EA - 19 Lithuania Latvia Estonia Source: Eurostat, preliminary data for 2015 by Statistics Lithuania 14
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