Post on 12-May-2015
Fiscal Consolidation and Public Investment: Friends, Foes, or Neutral Partners?A Look at Bulgaria and Romania
Armin RiessEuropean Investment Bank
International Seminar for Experts“The coming enlargement of the the EU”
Cicero FoundationOctober 12-13, 2006
Outline
1. Motivation – EIB interest
2. General observations (EU 27) Public debt sustainability (the long run)
Macroeconomic constraints to fiscal policy (the short run)
3. Fiscal consolidation and public investment Bulgaria
Romania
4. Conclusion
Outline
1. Motivation – EIB interest
2. General observations (EU 27) Public debt sustainability (the long run)
Macroeconomic constraints to fiscal policy (the short run)
3. Fiscal consolidation and public investment Bulgaria
Romania
4. Conclusion
Outline
1. Motivation – EIB interest
2. General observations (EU 27) Public debt sustainability (the long run)
Macroeconomic constraints to fiscal policy (the short run)
3. Fiscal consolidation and public investment Bulgaria
Romania
4. Conclusion
Public debt in EU-27 (% of GDP), 2006
Source: European Commission, Economic Forecast, Spring 2006
0
20
40
60
80
100
120L
UIR
ED
K FI
ES
UK
SWE
NL A
FR
PO
RG
ER
CY
PM
A
BE
LG
R IT ES
LA
RO LI
BU SL CZ
SK PO
HU
Maastricht 60% criterion
Fiscal balance in EU-27 (% of GDP), 2006
Source: European Commission, Economic Forecast, Spring 2006
-8
-6
-4
-2
0
2
4
6PO
R ITG
ER UK FR GR
MA
C
YP A
LU NL
BEL
IRE ES
SWE FI DK
HU CZ
PO SK RO SL LA LI ES BU
Maastricht 3% criterion
Debt dynamics
Change in debt/GDP ratio
= fiscal deficit/GDP ratio
– nominal GDP growth • debt/GDP ratio
Debt dynamics
Change in debt/GDP ratio
= fiscal deficit/GDP ratio
– nominal GDP growth • debt/GDP ratio
Key message: debt accumulation the slower, the smaller the deficit higher economic growth
Real GDP growth (in %), 2000-05
Source: European Commission, Economic Forecast, Spring 2006
0
1
2
3
4
5
6
EU 25 Bulgaria Romania
Fiscal deficit that makes debt/GDP converge to 60% (Maastricht criteria)
Nominal GDP growth
(in %)
Fiscal deficit
(in % of GDP)
Fiscal deficit that makes debt/GDP converge to 60% (Maastricht criteria)
Nominal GDP growth
(in %)4.0% 5.0% 7.0% 9.0%
Fiscal deficit
(in % of GDP)
Fiscal deficit that makes debt/GDP converge to 60% (Maastricht criteria)
Nominal GDP growth
(in %)4.0% 5.0% 7.0% 9.0%
Fiscal deficit
(in % of GDP)2.4% 3.0% 4.2% 5.4%
Fiscal deficit that makes debt/GDP converge to 60% (Maastricht criteria)
Nominal GDP growth
(in %)4.0% 5.0% 7.0% 9.0%
Fiscal deficit
(in % of GDP)2.4% 3.0% 4.2% 5.4%
Bulgaria: fiscal balance and public debt (in % of GDP)
-1
0
1
2
3
4
5
1998 1999 2000 2001 2002 2003 2004 2005 2006*
-20
0
20
40
60
80
100
Source: National Statistical Institute (NSI) of Bulgaria; *Projected
Public debt (right scale)
Fiscal balance (left scale)
Romania: fiscal balance and public debt (in % of GDP)
-6
-4
-2
0
2
4
6
1998 1999 2000 2001 2002 2003 2004 2005 2006*
0
5
10
15
20
25
30
Source: IMF; *based on policy measures (1.8% of GDP) relative to initial budget
Pubic debt (right scale)
Fiscal balance (left scale)
Outline
1. Motivation – EIB interest
2. General observations (EU 27) Public debt sustainability (the long run)
Macroeconomic constraints to fiscal policy (the short run)
3. Fiscal consolidation and public investment Bulgaria
Romania
4. Conclusion
Outline
1. Motivation – EIB interest
2. General observations (EU 27) Public debt sustainability (the long run)
Macroeconomic constraints to fiscal policy (the short run)
3. Fiscal consolidation and public investment Bulgaria
Romania
4. Conclusion
Macroeconomic constraints
Concerns about
• Inflation internal imbalances
• External current account external imbalances
Macroeconomic constraints
Concerns about
• Inflation internal imbalances
• External current account external imbalances
External current account (in % of GDP)
Current account balance = Savings – Investment
Current account balance = Trade balance + …
External current account (in % of GDP)
-15
-10
-5
0
5
10
15
20
25
30
1995 1997 1999 2001 2003 2005
Saving
Current account balance
Investment
Current account balance = Savings – Investment
Current account balance = Trade balance + …
Current account balance =
External current account (in % of GDP)
-15
-10
-5
0
5
10
15
20
25
30
1995 1997 1999 2001 2003 2005
Saving
Current account balance
Investment
Current account balance = Savings – Investment
Current account balance =
Current account balance = Trade balance + …
(Savings – Investment) of private sector + fiscal balance
Outline
1. Motivation – EIB interest
2. General observations (EU 27) Public debt sustainability (the long run)
Macroeconomic constraints to fiscal policy (the short run)
3. Fiscal consolidation and public investment Bulgaria
Romania
4. Conclusion
Outline
1. Motivation – EIB interest
2. General observations (EU 27) Public debt sustainability (the long run)
Macroeconomic constraints to fiscal policy (the short run)
3. Fiscal consolidation and public investment Bulgaria
Romania
4. Conclusion
Bulgaria: contributions to change in fiscal balance (in % of GDP), 2001-05
-2
-1
0
1
2
3
4
5
6
Source: Bulgarian National Bank
Change infiscal balance
Change in fiscal balance 3.8 %
Decline in interest payments on public debt2.1 %
Increase in revenue3.1 %
Increase in current expenditure (excl. interest payments)
– 1.6 %
Decline in public investment0.2 %
Romania: contributions to change in fiscal balance (in % of GDP), 2001-05
-3
-2
-1
0
1
2
3
4
5
6
Source: IMF
Change infiscal balance
Change in fiscal balance 3.3 %
Decline in interest payments on public debt3.7 %
Decline in revenue2.2 %
Decline in current expenditure (excl. interest payments)
1.5 %
Decline in public investment0.3 %
Public investment (% of GDP)
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
2002 2003 2004 2005
Bulgaria Romania NMS-8
Source: AMECO (European Commission)
Eurozone countries 2005
Conclusion
Fiscal policy in BU & RO: macroeconomic stability
rather than debt sustainability
Public investment in BU & RO low compared to
NMS-8, but increase possible without deteriorating
fiscal balance
Fiscal consolidation has not come at expense of
public investment “neutral partners”
Fiscal consolidation and public investment: friends, foes, or neutral partners?
A look at Bulgaria and Romania
Armin Riess(a.riess@eib.org)
European Investment Bank
International Seminar for Experts“The coming enlargement of the the EU”
Cicero FoundationOctober 12-13, 2006