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Fiscal Consolidation and Public Investment: Friends, Foes, or Neutral Partners? A Look at Bulgaria...
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![Page 1: Fiscal Consolidation and Public Investment: Friends, Foes, or Neutral Partners? A Look at Bulgaria and Romania Armin Riess European Investment Bank International.](https://reader034.fdocuments.net/reader034/viewer/2022051613/5514a665550346d36e8b5c6e/html5/thumbnails/1.jpg)
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
![Page 2: Fiscal Consolidation and Public Investment: Friends, Foes, or Neutral Partners? A Look at Bulgaria and Romania Armin Riess European Investment Bank International.](https://reader034.fdocuments.net/reader034/viewer/2022051613/5514a665550346d36e8b5c6e/html5/thumbnails/2.jpg)
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
![Page 3: Fiscal Consolidation and Public Investment: Friends, Foes, or Neutral Partners? A Look at Bulgaria and Romania Armin Riess European Investment Bank International.](https://reader034.fdocuments.net/reader034/viewer/2022051613/5514a665550346d36e8b5c6e/html5/thumbnails/3.jpg)
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
![Page 4: Fiscal Consolidation and Public Investment: Friends, Foes, or Neutral Partners? A Look at Bulgaria and Romania Armin Riess European Investment Bank International.](https://reader034.fdocuments.net/reader034/viewer/2022051613/5514a665550346d36e8b5c6e/html5/thumbnails/4.jpg)
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
![Page 5: Fiscal Consolidation and Public Investment: Friends, Foes, or Neutral Partners? A Look at Bulgaria and Romania Armin Riess European Investment Bank International.](https://reader034.fdocuments.net/reader034/viewer/2022051613/5514a665550346d36e8b5c6e/html5/thumbnails/5.jpg)
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
![Page 6: Fiscal Consolidation and Public Investment: Friends, Foes, or Neutral Partners? A Look at Bulgaria and Romania Armin Riess European Investment Bank International.](https://reader034.fdocuments.net/reader034/viewer/2022051613/5514a665550346d36e8b5c6e/html5/thumbnails/6.jpg)
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
![Page 7: Fiscal Consolidation and Public Investment: Friends, Foes, or Neutral Partners? A Look at Bulgaria and Romania Armin Riess European Investment Bank International.](https://reader034.fdocuments.net/reader034/viewer/2022051613/5514a665550346d36e8b5c6e/html5/thumbnails/7.jpg)
Debt dynamics
Change in debt/GDP ratio
= fiscal deficit/GDP ratio
– nominal GDP growth • debt/GDP ratio
![Page 8: Fiscal Consolidation and Public Investment: Friends, Foes, or Neutral Partners? A Look at Bulgaria and Romania Armin Riess European Investment Bank International.](https://reader034.fdocuments.net/reader034/viewer/2022051613/5514a665550346d36e8b5c6e/html5/thumbnails/8.jpg)
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
![Page 9: Fiscal Consolidation and Public Investment: Friends, Foes, or Neutral Partners? A Look at Bulgaria and Romania Armin Riess European Investment Bank International.](https://reader034.fdocuments.net/reader034/viewer/2022051613/5514a665550346d36e8b5c6e/html5/thumbnails/9.jpg)
Real GDP growth (in %), 2000-05
Source: European Commission, Economic Forecast, Spring 2006
0
1
2
3
4
5
6
EU 25 Bulgaria Romania
![Page 10: Fiscal Consolidation and Public Investment: Friends, Foes, or Neutral Partners? A Look at Bulgaria and Romania Armin Riess European Investment Bank International.](https://reader034.fdocuments.net/reader034/viewer/2022051613/5514a665550346d36e8b5c6e/html5/thumbnails/10.jpg)
Fiscal deficit that makes debt/GDP converge to 60% (Maastricht criteria)
Nominal GDP growth
(in %)
Fiscal deficit
(in % of GDP)
![Page 11: Fiscal Consolidation and Public Investment: Friends, Foes, or Neutral Partners? A Look at Bulgaria and Romania Armin Riess European Investment Bank International.](https://reader034.fdocuments.net/reader034/viewer/2022051613/5514a665550346d36e8b5c6e/html5/thumbnails/11.jpg)
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)
![Page 12: Fiscal Consolidation and Public Investment: Friends, Foes, or Neutral Partners? A Look at Bulgaria and Romania Armin Riess European Investment Bank International.](https://reader034.fdocuments.net/reader034/viewer/2022051613/5514a665550346d36e8b5c6e/html5/thumbnails/12.jpg)
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%
![Page 13: Fiscal Consolidation and Public Investment: Friends, Foes, or Neutral Partners? A Look at Bulgaria and Romania Armin Riess European Investment Bank International.](https://reader034.fdocuments.net/reader034/viewer/2022051613/5514a665550346d36e8b5c6e/html5/thumbnails/13.jpg)
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%
![Page 14: Fiscal Consolidation and Public Investment: Friends, Foes, or Neutral Partners? A Look at Bulgaria and Romania Armin Riess European Investment Bank International.](https://reader034.fdocuments.net/reader034/viewer/2022051613/5514a665550346d36e8b5c6e/html5/thumbnails/14.jpg)
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)
![Page 15: Fiscal Consolidation and Public Investment: Friends, Foes, or Neutral Partners? A Look at Bulgaria and Romania Armin Riess European Investment Bank International.](https://reader034.fdocuments.net/reader034/viewer/2022051613/5514a665550346d36e8b5c6e/html5/thumbnails/15.jpg)
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)
![Page 16: Fiscal Consolidation and Public Investment: Friends, Foes, or Neutral Partners? A Look at Bulgaria and Romania Armin Riess European Investment Bank International.](https://reader034.fdocuments.net/reader034/viewer/2022051613/5514a665550346d36e8b5c6e/html5/thumbnails/16.jpg)
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
![Page 17: Fiscal Consolidation and Public Investment: Friends, Foes, or Neutral Partners? A Look at Bulgaria and Romania Armin Riess European Investment Bank International.](https://reader034.fdocuments.net/reader034/viewer/2022051613/5514a665550346d36e8b5c6e/html5/thumbnails/17.jpg)
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
![Page 18: Fiscal Consolidation and Public Investment: Friends, Foes, or Neutral Partners? A Look at Bulgaria and Romania Armin Riess European Investment Bank International.](https://reader034.fdocuments.net/reader034/viewer/2022051613/5514a665550346d36e8b5c6e/html5/thumbnails/18.jpg)
Macroeconomic constraints
Concerns about
• Inflation internal imbalances
• External current account external imbalances
![Page 19: Fiscal Consolidation and Public Investment: Friends, Foes, or Neutral Partners? A Look at Bulgaria and Romania Armin Riess European Investment Bank International.](https://reader034.fdocuments.net/reader034/viewer/2022051613/5514a665550346d36e8b5c6e/html5/thumbnails/19.jpg)
Macroeconomic constraints
Concerns about
• Inflation internal imbalances
• External current account external imbalances
![Page 20: Fiscal Consolidation and Public Investment: Friends, Foes, or Neutral Partners? A Look at Bulgaria and Romania Armin Riess European Investment Bank International.](https://reader034.fdocuments.net/reader034/viewer/2022051613/5514a665550346d36e8b5c6e/html5/thumbnails/20.jpg)
External current account (in % of GDP)
Current account balance = Savings – Investment
Current account balance = Trade balance + …
![Page 21: Fiscal Consolidation and Public Investment: Friends, Foes, or Neutral Partners? A Look at Bulgaria and Romania Armin Riess European Investment Bank International.](https://reader034.fdocuments.net/reader034/viewer/2022051613/5514a665550346d36e8b5c6e/html5/thumbnails/21.jpg)
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 =
![Page 22: Fiscal Consolidation and Public Investment: Friends, Foes, or Neutral Partners? A Look at Bulgaria and Romania Armin Riess European Investment Bank International.](https://reader034.fdocuments.net/reader034/viewer/2022051613/5514a665550346d36e8b5c6e/html5/thumbnails/22.jpg)
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
![Page 23: Fiscal Consolidation and Public Investment: Friends, Foes, or Neutral Partners? A Look at Bulgaria and Romania Armin Riess European Investment Bank International.](https://reader034.fdocuments.net/reader034/viewer/2022051613/5514a665550346d36e8b5c6e/html5/thumbnails/23.jpg)
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
![Page 24: Fiscal Consolidation and Public Investment: Friends, Foes, or Neutral Partners? A Look at Bulgaria and Romania Armin Riess European Investment Bank International.](https://reader034.fdocuments.net/reader034/viewer/2022051613/5514a665550346d36e8b5c6e/html5/thumbnails/24.jpg)
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
![Page 25: Fiscal Consolidation and Public Investment: Friends, Foes, or Neutral Partners? A Look at Bulgaria and Romania Armin Riess European Investment Bank International.](https://reader034.fdocuments.net/reader034/viewer/2022051613/5514a665550346d36e8b5c6e/html5/thumbnails/25.jpg)
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 %
![Page 26: Fiscal Consolidation and Public Investment: Friends, Foes, or Neutral Partners? A Look at Bulgaria and Romania Armin Riess European Investment Bank International.](https://reader034.fdocuments.net/reader034/viewer/2022051613/5514a665550346d36e8b5c6e/html5/thumbnails/26.jpg)
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 %
![Page 27: Fiscal Consolidation and Public Investment: Friends, Foes, or Neutral Partners? A Look at Bulgaria and Romania Armin Riess European Investment Bank International.](https://reader034.fdocuments.net/reader034/viewer/2022051613/5514a665550346d36e8b5c6e/html5/thumbnails/27.jpg)
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
![Page 28: Fiscal Consolidation and Public Investment: Friends, Foes, or Neutral Partners? A Look at Bulgaria and Romania Armin Riess European Investment Bank International.](https://reader034.fdocuments.net/reader034/viewer/2022051613/5514a665550346d36e8b5c6e/html5/thumbnails/28.jpg)
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”
![Page 29: Fiscal Consolidation and Public Investment: Friends, Foes, or Neutral Partners? A Look at Bulgaria and Romania Armin Riess European Investment Bank International.](https://reader034.fdocuments.net/reader034/viewer/2022051613/5514a665550346d36e8b5c6e/html5/thumbnails/29.jpg)
Fiscal consolidation and public investment: friends, foes, or neutral partners?
A look at Bulgaria and Romania
Armin Riess([email protected])
European Investment Bank
International Seminar for Experts“The coming enlargement of the the EU”
Cicero FoundationOctober 12-13, 2006