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Structural Reforms and Consolidation

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					Structural Reforms and Consolidation
 Conference organized by the IMF Fiscal Affairs Department and
               the Swedish Ministry of Finance –
 Medium-Term Budgetary Frameworks and Fiscal Consolidation Programs
                     7-8 May 2012, Stockholm

                   Pier Carlo Padoan
OECD Deputy Secretary-General and Chief Economist
                  Outline



The size of the challenge
Spending efficiency
Revenue measures
Labour and product market reforms




                                    2
      Gross debt has risen to high levels in OECD
                       countries

      % of GDP
                                               2007   2011

200                                                          200



150                                                          150



100                                                          100



50                                                           50



 0                                                           0




  Source: OECD Economic Outlook 90 Database.




                                                                   3
                         Consolidation needs are large
          (fiscal gap from 2013 for debt to reach 50% of GDP by 2050)

      % of GDP                                                    Previous scenario plus
12                        Baseline       "Low" health     "High" health                    Long-term care   Pensions
                                                                                                                       12


10                                                                                                                     10


 8                                                                                                                     8


 6                                                                                                                     6


 4                                                                                                                     4


 2                                                                                                                     2


 0                                                                                                                     0




     Note: “Low” health assumes policy action curbs health spending growth. “High” health is the additional
     cost pressure in the absence of these policy actions.




                                                                                                                            4
                      Impact on debt sustainability
  Fiscal gaps with productivity shocks and spending efficiency
Change in underlying primary balance needed to bring debt to 50% of GDP in 2050




   Note: The change is from the underlying primary balance projected for 2012. In the simulations, interest rates remain at
   their baseline level and government financial assets are assumed to remain constant as a share of GDP. Government
   spending efficiency is assumed to reduce spending by 0.9% of GDP by 2050.
   Source: FISCAL CONSOLIDATION, Working Party No. 1 on Macroeconomic and Structural Policy Analysis,
   ECO/CPE/WP1(2011)19.


                                                                                                                              5
Why consolidate? Long-term considerations

Limit negative effects on long-term growth
Respect other policy objectives
Examples include:

  Raising public sector efficiency
  Eliminating wasteful spending
  Raising taxes on negative externalities
  Reconsider tax expenditures



                                             6
Health care efficiency




                         7
   Primary and secondary education efficiency




Source: Sutherland et al. (2007).




                                                8
                        Better targeted spending

Share of social transfers received by the top half of the population
                                2005




  Source: Whiteford (2009)


                                                                       9
                         Less distortionary taxation

                  Recurrent tax revenues from immovable property, 2009
       % GDP
 4                                                                       4

3.5                                                                      3.5

 3                                                                       3

2.5                                                                      2.5

 2                                                                       2

1.5                                                                      1.5

 1                                                                       1

0.5                                                                      0.5

 0                                                                       0




      Source: OECD Revenue Statistics database




                                                                             10
                         Environmental tax revenues

                                                     2009 (1)   2000
    % of GDP
5


4


3


2


1


0




    Source: OECD/EEA database on instruments used for environmental policy and natural
    resources management.




                                                                                         11
                          The VAT revenue ratio
                                    Average 2007-2008

100

90

80

70

60

50

40

30

20

10

 0




 The VAT revenue ratio measures the ratio between the VAT revenue actually collected and
 what would theoretically be raised if VAT was applied at the standard rate




                                                                                           12
                Pension reforms
Implicit taxes on continued work at older ages versus
    pension up-take, % average worker earnings

105
                       2009   2005
 95
 85
 75
 65
 55
 45
 35
 25
 15
  5
 -5




                                                        13
 Some structural reforms can boost both
          growth and budgets


Structural reforms that boost productivity
may not hit that hard on government budgets
  Taxes go up but so do public-sector wages and
  transfers
But structural reforms that boost sustainable
employment levels can hit hard




                                                  14
                                  Unemployment benefit reform
              Change in aggregate employment rate following a "typical"
              reduction in initial unemployment benefit replacement rate

                                                      Years after the reform
                                  1               2              3             4    5
                      1
                                                                                    **
                    0.9

                    0.8
                                                                               **
                    0.7
Percentage points




                    0.6
                                                                **
                    0.5

                    0.4

                    0.3

                    0.2

                    0.1

                      0


                    Source: Bouis et al. (2012)


                                                                                         15
                                 Product market reform
                    Change in aggregate labour force participation following a
                                "typical" product market reform
                                          Years after the reform
                           1          2              3             4    5
        0.400
                                                                   **
        0.350
                                                                        **
        0.300                                       **
Percentage points




        0.250


        0.200


        0.150


        0.100


        0.050


        0.000


    Source: Bouis et al. (2012)


                                                                                 16
            Impact of higher employment
 Effect of 1% higher employment on the primary balance
                                    Per cent of GDP




Source: OECD Economic Outlook 88 database; and OECD calculations.


                                                                    17
 Policy action can reduce global imbalances
Sum of current account balances in absolute value divided by 2




                                                                 18
Structural reforms and more ambitious fiscal
           consolidation raise GDP
   Differences from baseline in the potential growth rate




                                                            19
Thank you




            20

				
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