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									DG ECFIN




           Dealing with debt sustainability
               when exiting the crisis



                              Marco Buti
                           Director General

                            24 November 2009
                      ICAEW – CIPFA – ECMI Event
             “Measuring the impact of the crisis on public debt”
DG ECFIN
                      The short term: fiscal impact of the crisis
                      Automatic stabilisers and discretionary policies lead to large deficits


                      Government balances in 2007-11 in the Commission Services’ Autumn
                      2009 Forecasts
                       5


                       2


                       -1
           % of GDP




                       -4


                       -7

                                 Budget      balance 2007
                      -10        Budget      balance 2008
                                 Budget      balance 2009
                                 Budget      balance 2010
                      -13        Budget      balance 2011

                                      3% of GDP threshold
                      -16
                            BG   DK     SE    LU   FI   EE   DE   CY   HU   AT   MT   NL   IT   BE   SK   SI   PL   CZ   RO   PT   FR   LV   LT   ES   UK   IE   EL   EA-   EU-
                                                                                                                                                                       16    27




                                                                                                           2
DG ECFIN   Impact of the crisis on debt

           Change in debt as a share of GDP – Commission Autumn 2009 forecasts
                                                         2007     2011

           140%

           120%

           100%

            80%

            60%

            40%

            20%

             0%
                  EE BG LU RO DK SK CZ SE SI LT FI LV PL CY NL MT ES AT HU DE EU- FR EA- UK PT IE BE IT EL
                                                                              27     16


                                                                 3
DG ECFIN   The medium term: government debt
           Total fiscal costs of past crises



           Large fiscal deficits
           contributed to public
           debt-to-GDP ratios
           ratcheting them up by
           20 points of GDP, on
           average. This impact
           has taken a long time
           to reverse in the past.




                                               4
DG ECFIN
              The medium term: government debt

           Debt is on-track to reach 120% of GDP by 2020 in the absence of consolidation
           Ageing is a concern that adds to sustainability worries

                       Euro area                             Non-euro area




                                                      5
DG ECFIN   The long term: the ageing challenge

           Costs set to increase substantially but with wide variation
           between countries

                                                                                                     Long-term care,
                                    Pension spending                     Healthcare                  unemployment             Total
                                                                                                      and education

                                                   Change                          Change                    Change              Change
                                                   2010 to                         2010 to                   2010 to             2010 to
                                      2010          2060             2010           2060             2010     2060     2010       2060
            Poland                    10.8            -2.1             4.1             0.8             4.2     0.1     19.1           -1.1
            Estonia                    6.4            -1.6             5.1             1.1             3.2     0.4     14.8           -0.1
            Latvia                     5.1             0.0             3.5             0.5             3.6     0.8     12.3           1.3
            EU-27                     10.2             2.3             6.8             1.4             6.1     0.9     23.2           4.6
            EA                        11.2             2.7             6.8             1.3             6.4     1.1     24.5           5.1
            Belgium                   10.3            4.5             7.7             1.1             8.9      1.0     26.8           6.6
            Slovenia                  10.1             8.5             6.8             1.7             6.2     2.4     23.1           12.7

            Greece                    11.6            12.5             5.1             1.3             5.2     2.2     21.9           16.0
            Luxembourg                 8.6            15.3             5.9             1.1             5.4     1.7     19.9           18.2

             Source: European Commission and the Economic Policy Committee (2009), The 2009 Ageing Report

                                                                                              6
DG ECFIN   The long term: the ageing challenge
           Decomposition of the S2 indicator
                  LTC (% of GDP)
           14.0

           12.0
                      S2=0        S2=2      S2=4          S2=6       S2=8        S2=10                S2=14 S2=16
                                                                                              LU
                                                                                                                      EL

           10.0                                     Sustainability gap
                                                         (S2>0)
                                                                                                      CY                      SI
            8.0
                           No sustainability gap
                                 (S2<0)                                                                                                                 IE
            6.0                                                                                      MT                                   ES
                                                                                               BE               NL               RO
            4.0                                                                                                      EA       CZ                         UK
                                                                                              FI DE       AT                 LT
                                                                                                                            EU27
                                                                                                                                 SK
            2.0                                                                                                              FR
                                                                                                                                                             S2=12
                                                                                             SE IT
                      Unfavourable long-term projections                               HU DK                               PT                                LV
                                                                                            BG
            0.0                                                                                            EE
                      Favourable long-term projections
                                                                                                                                   PL
           -2.0
                                                          Favorable initial fiscal position        Unfavorable initial fiscal position
           -4.0
              -14.0       -12.0     -10.0          -8.0       -6.0        -4.0        -2.0     0.0          2.0            4.0          6.0         8.0      10.0
                                                                                                                                               IBP (% of GDP)

                                                                 IBP: required adjustment given the initial budgetary position
                                              LTC: required adjustment given the long-term change in age-related expenditure
                                                                                              7
                     ECOFIN Council 20 October 2009 and
DG ECFIN
                       European Council 29-30 October
                           Designing fiscal exit strategies

           Fiscal consolidation should be coordinated within a consistent
           implementation of the SGP.

           Withdrawal of stimulus should be timely. Provided that the
           Commission forecasts continue to indicate that recovery is
           strengthening and becomes self-sustaining, consolidation should
           start in 2011 at the latest, with some countries needing to
           consolidate earlier.

           Consolidation will need to go well beyond the benchmark 0.5% of
           GDP per annum.

           Important additions:
               Strengthened national budgetary frameworks to underpin credibility of
               consolidation.
               Measures to support long-term fiscal sustainability
               Strengthening of structural efforts to enhance productivity and support
               long term investment



                                                    8
DG ECFIN
           The EDP
           November 2009 recommendations by the European Commission




                          Start    Deadline       # of years   Deficit in 2009


               BE         2010      2012              3             -5.9

               CZ         2010      2013              4             -6.6

               DE         2011      2013              3             -3.4

               IE         2010      2014              5            -12.5

               ES         2010      2013              4            -11.2

               FR         2010      2013              4             -8.3

               IT         2010      2012              3             -5.3

               NL         2011      2013              3             -4.7

               AT         2011      2013              3             -4.3

               PT         2010      2013              4             -8.0

               SI         2010      2013              4             -6.3

               SK         2010      2013              4             -6.3

               UK        2010/11   2014/15            5            -12.1




                                              9
DG ECFIN
           What do we know about how to consolidate
           successfully?


             Consolidations based on expenditure cuts tend to be longer lasting
                  Especially true if also focus on structural reforms increasing work incentives and public sector
                  efficiency
                  Tax based consolidation tends to work better if it is gradual and starts from a lower level

             Gradual adjustments have proven more effective
                  Often accompanied by structural reforms

             Improvements in the fiscal institutions can be important complements to consolidation
                  Countries with existing strong institutions consolidate more effectively

             Difficult macroeconomic and public finance starting points can be catalysts for successful
             consolidations
                  Possibly because a consensus in favour of consolidations is easier to reach

             Consolidations have often been unsuccessful though, with debt continuing to increase
                  Not an option for some countries




                                                                    10
DG ECFIN   What choices are available?


             Reducing expenditure?
                 For Member States with high expenditure it may be possible to reduce it
                 Efficiency gains also possible

             Increasing tax?
                 Tax and SS already high in come countries, but in others increasing tax is a feasible
                 option

             Structural reforms?
                 Reforming tax systems and improving growth potential can provide gains over the
                 medium and long term
                 Evidence that such reforms are often crucial to ensure successful consolidations

             Pension changes for the long term?
                 Scope to change the pension system but can only be a part of the answer, as
                 ageing is separate but compound problem to the debt increase from the crisis

             Using the fiscal frameworks to aid consolidation
                 Both European and national frameworks important




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