What is Credible Fiscal Policy? The Canadian Experience. FMI Ottawa November 22nd

Transcription

1 What is Credible Fiscal Policy? The Canadian Experience FMI Ottawa November 22nd

2 What is Credible Fiscal Policy? No consensus among economists/policy makers But used term used extensively Difficult to achieve, easy to lose

3 What is Credible Fiscal Policy? Tough political choices to ensure fiscal sustainability Stable economic growth through control of accumulation of gov t debt

4 What is Credible Fiscal Policy? Little evidence of credible fiscal policy in most countries Among G-7, only Germany & Canada Among G-20, above plus Australia, South Korea & Turkey

5 What is Credible Fiscal Policy? Seek approval of fiscal policies from four key groups: Bond markets Stakeholders Media General public Order of rankings depends on severity & nature of fiscal problems, actions proposed & groups impacted the most

6 Factors in Deciding Credible Fiscal Policy 1. Fiscal Policy must be realistic: Based on sound analysis & balanced view of economic and fiscal prospects, challenges & risks

7 Factors in Deciding Credible Fiscal Policy 2. Fiscal Policy must be responsible: Willing to make difficult policy choices necessary to establish sustainable fiscal framework Difficult: requires putting policy ahead of politics

8 Factors in Deciding Credible Fiscal Policy 3. Fiscal Policy must be prudent: Allow for forecasting economic/fiscal errors, unforeseen events & uncertainties Forecasting more of an Art than Science All more difficult with annual point estimate target

9 Factors in Deciding Credible Fiscal Policy 4. Fiscal Policy must be transparent: Full disclosure of analysis & information Relate to both current planning period and the future Government must be held accountable

10 Factors in Deciding Credible Fiscal Policy Factors not mutually exclusive Re-enforce each other Importance can vary over time & among the four key groups e.g. In 1994, responsible & prudent more important than realistic & transparent

11 Canadian Experience: 1980s to mid-1990s Early 80 s, Department of Finance: key policy research institution November 1984: A New Direction for Canada: An Agenda foe Economic Renewal Recognized that failure of gov t to deal with real problems

12 Canadian Experience: 1980s to mid-1990s Admitted that Canada faced a structural deficit need for rebalancing of revenues/expenses Throughout 80s/early 90s, major structural reforms: tax reform (PIT/CIT/Sales), free trade, EI, devolution of Crown corps But impact largely long term

13 Canadian Experience: 1980s to mid 1990s Gov t realized problem of debt dynamics but did not take significant actions in short term to reduce deficit Based its fiscal projections on favorable case no prudence Good analysis offset by bad decision making

14 Canadian Experience: 1980s to mid-1990s Early 90 s, disconnect between fiscal and monetary policy Monetary policy tight Fiscal policy relatively loose Working at cross purposes

15 Canadian Experience: 1980s to mid-1990s Criticism over poor forecasting record Forecast declines in deficit which didn t materialize Unrealistic interest rate/economic projections

16 Canadian Experience: 1980s to mid-1990s Bottom-line: Realistic: Met Responsible: Partially Met Prudent: Not Met Transparency: Met

17 Canadian Experience: mid-1990s to mid-2000s New gov t in 1993: Change in budgetary process Fiscal target (3% of GDP) Short-term focus Inclusion of Prudence (CR/economic prudence) Private sector forecasts

18 Canadian Experience: mid-1990s to mid-2000s Update of Agenda Series of policy papers Identification of issues But first budget failure Public demanded more action Key element to fiscal success

19 Canadian Experience: mid-1990s to mid-2000s 1995 Budget major milestone Headline on PS cuts Consensus that Gov t got it Beyond expectations Major short-term structural reforms Program Review: Transfers to provinces: EI

20 Canadian Experience: mid-1990s to mid-2000s Results immediate Interest rate premium fell Economic growth picked up Virtuous cycle

21 Canadian Experience: mid-1990s to mid- 2000s Bottom-line: Realistic: Met Responsible: Met Prudent: Met Transparency: Partially Met

22 Canadian Experience: Current Period Fiscal situation inherited by present gov t Annual surpluses Declining debt-to-gdp ratio From worse to best among G-7 countries Challenge: to maintain this enviable fiscal situation

23 International Comparisons Net Financial Liabilities (per cent of GDP) Canada France Germany Italy Japan United Kingdom United States Source: OECD Economic Outlook May 2011

24 Canadian Experience: Current Period Credibility has again come under attack Conflict between politics and fiscal/economic policy Unrealistic view of economic/fiscal prospects in 2008 Denial of structural deficit No discussion re aging of population

25 Canadian Experience: Current Period Economic projections include minimum risk adjustment: Implies about $1.5 B in annual prudence Prudence in 90s much larger Revenues/expenses much larger now Should increase over time due to greater uncertainty

26 Canadian Experience: Current Period Use of average private sector forecast does not ensure economic forecasts are prudent: Range of views Most focus on short term only Most do not have econometric models Role of Finance

27 Canadian Experience: Current Period Bank of Canada releases quarterly economic forecasts Senior officials appear regularly before Committees Finance forecasts should again be used Gov t to take responsibility Justified against private sector

28 Canadian Experience: Current Period Currently, fiscal planning process neither transparent or accountable Access to federal officials limited 2010 Update not presented to Finance Committee Restrictions on PBO

29 Canadian Experience: Current Period Again in uncharted waters Fall update/budget important as to how gov t assesses current situation & actions proposed Need for initiatives to increase productivity & sustain economic growth Focus on short-term deficit target may not be that important.

30 Canadian Experience: Current Period Bottom-line: Realistic: Not Met Responsible: Not Met Prudent: Partially Met Transparency: Not Met

31 Key issues today: Conclusion Euro financial crisis US debt crisis Structural deficit Impact of ageing of population Need for decisive actions