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Project Background
Timely topic
Extreme fiscal adjustment At least 8% point improvement in fiscal balance over 5 years
Approach Consulted available literature Interviewed contemporaneous actors Comprehensive focus Policies Institutional/process reforms Government strategy
Countries Reviewed
Country Canada Finland
Period of Adjustment
1993-1998 1993-2000
Netherlands
Sweden Thailand Turkey United Kingdom
Source: WEO
1995-2000
1993-2000 1999-2003 2002-2006 1993-2000
11.2
14.8 11.1 13.9 9.1
3 2 1 0
Canada Finland Netherlands Sweden Thailand Turkey UK 1.0 0.2 1.0
-1 -2 -3
-1.5 -2.5 -2.3
-4 -6
-8 Canada Thailand Finland Turkey Netherlands UK Sweden
Canada
Finland Netherlands Sweden Thailand Turkey United Kingdom
Source: WEO
1.5
2.7 -0.3 1.9 1.5 -0.3 -3.3
1.6
4.0 0.5 2.2 2.2 0.0 -2.6
1.6
5.3 0.2 3.6 0.2 -1.7 -2.7
0.1
4.2 0.4 2.2 0.1 -2.4 -4.9
-4.9
-2.7 -5.6 -0.9 -3.2 -5.6 -10.4
-5.6
-2.8 -5.1 -0.2 -0.8 -2.7 -9.9
-4.5
-0.8 -5.0 0.1 -1.9 -0.3 -8.7
Adjustment Triggers
Market driven
Turkey
Politically Driven
Thailand
Finland Sweden Canada United Kingdom
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Netherlands
Finland
Netherlands
Sweden
Thailand
Turkey
United Kingdom
Political Context
Two Patterns: Newly elected vs. mid-term govts
Jean Chretien elected with majority government in 1993, re-elected in 1997 Esko Aho led center-right coalition government elected in 1991; Paavo Lipponen center-left coalition government elected in 1995 Wim Kok led center-left coalition government elected in 1994, reelected in 1999 Carl Bildt led centre-right coalition elected in 1991; Ingvar Carlsson led center-left coalition government elected in 1994; party re-elected in 1998 with Goran Persson as Prime Minister Coalition government led by Chavalit Yongchaiyudh elected in 1996; Thaksin Shinawatra elected in 2001 Ahmet Necdet Sezer elected president in 2000; Recep Tayyip Erdoan elected as president with strong majority in 2003 John Major re-elected with majority government in 1992; Tony Blair elected in 1997 with majority government
United Kingdom
10
Adjustment Trigger
11
Adjustment Strategies
Communication
Fiscal goals
Re-definition of government Spending review process Future competitiveness Broad based public sector reforms
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Communication
Public - societal exercise Canada A New Framework for Economic Policy Finland Presidential report on employment Turkey "Turkish Transition to a Strong Economy Program Markets Forecasts made transparent to markets Canada Sweden
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14
4 years 4 years
15
Re-Definition of Government
Canada (Program Review) Serving the public interest; Necessity of government involvement, as opposed to the private sector; Appropriateness of federal role, as opposed to other levels of govt; Scope for public and private sector partnerships; Scope for increased efficiency; Affordability United Kingdom Embraces Public Private Partnerships Turkey Limit the role and reach of government General deregulation of the economy Thailand in 2nd stage Dual Track Policy government as engine of growth, yet sustainable Establishment of safety net medical, housing, etc. Expansive policy in agricultural sector, local development, and SMEs
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Canada
Program review led by Minister of Finance
United Kingdom
Fundamental Expenditure Review led by
Treasury
17
Future Competitiveness
Turkey general deregulation of economy, many SOEs
removed from government support Finland unemployment key concern Sweden subsidized child care, education, and active labor market policies, shielded from cuts Thailand in 2nd stage government as an engine of growth; promote exports by public investments through choice and concentration
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Finland
Netherlands
Primarily expenditure
53 / 47
Sweden
Thailand
Primarily expenditure
70 / 30
Turkey
United Kingdom 50 / 50
20
Individual transfers Reduced Intergovernmental transfers Wage bill Reduced 19% downsizing Yes
Formula Reduced n/a n/a changed Incentive Tied to Reduced to leave or productivi Reduced greatly retire ty Yes n/a n/a n/a
Pensions
Privatization
Yes
Yes
n/a
n/a
Planned
Initiated
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savings decisions on statutory appropriations (entitlements) to be made with a simple majority in Parliament (as opposed to twothirds) Proved to be of crucial importance in getting government expenditure under control
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23
X X X
X X2 X
X X X2 X
X2
X X
X X X X X 24
Empowering MoF
Netherlands:
The Ministry of Finance has authority to unilaterally impose higher local tax rates on the citizens of sub-national governments that fail to live within their budget allocations.
25
Lessons (1)
Sustained commitment and leadership Strong Minister of Finance (or equivalent) in all countries Focus on building credibility Markets Society Manage expectations and be consistent in messages 5 year + exercise Adjustment package Comprehensiveness is important shared burden Speed - short time frame as longer targets cross political events Front load the pain tolerance has a limited life Empowerment of fiscal actors Greater role for MoF Use of quasi-independent fiscal bodies
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Lessons (2)
Good practices Prudence in forecasting Clear rules on managing an unexpected surplus Ensure major programs are not indexed to inflation Transparency of budgeting process New policy initiatives offset with funding from existing programs Avoid undermining future competitiveness Protect education, labor force participation Sustainability Institutional / process reform Size of adjustment constrains ability to restore cuts Can be politically rewarding
27
Questions?
28