elke baumann federal ministry of finance, germany 39th cmtea september 25, 2008 iaşi a new budget...

Bundesministerium der Finanzen

Berlin

Elke BaumannFederal Ministry of Finance, Germany

39th CMTEA September 25, 2008

Iaşi

A new budget rule for Germany

in the light of uncertainty about medium-term economic perspectives


Berlin

Outline

• Status quo and problems of the existing budget rule

• Why a reform now?• Criteria for a new budget rule• Proposal of the Federal Ministry of Finance for

a new budget ruleSpecial focus on changing economic

conditions and medium-term economic perspectives


Berlin

Regulations restricting budgetary policy Status quo - Art. 115 German Constitution:

Revenue obtained by borrowing shall not exceed the total of investment expenditures provided for in the budget (“Golden Rule”)

Exceptions shall be permissible only to avert a disturbance of the macroeconomic equilibrium


Berlin

Golden Rule - Art. 115 German ConstitutionProblems and limitations of the existing rule- Gross investment concept – depreciations and sales are

not taken into account

- No clear definition of the exception clause

- Asymmetric reaction over the business cycle

- Possible conflicts with objectives and rules of the European Stability and Growth Pact (SGP)

- No enforcement during execution

In almost half of the years since 1975 net borrowing was higher than gross investment

Increase in the central government's indebtedness could not be prevented


Berlin

Increase of public debt since 1970

Indebtedness (% of GDP)

0

10

20

30

40

50

60

70

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

Länder and communities

Federation (incl. special funds)

Public debt (% of GDP)


Berlin

Why a reform now? Favourable conditions for a reform

• Short term: improvement of the fiscal stance and compliance with the existing budget rules (German Constitution and SGP).

• Medium term: structural improvement of revenues (substitution of one-off measures by tax revenues).

• Judgement of Federal Constitutional Court in July 2007 about budget in 2004

• Länder are looking for early-warning system for distressed budget cases (Federalism Commission II).

High acceptance by the public.

Grand coalition may have the majority to change the Constitution.


Berlin

Why a reform now? Favourable conditions for a reform

Net lending (+)/borrowing (-) of general government- in % of GDP -

-1.2

-2.8

-3.7

-4.0-3.8

-3.3

-2

-3

-0 -0

-1.5

0.1

-1.5

- 1/2

-3 1/2

-1 1/2

-2 1/2

-3-3 1/2

-1 1/2

-4.5

-4

-3.5

-3

-2.5

-2

-1.5

-1

-0.5

0

0.5

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

structural

actual


Berlin

• Compatibility with SGP

• Stabilisation over the business cycle

• Limit for (structural) net borrowing

• Limit one-off measures

• Enforcement (ex post correction)

• Flexibility - future viability (exception clause)

A new budget rulecriteria and requirements


Berlin

The new three components of net borrowing

cyclical component

structural component

net financial transactions

A new budget rulecomposition of net borrowing

• structural deficit of central government max. 0.35% of GDP

• Reason: in principal balanced budget, but sufficient flexibility for e.g. one-off effects of reforms.

• Size: SGP allows max. deviation of 0.5% (“close to balance”), federal level incl. social security funds gets 0.35% according to its share in overall debt.

• Allowing automatic stabilizers to work symmetrically over the business cycle by cyclical adjustment in net borrowing in case of divergences from potential output

• calculated as the product of the budgetary sensitivity (0.51) and the output gap

negative output gap deficit positive output gap surplus

• correction for net financial transactions (mainly privatization gains) in order to be compatible with the Maastricht definition

+ -


Berlin

Symmetric fiscal policy over the business cycleCyclical component with OG calculated by PF approach

GDP, potential growth, output gaps

1 700

1 800

1 900

2 000

2 100

2 200

2 300

2 400

2 500

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

bn e

uro

(chain

ed v

olu

mes)

-3

-2

-1

0

1

2

3

4

5

%

output gap, % of potential output (rhs)

GDP

potential output

positive output gap => cyclical surplus required

negative output gap => cyclical deficit allowed


Berlin

Symmetric fiscal policy over the business cycleCyclical component depending on medium-term economic forecastLower GDP growth than in baseline scenario

• Risk scenario I (1-time effect): -1 PP in 2009

• Risk scenario II (dynamics weaker over whole forecasting horizon): -1 PP in 2009 + 2010, -0.5 PP in 2011

Output gaps with different assumptions about medium-term economic development

-2.5

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

in %

of

pote

ntial G

DP

Base line scenario Risk scenario I Risk scenario II


Berlin

The new three components of net borrowing

cyclical component

structural component

net financial transactions

A new budget rulecomposition of net borrowing

• structural deficit of central government max. 0.35% of GDP

• Reason: in principal balanced budget, but sufficient flexibility for e.g. one-off effects of reforms.

• Size: SGP allows max. deviation of 0.5% (“close to balance”), federal level incl. social security funds gets 0.35% according to its share in overall debt.

• Allowing automatic stabilizers to work symmetrically over the business cycle by cyclical adjustment in net borrowing in case of divergences from potential output

• Size: product of the budgetary sensitivity (0.51) and the output gapcentral govt: 50 % according to share of cyclical components

negative output gap deficit positive output gap surplus

• Correction for net financial transactions (mainly privatization gains) in order to be compatible with the Maastricht definition

• Reason: national financial statistics are on a cash basis => net borrowing does not include revenues from net financial transactions

+ -


Berlin

Limit for (structural) net borrowingStructural element

• limitation of structural net borrowing, maximum structural deficit of 0.5 % of GDP

• limit complies with medium term objective of the SGP (close to balance or in surplus)

• need of distribution of structural net borrowing between the central government and the Länder.

• Breakdown of 70:30, this means: – 0.35% of GDP for the central govt and social security

funds– 0.15% of GDP for the Länder


Berlin

Financial transactionsLimitation of one-off measures

• Existing budget rule: limit of net borrowing as defined in national financial statistics does not include revenues from financial transactions (deficit ≠ net borrowing)

– in the past net financial transactions have been strong

– incentive for one-off operations in order to comply with golden rule

• New budget rule: definition of net borrowing will still be based on national financial statistics, nevertheless full inclusion of financial transactions (i.e. privatisations, net changes in assets) in accordance with the methodology in the system of national accounts reduction of assets reduces limit of net borrowing by the same amount


Berlin

Net borrowing limit according to the new budget rule (central govt)size of the different components in real time (at the time of establishment of budget)

-20

-15

-10

-5

0

5

2000 2001 2002 2003 2004 2005 2006 2007 2008

in b

n e

uro

Cyclical component Structural component Total net borrowing allowed


Berlin

Control fund enforcement and viability

• Need for monitoring and setting incentives not only for the formulation but also for the execution of the budget – ex post control of compliance

• Deviations from the allowed limits in the execution of the budget will be put on a special account

• The account should only track structural deviations from the allowed net borrowing, cyclical deviations due to another economic development than expected ex ante should not be accounted

• Accumulation over the years. If the (accumulated) debit side of the account exceeds a specified threshold – i.e. maximum debit of 1% of GDP –, consolidation measures have to be introduced

• Credit not allowed to be used in order to finance net borrowing in following years


Berlin

Control fund example calculation for central government

budget establishment

actual

1 GDP growth, real, in % 1.7 0.82 Structural component (0.35% of GDP)3 Cyclical Component (ex ante) -5.74 Effect of difference betw. forecasted and actual GDP

growth on cyclical component -5.15 Cyclical Component (ex post) [3 + 4] -10.86 Net borrowing limit (+ = surplus) [2 + (3 or 5, resp.)] -13.6 -18.77 Ex post net borrowing (calculated from deviation of

actual net borrowing from target, adjusted by net financial transactions) -21.3

8 Debit (-) or credit (+) of control fund -2.7Decomposition of target-actual-deviation

9 Deviation of net borrowing from target -7.710 because of other GDP growth than forecasted -5.1

[7 - 6 (establishment)]11 because of non-cyclical reasons (discretionary) [8] -2.7

Budget 2005

in bn euro

-7.9


Berlin

Control fund Ex post correction of cyclical componentStrong revisions of output gap estimates

Output gap estimates for the year 2004 at different times of estimation

-1.8-1.6-1.4-1.2-1.0-0.8-0.6-0.4-0.20.0

Fall2003

Spring2004

Fall2004

Spring2005

Fall2005

Spring2006

Fall2006

Spring2007

Fall2007

Spring2008

in %

of p

oten

tial G

DP


Berlin

Net borrowing limit according to new budget rule (central govt)Simulation result: Comparison of ex ante and ex post

Net borrowing (-) limit

-30

-25

-20

-15

-10

-5

0

2000 2001 2002 2003 2004 2005 2006 2007

bn e

uro

ex ante

ex post

GDP growth

-101122334

2000 2001 2002 2003 2004 2005 2006 2007

%

ex ante

ex post


Berlin

-40

-35

-30

-25

-20

-15

-10

-5

0

5

2000 2001 2002 2003 2004 2005 2006 2007

bn e

uro

Net borrow ing limit ex post

Net borrow ing (-)/lending (+) ex post

Net borrowing limit according to new budget rule (central govt)Simulation result: Comparison of ex post limit and realization


Berlin

Exception clauseflexibility

• Exception clause for emergency cases (i.e. natural disaster)

• coupled with a high quorum of the parliament (60 % or even two-third)


Berlin

Open questionsWhat remains to be clarified? Further procedure?• Federalism Commission II wants to have a solution, but still

some remaining differences between political parties, esp.:

- Structural component: elimination (CDU) vs. higher than 0.5 % (SPD)

- Control fund: What threshold should be introduced and how quick should the debit above the threshold be reduced?

- Specification of exceptions?

• Decisions have to be made very soon as new elections are coming closer (Sept 2009)

• Reform of Constitution is necessary

• Communication to the public


Berlin

Thank you for your attention

The golden rule is there are no golden rules

George Bernhard Shaw

elke baumann federal ministry of finance, germany 39th cmtea september 25, 2008 iaşi a new budget...

Documents