Mauro (ed ) chipping away at public debt; sources of failure and keys to success in fiscal adjustment (2011)

FFIRS 05/16/2011 19:30:45 Page FFIRS 05/16/2011 19:30:45 Page Chipping Away at Public Debt FFIRS 05/16/2011 19:30:45 Page FFIRS 05/16/2011 19:30:45 Page Chipping Away at Public Debt Sources of Failure and Keys to Success in Fiscal Adjustment EDITED BY PAOLO MAURO John Wiley & Sons, Inc FFIRS 05/16/2011 19:30:45 Page Copyright # 2011 by The International Monetary Fund All rights reserved Published by John Wiley & Sons, Inc., Hoboken, New Jersey Published simultaneously in Canada No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, (978) 750-8400, fax (978) 646-8600, or on the Web at www.copyright.com Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, (201) 748-6011, fax (201) 748-6008, or online at www.wiley.com/go/permissions Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book and specifically disclaim any implied warranties of merchantability or fitness for a particular purpose No warranty may be created or extended by sales representatives or written sales materials The advice and strategies contained herein may not be suitable for your situation You should consult with a professional where appropriate Neither the publisher nor author shall be liable for any loss of profit or any other commercial damages, including but not limited to special, incidental, consequential, or other damages Nothing contained in this book should be reported as representing the views of the IMF, its Executive Board, member governments, or any other entity mentioned herein The views expressed in this book belong solely to the authors For general information on our other products and services or for technical support, please contact our Customer Care Department within the United States at (800) 762-2974, outside the United States at (317) 572-3993 or fax (317) 572-4002 Wiley also publishes its books in a variety of electronic formats Some content that appears in print may not be available in electronic books For more information about Wiley products, visit our web site at www.wiley.com Library of Congress Cataloging-in-Publication Data Chipping away at public debt: sources of failure and keys to success in fiscal adjustment/ edited by Paolo Mauro p cm Includes index ISBN 978-1-118-04338-7 (hardback) ISBN 978-1-118-11304-2 (ebk); ISBN 978-1-118-11305-9 (ebk); ISBN 978-1-118-11306-6 (ebk) Printed in the United States Debts, Public Fiscal policy Budget deficits Government spending policy I Mauro, Paolo HJ8015.C47 2011 336.3 0435–dc22 2011014255 Printed in the United States of America 10 FTOC 06/10/2011 15:8:24 Page Contents Foreword ix Acknowledgments xi xiii Introduction CHAPTER Canada: A Success Story Cemile Sancak, Lucy Qian Liu, and Taisuke Nakata CHAPTER Introduction Background Plans versus Outcomes: Macroeconomic Factors Nature and Composition of Adjustment Structural Reforms Extent to which Adjustments Were Sustained Conclusion Notes 13 21 23 25 27 United States: The Quest for Fiscal Discipline 31 Jiri Jonas Introduction First Attempt: Balanced Budget and Emergency Deficit Control Act 1985 Second Attempt: Omnibus Budget Reconciliation Act of 1990 Third Attempt: Omnibus Budget Reconciliation Act of 1993 Actual versus Projected Fiscal Performance under Omnibus Budget Reconciliation Act of 1993 1990s Deficit Reduction: Good Policy or Good Luck? Easy Won, Easy Lost? Conclusion Notes 31 33 36 38 42 44 50 52 54 v FTOC 06/10/2011 15:8:24 Page vi CHAPTER Contents France: Virtue and Fortune 57 Edouard Martin, Irina Tytell, and Irina Yakadina Introduction: Factors Underlying the Need for Fiscal Consolidation 57 Early Attempts at Fiscal Adjustment 61 A First Attempt at Medium-Term Fiscal Consolidation, 1994–97 64 A More Systematic Approach to Medium-Term Budgeting: Consolidation Experiences under the Stability and Growth Pact 72 Conclusion 81 Notes 82 CHAPTER Germany: Fiscal Adjustment Attempts With and Without Reforms 85 Christian Breuer, Jan Gottschalk, and Anna Ivanova CHAPTER Introduction 1975–79 Consolidation Attempt 1981–85 Consolidation Attempt 1991–95 Consolidation Attempt 2003–07 Consolidation Attempt Lessons Notes 85 88 93 99 105 110 112 United Kingdom: Four Chancellors Facing Challenges 115 Toni Ahnert, Richard Hughes, and Keiko Takahashi Introduction Selection of Consolidation Plans Background, Content, and Performance of the Four Adjustment Plans Determinants of Success and Failure Lessons from Success and Failure Appendix 5A United Kingdom: Fiscal Adjustment Plans and Outturns Notes CHAPTER Italy: Medium-Term Fiscal Planning under Frequent Government Changes 115 116 117 125 138 140 150 153 Fabrizio Balassone, Sandro Momigliano, and Pietro Rizza Introduction A Brief History of Italy’s Fiscal Planning Framework 153 155 FTOC 06/10/2011 15:8:24 Page vii Contents Short-Term Origins of Medium-Term Failures A Narrative of Design and Performance of Pre- and Post-European Monetary Unit Plans Implementing Plans for the Year Ahead Two Important Plans Analyzed in Detail Conclusion Notes CHAPTER Japan: Fiscal Adjustment Plans and Macroeconomic Shocks Keiko Takahashi and Kiichi Tokuoka Introduction The 1997 Fiscal Structural Reform Act Medium-Term Fiscal Adjustment Plans: Fiscal Year 2002 and the Following Conclusion Appendix 7A: The Bohn Fiscal Sustainability Test Appendix 7B: Timeline of Medium-Term Fiscal Adjustment Plans in Japan Notes CHAPTER CHAPTER The Performance of Large Fiscal Adjustment Plans in the European Union: A Cross-Country Statistical Analysis S Ali Abbas, Fuad Hasanov, Paolo Mauro, and Junhyung Park 157 162 165 167 172 174 177 177 178 189 203 206 209 209 213 Introduction Data, Sample Selection, and Methodology Descriptive Analysis Regression Analysis Conclusion Appendix 8A: Data Issues and Cyclical Adjustment Appendix 8B: Timeline for European Monetary Integration (1990–2009) Notes 213 216 219 232 241 243 Conclusion Key Findings: What Failed and What Worked in Past Attempts at Fiscal Adjustment Implications for Planned Adjustments Notes 249 245 246 251 255 258 FTOC 06/10/2011 15:8:24 Page viii Contents References 259 About the Project Team 267 Index 271 BREF 06/07/2011 264 17:1:34 Page 264 References Martin, Paul 2008 Come Hell or High Water: My Life In And Out of Politics Mccleland & Stewart Martin, Paul 2010 ‘‘Improvement in a Cold Climate,’’ keynote speech for the Guardian Public Services Summit Masson, Paul and Michael Mussa 1995 ‘‘Long-Term Tendencies in Budget Deficits and Debt.’’ In Budget Deficits and Debt: Issues and Options, proceedings from a Symposium sponsored by the Federal Reserve Bank of Kansas City, Jackson Hole, Wyoming Mendoza, Enrique G and Jonathan D Ostry 2008 ‘‘International Evidence on Fiscal Solvency: Is Fiscal Policy ‘Responsible’?’’ Journal of Monetary Economics Milesi-Ferretti, Gian Maria 2003 ‘‘Good, Bad or Ugly: On the Effects of Fiscal Rules with Creative Accounting,’’ Journal of Public Economics (No 88), pp 377–94 Milesi-Ferretti, Gian Maria, and Kenji Moriyama March 21–23, 2004 ‘‘Fiscal Adjustment in EU Countries: A Balance Sheet Approach,’’ in Public Debt, proceedings of the 6th Banca d’Italia Workshop on Fiscal Policy, Perugia Ministry of Finance, Japan 1998 Medium-Term Fiscal Projections Miyazaki, Masato 2006 ‘‘Framework for Fiscal Consolidation: Successes and Failures in Japan,’’ OECD Journal on Budgeting (Vol 6, No 4) Momigliano, Sandro and Pietro Rizza 2007 ‘‘Temporary Measures in Italy: Buying or Losing Time?’’ in Magyar Nemzeti Bank (ed.), Temporary Measures and Off-budget Activities Moulin, Laurent March 12, 2004 ‘‘Expenditure rules a la franSc aise: An assessment after five years,’’ ECFIN country focus, Volume 1, No Moulin, Laurent and Peter Wierts 2006 ‘‘How Credible Are Multiannual Budgetary Plans in the EU?,’’ proceedings of the Banca d’Italia workshop on fiscal indicators, March 30 to April M€ uhleisen, Martin 2004 ‘‘Overview: Returning Deficits and the Need for Fiscal Reforms.’’ In Martin M€ uhleisen and Christopher Towe (eds.), U.S Fiscal Policies and Priorities for Long-Run Sustainability IMF Occasional Paper 227, Washington, D.C Nelson, Edward and Kalin Nikolav 2001 ‘‘U.K Inflation in the 1970s and 1980s: The Role of Output Gap Mismeasurement,’’ Working Paper No 148 London: The Bank of England Orszag, Peter July 25, 2007 Issues in Reinstating a Statutory Pay-As-You-Go Requirement Statement before the Committee on the Budget, U.S House of Representatives Reinhart, Carmen M and Kenneth Rogoff 2010 This Time Is Different: Eight Centuries of Financial Folly Princeton University Press Reischauer, Robert D 1990 ‘‘Taxes and Spending under Gramm-RudmanHollings,’’ National Tax Journal (Vol 43, No 3, September) BREF 06/07/2011 17:1:34 References Page 265 265 Rubin, Robert and Jacob Weisberg 2008 In an Uncertain World Random House Salvemini, Giancarlo (ed.) 2003 ‘‘I guardiani del bilancio: Una norma importante ma di difficile applicazione’’ l’articolo 81 della Costituzione, Venice, Marsilio Sancak, Cemile, Ricardo Velloso, and Jing Xing 2010 ‘‘Tax Revenue Response to the Business Cycle,’’ IMF Working Paper, WP/10/71 Sartor, Nicola (ed.) 1998 ‘‘Il risanamento mancato La politica di bilancio italiana: 1986–1990.’’ Rome, Carocci Spaventa, Luigi and Vincenzo Chiorazzo 2000 ‘‘Astuzia o virt u? Come accadde che l’Italia fu ammessa all’Unione Monetaria,’’ Donzelli Editore Strauch, Rolf, Mark Hallerberg, and J€ urgen von Hagen 2004 ‘‘Budgetary Forecasts in Europe: The Track Record of Stability and Convergence Programmes,’’ European Central Bank Working Paper No 307 (February) Also available as Economic Working Paper E2004/42, Centro de Estudios Andaluces, Sevilla, Spain Summers, Larry October 1986 Debt Problems and Macroeconomic Policies NBER Working Paper No 2061 National Bureau of Economic Research, Massachusetts Tanaka, Hideaki 2003 ‘‘Fiscal Consolidation and Medium-term Fiscal Planning in Japan,’’ OECD Journal on Budgeting (Vol 3, No 2) Tsibouris, George C., Mark A Horton, Mark J Flanagan, and Wojciech S Maliszweski 2006 ‘‘Experience with Large Fiscal Adjustments,’’ IMF Occasional Paper 246 United Kingdom Economics and Finance Ministry 1997 Fiscal Policy: Lessons from the Last Economic Cycle London: Her Majesty’s Treasury Van den Noord, Paul 2002 ‘‘Managing Public Expenditure: The U.K Approach,’’ OECD Economics Department Working Paper No 341 Paris: Organization for Economic Cooperation and Development Van Rompuy 2010 ‘‘Strengthening Economic Governance in the EU: Report of the Task Force to the European Council www.consilium.europa.eu/ uedocs/cms_data/docs/pressdata/en/ec/117236.pdf Von Hagen, J€ urgen, Andrew H Hallett, and Rolf Strauch 2001 ‘‘Budgetary Consolidation in the EMU,’’ EC Economic Papers Von Hagen, J€ urgen 2010 ‘‘Sticking to Fiscal Plans: The Role of Institutions,’’ Public Choice (144), pp 487–503 Von Hagen, J€ urgen and Guntram B Wolff 2004 ‘‘What Do Deficits Tell Us about Debt? Empirical Evidence on Creative Accounting with Fiscal Rules in the EU,’’ Discussion Paper No 38, Deutsche Bundesbank BREF 06/07/2011 17:1:34 Page 266 BABOUT 06/04/2011 16:57:10 Page 267 About the Project Team S.M Ali Abbas is an economist in the International Monetary Fund’s (IMF’s) Fiscal Affairs Department He has published on capital flows and government debt markets and recently co-compiled a comprehensive historical public debt database Before joining the IMF, he pursued doctoral studies in Economics at Oxford University, after a two-year Overseas Development Institute fellowship in the Tanzanian treasury Toni Ahnert was in the IMF’s Fiscal Affairs Department while this book was being written He is a Ph.D candidate at the London School of Economics and Political Science and affiliated with the Centre for Economic Performance He obtained Master’s degrees in Economics from Universitat Pompeu Fabra, Barcelona, and the University of Essex, U.K Fabrizio Balassone is a director in the Structural Economic Analysis Department at Banca d’Italia He was previously Advisor to the Head of the General Accounting Office in Italy and worked at the IMF Christian Breuer is an economist in the Public Finance Department at the Ifo Institute for Economic Research in Munich and represents the Ifo Institute at the Working Group for tax revenue forecasts at the German ministry of finance He obtained a Master’s degree in Economics from Martin-LutherUniversity Halle-Wittenberg Jan Gottschalk is a macroeconomic advisor with the IMF’s Pacific Financial Technical Assistance Centre; while this book was written he was with the Fiscal Affairs Department Prior to joining the IMF, he was a researcher with the Kiel Institute for the World Economy and published journal articles on monetary policy and business cycle research He obtained a Ph.D degree in Economics from Kiel University, Germany Fuad Hasanov is an economist in the IMF’s Fiscal Affairs Department Previously he was Assistant Professor at Oakland University in Rochester, Michigan He has published journal articles on economic growth, inequality, 267 BABOUT 06/04/2011 268 16:57:10 Page 268 About the Project Team housing, and consumption He holds a Ph.D in Economics from the University of Texas at Austin Richard Hughes is a Deputy Division Chief in the Fiscal Affairs Department of the IMF He was previously a Deputy Director in the Public Spending Directorate of Her Majesty’s Treasury, where he led the 2007 Comprehensive Spending Review He was educated at Harvard and Oxford Universities Anna Ivanova is an economist in the European department at the IMF Previously she worked as an economist in the Fiscal Affairs and Middle East and Central Asia departments of the IMF and as a physicist in the Institute of Nuclear Problems in Belarus She obtained her Ph.D in Economics from the University of Wisconsin–Madison, Master’s degree in Economic Development from Vanderbilt University, and Master’s degree in Nuclear Physics from Belarussian State University Jiri Jonas is a senior economist in the IMF’s Fiscal Affairs Department Previously he was the Czech Republic representative at the IMF Executive Board, and served as an advisor to the Minister of Finance He obtained a Master’s degree in Economics from the Prague School of Economics Lucy Qian Liu is an economist in the Middle East and Central Asia Department at the IMF, and was in the Fiscal Affairs Department while this book was being written She holds a Ph.D in Economics from Queen’s University in Canada Edouard Martin is a senior economist in the Middle East and Central Asia Department at the IMF, and was in the Fiscal Affairs Department while the book was being written Previously, he worked in the French Ministry of Finance Paolo Mauro is Chief of a Fiscal Operations Division in the IMF’s Fiscal Affairs Department He was previously a division chief in the Research Department and has held various operational positions in the IMF He is a highly cited author of journal articles on topics including corruption, sovereign bond spreads, exchange rate regimes, and growth-indexed bonds He recently coauthored Emerging Markets and Financial Globalization, Oxford University Press He obtained his Ph.D in Economics from Harvard University Sandro Momigliano is Chief of the Public Finances Division in the Structural Economic Analysis Department at the Bank of Italy He has published journal articles on fiscal policy, fiscal multipliers, and structural analysis of public finances BABOUT 06/04/2011 16:57:10 About the Project Team Page 269 269 Taisuke Nakata was in the IMF’s Fiscal Affairs Department while this book was being written He is an Economics Ph.D candidate at New York University Previously, he worked as an assistant economist at the Federal Reserve Bank of Kansas City He holds a B.A in Economics from the University of Chicago Junhyung Park was a research assistant in the IMF’s Fiscal Affairs Department while working on this book and is now a Ph.D student in economics at the University of California, Los Angeles He holds a B.A in Economics from the University of Virginia Pietro Rizza is an economist in the Structural Economic Analysis Department at the Bank of Italy He holds a Ph.D in Economics from Boston University and has previously worked as a consultant at the European Commission, the European Central Bank, and the World Bank Cemile Sancak is a senior economist in the Fiscal Affairs Department at the IMF She has published on the impact of the business cycle on revenues and the determinants of long-term growth Previously, she was an economist at the Federal Government of Canada and a lecturer at Carleton University, Ottawa, Canada She holds a Ph.D in Economics from Carleton University and a Master’s degree in Economics from Queen’s University, Kingston, Canada Keiko Takahashi is an economist in the Fiscal Affairs Department at the IMF She previously worked on macroeconomic and fiscal policy at the Ministry of Finance and the Cabinet Office in Japan She holds a Master’s degree (M.Phil) in Economics from University of Oxford Kiichi Tokuoka is an economist in the Asia and Pacific Department at the IMF Previously he worked for the Japanese Ministry of Finance He obtained a Ph.D in Economics from Johns Hopkins University Irina Tytell is a senior economist in the European Department at the IMF She had previously worked in the Research Department at the IMF and the IMF Institute She holds a Ph.D from Cambridge University, an M.Sc from the London School of Economics, and an M.A from the New Economic School in Moscow Ricardo Cicchelli Velloso is Deputy Division Chief in the IMF’s Fiscal Affairs Department, where he coordinates fiscal operational support to several IMF member countries He has led technical assistance missions on fiscal transparency, fiscal risks, and fiscal rules He previously held various positions in the IMF, including Resident Representative in Peru Prior BABOUT 06/04/2011 270 16:57:10 Page 270 About the Project Team to joining the IMF, he worked in Brazil’s Applied Economics Research Institute and taught at the Federal University of Rio de Janeiro He holds postgraduate degrees in Economics from the University of California at Berkeley and Federal University of Rio de Janeiro Mauricio Villafuerte is Deputy Division Chief in the IMF’s Fiscal Affairs Department He previously worked at the Ministry of Finance and the Central Bank of Ecuador He specializes in fiscal and monetary policy issues in natural resource–dependent countries and has published on fiscal policy management and fiscal institutions He pursued his doctoral studies in Economics at the University of California, Los Angeles Irina Yakadina is an economist in the European Department at the IMF and was in the Fiscal Affairs Department while this book was being written Prior to that, she taught at the IMF Institute She obtained a Ph.D in Economics from Pompeu Fabra University in Barcelona and holds a Master’s degree in Economics from the New Economic School in Moscow BINDEX 06/10/2011 12:5:31 Page 271 Index A Abe, Shinzo, 194 Accountability, 256–257 ‘‘Agenda for Economic Renewal,’’ Alesina, Alberto, 222 Amato, Giuliano, 175n.11 Ambition, degree of plan’s, 224, 237, 239, 241 Andre, Christophe, 211n.25 Appropriations Acts, 28n.18 Ardagna, Silvia, 222 Asian financial crisis, 179, 182 Auerbach, Alan J., 46–47, 52, 54 B Balanced Budget and Emergency Deficit Control Act (1985), see Gramm-RudmanHollings Act (GRH) Bank of Canada, 10 Bank of England, 121 Bankruptcy, 183 Base effects, 231–232, 237, 238 BEA, see Budget Enforcement Act Berglund, Per Gunnar, 56n.22 Bohn, Henning, 206 Bohn Fiscal Sustainability Test, 206–208 Boltho, Andrea, 258n.2 Borrowing, cost of, 45 Bretton Woods system, 2, British Airport Authority, 135 British Airways, 135 British Rail, 135 Brown, Gordon, 116 Buchanan, James M., 54n.2 Budget Enforcement Act (BEA), 36–37, 39, 44, 52, 53 Buettner, Thiess, 165 Bundesbank, 93 Bush, George H W., 36 C Canada, 1–26 ‘‘1985 Plan’’ overview, 4–5 ‘‘1995 Plan’’ overview, 5–7 emergence of debt problems in, 2–4 expenditure adjustments in, 14, 17–21 fiscal adjustment plan in, xvii, xix macroeconomic developments in, 7–13 pension reform in, 17, 23 public support for debt reduction in, 255 revenue adjustments in, 13–16 structural reform in, 4, 21–23 sustainability of adjustments in, 23–25 system of transfers to provinces in, 17, 21–23 unemployment insurance reforms in, 17, 21 Canada Assistance Plan, 21–22 Canada Health and Social Transfer, 22 Canada Pension Plan (CPP), 23 Capital gains tax, 125 Capital spending, 163 CBO, see Congressional Budget Office Central government: of Japan, 189 of United Kingdom, 131–132, 139–140 Chretien, Jean, 6, 17 Clarke, Kenneth, 116, 121–124, 126–135, 137, 139, 140, 146–147 Clinton Administration, 38, 40–44, 49 Congressional Budget and Impoundment Control Act, 54n.2 Congressional Budget Office (CBO), 40–42, 46, 47, 52 Conservatives (United Kingdom), 116, 118, 121, 136 Conservative/Liberal coalition (Germany), 99–101, 105 Consolidation, fiscal, 238 Consumer price index (CPI), 13, 21, 83n.9 Consumption taxes, 199 271 BINDEX 06/10/2011 12:5:31 Page 272 272 Contingency plans, 138 Contingency reserves, 254–255 Control Total (UK), 123, 138 Corporate taxes: in Canada, 14 in Japan, 185, 187 Council on Fiscal Structural Reform, 179 Counter-cyclical fiscal policies, 61, 64 CPI, see Consumer price index CPP (Canada Pension Plan), 23 Cross-country statistical analysis (EU), 213–245 data in, 216–218, 243–245 descriptive analysis, 219–232 findings, 215, 241–243 isolating determinants of success, 224–232 methodology of, 216–218 of plan design, 219–222 of plan implementation, 222–224 regression analysis, 232–241 sample selection for, 216–218 Crossrail project, 151n.14 Crown Corporations, 14 Cyclical decomposition, 7–11 Cyclical improvement, 104 Cyclically-adjusted components, 243–245 Cyclically adjusted deficits: in Germany, 91 in United States, 39 Cyclically adjusted overall balance, 85, 108 Cyclically adjusted revenues: in cross-country statistical analysis, 223 in France, 74 Cyclically-adjusted targets, 256 Cyclically induced revenue decline, 63 Cyclical tax revenues/expenditures, 185–187, 203 D Darling, Alistair, 116, 124–135, 137, 138, 148–149 Debt/GDP ratio: of Canada, 3, 25 disruptive reductions in, xxivn.2 of France, 57 of Germany, 88 of Japan, 177, 178 Decision on the Public Finances (Italy), 157 Defense spending: in Germany, 102 in United Kingdom, 134 in United States, 34–36, 46 Index Deficits: in Canada, 2, 4–7, 22, 25 in France, 66–67, 72, 75 in Germany, 87, 94 in Italy, 158, 171 in Japan, 177–179 structural, 39 in United Kingdom, 116, 124 in United States, 31, 33–34, 36, 39–40, 43, 50–52 Deficit reduction: in Canada, 4–7, 10, 13, 17, 26 in France, 65 in United States, 34–35, 37–39, 43, 46 Demand management policies, 94–95 Departmental Expenditure Limits (DELs), 138 Deposit insurance, 36 Descriptive analysis (cross-country statistical analysis), 219–232 Design, of large planned adjustments, 215 Deviation of initial deficit, 237, 239 DG ECFIN, see European Commission’s Economic and Financial Affairs General Directorate E East Germany, 100, 103–105, 111 EC (European Council), 65 Economic and Financial Affairs Council (ECOFIN), 163 Economic and Financial Planning Documents (EFPDs), 157, 158, 161–162, 165, 167–172 Economic growth See also Gross Domestic Product (GDP) growth in Canada, 4, 11–13 in cross-country statistical analysis, 226, 227, 229–231 as determinant of success, 250 in Germany, 103 in Italy, 161–162 in Japan, 185 as policymakers’ key objective, 219 role of, 253 in United Kingdom, 126, 139 in United States, 51 Economic shocks, 250, 256 EDP, see Excessive Deficit Procedure Education, spending on, 135 EFPDs, see Economic and Financial Planning Documents BINDEX 06/10/2011 12:5:31 Page 273 Index EMU, see European Monetary Union Energy price surge (1973-1974), 2, Entitlement spending, 38 ERM (Exchange Rate Mechanism), 121 ESA (European System of Accounts), 175n.14 Established Programs Financing, 22 EU, see European Union Euro, 72, 168, 226 European Commission’s Economic and Financial Affairs General Directorate (DG ECFIN), 216, 218, 224, 240 European Council (EC), 65 European Monetary Union (EMU): as driving force in fiscal adjustment, 251 entry to, as policymakers’ objective, 219 France’s membership in, 61, 65, 81 Italy’s membership in, 162–164, 167–168 and plan implementation, 226, 228 prerequisites for, xv timeline for integration, 245 ‘‘European semester,’’ 258n.5 European System of Accounts (ESA), 175n.14 European Union (EU) See also specific countries and France, 74 large fiscal adjustment plans in, see Cross-country statistical analysis statistical analysis of fiscal adjustment plans, xviii Eurostat, 175n.14 Ex-ante plans, 242 criteria for adjustment plan analysis, xvii–xviii in cross-country statistical analysis, 214, 218 in Japan, 177 selection of, 251 tracking outcomes with, xvi Excessive Deficit Procedure (EDP), 61, 78, 157, 215, 251 Exchange rates, 2, Exchange Rate Mechanism (ERM), 121 Excise taxes, 101 Expenditures: in Canada, 14, 17–21 in cross-country statistical analysis, 223 durability of cuts in, 257 in France, 57, 67, 74, 81 in Germany, 88–89, 92, 95, 102, 107, 109 in Italy, 154, 170, 171 in Japan, 180, 185–187, 199 273 in United Kingdom, 116, 118, 119, 121–124, 131–134, 139 in United States, 35, 37, 39, 40, 51 Expenditure/GDP ratio: expectations about, 253 in Germany, 90 in United Kingdom, 135 Ex-post outturn data, xvi in cross-country statistical analysis, 214, 220, 222 overview, 242 F FE (fixed effects) estimator, 237, 238 FER (‘‘Fundamental Expenditure Review’’), 123 Financial crisis of late 2000s, xiii effect on Canada, 25 effect on France, 72 effect on Japan, 200 effect on UK, 126 Financial Statement and Budget Report (FSBR), 136 Fiscal adjustment, xxivn.1, 218 Fiscal adjustment plans See also specific headings envisaged composition of, 252 institutional and political factors in, 254–255 lessons for designing, 255–258 macroeconomic factors in, 252–254 rationale for, 251 shifting framework to, xvi Fiscal balance base effect, 237 Fiscal Councils, 257 Fiscal Monitor, xxivn.1 Fiscal policy, xv Fiscal rules, 224–226, 255 Fiscal Structural Reform Act (Japan), 178–189, 209 Five-year forecasting, 140 Fixed effects (FE) estimator, 237, 238 Floating exchange rates, 2, Franc, 83n.3 France, 57–82 evolution of fiscal rules in, 73–74 expenditure restraint in, 66–67 fiscal adjustment plan in, xvii, xix fiscal consolidation between 2003-2007, 72, 76, 78 Guidance Law for Public Finance Control (1994), 65–66, 68–70 BINDEX 06/10/2011 12:5:31 Page 274 274 France (Continued) need for fiscal consolidation in, 57–61 overall performance of adjustment in, 67–72 Plan Barre in, 61, 63 spending by level of government, 78–81 Virage de la Rigueur, 64 France Telecom, 70 Frankel, Jeffrey, 56n.22 FSBR (Financial Statement and Budget Report), 136 Fuel taxes: in Canada, 13, 14 in France, 63 in Germany, 101 in United Kingdom, 123 ‘‘Fundamental Expenditure Review’’ (FER), 123 G GDP growth, see Gross Domestic Product (GDP) growth Germany, 85–112 1975-1979 consolidation attempt, 88–93 1981-1985 consolidation attempt, 93–99 1991-1995 consolidation attempt, 99–104 2003-2007 consolidation attempt, 105–110 fiscal adjustment plan in, xvii, xx government’s role in, 110–111 history of consolidation attempts in, 85–87 public support for debt reduction in, 255 unification of, 87 Girouard, Nathalie, 211n.25 Government(s): changes in, 232 duration of, 154 levels of, 131–132, 255 role of, 25, 31 Government debt: history of, xv–xvi public interest in, xiii ratios in G-7 economies, xiv Gramm-Rudman-Hollings Act (GRH), xviii, 33–36, 53 Greenspan, Alan, 40 Gross Domestic Product (GDP) growth: in Canada, 11–13 in France, 77, 78 in Japan, 190, 199 in United States, 33, 35, 44–47 Growth surprise, 237, 238 Index G-7 countries, xvii See also specific countries Guidance Law for Public Finance Control (France), 65–66, 68–70 H Hamilton, Alexander, 31 Hartz IV reforms, 107, 110, 114n.21 Hashimoto, Ryutaro, 179, 184 Health care: in France, 81 in Japan, 191 spending on, 135 Housing expenditures, 135 Housing price bubbles, 224 Howe, Geoffrey, 116–119, 126–139, 141–143 Hyperinflations, xxivn.2 I IMF, see International Monetary Fund Implementation, of large planned adjustments: findings on, 215, 222–225 measuring, 218 Implementation errors, 218, 234–236 Implementation ratios, 218, 223–225, 227, 230, 233 Income tax: in Canada, 13, 14 in Germany, 99, 100–101, 103, 105, 107 in Japan, 185, 199 in United Kingdom, 121, 125, 130, 139 in United States, 46–47, 51–52 Income tax rebates, 184 Inflation: in Canada, 3, 4, 11–13 in cross-country statistical analysis, 226, 227, 229–231 in Germany, 85, 93, 94 in United Kingdom, 118, 128, 139 in United States, 45 Initial fiscal balance, 237, 239 Inspection G e n e rale des Finances, 71 Institutional factors, 116, 240, 242–243 Insurance, deposit, 36 Insurance system, 60 ‘‘Integrated Expenditure-Revenue Reform,’’ 192 Interest rates: in Canada, in France, 65 in Italy, 158 BINDEX 06/10/2011 12:5:31 Page 275 275 Index in Japan, 179 in United States, 39, 40, 45 Interest spending, 74 International Monetary Fund (IMF), xxivn.1, 87, 117, 215, 252 Investment incentives, 61 Italy, 153–174 1994 Plan, 167–169 2002 Plan, 170–172 under EMU period, 163–164 fiscal adjustment plan in, xvii, xx–xxi future plans in, 165–166 history of fiscal planning in, 155–157 pre-EMU plans, 162–163 short-term origins of medium-term failures in, 157–162 J Japan, 177–209 applying Bohn Fiscal Sustainability Test to, 206–208 debt-to-GDP ratio of, 177, 178 fiscal adjustment plan in, xviii, xxi Fiscal Structural Reform Act, 178–189, 209 medium-term fiscal adjustment plans in, 189–203, 209 Japanese Government Bond (JGB) issuance, 189 Job creation, 61 K Kauder, Bjoern, 165 Kaynes-Oliveira-Tanzi effect, 247n.15 Kohl, Helmut, 97, 99 L Labor market reform, 87, 89, 91–93, 104, 107–111 Labor Party (United Kingdom), 117, 136 Lafontaine, Oskar, 99, 105, 110 Lambsdorff, Otto Graf, 97, 113n.10 Lamont, Norman, 122, 123 Large fiscal adjustment plans, in EU, see Crosscountry statistical analysis LASFE (local authority self-financed expenditures), 138 Lawson, Nigel, 116, 119–121, 126–135, 137, 139, 140, 144–145 Legislative Reorganization Act (1946), 54n.2 Leidy, M., 46 Liberals (Germany), 97, 99, 100 Local authority self-financed expenditures (LASFE), 138 Local governments: in France, 60, 67, 78, 81 in United Kingdom, 123, 131–132, 139–140 M Maastricht treaty: fiscal deficit criteria, 65, 67, 251 as impetus for fiscal consolidation, 162 prerequisites for Euro entry, 72 Macroeconomic factors: in Canada, 7–13, 25 in cross-country statistical analysis, 241–242 and economic shocks, 256 in France, 77–78 in Germany, 100 in Japan, 187, 189, 200–202 in United Kingdom, 126–129 in United States, 44, 45 Macroeconomic planning, 155 Manufacturing employment, 89 Martin, Paul, 5, 17 Medicare, 46 Medium-term budget framework (MTBF): in France, 70–71, 74 in United Kingdom, 140 Medium-term fiscal adjustment plans: in France, 64–72 in Italy, 157–162 in Japan, 180, 189–203, 209 Medium-term fiscal frameworks (MTFFs) See also specific frameworks in Germany, 85, 87 in United Kingdom, 135–136 Medium-term limits, 254 Mexico, Monitoring, 256–257 Moody’s, MTBF, see Medium-term budget framework MTFFs, see Medium-term fiscal frameworks M€ uhleisen, Martin, 56n.25 Mulroney, Brian, Multi-year budgets, 157 Multi-year expenditure planning/control, 136–138 Multi-year spending limits, 256 N NAFTA (North-American Free Trade Agreement), BINDEX 06/10/2011 12:5:31 Page 276 276 Nelson, Edward, 126 ‘‘A New Framework for Economic Policy,’’ Nielsen Task Force, Nikolav, Kalin, 126 Nominal interest rates, 10 North-American Free Trade Agreement (NAFTA), O OBRA (Omnibus Budget Reconciliation Acts), xviii OBRA-90 (Omnibus Budget Reconciliation Act of 1990), 36–38, 53 OBRA-93 (Omnibus Budget Reconciliation Act of 1993), 38–44, 46, 53–54 Obuchi, Keizo, 184 OECD, see Organization for Economic Cooperation and Development Olympic Games, 151n.14 Omnibus Budget Reconciliation Act (OBRA), xviii of 1990 (OBRA-90), 36–38, 53 of 1993 (OBRA-93), 38–44, 46, 53–54 Organic Budget Law (1971), 70, 71 Organization for Economic Cooperation and Development (OECD), 7, 21, 87, 166 Orszag, Peter, 56n.22 Outsourcing, 191 P Parliamentary fractionalization, 232 Pay-as-you-go (PAYGO) mechanism, 36, 38, 53, 98 Pension reform: in Canada, 17, 23 in Germany, 87, 90, 93, 97, 107, 109 PFI (Public Finance Initiative), 191 Plan Barre, 61, 63 Planning and Forecasting Reports (PFRs), 157, 165 Planning Total, 136 Policing, spending on, 135 Politics, 232, 240, 242–243, 250 Private Finance Initiative (UK), 123, 132 Private investment, 94 Program implementation, 75 Program Review (Canada), 6, 17 Provinces, transfers to, 17, 21–23 PSBR (Public Sector Borrowing Requirement), 118, 119 Public administration savings, 91 Index Public corporations, 140 Public Expenditure White Paper, 136 Public Finance Initiative (PFI), 191 Public sector borrowing, 118 Public Sector Borrowing Requirement (PSBR), 118, 119 Public sector employees, 67, 91, 120, 123, 192 Public support, 25, 255, 258 R Reagan Administration, 34 Real GDP growth surprise, 237 Recession: in France, 61 in Germany, 87, 88, 98, 103 in Japan, 184 in United Kingdom, 126 in United States, 36, 38 Regression analysis (cross-country statistical analysis), 232–241 Reischauer, Robert D., 54 Retirement programs: in France, 81 in Germany, 91 Revenue decline, 63 Revenue increases: in Canada, 10, 11, 13–16 in cross-country statistical analysis, 222 durability of, 257 expectations about, 253 in France, 65 in Germany, 89, 90 in Italy, 166 in Japan, 184–187, 199, 200 in United Kingdom, 119, 122, 123, 128, 130–131 in United States, 39, 41, 49 Revenue-to-GDP ratio, 221 Risk, 249 Rolls-Royce, 135 Rubin, Robert, 40 S Sales tax, 13 Sancak, Cemile, 211n.25 Savings and loan crisis, 38 Schroeder, Gerhard, 105, 107 Sequestration, 34, 36, 53 SGP, see Stability and Growth Pact Small and medium enterprises (SMEs), 61, 187 BINDEX 06/10/2011 12:5:31 Page 277 Index Social Democratic Party (Germany), 97–99, 104 Social programs, 64 Social security system: in France, 60, 63, 70, 78, 81 in Germany, 100 in Japan, 191, 200 in United Kingdom, 121, 123, 134 Social spending, 102 See also specific social programs Solidarity Pact, 104 SPs, see Stability programs Spending growth See also Expenditures in France, 78–80 limits on, 72 Spending Review White Paper, 136 Spending-to-potential GDP ratio, 57 Stability and Growth Pact (SGP): and cross-country statistical analysis, 214 as driving force in fiscal adjustment, 251 and France, 61, 70, 72, 82 and Germany, 105, 106 and Italy, 157 Stability programs (SPs), 72–74, 77, 81 Stagflation, Stimulus measures: in Germany, 92, 107 in Japan, 184, 187–189 Stock markets, 51, 52, 224 Structural decomposition, 7–11 Structural deficits, 39 Structural primary balance-to-potential GDP ratio, 246n.4 Structural reform: in Canada, 4, 21–23 as element of success, 25 in Germany, 87, 89, 103–104, 107–109, 253–254 in Japan, 179 role of, 253–254, 257 Subnational governments, 22–23, 25 Summers, Larry, 54n.4 Surplus: in Japan, 190, 196 in United States, 50 Sustainability: Bohn Fiscal Sustainability Test, 206–208 of fiscal consolidation in Germany, 89, 98 of pension reform in Germany, 107 Sustainable Investment rules, 136 277 T Taxes: in Canada, 13, 14 in cross-country statistical analysis, 221–223 in France, 64 in Germany, 97, 99–101, 103, 105, 107 in Italy, 163, 164, 166, 168 in Japan, 182, 184–185, 187, 199–200, 203 in United Kingdom, 119–121, 125, 130, 139 in United States, 37–39, 46–47, 51–52 Tax Reform Act (1986), 35 Thatcher, Margaret, 117–119 Timing, of consolidation announcements, 125–126 Tobacco, taxes on, 14, 123 Total Standard Spending (TSS), 131, 132 Transfers-to-GDP ratio, 60 Transfers to provinces, 17, 21–23 Transport, spending on, 135 Treaty of Maastricht, see Maastricht treaty TSS (Total Standard Spending), 131, 132 U Underinvestment, 151n.18 Unemployment: in France, 60, 64, 81 in Germany, 88, 89, 91–100, 103, 105 in Italy, 168 Unemployment insurance reform: in Canada, 17, 21 in Germany, 91, 96, 101, 102 Unification, in Germany, 85, 87, 99–104 United Kingdom, 115–149 1980 MTFS, 116–119, 125–135, 137, 141–143 1984 Budget, 116, 119–121, 127–134, 137, 144–145 2007 Pre-Budget Report and Comprehensive Spending Review, 116, 124–135, 137, 138, 148–149 consolidation success and failure in, 138–140 expenditure distribution between sectors, 134–135 expenditure reductions in, 128, 130–134 fiscal adjustment plan in, xviii, xxi–xxii fiscal and budgetary frameworks in, 135–138 macroeconomic factors in, 126–129 November 1993 Budget, 116, 121–124, 126–134, 137, 146–147 BINDEX 06/10/2011 12:5:31 Page 278 278 United Kingdom (Continued) revenue increases in, 128, 130–131 scale and pace of adjustments in, 128, 130 timing of consolidation announcements in, 125–126 use of fiscal years in documents in, 248n.25 United States, 31–54 1990s deficit reduction in, 44–50 fiscal adjustment plan in, xviii, xxii–xxiii fiscal deficit vs public debt in, 50–52 free trade agreement with Canada, Gramm-Rudman-Hollings Act, xviii, 33–36, 53 history of deficit in, 31, 52, 53 Omnibus Budget Reconciliation Act (1990), 36–38, 53 Omnibus Budget Reconciliation Act (1993), 38–44, 46, 53–54 United States Congress, 34, 56n.21 United States Office of Budget Management, 36 Unity Fund (Germany), 100 Index V Value Added Tax (VAT): in Canada, 14 in France, 61, 63 in Germany, 92, 93, 101, 103, 108 in United Kingdom, 123–125 Vernengo, Matias, 56n.22 Virage de la Rigueur, 64 W Wagner, Richard E., 54n.2 Waigel, Theo, 99 War-related obligations, 93 West Germany, 100, 101, 104, 111 World Economic Outlook (WEO), 215, 252 World War I debt, 85 Y Yen, 179 Z ‘‘Zero volume growth’’ spending rule, 74 ... information about Wiley products, visit our web site at www.wiley.com Library of Congress Cataloging -in- Publication Data Chipping away at public debt: sources of failure and keys to success in. .. 19:30:45 Page Chipping Away at Public Debt FFIRS 05/16/2011 19:30:45 Page FFIRS 05/16/2011 19:30:45 Page Chipping Away at Public Debt Sources of Failure and Keys to Success in Fiscal Adjustment. .. had to be abandoned; and some where plans proved resilient and instrumental to ultimately bringing the public finances under control The stories are important, informative, and interesting in