1 GROUP 1

2 Group 1 - COUNTRIES 1. ARMENIA 2. CROATIA 3. BOSNIA AND HERZEGOVINA 4. BULGARIA 5. MACEDONIA 6. MONTENEGRO 7. ROMANIA 8. SERBIA Including World Bank experts, OECD experts and a representative from the Swedish MoF

General Situation Overview by Country All countries have fiscal rules (with Macedonia currently in the Parliament adoption process) All EU Member States (Bulgaria, Romania, Croatia) have complex rules alongside the simple ones, (adopted or planned), which take into account cyclical adjustments, while other countries have only simpler rules, and general escape clauses that lack a thoroughly regulated implementation. Most countries have some form of Maastricht rules in place (deficit limits in the amount of 3% and debt limits in the amount of 60% of the GDP respectively), but all countries have the debt rule. In that respect, a part of the group discussion focused on how to distinguish the debt rule from other rules, considering that other rules are aimed at achieving the final objective, i.e. the debt level. 3

Key challenges In most countries of the region the rules are not complied with. Enforcement mechanisms have not been ensured at all or they have been ensured generally just for the sake of complying with the requirement to propose measures to the parliament Even though most countries have escape clauses, these are incomplete - What exactly does the term "crisis" mean, i.e. at what point does the sharp decline of GDP occur? The flaw of simple rules is that they are pro- cyclical. The flaw of complex rules, which take into account cyclical developments, is the lack of quality macroeconomic data, and the time gap between identifying the occurrence of a crisis/disturbance and the procedures necessary for fiscal adjustment. 4

Key challenges Macroeconomic projection capacities are low in some cases even for basic macro indicators, and overly optimistic revenue projections constitute an issue. Data-gathering capacities and projections of cyclic macro indicators are even weaker, which consequently affects the fiscal rule implementation monitoring. Monitoring the fiscal rule implementation at sub-governmental levels, extra-budgetary funds and other parts of the general government sector is complicated, and enforcement mechanisms are practically absent, especially in terms of the independence of sub-governmental levels. 5

Challenges It is difficult to maintain rule longevity through the periods of governmental change. The biggest challenge is the lack of proper political commitment on the one hand, and the lack of proper political consequence for non- compliance on the other. 6

Key factors for success and effective implementation Fiscal rules should be part of a wider public finance management strategy and they should be anchored within a mid-term expenditure framework. Macroeconomic projections should be analysed and criticised by authorities other than the ministries of finance (fiscal councils, and in some cases, the central bank). Legal basis for fiscal rules is the key for the countries of the region. In order to generate a wider political commitment, and a wider public interest, some countries have decided to embed fiscal rules in their Constitution (Macedonia): 7

Key factors for success and effective implementation There should be a wider commitment to fiscal discipline and fiscal rules not just within the government but also in the parliament, and not just in the budget adoption stage but all year long, most likely non-applicable (e.g. in Montenegro during the budget adoption stage the rules were enforced, but during the year, the parliament adopted an act which when implemented exceeded the limits of the rules). The media can be an important factor in raising public awareness on the importance of fiscal discipline and consequently in achieving a higher level of political accountability. 8

Key factors for success and effective implementation Simpler fiscal rules, despite their flaws (particularly the risk of a pro-cyclical fiscal policy) can play an important psychological role and provide an additional "excuse" to the Ministry of Finance to insist on fiscal discipline, especially because both the parliament and the public can better understand simpler rules. There is no single rule model applicable to all countries; specificities are numerous, particularly in terms of adequate debt level. That is why it is important for the ministries of finance to decide which fiscal rules are the most appropriate for a particular country. 9

Thank you/Hvala 10