BCOP MEETING ON FISCAL RULES: WRAP-UP Naida Carsimamovic Vukotic, BCOP Resource Team BCOP plenary meeting, Belarus, February

WHY DO WE NEED FISCAL RULES? 1.To ensure long-term fiscal sustainability. 2.To depoliticize economic decision-making process. 3.To signal fiscal discipline commitment and credibility, which in turn improved government borrowing conditions and improve private sector’s expectation. 4.To prevent counter-cyclical fiscal policies in the case of complicated rules, including prevention of expansive fiscal policy in good times. 5.To be better equipped to deal with external environment trends that have uncontrollable influence on revenues – e.g. commodity producing countries or small open economies with foreign trade vulnerabilities. 2

WHAT ARE FISCAL RULES? 1.Permanent fiscal policy constraint expressed as an fiscal indicator. 2.Controlling short-term political objectives for the sake of long-term development objectives (debt sustainability). 3.Terminology/definitional issues, legislated versus informal. 3. Numerous trade-offs: simple vs. complicated easily vs. growth- monitored stabilizing easy difficult for signal vs. the public to understand 3

HOW TO DESIGN AND IMPLEMENT RULES? 1.WHAT RULE TO CHOSE:  Take into account country’s specific vulnerabilities in terms of: a)structure of economy, b)fiscal policies and processes, c)political landscape/maturity, d)and institutional capacities  Carefully consider all pros and cons (simplicity, sustainability, stabilization, operationalization, robustness, and verification) of different rule types and decide on: a)simplicity vs. complexity (i.e. degree to which to introduce counter- cyclical elements) b)type or rule (debt, budget balance, expenditure, revenue)  Consider minimizing the “gaming” of investment expenditure cuts, but be careful not to open the Pandora box of exceptions. 4

HOW TO DESIGN AND IMPLEMENT RULES? 2. LEGAL BASIS:  Grounding rules within primary legislation may serve to broaden political support and alleviate some of the risks of constant changes.  Having all fiscal accountability provisions in one piece of legislation makes it easier.  Choose the form that has the highest chance of being implemented.  Maximize the coverage of general government expenditures by rules. Monitoring of implementation is challenging, but at minimum ensure that the expectations are clearly communicated and focus on good coordination in the budget planning stage. Consider building in the buffer for sub-national levels within the central government budget. 5

HOW TO DESIGN AND IMPLEMENT RULES? 3.ESCAPE CLAUSES AND ENFORCEMENT MECHANISMS:  Clear definition of “exceptional circumstance”  Sanctions are important 4.HOW TO MONITOR:  Must be done constantly, not just during budget adoption stage.  An “independent” body (Fiscal Council) can help increase credibility of Ministry of Finance by: a)Monitoring/verifying compliance with fiscal rule b)Reviewing macroeconomic projections and assumptions for revenue projections 6

WHEN TO USE FISCAL RULES? 1.Manage your expectations: Fiscal rules are not just a fad but they will not magically fix damaged public finances. 2.Sequencing matters! Overall budget process must be effective and credible first, and fiscal rules then used within broader PFM Strategy, as one of the tools for fiscal discipline. Otherwise, there is a greater risk of more frequent needs for changes and loss of credibility. 3.Fiscal rules cannot replace political commitment! 4.….but they can signal (even in their simple forms - – DO NOT LET THE BEST BE THE ENEMY OF THE GOOD) the existence of commitment and can serve as a tool to put fiscal discipline into the public discussion and shift focus to more of a long-term perspective. 5.Ultimately, sanctions can only come from the public holding the political decision-makers more accountable for fiscal discipline. 7

VIRTOUS CYCLE OF FISCAL DISCIPLINE SUPPLY AND DEMAND – MF, POLITICAL DECISION-MAKERS, AND PUBLIC The broader public demand for economic stability Generating political will Choice of appropriate rules and independent oversight 8

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Questions? Thank you for your attention 10