Presentation Armin Riess

Slide1: 

Fiscal Consolidation and Public Investment:  Friends, Foes, or Neutral Partners? A Look at Bulgaria and Romania Armin Riess European Investment Bank International Seminar for Experts “The coming enlargement of the the EU” Cicero Foundation October 12-13, 2006

Outline: 

Outline 1. Motivation – EIB interest 2. General observations (EU 27) Public debt sustainability (the long run) Macroeconomic constraints to fiscal policy (the short run) 3. Fiscal consolidation and public investment Bulgaria Romania 4. Conclusion

Outline: 

Outline 1. Motivation – EIB interest 2. General observations (EU 27) Public debt sustainability (the long run) Macroeconomic constraints to fiscal policy (the short run) 3. Fiscal consolidation and public investment Bulgaria Romania 4. Conclusion

Outline: 

Outline 1. Motivation – EIB interest 2. General observations (EU 27) Public debt sustainability (the long run) Macroeconomic constraints to fiscal policy (the short run) 3. Fiscal consolidation and public investment Bulgaria Romania 4. Conclusion

Public debt in EU-27 (% of GDP), 2006: 

Public debt in EU-27 (% of GDP), 2006 Source: European Commission, Economic Forecast, Spring 2006 Maastricht 60% criterion

Fiscal balance in EU-27 (% of GDP), 2006: 

Fiscal balance in EU-27 (% of GDP), 2006 Source: European Commission, Economic Forecast, Spring 2006 Maastricht 3% criterion

Debt dynamics: 

Debt dynamics Change in debt/GDP ratio = fiscal deficit/GDP ratio – nominal GDP growth • debt/GDP ratio

Debt dynamics: 

Debt dynamics Change in debt/GDP ratio = fiscal deficit/GDP ratio – nominal GDP growth • debt/GDP ratio Key message: debt accumulation the slower, the smaller the deficit higher economic growth

Real GDP growth (in %), 2000-05: 

Real GDP growth (in %), 2000-05 Source: European Commission, Economic Forecast, Spring 2006

Fiscal deficit that makes debt/GDP converge to 60% (Maastricht criteria): 

Fiscal deficit that makes debt/GDP converge to 60% (Maastricht criteria)

Fiscal deficit that makes debt/GDP converge to 60% (Maastricht criteria): 

Fiscal deficit that makes debt/GDP converge to 60% (Maastricht criteria)

Fiscal deficit that makes debt/GDP converge to 60% (Maastricht criteria): 

Fiscal deficit that makes debt/GDP converge to 60% (Maastricht criteria)

Fiscal deficit that makes debt/GDP converge to 60% (Maastricht criteria): 

Fiscal deficit that makes debt/GDP converge to 60% (Maastricht criteria)

Bulgaria: fiscal balance and public debt (in % of GDP): 

Bulgaria: fiscal balance and public debt (in % of GDP) Source: National Statistical Institute (NSI) of Bulgaria; *Projected Public debt (right scale) Fiscal balance (left scale)

Romania: fiscal balance and public debt (in % of GDP): 

Romania: fiscal balance and public debt (in % of GDP) Source: IMF; *based on policy measures (1.8% of GDP) relative to initial budget Pubic debt (right scale) Fiscal balance (left scale)

Outline: 

Outline 1. Motivation – EIB interest 2. General observations (EU 27) Public debt sustainability (the long run) Macroeconomic constraints to fiscal policy (the short run) 3. Fiscal consolidation and public investment Bulgaria Romania 4. Conclusion

Outline: 

Outline 1. Motivation – EIB interest 2. General observations (EU 27) Public debt sustainability (the long run) Macroeconomic constraints to fiscal policy (the short run) 3. Fiscal consolidation and public investment Bulgaria Romania 4. Conclusion

Macroeconomic constraints: 

Macroeconomic constraints Concerns about Inflation  internal imbalances External current account  external imbalances

Macroeconomic constraints: 

Macroeconomic constraints Concerns about Inflation  internal imbalances External current account  external imbalances

External current account (in % of GDP): 

External current account (in % of GDP) Current account balance = Savings – Investment Current account balance = Trade balance + …

External current account (in % of GDP): 

External current account (in % of GDP) Saving Current account balance Investment Current account balance = Savings – Investment Current account balance = Trade balance + … Current account balance =

External current account (in % of GDP): 

External current account (in % of GDP) Saving Current account balance Investment Current account balance = Savings – Investment Current account balance = Current account balance = Trade balance + … (Savings – Investment) of private sector + fiscal balance

Outline: 

Outline 1. Motivation – EIB interest 2. General observations (EU 27) Public debt sustainability (the long run) Macroeconomic constraints to fiscal policy (the short run) 3. Fiscal consolidation and public investment Bulgaria Romania 4. Conclusion

Outline: 

Outline 1. Motivation – EIB interest 2. General observations (EU 27) Public debt sustainability (the long run) Macroeconomic constraints to fiscal policy (the short run) 3. Fiscal consolidation and public investment Bulgaria Romania 4. Conclusion

Bulgaria: contributions to change in fiscal balance (in % of GDP), 2001-05: 

Bulgaria: contributions to change in fiscal balance (in % of GDP), 2001-05 Source: Bulgarian National Bank Change in fiscal balance Change in fiscal balance 3.8 % Decline in interest payments on public debt 2.1 % Increase in revenue 3.1 % Increase in current expenditure (excl. interest payments) – 1.6 % Decline in public investment 0.2 %

Romania: contributions to change in fiscal balance (in % of GDP), 2001-05: 

Romania: contributions to change in fiscal balance (in % of GDP), 2001-05 Source: IMF Change in fiscal balance Change in fiscal balance 3.3 % Decline in interest payments on public debt 3.7 % Decline in revenue 2.2 % Decline in current expenditure (excl. interest payments) 1.5 % Decline in public investment 0.3 %

Public investment (% of GDP): 

Public investment (% of GDP) Source: AMECO (European Commission) Eurozone countries 2005

Conclusion: 

Conclusion Fiscal policy in BU & RO: macroeconomic stability rather than debt sustainability Public investment in BU & RO low compared to NMS-8, but increase possible without deteriorating fiscal balance Fiscal consolidation has not come at expense of public investment  “neutral partners”

Slide29: 

Fiscal consolidation and public investment: friends, foes, or neutral partners? A look at Bulgaria and Romania Armin Riess (a.riess@eib.org) European Investment Bank International Seminar for Experts “The coming enlargement of the the EU” Cicero Foundation October 12-13, 2006