Hilde C. Bjørnland. BI Norwegian Business School. Advisory Panel on Macroeconomic Models and Methods Oslo, 27 November 2018

Transcription

1 Discussion of OECD Deputy Secretary-General Ludger Schuknecht: The Consequences of Large Fiscal Consolidations: Why Fiscal Frameworks Must Be Robust to Risk Hilde C. Bjørnland BI Norwegian Business School Advisory Panel on Macroeconomic Models and Methods Oslo, 27 November 2018 Hilde C. Bjørnland Discussion of OECD FinDep / 10

2 Risk, uncertainty and resource rich economies How can fiscal frameworks be robust to risk? In resource rich economies? huge costs associated with the large and unpredictable swings in commodity prices if not well managed, the volatility can destabilize the domestic economy and undermine long-term growth. Management of resources v/s rule based fiscal policy Recent volatile periods are opportune moments to review how fiscal policy can be strengthened to manage risk. Hilde C. Bjørnland Discussion of OECD FinDep / 10

3 How does fiscal policy respond?... Evidence of procyclical fiscal policy, Figure I. Country correlations between the cyclical components of the real government expenditure and real GDP Switzerland Finland United Kingdom France Australia Austria Jamaica Sweden Congo, Dem. Rep. of Greece Sudan United States Kuwait Spain Japan Belgium Canada Italy Yemen Denmark Netherlands Korea Ireland Colombia Sri Lanka New Zealand El Salvador Uganda United Arab Emirates South Africa Panama Tanzania Mexico India Gambia Angola Brazil China Norway Zambia Thailand Honduras Egypt Bolivia Mozambique Ecuador Chile Uruguay Jordan Argentina Germany Haiti Congo, Rep. of Costa Rica Pakistan Indonesia Venezuela Hong Kong Ghana Libya Senegal Morocco Turkey Kenya Malaysia Tunisia Portugal Algeria Nicaragua Guatemala Togo Madagascar Philippines Iran Dominican Rep. Qatar Nigeria Bangladesh Côte d'ivoire Mali Bahrain Paraguay Myanmar Niger Peru Saudi Arabia Gabon Sierra Leone Oman Trinidad and Tobago Syrian Arab Rep. Cameroon Botswana Azerbaijan -1 Notes: Dark bars are OECD countries and light ones are non-oecd countries. The cyclical components have been estimated using the Hodrick-Prescott Filter. A positive (negative) correlation indicates procyclical (countercyclical) fiscal policy. Real government expenditure is defined as central government expenditure and net lending deflated by the GDP deflator. Source: World Economic Outlook and International Financial Statistics (IMF). Hilde C. Bjørnland Discussion of OECD FinDep / 10

4 ... to more countercyclical fiscal policy, Figure II. Country correlations between the cyclical components of the real government expenditure and real GDP United States Norway Bolivia Canada Australia Nigeria Malaysia Turkey Costa Rica Chile Saudi Arabia Spain Algeria Japan Finland Korea Hong Kong United Kingdom Zambia Syrian Arab Rep. Germany Ireland Botswana Denmark Libya Indonesia Austria Netherlands Philippines Brazil Belgium Côte d'ivoire Paraguay Italy United Arab Emirates Bahrain Yemen Morocco Oman El Salvador Uganda Argentina Egypt Cameroon France Ecuador Portugal Colombia Sudan Gambia Honduras Switzerland Greece Mozambique Sweden South Africa Kuwait Guatemala Madagascar Congo, Rep. of Gabon Thailand Mali Niger Pakistan Sierra Leone Haiti India Jamaica New Zealand Nicaragua Bangladesh Dominican Rep. Azerbaijan Angola Sri Lanka Qatar Ghana Venezuela Jordan China Trinidad and Tobago Tunisia Myanmar Kenya Senegal Iran Uruguay Togo Mexico Panama Congo, Dem. Peru Tanzania Notes: Dark bars are OECD countries and light ones are non-oecd countries. The cyclical components have been estimated using the Hodrick-Prescott Filter. A positive (negative) correlation indicates procyclical (countercyclical) fiscal policy. Real government expenditure is defined as central government expenditure and net lending deflated by the GDP deflator. Source: World Economic Outlook and International Financial Statistics (IMF). Hilde C. Bjørnland Discussion of OECD FinDep / 10

5 Commodity producers - key questions to answer Still... Countercyclical pattern could reflect the economic cycles - booming demand in the period Does the fiscal framework adopted in resource rich economy shelter the economies from commodity price fluctuations? The adoption of a fiscal framework is no proof in itself that fiscal policy works to insulate the economy from commodity price fluctuations Rule can be too lax, or rule is not followed Hilde C. Bjørnland Discussion of OECD FinDep / 10

6 Prime example - Norway Sovereign wealth fund established in the mid 1990s - all windfall gains saved in the fund Fiscal rule established government can on average spend 4 % of the fund (the expected real return) every year (reduced to 3%): 1 Smooth spending from the oil wealth. A gradual phase in should stabilise economic developments over time, thereby insulating the economy from Dutch disease 2 Stabilises the fiscal impulse over and above longer term smoothing by allowing deviations from the 4 percent rule to counteract large cyclical variations in economic activity or sharp swings in the value of the fund. Hilde C. Bjørnland Discussion of OECD FinDep / 10

7 Prime example - Norway - reconsidered Bjørnland and Thorsrud (2018) find that for Norway: Following an oil price shock, fiscal policy has become more (not less), pro-cyclical after the implementation of the fiscal rule BUT Following a global activity shock, the picture is somewhat more nuanced, with some components of public spending being counter-cyclical the last decade. Hilde C. Bjørnland Discussion of OECD FinDep / 10

8 Fiscal policy response (relative to GDP) to world demand shocks and oil price shocks World activity shock Oil price shock Source: Bjørnland and Thorsrud (2018). The figure reports the response, across time and horizons, of value added in the public sector relative to the GDP in the mainland economy. A value above zero indicates that the public sector responds more positively to the given shock than GDP mainland economy. Hilde C. Bjørnland Discussion of OECD FinDep / 10

9 Conclusions and policy recomodations Management of natural resource wealth should be seen as part of a strategy for sustainable, inclusive and broad based growth The goal of sheltering the economy from shocks, versus saving resource revenue for future usage. Trade off complex rules versus prudent spending Simple rules to avoid over-spending Hilde C. Bjørnland Discussion of OECD FinDep / 10

10 References I Bjørnland, H. C. and L. A. Thorsrud (2018). Commodity prices and fiscal policy design: Procyclical despite a rule. Journal of Applied Econometrics (forthcoming). Hilde C. Bjørnland Discussion of OECD FinDep / 10