MACROECONOMIC STATISTICS
Sponsored by a Grant TÁMOP-4.1.2-08/2/A/KMR-2009-0041 Course Material Developed by Department of Economics,
Faculty of Social Sciences, Eötvös Loránd University Budapest (ELTE) Department of Economics, Eötvös Loránd University Budapest
Institute of Economics, Hungarian Academy of Sciences Balassi Kiadó, Budapest
2 Author: Gábor Oblath
Supervised by Gábor Oblath January 2011
Week 11
Imbalances, financing and sustainability Concepts, sources and illustrations
Two broad topics
• Concepts, formulae, sources, some illustrations
• Case study: Hungary’s relative fiscal position in 2010
”Fundamentals”
• Two meanings
– Economic growth
– Macroeconomic balances/imbalances
• Unsustainable deficits undermine growth
• Sustainable growth assumes sustainable deficits
• No (too slow) growth turns deficits unsustainable
3
”Sustainability” of deficits?
• If current deficits (i.e. current additions to existing debts) do not lead to sustained increase in the debt/GDP indicator, implying (in the medim run)
• debt/debt ≤ GDP/GDP
• Fiscal sustainability: definitions and further issues
Definition of, and some issues related to fiscal sustainability 1
• No single definition of ‘fiscal sustainability’
• A simple approach: link sustainability to some fiscal target (i.e., a pre-determined ratio for public debt/GDP)
• Fiscal policy ‘sustainable’ if (with reasonable assumptions)
– ”the government can maintain its current policies indefinitely while continuing to stabilise the debt-GDP ratio at the desired level”
• The primary balance (PB/GDP) required to stabilise the debt ratio at a given target level (D/GDP) [r is the effective (real) interest rate on government debt, and g is the (real) rate of GDP growth]:
• if the interest rate > growth rate, a surplus in the primary balance will be necessary to stabilise the debt ratio. The higher the interest rate is relative to growth, the higher is the necessary surplus
1 *The following draws on: Office for Budget Respnsibility: Pre-Budget Forecast, June 2010, ch. 5 http://budgetresponsibility.independent.gov.uk/d/pre_budget_forecast_140610.pdf
4
Sustainability: further dimensions
• More comprehensive view: beyond a simple debt target, i.e.,
– solvency – does the government have the ability to pay its financial obligations?
– growth – does the fiscal position support or hinder economic growth?
– stability – can the government meet its future obligations without increasing the tax burden?
– fairness – can the government pay for current obligations without shifting the cost to future generations?
– robustness to shocks – can fiscal policy absorb economic shocks without public debt reaching unsustainable levels?
Concepts and illustrations: Source: EC DG- Ecfin (General goverment data)
http://ec.europa.eu/economy_finance/db_indicators/gen_g ov_data/documents/2010/autumn2010_country_en.pdf
Debt dynamics:
total balance (net borrowing and GDP growth)
5
Debt dynamics: primary balance and implicit interest rate
The meaning of ”stock-flow adjustment”
• The stock-flow (S/F) adjustment (debt-deficit adjustment) ensures consistency between
– net borrowing (flow) and
– the variation in the stock of gross debt
• It includes
– the accumulation of financial assets,
– the changes in the value of debt denominated in foreign currency and – remaining statistical adjustments.
6
Illustration
• Based on DG EC FIN (General government data, autumn, 2010)
• Factors contributing to annual changes in public debt/GDP – Primary deficit (PD) vs. snow-ball effect (i-y)
– Primary gap (difference between actual and PB and the PB required for stabilising the debt-GDP ratio)
• Countries compared: HU and CZ
– Size of (S/F) adjustment in HU vs. CZ in 2008: possible explanation? [Hint:
the size and currency composition of debt]
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The relationship between debt/GDP and the
primary balance (example)
8
Sources of fiscal data for EU-countries
• Eurostat:
• http://epp.eurostat.ec.europa.eu/portal/page/portal/government_finance_stati stics/introduction
• Government finance statistics (GFS) show the economic activities of government, including: government revenue
• government expenditure
• government deficit
• transactions in assets
• transactions in liabilities
• other economic flows
• balance sheets
• AMECO: General government (S13)
• http://ec.europa.eu/economy_finance/ameco/user/serie/SelectSerie.cfm
Case study
Hungary’s fiscal position and sustainability in international comparison (based on information available in October 2010)
9
Fiscal balances/GDP in EU-countries
Public debt-GDP ratios V4 countries
In 2008–2009: huge deterioration in fiscal balances; exception: HU. But see: 2002; 2005–2006
10
Hungary’s public debt ratio extremely high relative to its level of development
Debt/GDP and per capita GDP at PPP in 2009
Fiscal sustainability: illustrative international comparison
• Needed correction in the PB
(debt/GDP) ≈ debt/GDP 0*(interest rate – GDP-growth) – primary surp.
snow-ball effect
UK
FI SE SK
SI RO
PT
PL
AU NL MT
HU
LV LT
CY IT
FR
ES EL
IE
EE
DE
DK CZ
BG
BE
0 20 40 60 80 100 120
9,0 9,2 9,4 9,6 9,8 10,0 10,2 10,4 10,6
Debt/GDP
%
Ln(GDP/cap) PPP
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• debt-stabilising primary surplus = – (snow-ball efect)
• Primary gap = debt-stabilising primary surplus – actual PB
• Illustrations
Source: IMF: Fiscal Monitor, May 2010
12
Another comparison
• Projected change in the fiscal balance and public debt 2007–2015
• HU (this time) positive ”outlier”
• Source: IMF (2010)
According to comparative
analyses/projections, HU’s fiscal prospects better than for most other countries
• But perception of financial markets different see – CDS- spreads
13 – Government bond yields
• Three questions:
1. Why?
2. The cost of low credibility?
3. What could be done?
CDS spreads on 10y bonds
14
Yields: 5-year government bonds
1. Why? – several reasons
• Inherited problems
– Huge debt – serious vulnerability
– ”Sins of the past” (irresponsible fiscal policy of former governments)
• Serious errors in the government’s communication
• The lack of clarity/transparency regarding medium-term fiscal objectives
• Measures dampening the potential growth of the economy (extra taxes on the financial, retail, communications etc. sectors)
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2. The cost of low credibility
• Very simple (and rough) approximation
• Depart from the cross-section relationship between interest/GDP and debt/GDP in the EU
• How much more interest does the HU government pay than implied by debt/GDP?
Government interest payment/GDP (x axis) vs. public debt/GDP (y axis) in the EU in
2009
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Residuals of the cross-section trend (in % of GDP) in 2009
3. Steps (that would have had) to be taken
• Roughly 1-1.5 % points adjustment in the primary balance (relative to GDP) based on lasting measures
• Recognition and communication of the relative favourable fiscal position (outlook) of HU
• Measures to enhance the medium term growth potential of HU
• Credible commitment by the government to observe the medium term fiscal rules of Hungary
• (It happened otherwise)
-1 0 1 2 3 4 5
UK SE FR NL DE FI CY DK LU EU16 PT CZ SK EU27 BE ES EE IT BG AT IE LT SI MT PL LV EL RO HU
Kamat/GDP_2009 Maradékok
1% of GDP HUF 260 bn.
