MACROECONOMIC STATISTICS

MACROECONOMIC STATISTICS

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

MACROECONOMIC STATISTICS

Author: Gábor Oblath

Supervised by Gábor Oblath January 2011

ELTE Faculty of Social Sciences, Department of Economics

MACROECONOMIC STATISTICS

Week 11

Imbalances, financing and sustainability Concepts, sources and illustrations

Gábor Oblath

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

”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*

• 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

*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

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_gov_data/documents/2010/autumn2010_

country_en.pdf

Debt dynamics:

total balance (net borrowing and GDP growth)

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.

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]

The relationship between debt/GDP and the primary balance (example)

0 1 2 3 4 5

0 10 20 30 40 50 60 70 80 90 100 110 120 Adósság/GDP (%)

Elsődleges egyenleg/GDP (%)

(i-y)=1 (i-y)=2 (i-y)=3 (i-y)=4

Primary balance

Debt/GDP

(i: interest, y: GDP-growt) The figure illustrates that at a higher debt ratio, any shock to (i-y) [increase in i or a fall in y] requires a larger adjustment in PB than at a lower debt ratios

Sources of fiscal data for EU-countries

• Eurostat:

• http://epp.eurostat.ec.europa.eu/portal/pag e/portal/government_finance_statistics/int roduction

• 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/ame co/user/serie/SelectSerie.cfm

Case study

Hungary’s fiscal position and sustainability in international comparison (based on

information available in October 2010)

Fiscal balances/GDP in EU-countries

In 2008–2009: huge deterioration in fiscal balances; exception: HU But see: 2002; 2005–2006

Public debt-GDP ratios V4 countries

10 20 30 40 50 60 70 80

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Czech Republic

Hungary Poland Slovakia

%

IMF-credit

Recession

Hungary’s public debt ratio extremely high relative to its level of development

Debt/GDP and per capita GDP at PPP in 2009

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

Fiscal sustainability: illustrative international comparison

• Needed correction in the PB

(debt/GDP) ≈ ^debt/GDP ₀*(interest rate – GDP-growth) – primary surp.

snow-ball effect

• debt-stabilising primary surplus = – (snow-ball efect)

• Primary gap = debt-stabilising primary surplus – actual PB

• Illustrations 

Source: IMF: Fiscal Monitor, May 2010

Another comparison

• Projected change in the fiscal balance and public debt 2007–2015

• HU (this time) positive ”outlier”

• Source: IMF (2010)

HU Magyarország relatív helyzete jó

According to comparative analyses/projections, HU’s fiscal prospects better than for most other countries

• But perception of financial markets different see

– CDS- spreads 

– Government bond yields 

• Three questions:

1. Why?

2. The cost of low credibility?

3. What could be done^?

CDS spreads on 10y bonds

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)

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

UK FI SE

SK RO SI

PT PL

AT NL

MT

HU

LU LVLT

CY

IT

FR

ES

EL

IE

EE

DE

CZDK

BG

BE

EU16

y = 0,0424x + 0,2574 EU27

R² = 0,9026

0 1 2 3 4 5 6

0 20 40 60 80 100 120

Kamat/GDP_2009

Adósság/GDP_2008 (%)

%

Residuals of the cross-section trend (in % of GDP) in 2009

-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.

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)