BUDGETS

Chilean budgetary policy has been very successful in terms of national debt reduction and reserve fund accumulation. The country’s budgetary policy is based on a fiscal rule that explicitly and relatively transparently links overall government spending to an estimate of government revenue trends. This puts Chile at the international best-practice frontier regarding budget policies and fiscal regimes. Although temporarily suspended during the difficult 2009 – 2010 period, this rule’s application since 2001 (and the adherence to fiscal orthodoxy even without a rule since the mid-1980s) has allowed the government to reduce overall debt, accumulate sovereign wealth and reduce its overall financial liabilities to negative levels. This policy proved absolutely adequate in dealing with the world financial crisis.

The Norwegian government receives a large flow of financial resources from the extraction of petroleum. This began in the 1980s and is projected to remain substantial until around at least 2040, and in natural gas probably longer. Gas has now passed oil as the most important source of income and the production of oil has been in decline during recent years. It is expected that by 2025 there will be significant drop in revenue generated from the petroleum sector, requiring significant budgetary changes. In many countries, the abundance of natural resources has given way to corruption and irresponsible fiscal policies. Norway has so far avoided this resource “curse.” One important achievement has been the establishment of a so-called petroleum fund, created in 1990 by the Norwegian parliament as a means to share oil proceeds between current and future generations, as well as to smooth out the effects of highly fluctuating oil prices, now designated a “pension fund.” The fund is administered by Norges Bank Investment Management (NBIM), an arm of Norway’s central bank, and invests exclusively in non-Norwegian assets. Under current rules, the government is required to invest all petroleum revenue in the fund. Each year, at most 4% of the fund’s value is made available for current expenditure. This principle is supported by all political parties except for the populist Progress Party, but has no constitutional protection. When including the petroleum fund, the net asset position of the Norwegian government amounts to about 120% of GDP. This surplus is sufficient to cover outstanding and future pension liabilities, putting the country currently in a unique position compared with most Western countries.

With the exception of the current financial crisis, the Swedish budget and economy has been in balance since the mid-1990s. Since then, fiscal and budgetary discipline has been extraordinarily strong and the Ministry of Finance has secured a leading role in government. Taxes have not been stable, as three major tax cuts have been implemented over the past four years. Overall, however, there is a high degree of stability in budgetary politics. The OECD emphasizes the norm-based budgetary framework that enabled the consolidation of public budgets during the recent past. Because of the impact of the global financial crisis, discretionary fiscal policies somehow eroded the norm-based budgetary process. Nevertheless, the budgetary policy is fiscally sustainable (in fact, fiscal sustainability in Sweden is ranked among the highest in the EU).

Budgetary policy in Switzerland is fiscally sustainable. Gross public debt (general government) started to increase in the mid-1990s from a low level of 38% of GDP to reach a peak of 58% in 2004, but receded to 44% in 2009. Structurally adjusted budgets were balanced even during the crisis of 2008 – 2009.
This fiscal sustainability is mainly due to the political decisions to have a low tax load and a lean state. In addition, keeping the public deficit and debt low has been a major concern of politicians at all levels of the political system. Various rules and means have been developed in order to avoid the dynamics of expanding budgets. For example, on the federal level, there is the constitutional “debt brake” (Article 126, Article 159): “The maximum of the total expenditures which may be budgeted shall be determined by the expected receipts, taking into account the economic situation.” Direct democracy offers another effective means of keeping the budget within limits. In popular votes, the people have proven reluctant (compared in particular to members of parliaments when elections are drawing near) to support expansion in state tasks, and a corresponding rise in taxes and/or public debt (Kirchgässner et al. 2002).


Even taking into account the fact that some individual cantonal and municipal governments do pursue unsustainable budgetary policies, the total (i.e., general government) budgetary policy achievement arguably puts Switzerland in the OECD’s top group in terms of fiscally sustainable national policies.

The collapse of markets in the Soviet Union caused an economic crisis in Finland in the early 1990s, and the level of indebtedness increased sharply. However, a fiscal consolidation program significantly reduced expenditures, and Finland enjoyed budget surpluses and was able to pay down accumulated debt. Finland’s net debt management strategy has been successfully implemented despite the challenges created by the current international financial crisis and has maintained an even exemplary low debt-management strategy. As a result, the Finnish state’s debt management strategy and risk management are used as a benchmark for other countries. The level of indebtedness has been reduced to less than 30% of GDP, and according to a poll among international banks, Finland had the most impressive sovereign funding team of 2009. However, economic growth must be improved further to offset the impact of the country’s aging population. The budgetary situation of municipalities has become more fragile.

New Zealand’s budgetary policy is fiscally highly sustainable. However, the world financial crisis ended 14 years of budget surplus. The new government has stated that the return to high-debt levels would be imprudent, and made decisions in the 2009 budget that bring net debt back so that it peaks below 40% of GDP and reaches 30% of GDP no later than the early 2020s.

Despite the periodic high budget deficits observed for federal and state governments, fiscal policies in Australia are sustainable. Australia was not immune to the recent global economic downturn, with the federal government budget balance moving from a surplus of $21 billion in 2007– 2008 to a $30 billion deficit in 2008 – 2009 and a $54 billion deficit (4.5% of GDP) in 2009 – 2010. The budget turn-around can be attributed in part to fiscal stimulus measures taken in 2008 and 2009, but mostly to a large fall in tax receipts, particularly from company taxes. The budget is forecast to return to surplus in 2012 – 2013, and net federal government debt is projected to peak at 6% of GDP in 2011 – 2012.

Fiscal sustainability has also been enhanced by the establishment of a scheme to fund future public sector employee superannuation (pension) liabilities. Established under the Future Fund Act 2006, the fund is independently managed and aims to have AUD 140 billion of funds under management by 2020.

An ongoing issue for fiscal sustainability at the state level is the vertical fiscal imbalance that exists between the federal and state governments. The inability of state governments to raise sufficient revenue to meet expenditure requirements and their consequent reliance on block grants from the federal government creates acrimony and instability, and arguably sub-optimal public provision of goods and services in areas such as health, education and transport.

Relatively speaking, the government of Canada is in a strong fiscal position. Canada’s budget deficit as a proportion of GDP is low by international standards, as is its public debt/GDP ratio. The federal budget released in February 2010 projects a decline in the deficit in coming years as the economy recovers, with the deficit almost completely eliminated by 2014 – 2015. Nevertheless, the goal of fiscal sustainability is threatened by two factors. The first is the deterioration in the structural balance resulting from the two-point cut in the GST-HST. The second is the rising health costs associated with the aging of the population, and the increased share of the population falling into age groups in which health costs are high.

The global economic crisis that started in 2008 has had adverse effects on Denmark’s public budget. In 2008 Denmark operated under a surplus, corresponding to 3.4% of GDP. In 2009 that changed to a deficit corresponding to about 3% of GDP. The deficit is expected to reach about 5.5% of GDP in 2010. The large swing in the budget balance is partly due to the strong automatic budget reaction and partly due to an expansionary fiscal policy (amounting to 1.5% of GDP).
Systematic budget deficits are forecasted, and measures are needed both to meet the 3% budget norm within the Stability and Growth Pact, and to ensure fiscal sustainability. Public debt is low by international standards (in 2008, 35% of GDP), and net debt was negative before the crisis. Denmark succeeded in consolidating public finances in the years prior to the financial crisis.
While public finances in Denmark are not in as difficult a position as a number of other European countries, there are still significant problems. A particular noteworthy aspect is that analyses of fiscal sustainability show that the structural balance will display deficits for the coming 35 to 40 years. Although surpluses are expected far in the future, implying that the country’s fiscal sustainability indicator looks reasonably favorable (and among the best within the European Union), it is very risky to base economic policy on a trajectory implying systematic deficits for such an extended period. Hence, the need for reforms to consolidate public finances and to ensure a more robust budget profile.

Public finances had improved significantly prior to the recent economic crisis, with the budget deficit coming close to balance in 2008. Since then, the budget deficit and the gross public debt have been pushed up by crisis-related revenue shortfalls and anti-crisis stimulus packages.
Three such packages were launched as part of the government’s attempt to revive the economy (for the details, see Economy). The stimulus launched in November 2008 amounted to €3.9 billion in 2009 (0.2% of 2008 GDP) and an additional €7.1 billion in 2010. The second stimulus package, launched in January 2009, was significantly larger, amounting to a total of €54.3 billion to be spent in 2009 and 2010. The third stimulus package, implemented beginning in December 2009, included measures worth €8.9 billion. Overall, as a result both of the automatic stabilizers and the discretionary packages, the government balance turned to deficit (around 3.3% of GDP in 2009 and around 4.5% of GDP in 2010, according to the June 2010 forecast). However, these figures contrast favorably with the much worse deficit figures posted by other EU and industrial countries, reaching the double-digit level in countries including the United Kingdom, the United States and Ireland.
Germany appears to be at medium risk with regard to the long-term sustainability of public finances. The long-term budgetary impact of aging is close to the EU average. However, public finances are increasingly coming under pressure due to rising pension and health care costs. To address these and other structural challenges, a constitutional debt limit was introduced in 2009 which restricts the federal government’s cyclically adjusted budget deficit to a maximum of 0.35% of GDP, and requires balanced cyclically adjusted budgets for the individual federal states. As a result of a transitional rule, this reform will become binding for the central government in 2016 and for the states in 2020. The aim of this constitutional revision is to provide a clear prior commitment to fiscal consolidation, greater transparency and clarity, and consistency with the European Stability and Growth Pact. However, the implementation needs careful monitoring in order to prevent pro-cyclical behavior, close remaining loopholes, strengthen the stability council and preserve budgetary flexibility on all governmental levels.
The German federal government enjoys an undisputed triple-A rating as a debtor from all rating agencies, with its reputation even enhanced in the wake of the European debt crisis originating from Greece. In this situation, the yields on German government bonds fell to unprecedentedly low levels. This development has led to substantial savings on interest payments.

According to the Maastricht criteria, Luxembourg is a model budgetary student. Despite a counter-cyclical spending program, the country’s budget deficit in 2009 remained at 1% of GDP under the Maastricht formula, compared to 3.2% in Germany, 5.9% in Belgium and 8.2% in France. In 2008 Luxembourg had a debt of 13.5% of GDP, at the lower end of EU countries. In addition, its net debt, resulting from its debt minus investments in companies (i.e., Arcelor-Mittal, SES and BNP-Paribas) and reserves, for example pension and employment funds, lies below zero.
The government has presented a stability and growth program that will lower the public sector deficit to zero by 2014. This would be possible through annual savings of around €400 million. This measure, which trade unions have characterized as representing unnecessary and exaggerated austerity, will be one of the most controversial topics of the Tripartite.
However, budgetary policy is not really sustainable as the budget balance is too dependent on the use of regulatory niches. This can be illustrated by a recent change in VAT regulation within the European Union. On December 4, 2007, the Council of the European Union reached a political agreement on changing the rules on VAT so as to ensure that VAT on services accrues to the country where consumption occurs, rather than where the supplier is located. For e-commerce, or more precisely for business-to-consumer supplies of services, this will only start on January 1, 2015, with a four-year transitional phase in which taxes will be shared by both the country of the supplier and of the consumer.
As the VAT revenues of e-commerce are equivalent to about 1% of GDP, the loss of revenue will be considerable. But furthermore, to avoid job cut-backs the government has some 10 years to persuade enterprises attracted by the possibility of applying the lowest possible VAT rates that there exists other reasons to stay in Luxembourg (e.g., state-of-the-art IT infrastructure, good broadband connectivity and skilled labor).

Following a major economic crisis in 1982, caused mainly by uncontrolled public spending, Mexican authorities worked hard to achieve macroeconomic stability. Despite – or perhaps because of – another serious crisis in 1994 – 1995, it can be said that this policy effort eventually succeeded. As recently as 2007, Mexico’s fiscal sustainability looked strong. Then came a series of issues – swine flu, declining oil production and the general world recession – which hurt the Mexican economy badly. In 2008, Mexico went to the IMF for help amid fears of a collapsing peso. The result was a serious Mexican recession. Very recently, though, investor confidence has returned. Mexico now has an abundant amount of foreign exchange reserves. In the first few months of 2010, the peso increased in value against the dollar, and there is every sign that macroeconomic stability in Mexico is currently stronger than in some countries of the European Union. Despite some continuing vulnerabilities, Mexico’s macroeconomic policy appears successful.

Korea’s budget policies remain sound. It has among the OECD’s lowest levels of public debt and public expenditure. In a recent report, the Korea Institute of Public Finance said Korea’s debt ratio grew from 30.7% in late 2007 to 35.6% in 2009, but that this increase is forecast to slow and peak at 36.1% in 2010, before decreasing to 35.9% by 2013.
Nevertheless, the government has been remarkably pragmatic in abandoning what traditionally had been very conservative fiscal policies, implementing the OECD’s largest fiscal stimulus in an attempt to sustain economic growth. The country’s budgetary soundness was favorably assessed in the OECD’s March report “Preparing Fiscal Consolidation.” The actual balance of Korea’s budget (expressed in terms of percentage of nominal/potential GDP) in 2009 stood at -1.8%, fourth-healthiest among OECD countries. The report also forecast the post-crisis budget balances of the 16 G-20 nations, and Korea was among the only countries expected to record a surplus in 2010 and 2011. On the other hand, the low overall government expenditure leaves room for doubt whether, amid a maturing economy and an aging society, the Korean government is prepared to take over more responsibility, particularly with respect to increasing spending for social security and education. The recent shift of government expenditure to construction projects might also create short-term growth at the expense of long-term development prospects.

When the global financial crisis intensified during the last quarter of 2008, Turkish policymakers thought its impacts on the Turkish economy would be fairly limited. Their optimism stemmed from a number of factors, including the country’s healthy banking sector, the prudent fiscal and monetary policies followed during the last few years, the floating exchange rate regime and strong levels of international reserves.
To strengthen the real economy, the government took many measures. But the measures introduced by the government were largely considered to be a meager policy response to the crisis. It seems that until the summer of 2009, the government was too optimistic. However, the sharp contraction in global economic activity, weak domestic demand conditions and the sudden cessation in external capital flows ultimately impacted the Turkish economy negatively, and the disinflation process accelerated in 2009. As a result, policymakers had to act. The dramatically negative performance of the Turkish economy in the first half of 2009 seems to have lessened the government’s optimism. Starting from early summer 2009, the government signaled that it was working on a comprehensive program, and would also introduce concrete measures to deal with the effects of the global crisis on the economy. As a result of these efforts, it announced a medium-term program in September 2009 which covers the 2010 – 2012 period. The program outlines the country’s fiscal targets for the next three years, proposes an exit strategy from the crisis and provides forecasts for major macroeconomic variables. The main purposes of the program are to establish a framework that will enable Turkey to achieve a sustainable growth rate in the aftermath of the crisis, and to raise society’s welfare.
Regarding the budget composition, we note that Turkey has raised the share dedicated to social security spending, taking serious steps in the direction of more social equality as well as sustainability. The incumbent government, for the first time in the republic’s history, raised health and education spending at the cost of military expenditure. Education spending, which was below defense expenditure in 2002, was raised to double the military’s budget share. Health expenditures, which were one-third of military costs in 2002, today are only 10% lower than defense expenditures.
For 2007, the budget deficit represented just 1.6% of GDP. During 2008, the deficit/GDP ratio increased to 1.8% of GDP, rising during 2009 to 5.5% of GDP. As of the end of 2009, public debt amounted to 46.3% of GDP. All these indicators point to a worsening situation as compared to the pre-crisis period, but on the other hand, these indicators hint at a better absolute situation for Turkey than for Ireland, Italy or Greece. Turkey is in comparatively better shape than Portugal or Spain, and the country has managed the financial crisis without help from the IMF. However, data on unemployment indicate that as of March 2010, this rate stood at 13.7%. Thus, Turkey has not solved its internal balance problem, and further measures are necessary to achieve internal balance.
According to the State Planning Organization (2009), the stimulus package amounted to 0.8% of GDP during 2008, 2.1% of GDP during 2009, and 1.6% of GDP during 2010. Turkey realized that policies associated with increasing public consumption, public investment and transfer payments and reducing taxes have to take into consideration constraints on fiscal sustainability.

In the period under review, Hungary continued the radical fiscal adjustment begun in 2007. Despite the economic crisis, the general government fiscal deficit was stabilized at about 4% in 2008 and 2009. Fiscal adjustment helped to fend off a currency crisis in late 2008 and won the Bajnai government much international acclaim. In order to emphasize its commitment to reform, the Gyurcsány government established a Budgeting Council (Költségvetési Tanács) in charge of monitoring the reduction of the budget deficits. Nominated by the president, the Hungarian National Bank and the State Audit Office, its three members were first elected by parliament in February 2009.

Austria’s national budget, at least until the onset of the financial crisis in 2009, has fulfilled the Maastricht criteria. Due to the crisis and the effects of relatively powerful automatic stabilizers, the budget deficit is forecast to increase significantly in the next few years. These automatic stabilizers, however, have mitigated in significant ways the negative effects of the financial crisis, and while tax revenues from corporate taxes have declined considerably, recent increases in consumption taxes such as VAT and petroleum taxes have offset that decline sizably.
On the other hand, fiscal measures with relatively limited budgetary sustainability (e.g., expanding early retirement plans, instituting mandatory preschool education and establishing incentives for infrastructural development and SMEs) now render fiscal consolidation all the more necessary. Most pundits and experts generally agree that Austria will fail to meet the Maastricht criteria in the near future, as seems to be the case for most other EU members.

Budgetary policy has been sound over the course of the period before 2008. The economic crisis, however, has put severe pressures on the government budget. Over the course of the period under review, the national balance switched from a surplus in 2008 to a deficit in 2010. The deficit for 2009, registered at 4.6% of GNP. The prospects are not promising; the CPB expects this figure to increase to 6.3% by the end of 2010. Tax revenues will decrease further, while unemployment expenditures and interest will go up. Factors affecting the negative EMU-balance include disappointing gas benefits and a stimulating policy package to facilitate economic recovery following the Supplementary Policy Agreement by the national government. The rapid pace of budget deterioration is unequalled in Dutch history. The deficit of 6.3% is far worse than was expected two years ago. The same goes for the EMU-debt of 66%. The current plans to increase the age for retirement can be seen as a measure to improve budgetary sustainability.

In 2008 and 2009, Poland’s fiscal stance deteriorated considerably. Fiscal deficit growth was in part due to the adoption of substantial stimulus measures. Financing the deficit was facilitated by high privatization proceeds. In order to underline its commitment to medium-term fiscal adjustment and fiscal sustainability, the Tusk government initiated an amendment of the Public Finance Act in August 2008. Originally vetoed by President Kaczyński, this act was eventually signed in September 2009. The new legislation has increased the transparency of the public accounts, strengthened the requirements for governments to draw up medium-term budgets, and further specified the adjustment mechanisms to be triggered when the country’s public debt passes the legally set safety thresholds of 50%, 55% and 60% of GDP. However, original 2009 plans to reduce the deficit to 3% of GDP already in 2012 lacked credibility. In early 2010, the government reacted to concerns over the fiscal stance by discussing the introduction of expenditure rules.

With the United Kingdom being a highly centralized state, the government is in a much better position to exert control over budgetary policy than is the case in more decentralized countries, as most spending is directly or indirectly controlled from Whitehall. On the other hand, this also offers little hope of escaping blame if budget deficits get out of control.
Under the Labour government, public sector spending increased significantly, and the number of people employed in the public sector rose by around 15%. From the beginning of the second term onward, the government substantially increased spending on the National Health Service (NHS), as well as for education, transport, police and prisons. This has contributed to a persistent budget deficit of around 3% of GDP since 2000, in spite of the era’s strong economic growth.
The financial crisis beginning in 2007 hit the United Kingdom doubly: On the one hand, the fiscal downturn started from a point of already-substantial deficit; on the other, the country’s necessary expenditure on bank bailouts and capital injections was higher than in other countries due to the high level of financial sector exposure.

In the 2009 – 2010 fiscal year (the UK’s tax year runs for historical reasons from April 6 to the following April 5), total tax revenues declined by 3.6% in cash terms, with personal income tax revenue falling by 5.1% and corporation tax by 16.5%. This drop in revenue contributed to a projected budget deficit of £164 billion (11.8% of GDP) when the outgoing government’s final budget was announced in March 2010. However, this figure was subsequently revised downward to £156 billion (and was shown in the June 2010 budget as being reduced to11% of GDP – see HM Treasury, 2010). While obviously still a high and alarming deficit, that is significantly lower than the 12.6% that had been projected as recently as November 2009 in the chancellor’s Pre-Budget Report.

Fiscal consolidation is both highly necessary and will be very difficult to manage in such a way as to avoid choking off the economic recovery under way. The government will have to make delicate judgments as to the timing of consolidation measures. The new government elected at the general election of May 6 will thus face a huge challenge, necessitating measures that will likely be very unpopular. However, there is little doubt that the new government will be able to take the steps necessary, and in its June 2010 budget, it set out a credible trajectory for doing so.

With a public deficit of 6% in 2009, Belgium’s debt-to-GDP ratio hit the 100% threshold again and is still rising. The ratio will not be falling quickly in the medium-term, due to the fallout of the global economic crisis and structurally high costs in terms of public spending (a generous welfare state and large public bureaucracies, from the federal to local levels).
Ahead, when the baby-boomer generation reaches pension age, social welfare and healthcare costs will most likely increase quickly and there is no well-crafted plan to address these issues. To the contrary, electoral competition among parties encourages talk of higher pensions (which is needed for some population segments) without sufficiently considering the countervailing challenges of, such as, increasing employment rates for those aged 55-65. Given the very high tax-to-GDP rate (it is among the top-three in the OECD) and the excessive taxation of labor income (first in the OECD), there will thus be a need to reduce expenditures in some areas of the government budget; but a political stalemate since 2007 has prevented a clear outlook until now. To address this, the prime minister is trying to push political parties to focus on longer-term objectives, with a “Belgium 2020” perspective. There is very little information about the contents of this plan and only the future will tell if such a plan manages to rapidly restore fiscal sustainability.

Reflecting a long period of low budget deficits, the level of debt relative to GDP is very low by international standards. The reaction to the economic crisis has been complicated by sharp policy disagreements. A view from the political right saw this as a source of very immediate danger and emphasized the need for speedy reduction of the deficit, to be achieved by spending cuts. A major anti-crisis measure was to include further cuts in taxes on businesses. A view from the political left emphasized the tolerability of a deficit, and sought to counter the crisis with spending both on infrastructural investment and higher social benefits. The Fischer government sought to combine both approaches, including a so-called anti-crisis program of expansionary measures and a commitment to savings, aimed at keeping the budget deficit to within 5% of GDP. However, its proposals failed to achieve a consensus. President Klaus refused to sign the proposed budget for 2010 into law. The size of future deficits will be heavily dependent on trends in GDP. Early results for 2010 suggest that growth rates have been overestimated, pointing to a possible further rise in deficits. This raises more forcefully questions of how, and how quickly, balance should be restored.

The economic collapse in 2008 increased the country’s foreign debt dramatically. Gross public debt rose from 29% of GDP at the end of 2007 to 105% of GDP at the end of 2009. Hence, the crisis has increased gross public debt by about 75% of GDP. Net public debt, that is, the government’s foreign debt minus its foreign assets, stood at 73% of GDP at the end of 2009, and is projected to drop to 61% by 2014. In its advice to the Icelandic government, the IMF emphasizes the importance of sustainability. Hence the IMF’s insistence on a major turnaround in the country’s fiscal position through a mixture of revenue increases and expenditure cuts. The IMF has expressed the view that, provided the fund’s fiscal program is adhered to, Iceland’s public debt is sustainable, including the Icesave debt to Great Britain and the Netherlands associated with the collapse of Landsbanki Islands. Negotiations between the three governments produced an agreement by which Iceland must pay the United Kingdom a sum of GBP 2.35 billion and the Netherlands about €1.3 billion over the 2016 – 2023 period. The sum of the two figures is equivalent to about half of Iceland’s GDP in 2009, and seems likely, with the assumption of a reasonable rate of asset recovery, to overstate by a significant margin the ultimate cost involved for Iceland. The Icelandic government expects to be able to recover between 75% and 95% of Landsbanki’s deposit claims.
Clearly, it is going to be difficult for Iceland’s government to restore and sustain rapid economic growth over the next few years while facing such serious budgetary policy constraints. A further complicating factor is the uncertainty associated with the Supreme Court’s June 2010 ruling that bank loans indexed to foreign currencies were illegal. As of the time of writing, the financial ramifications of this ruling had yet to be worked out.

Slovakia’s public debt is relatively low. Strong economic growth in 2008 helped the country in meeting the Maastricht deficit criterion needed to enter the euro zone in 2009. The government reacted reluctantly to the economic crisis, confining itself to adopting two relatively small fiscal stimulus packages in November 2008 and February 2009. Due to the strong decline in output, the fiscal stance deteriorated drastically in 2009. Not the least because of the 2010 elections, the Fico government refrained from launching major attempts at fiscal adjustment. Medium-term fiscal problems are aggravated by the rising hidden debt accumulated by the health care sector, public companies and private-public partnerships, most notably in the field of highway construction.

The present budgetary situation is unsustainable in the long run. In recent years, budgetary policy has suffered from the absence of a reorientation of public expenditure. Over the last years, the political elite, with the support of the voters, has made the implicit choice of shifting present costs to future generations. As a result, all indicators are in the red: the public deficit, the public debt, the social security deficit and the pension systems. When he came to power, President Nicolas Sarkozy, while engaging some structural reforms (e.g., cuts in the number of state employees) which should reduce public expenditure in the long run, was opposed to all forms of “austerity” and promised to meet debt problems with more economic growth rather than with less expenditure. Faced with the effects of the economic crisis of 2008-2009 and with growing deficits in social security (mainly pensions and the health system), which have led to a public deficit of 8.2% of GDP in 2009 (significantly above the OECD average), the government is forced to cut public spending and/or raise taxes but has no clear strategy so far. Therefore, its commitment to reduce the deficit to 3% of GDP by 2013 is met with skepticism by most experts.

With the onset of global financial crisis, Italy’s negative budgetary situation, with high public debt and endemic difficulties in controlling the rise in public expenditures, has further worsened. The state deficit has risen to 5.5% of GDP, and the public debt to 123.6% of GDP. However, on a comparative basis it can be said that the government has been able to contain the negative effects of the crisis and that the sustainability of its debt is for the time being assured. Whether avoiding the worst crisis outcomes in the short term will also nurture a willingness and capacity to put budgetary policies on a more virtuous track in the medium term is a question which cannot be answered yet. However, this must be done if Italian public budgets are to preserve solvency, support economic growth more effectively than in the past, and start redressing the serious deficits in intergenerational fairness which currently have a very negative impact on younger generations.
At the beginning of 2010, and throughout the spring of that year, Italy’s Ministry of Economy and Finance struggled to convince credit rating agencies, markets, media and the public of the sustainability of Italy’s public debt. At least through the end of the review period, Minister Giulio Tremonti and his staff proved successful in this goal. The spread between Italian government bonds and German bonds did not get out of control. However, in the crisis year of 2009, the government was not able to implement a significant stimulus package, as other European governments did. This is evidence that there is no longer any margin for discretionary action in the Italian budget. But as Italian banks were not deeply exposed to the financial crisis, sovereign debt remained – on a high level – more or less stable. Nevertheless there is need of additional money to modernize the public administration and the country’s transport and communication networks, which can not be done solely with private money, as well as to reduce the public debt.

As highlighted in the SGI 2009 report, efforts at controlling the budget deficit exceeded the government’s own expectations in the 2005 – 2007 period: The government expected reach a level below 3% in 2008, but in fact achieved this a full year earlier, with a deficit of 2.6% in 2007. Since then, however, there has been nothing short of a budgetary collapse.
In December 2008, the government’s projection for 2009’s budget deficit was 3%. In February 2009, the government approved a supplementary budget which projected the deficit for that year at 3.9%. This was revised to 5.9% in mid-2009, a projection the government stuck with until the September 2009 legislative elections. In November, this was revised to 8.4%. In fact, the actual 2009 budget deficit was to exceed even this last estimate, in the end reaching 9.3%. This deficit inevitably percolated through to Portugal’s public debt, which reached 81.1% of GDP in 2009 – 10 percentage points more than 2008, and more than 20 percentage points higher than in 2003.
While some deterioration was expected given the recession and the government’s bailout of parts of the financial sector, its extent was a surprise – even for the government, as the above revisions suggest. As such, policy in the period under analysis here seriously failed to achieve the goal of fiscal sustainability.
The Portuguese government’s response to this situation came in the shape of the budget for 2010, announced in late January and approved in March; and particularly in its draft Stability and Growth Program (SGP) for the 2010 – 2013 period. The SGP, unveiled to euro zone finance ministers on March 15, projects a reduction of the budget deficit to 8.3% in 2010 (a measure also outlined in the 2010 budget), 6.6% in 2011, and 4.6% in 2012, before reaching 2.8% in 2013. With regard to public debt, this is expected to rise before stabilizing, reaching 86% of GDP in 2010 and then rising to 89.4% and 90.7% respectively in 2011 and 2012, before beginning to drop in 2013 (to 89.8% of GDP).
The bulk of the declines in the deficit is to come from cutbacks in public expenditure, which are expected to account for half of the overall deficit decrease. This is to be achieved through a reduction in real public sector wages over the next four years, as well as through cuts in public employment, the government adopting a “retain one public-sector worker for every two that leave” rule. The goal here is to reduce expenditure on public sector wages and personnel to below 10% of GDP by 2013, from the current level of 11.2%. Reflecting the finance minister’s focus on reducing public spending, gains in terms of state revenues are comparatively more modest, accounting for only 15% of the projected reduction in the deficit. This will be done notably through selling off part or all of the state’s holdings in several companies, as well as through a variety of tax changes. The remainder of the budgetary containment is to be achieved through the impact of automatic stabilizers as the economy begins to pick up, with the government estimating fairly moderate growth rates of 0.7% in 2010, 0.9% in 2011, 1.3% in 2012 and 1.7% in 2013.

After a decade of steady improvement in Spain’s public finances (with budget surpluses seen from 2004 to 2007), the economic crisis has pushed the budget into severe imbalance. Pump-priming in the last two years has led to a drastic increase in public spending, with public debt growing slightly in 2008 and more considerably in 2009. By the close of the review period, the overall budget deficit stood at 11.4% of GDP (more than twice the government’s gloomiest estimates).
Taking this into account, the announcement of the austerity plan only a month after closing the general budget for 2010 did not seem to take anyone by surprise. However, many economists are skeptical and have raised doubts as to its feasibility. According to the plan, an annual cut in spending of 4% will take the deficit down back to 3% of GDP by 2013. This level of spending cuts mostly corresponds to the plans of the central government, which has already announced that new hiring in the public service will be reduced by 70% in 2010. However, 20% of the cuts will have to be made by autonomous regional governments, a task that seems more difficult to achieve, given their spending records and their perpetual need for funds.
In addition, the plan depends on quick and significant economic growth, an estimate that is far too optimistic. All in all, the government has lost credibility with respect to its capability to produce accurate estimates. Whereas faulty calculations have led to inadequate macroeconomic policies, the government remains focused on expanding social expenditure and subsidizing unemployment rather than creating structures supportive of long-term employment. In addition, spending pressures related to the aging of the population will keep rising, affecting the long-term sustainability of public finances.

In 2007 Ireland recorded a small surplus in its general government balance. By 2009 this had turned into a deficit equal to 12.5% of GDP. The deterioration in public finances in 2008 was very sudden, as tax receipts collapsed and current spending continued to increase. Gross national debt was only 25% of GDP at the end of 2007. By the end of 2009 it had risen to 65%, and is projected to reach 80% by the end of 2011.
The rise in the level of borrowing has led to a risk premium on Irish government bonds that reached almost three percentage points early in 2009, but (as of the time of writing) subsequently fell back to 1.5 percentage points. In accordance with the update of Ireland’s stability program (published as a part of the country’s 2010 budget, in accordance with the terms of the Maastricht Treaty), the government has committed itself to reducing the deficit to 2.9% of GDP by 2014. This would lead to a stabilization of the debt/GDP ratio in the region of 80% of GDP.

The credibility of this program is very much open to question. By the close of the review period, three months into 2010, the economy was showing few signs of renewed growth and the government’s tax receipts continued to lag behind budget projections. To reduce the deficit by over four percentage points of GDP in 2011 would require another drastic round of cuts in expenditure and/or increases in taxes. Given the resistance that has built up to the measures taken in the budgets of 2009 and 2010, which at best stabilized public finances, it is difficult to envisage the government meeting the targets outlined in the 2010 budget program.
The government is thus faced with the prospect of failing to meet the target of stabilizing the public finances, while continuing to withdraw aggregate demand from the economy during the depths of a recession. In this context, the best that can be said of budgetary policy is that the goal is to restore stability to public finances, but the prospects for delivering this are poor.

Public indebtedness n Japan is approaching 200% of GDP, or 100% on a net basis, the highest level of any developed economy. During the period under review, few concrete steps were taken to correct this situation, despite repeated calls for a general tax reform, and despite plans to upgrade the social welfare system that appear to make the government’s revenue base even less sustainable. The Aso-led government’s December 2008 social welfare program offers a case in point.

There is now a clear consensus emerging that the Great Recession has led to a fiscal crisis in the United States that needs a sustained response and a concerted effort to bring down burgeoning deficits. In fiscal 2009, the budget deficit was $1.4 trillion or 9.9% of GDP, the largest ever since the end of World War II. For FY 2010, a deficit of $1.3 trillion or 9.2% of GDP is expected – representing only a slight improvement. These deficits are the result of sharply lower revenues due to the recession, spending associated with the downturn (economic stabilizers) and the cost of programs to combat the downturn. In addition the budget deficit is in large part caused by Bush era policies, with tax reductions, especially for upper income groups, along with spending increases, especially for Medicare (prescription drug coverage) and the wars in Iraq and Afghanistan.
The Obama administration’s fiscal and budgetary policies may have been fully justified given the severity of the downturn. But whether the United States can converge on a path of long-term fiscal consolidation appears doubtful: both parties have ruled out broad tax increases, the bulk of spending occurs in untouchable programs such as health programs, pensions and defense and net interest payments. The politics of such adjustment processes are unpredictable. The Great Recession had made the need to impose fiscal discipline a less urgent problem, but it will need immediate consideration once the economy fully recovers. Whether the U.S. political system can deliver the necessary actions remains doubtful. In addition, some economist have argued for postponing the actual imposition of tax increases or spending cuts until the economic recovery is firmly established.

The Greek fiscal crisis of 2009 –2010 received widespread international attention. Since the mid-1990s, Greece had been running a high “mortgage,” with public debt levels consistently at or above 100% of GDP. The sudden announcement of dramatically revised deficit projections in September 2009 created major concern in the financial markets as to Greece’s ability to continue to cover its borrowing costs.
In 2009, the Greek budget deficit reached 13.6% of GDP. Among OECD countries, this was surpassed only by Iceland. In the same year, the Greek government’s net debt interest payments as a percentage of nominal GDP were the highest in the OECD, on a par with Italy and Iceland. In April 2010, the Greek government resorted to a rescue package guaranteed by the IMF and the rest of the euro zone countries in order to meet its financial obligations. The purpose of this action was to pay Greece’s soaring debts, to which France, Switzerland and Germany were exposed.
This outcome was the result of many different factors: the accumulated interest to be paid for a large public debt incurred over decades; the decision after entry into the euro not to take advantage of low interest rates and high growth to pay off some of the public debt; the continuation of the tendency to hire unnecessary personnel in the public sector, often for political reasons; the falling competitiveness of the Greek economy in 2008 – 2010; the endemic low capacity of the Greek state to raise taxes; the long-term propensity of successive governments to use inflows from the European Union to raise incomes rather than to restructure the economy; and the long-term, very high Greek expenditure on defense (in 2009, Greece spent 2.8% of its GDP on defense, compared to an average of 1.7% in the other European NATO countries). In sum, there is no doubt that this type of budgetary policy is not sustainable. The new government has, of necessity, prioritized a more effective budget management and tax collection process.