Author Topic: Let's play Ministers of Finance  (Read 1229 times)

Napodano

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Let's play Ministers of Finance
« on: May 13, 2010, 16:42:32 GMT »
From an article published in the Economist (downloadable from the board 'Have you seen this?):
'IMF's calculations  suggest that to reduce their ratios of public debt to GDP to 60% by 2030, the rich world's governments need to improve their budget balances by an average of 8% of GDP by 2020. The average structural deficit (ie, before interest payments) must swing from 4.3% of GDP in 2010 to a surplus of 3.7%. They must then maintain that surplus. A fifth of the rich world's economies (including America and Britain) would need adjustments of around 10% of GDP or more'.

Now, let's play Ministers of Finance for a moment. Where would you start your fiscal adjustment intervention?

Spending cuts or tax hikes? A mix of the two?
Challange your PFM Board fellows by being specific in your prescriptions. Careful, some Ministers of Finance in real life may lurk on  ;) 
« Last Edit: May 13, 2010, 16:44:50 GMT by Napodano »

John Short

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Re: Let's play Ministers of Finance
« Reply #1 on: May 13, 2010, 20:03:27 GMT »
Start by deciding on affordable tax to GDP ratio and affordable borrowing target for the next 3 years commensurate with maintaining economic incentives to generate steady non inflationary economic growth.  Then
1 Carry out a tax review with a focus on VAT, excise, income tax and corporation tax (no national insurance!) and set ad valorem rates against tax base to estimate revenue in line with above.
2 spend 90% of that by carrying out a strategic spending review to focus on priority sectors over a three year period
3 give the revenue in line with spending review to the relevant ministries to spend on their internal priority programmes over a three year period
4 Carry over any surplus for a rainy day (but obviously reduce short term borrowing when in surplus).
5 Go and watch Ireland win the Rugby World Cup in New Zealand. 
6. Celebrate Ireland's victory with a few (?) bottles of red wine!


STONE

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Re: Let's play Ministers of Finance
« Reply #2 on: May 17, 2010, 17:14:01 GMT »
I have just watched George Osborne's announcement about his plans for independent economic forecasts in the UK with the appointment of Alan Budd as head of an Office of Budget Responsibility and his announcement of his intention to announce GBP 6 billion of expenditure cuts so he'll be playing minister of finance soon.

There's an interesting point about the IMF's calculations on reaching the 60 per cent thing - where did the 60 per cent debt and (3 per cent deficit) targets (or are they limits?) come from in the Maastricht Treaty - why 60 per cent and why not 61 or 59 per cent?

The thing I like about Fiscal Responsibility Laws is that they are enshrined in legislation - voted by Parliaments and then Parliaments vote budgets... quis custodiet ipsos custodes

Napodano

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Re: Let's play Ministers of Finance
« Reply #3 on: May 29, 2010, 08:56:45 GMT »
This is what OECD Governments agreed on fiscal consolidation:

'What instruments should be used?
Fiscal consolidation should focus on instruments that minimise its adverse impact on trend growth. There are policy trade-offs that need to be taken into consideration in the choice of spending components and sources of taxation to achieve consolidation. Also, to the extent that the costs and benefits of different instruments differ across social groups, fiscal consolidation will have implications for income distribution and equity. In particular:
  • While expenditure cuts are needed, fiscal retrenchment should preserve pro-growth programmes. This includes productive outlays, such as on education, R&D and infrastructure, which are expected to be growth-enhancing in the longer term. Education policies have a bearing on growth through productivity gains arising from human capital accumulation. Support for innovation, including through tax expenditures on R&D, has the scope for creating new sources of growth by enhancing labour and multifactor productivity. Initiatives to improve public infrastructure are pro-growth to the extent that they unleash opportunities for private investment.
  • As for tax hikes, they should rely on the least growth-distorting instruments.6 Taxes on immobile bases, such as property, and consumption are less distortive than those on factor income (such as personal and corporate income). Income tax hikes have a bearing on growth, because they influence labour utilisation (by affecting decisions on labour force participation and hours worked) and productivity (through incentives for human capital accumulation). Moreover, there could be greater recourse to green revenue in fiscal consolidation programmes, including receipts from green taxes and carbon trading, which would also be welfare-enhancing'.

It is interesting to see more and more suggestions to shift from income tax to sales/VAT taxes. What is your opinion on this shift, fellow PFM Boarders?

The full document, PREPARING FISCAL CONSOLIDATON, is attached below.
« Last Edit: May 29, 2010, 09:03:52 GMT by Napodano »

John Short

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Re: Let's play Ministers of Finance
« Reply #4 on: May 31, 2010, 12:10:23 GMT »
I think this is a good example of the need to have a relationship between tax policy and tax administration.  The focus has to be on being able to collect what should be collected so there is no point in a switch from a collectable tax to one that does not have the administration in place to collect it.  This should also address evasion where the cost of collection is high in relation to what is being collected and minimising loopholes to eliminate avoidance.  Then it becomes an issue of balance and equity, ensuring that distortions are minimised and disincentives to work are not rife.  There is a great temptation to use tax too much when it should be expenditure policy (or neither) to implement social policy.  As a result, tax administration can become over burdened and there are diminishing returns.   (If people want to marry, marry for love not because of a small tax benefit, but higher tax thresholds are good for raising the disposable income of the lower paid and then expenditure policy can then take over with respect to education and health, as examples.)
 
I read over the weekend of advice to Greece to get out of the euro, devalue and default because it is the only way to generate growth to raise revenue to service whatever debt that may be left.  Yet, one of the reasons Greece is in such a mess is that it does not collect the taxes that it should be collecting.  Surely, that has to be the first plank in its reform package?  Did not hear of any mention of that over the weekend!
« Last Edit: May 31, 2010, 13:13:12 GMT by Napodano »

PSCANDIZZO

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Re: Let's play Ministers of Finance
« Reply #5 on: May 31, 2010, 14:41:43 GMT »
First of all, I would discuss the meaning of fiscal consolidation. can it mean that all countries simultaneously engage in deflationary policies just at the moment where the uncertainty on the crisis is at its maximum? This is particularly true for Euroland, which seems to be tempted by protectionist policies under the cover of fiscal restrain. The problem is that USA has been gradually transforming itself in a country of last resort, both as a consumer and, paradoxically, as a lender. If Europe does not face its responsibilities, the ensuing condition may be unsustainable, despite any fiscal consolidation.

petagny

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Re: Let's play Ministers of Finance
« Reply #6 on: May 31, 2010, 17:12:45 GMT »
PSCANDIZZO makes an important point. Did anyone notice the reason given by Fitches for downgrading Spain's debt last Friday? It was because of the likely negative impact on growth from deflationary fiscal policies and not because the Spanish government wasn't being tough enough! Greece is a bit of an outlier when it comes to this crisis.

Spain's fiscal position wasn't too bad before the crisis. The negative position now is as a result of the crisis not a cause: the cause lies in irresponsible private sector borrowing and lending. The way things are looking, Europe is in for a very long haul, particularly if Germany pushes on with meeting its 'economically illiterate' (Wolfgang Munchau in the FT) commitment to a balanced budget by 2016. Clearly, aging populations and unsustainable pension obligations mean that some significant adjustments will be required, but all of that will be a lot easier to deal with in a growing economy.
« Last Edit: June 01, 2010, 06:50:34 GMT by Napodano »

petagny

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Re: Let's play Ministers of Finance
« Reply #7 on: June 01, 2010, 14:45:54 GMT »
Here's Martin Wolf making the same point as my previous post in relation to the UK economy, but rather more lucidly.

'Spare Britain the Policy Hair Shirt'

http://www.ft.com/cms/s/0/932eafe6-69c1-11df-8432-00144feab49a.html
« Last Edit: June 01, 2010, 14:49:20 GMT by petagny »

John Short

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Re: Let's play Ministers of Finance
« Reply #8 on: June 01, 2010, 19:05:33 GMT »
And some sound political advice on the politics of it - even from a Tory

http://www.timesonline.co.uk/tol/comment/columnists/guest_contributors/article7141296.ece
« Last Edit: June 01, 2010, 20:13:18 GMT by John Short »

Napodano

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Re: Let's play Ministers of Finance
« Reply #9 on: June 03, 2010, 08:23:45 GMT »
A clear example on how to make difficult choices to cut budget deficit comes from the UK Treasury (see press releaseattched below).

A quick read may show the usual approach, cutting investment projects but a more careful reader can see the effort to (re)prioritize  expenditures, moving away from linear cuts.

Am I too indulgent to the new UK administration?

Excerpt from the annoucement

'Today the Chancellor of the Exchequer George Osborne and Chief Secretary to the Treasury, David Laws announced:
1. The details of £6.2 billion of savings from Government spending in 2010-11 to tackle the unprecedented £156 billion deficit, while protecting the quality of key frontline services
2. Schools, Sure Start and spending on education for 16-19 year-olds will be protected from these in-year cuts
3. £500 million out of the £6.2 billion will be used to improve Britain’s growth potential and create a fairer society, by reinvesting in further education, apprenticeships and social housing
4. The foundation of an Efficiency and Reform group chaired by the Chief Secretary David Laws and Cabinet Office Minister Francis Maude to oversee the implementation of many of the savings announced today.'

John Short

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Re: Let's play Ministers of Finance
« Reply #10 on: June 03, 2010, 14:46:59 GMT »
'Let's see:  the budget comes next; then the spending round will follow the budget so we have a three stage process which hopefully has at the end public spending based on priorities rather than on cuts from existing spending plans (based on affordability and macro stability, of course).  It will be an interesting exercise.  However, as Monty Python said "David Laws is no more", it is now Danny Alexander..

John Short

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« Last Edit: June 08, 2010, 16:38:16 GMT by Napodano »

petagny

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Re: Let's play Ministers of Finance
« Reply #12 on: June 09, 2010, 09:06:27 GMT »
This is useful and I'm sure we'll all be referring to in our work. But in reality, the new government has committed a cardinal sin and undermined the whole approach by protecting large areas of service delivery and untargeted entitlements. The old government had of course done exactly the same!

petagny

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Re: Let's play Ministers of Finance
« Reply #13 on: June 09, 2010, 10:21:22 GMT »
Going back to the timing of fiscal tightening...

Prompted by the G20's recent change of heart, Jeffrey Sachs yesterday buried Keynesian economics in the Financial Times: 'Mainstream Keynesian economics is facing its last hurrah'; 'The hastily assembled stimulus packages were a throwback to naive Keynesianism.'; and 'To rebuild our economies, the watchword must be investment rather than stimulus.'

Today, in the same paper Martin Wolf responds by stating that we are not out of the woods yet and deflation and the Keynesian liquidity trap are still not distant possibilities. In support of his argument, Wolf quotes from the attached Keynesian analysis of the Japanese recession by an external member of the Bank of England's Monetary Policy Committee.

There has been a lot of talk in the last couple of days of the admirable success with which Sweden and Canada tackled their fiscal problems in the 1990s. What these countries were able to do in the context of a stable and growing world economy is, however, rather different from what may happen if there is a coordinated fiscal contraction across the western economies.  Are we in for a beggar-thy-neighbour downward spiral or will cuts in public spending be replaced by a virtuous rebound in private sector consumption and investment. As Wolf point out, it's not evident that the huge increase in private sector net saving has been caused by the fiscal stimulus: it's rather the reverse! Why should the private sector suddenly stop saving/increase investment when the public sector starts saving more?

It is indeed naive to believe that Keynesian policies can be used to 'fine tune' an economy, but are we really back in that world yet or do 'animal spirits' still reign?

John Short

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Re: Let's play Ministers of Finance
« Reply #14 on: July 02, 2010, 13:39:18 GMT »
The Times (London, that is) July 1, 2010 has a supplement CEO Summit "Setting Britain's Agenda” - Business Leaders present their policies to the Coalition Government.  It includes an interview with Jean Chrétien the deficit cutting PM of Canada.  Looks like a read for a flight.

A transcript of the speech given by the Prime Minister to The Times CEO Summit in London is available at
http://www.number10.gov.uk/news/speeches-and-transcripts/2010/06/speech-to-the-times-ceo-summit-52659

'For me, the essential question – and the question I want to try and answer tonight – is how will Britain earn its living and its place in the world in the future. I think there are too many people in this country who live under the delusion that a prosperous past guarantees a prosperous future, and you just spring back after a difficult time. It isn’t written anywhere that this country automatically deserves a place at the top table; it was once said that freedom once won is not won forever. It is like an insurance premium, each generation has to renew it. I think economic prosperity is the same; just because we have had it before doesn’t mean we will automatically get it again.'
« Last Edit: July 02, 2010, 17:09:51 GMT by Napodano »

Reg

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Re: Let's play Ministers of Finance
« Reply #15 on: November 27, 2011, 17:00:37 GMT »
'Allo it's me again,

Just a quickie... do you lot reckon that George Osborne will be posting anything under this topic next week?

Cheers!

Reg

 

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