Fiscal Consolidation and Public Investment: Friends, Foes, or

Fiscal Consolidation and Public Investment: Friends, Foes, or Neutral Partners?A Look at Bulgaria and Romania

Armin RiessEuropean Investment Bank

International Seminar for Experts“The coming enlargement of the the EU”

Cicero FoundationOctober 12-13, 2006

Outline

1. Motivation – EIB interest

2. General observations (EU 27) Public debt sustainability (the long run)

Macroeconomic constraints to fiscal policy (the short run)

3. Fiscal consolidation and public investment Bulgaria

Romania

4. Conclusion

Outline

1. Motivation – EIB interest

2. General observations (EU 27) Public debt sustainability (the long run)

Macroeconomic constraints to fiscal policy (the short run)

3. Fiscal consolidation and public investment Bulgaria

Romania

4. Conclusion

Outline

1. Motivation – EIB interest

2. General observations (EU 27) Public debt sustainability (the long run)

Macroeconomic constraints to fiscal policy (the short run)

3. Fiscal consolidation and public investment Bulgaria

Romania

4. Conclusion

Public debt in EU-27 (% of GDP), 2006

Source: European Commission, Economic Forecast, Spring 2006

0

20

40

60

80

100

120L

UIR

ED

K FI

ES

UK

SWE

NL A

FR

PO

RG

ER

CY

PM

A

BE

LG

R IT ES

LA

RO LI

BU SL CZ

SK PO

HU

Maastricht 60% criterion

Fiscal balance in EU-27 (% of GDP), 2006

Source: European Commission, Economic Forecast, Spring 2006

-8

-6

-4

-2

0

2

4

6PO

R ITG

ER UK FR GR

MA

C

YP A

LU NL

BEL

IRE ES

SWE FI DK

HU CZ

PO SK RO SL LA LI ES BU

Maastricht 3% criterion

Debt dynamics

Change in debt/GDP ratio

= fiscal deficit/GDP ratio

– nominal GDP growth • debt/GDP ratio

Debt dynamics

Change in debt/GDP ratio

= fiscal deficit/GDP ratio

– nominal GDP growth • debt/GDP ratio

Key message: debt accumulation the slower, the smaller the deficit higher economic growth

Real GDP growth (in %), 2000-05

Source: European Commission, Economic Forecast, Spring 2006

0

1

2

3

4

5

6

EU 25 Bulgaria Romania

Fiscal deficit that makes debt/GDP converge to 60% (Maastricht criteria)

Nominal GDP growth

(in %)

Fiscal deficit

(in % of GDP)

Fiscal deficit that makes debt/GDP converge to 60% (Maastricht criteria)

Nominal GDP growth

(in %)4.0% 5.0% 7.0% 9.0%

Fiscal deficit

(in % of GDP)

Fiscal deficit that makes debt/GDP converge to 60% (Maastricht criteria)

Nominal GDP growth

(in %)4.0% 5.0% 7.0% 9.0%

Fiscal deficit

(in % of GDP)2.4% 3.0% 4.2% 5.4%

Fiscal deficit that makes debt/GDP converge to 60% (Maastricht criteria)

Nominal GDP growth

(in %)4.0% 5.0% 7.0% 9.0%

Fiscal deficit

(in % of GDP)2.4% 3.0% 4.2% 5.4%

Bulgaria: fiscal balance and public debt (in % of GDP)

-1

0

1

2

3

4

5

1998 1999 2000 2001 2002 2003 2004 2005 2006*

-20

0

20

40

60

80

100

Source: National Statistical Institute (NSI) of Bulgaria; *Projected

Public debt (right scale)

Fiscal balance (left scale)

Romania: fiscal balance and public debt (in % of GDP)

-6

-4

-2

0

2

4

6

1998 1999 2000 2001 2002 2003 2004 2005 2006*

0

5

10

15

20

25

30

Source: IMF; *based on policy measures (1.8% of GDP) relative to initial budget

Pubic debt (right scale)

Fiscal balance (left scale)

Outline

1. Motivation – EIB interest

2. General observations (EU 27) Public debt sustainability (the long run)

Macroeconomic constraints to fiscal policy (the short run)

3. Fiscal consolidation and public investment Bulgaria

Romania

4. Conclusion

Outline

1. Motivation – EIB interest

2. General observations (EU 27) Public debt sustainability (the long run)

Macroeconomic constraints to fiscal policy (the short run)

3. Fiscal consolidation and public investment Bulgaria

Romania

4. Conclusion

Macroeconomic constraints

Concerns about

• Inflation internal imbalances

• External current account external imbalances

Macroeconomic constraints

Concerns about

• Inflation internal imbalances

• External current account external imbalances

External current account (in % of GDP)

Current account balance = Savings – Investment

Current account balance = Trade balance + …

External current account (in % of GDP)

-15

-10

-5

0

5

10

15

20

25

30

1995 1997 1999 2001 2003 2005

Saving

Current account balance

Investment

Current account balance = Savings – Investment

Current account balance = Trade balance + …

Current account balance =

External current account (in % of GDP)

-15

-10

-5

0

5

10

15

20

25

30

1995 1997 1999 2001 2003 2005

Saving

Current account balance

Investment

Current account balance = Savings – Investment

Current account balance =

Current account balance = Trade balance + …

(Savings – Investment) of private sector + fiscal balance

Outline

1. Motivation – EIB interest

2. General observations (EU 27) Public debt sustainability (the long run)

Macroeconomic constraints to fiscal policy (the short run)

3. Fiscal consolidation and public investment Bulgaria

Romania

4. Conclusion

Outline

1. Motivation – EIB interest

2. General observations (EU 27) Public debt sustainability (the long run)

Macroeconomic constraints to fiscal policy (the short run)

3. Fiscal consolidation and public investment Bulgaria

Romania

4. Conclusion

Bulgaria: contributions to change in fiscal balance (in % of GDP), 2001-05

-2

-1

0

1

2

3

4

5

6

Source: Bulgarian National Bank

Change infiscal balance

Change in fiscal balance 3.8 %

Decline in interest payments on public debt2.1 %

Increase in revenue3.1 %

Increase in current expenditure (excl. interest payments)

– 1.6 %

Decline in public investment0.2 %

Romania: contributions to change in fiscal balance (in % of GDP), 2001-05

-3

-2

-1

0

1

2

3

4

5

6

Source: IMF

Change infiscal balance

Change in fiscal balance 3.3 %

Decline in interest payments on public debt3.7 %

Decline in revenue2.2 %

Decline in current expenditure (excl. interest payments)

1.5 %

Decline in public investment0.3 %

Public investment (% of GDP)

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

2002 2003 2004 2005

Bulgaria Romania NMS-8

Source: AMECO (European Commission)

Eurozone countries 2005

Conclusion

Fiscal policy in BU & RO: macroeconomic stability

rather than debt sustainability

Public investment in BU & RO low compared to

NMS-8, but increase possible without deteriorating

fiscal balance

Fiscal consolidation has not come at expense of

public investment “neutral partners”

Fiscal consolidation and public investment: friends, foes, or neutral partners?

A look at Bulgaria and Romania

Armin Riess(a.riess@eib.org)

European Investment Bank

International Seminar for Experts“The coming enlargement of the the EU”

Cicero FoundationOctober 12-13, 2006