On the road to the European Union : some remarks on budgetary performance in Transition Economies

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Title: On the road to the European Union : some remarks on budgetary performance in Transition Economies
Author: Kosterna, Urszula
Organization: Bank of Finland
Suomen Pankki
Department / Unit: Institute for Economies in Transition (BOFIT)
Siirtymätalouksien tutkimuslaitos (BOFIT)
Series number: 2/1998
Year of publication: 1998
Publication date: 27.2.1998
Pages: 31-61
Keywords: integraatio; Itä-Eurooppa; budjettivaje; julkinen talous; Bofit-kokoelma
Abstract: Accession to the EU is one of the biggest challenges for the CEECs in the coming years.Sound and sustainable public finances are crucial for the transformation towards a market economy to be continued (completed), as well as for the country's ability to comply with the membership requirements.As the long-term macroeconomic stability depends heavily on sound and sustainable fiscal balances, the structural reforms that will strengthen public finances should be a task of a highest priority for applicant countries. The measurement of the budgetary position in transition economies presents important difficulties, as the quality and comparability of statistics is still poor, and as those less visible forms of fiscal deficit (i.e. the quasi-fiscal deficit and the contingent deferred fiscal deficit) are clearly linked with the postponements in structural reforms. Furthermore, there is unquestioned interdependence between fiscal policy (budgetary aggregates) and the transition process (changes in macro- and microeconomic performance of the country).Indeed, one can hardly expect a successful balanced-budget policy during the entire journey from plan to market.To the extent that fiscal imbalances reflect the costs of necessary adjustments, they may be temporarily justified (as 'transitional' deficits).Thus, the most difficult issue in designing and implementing fiscal policy during transition is choosing a proper balance between the need to achieve macroeconomic stability (which require fiscal discipline) and the need to pursue structural, market-oriented (and fiscally costly) reforms.In practice, in the short run, this can lead to conflicts between quality and quantity of fiscal adjustment. When the quality of fiscal adjustment is poor, the current 'good' quantities are not the evidence of sound public finances.Slow progress in structural reforms, which is not fully reflected in current budgetary aggregates, poses a risk of future fiscal imbalances and constitutes a threat to macroeconomic stabilization and sustainable growth.Therefore, further progress in restructuring the economy and reducing the role that the state plays in production and resource allocation remain the main challenges for sustainable fiscal position in transition economies. The current levels of government spending in the relatively poor transition countries are much too excessive.The need to finance high government spending (strongly dominated by current transfers) makes impossible the reduction of the overall heavy fiscal burden on the economy.Such a burden creates a strong barrier to fast growth and leads to the development of the underground economy. With this unfavourable current situation any pressure on the expenditure side will deteriorate fiscal position.Such pressures will derive from the continuous progress in structural reform as well as from the process of the preparation to accession. As discussed in this paper, the budget deficit, as usually measured, has important shortcomings as an indicator of sound and sustainable public finances in transition economies.But this does not mean that fiscal imbalances are the matter of irrelevance. Instead, the medium term reform programs should address the need to reduce the fiscal deficit, but this goal can be achieved only by reshaping government expenditure with priorities given to productive activities (such as investment in infrastructure and in human capital), together with reducing the size of public spending. Keywords: budget, deficit, European Union, fiscal policy
Note: Uudelleenjulkaistu pdf-muodossa 2002 (Idäntalouksien yksikön sarja)Reprint in PDF format 2002 (Unit for Eastern European Economies series)

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