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  • 1. Fiscal Consolidation and Public Investment:  Friends, Foes, or Neutral Partners? A Look at Bulgaria and Romania Armin Riess European Investment Bank International Seminar for Experts “ The coming enlargement of the the EU” Cicero Foundation October 12-13, 2006
  • 2. 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
  • 3. 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
  • 4. 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
  • 5. Public debt in EU-27 (% of GDP), 2006 Source: European Commission, Economic Forecast, Spring 2006 Maastricht 60% criterion
  • 6. Fiscal balance in EU-27 (% of GDP), 2006 Source: European Commission, Economic Forecast, Spring 2006 Maastricht 3% criterion
  • 7. Debt dynamics Change in debt/GDP ratio = fiscal deficit/GDP ratio – nominal GDP growth • debt/GDP ratio
  • 8. 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
  • 9. Real GDP growth (in %), 2000-05 Source: European Commission, Economic Forecast, Spring 2006
  • 10. Fiscal deficit that makes debt/GDP converge to 60% (Maastricht criteria) Fiscal deficit (in % of GDP) Nominal GDP growth (in %)
  • 11. Fiscal deficit that makes debt/GDP converge to 60% (Maastricht criteria) Fiscal deficit (in % of GDP) 9.0% 7.0% 5.0% 4.0% Nominal GDP growth (in %)
  • 12. Fiscal deficit that makes debt/GDP converge to 60% (Maastricht criteria) 5.4% 4.2% 3.0% 2.4% Fiscal deficit (in % of GDP) 9.0% 7.0% 5.0% 4.0% Nominal GDP growth (in %)
  • 13. Fiscal deficit that makes debt/GDP converge to 60% (Maastricht criteria) 5.4% 4.2% 3.0% 2.4% Fiscal deficit (in % of GDP) 9.0% 7.0% 5.0% 4.0% Nominal GDP growth (in %)
  • 14. Bulgaria : fiscal balance and public debt (in % of GDP) Source: National Statistical Institute (NSI) of Bulgaria; *Projected Public debt ( right scale ) Fiscal balance ( left scale )
  • 15. Romania : fiscal balance and public debt (in % of GDP) Source: IMF; *based on policy measures (1.8% of GDP) relative to initial budget Pubic debt ( right scale ) Fiscal balance ( left scale )
  • 16. 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
  • 17. 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
  • 18. Macroeconomic constraints
    • Concerns about
      • Inflation  internal imbalances
      • External current account  external imbalances
  • 19. Macroeconomic constraints
    • Concerns about
      • Inflation  internal imbalances
      • External current account  external imbalances
  • 20. External current account (in % of GDP) Current account balance = Savings – Investment Current account balance = Trade balance + …
  • 21. External current account (in % of GDP) Saving Current account balance Investment Current account balance = Savings – Investment Current account balance = Trade balance + … Current account balance =
  • 22. External current account (in % of GDP) 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
  • 23. 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
  • 24. 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
  • 25. Bulgaria : contributions to change in fiscal balance (in % of GDP), 2001-05 Source: Bulgarian National Bank Change in fiscal balance Change in fiscal balance 3.8 % Decline in interest payments on public debt 2.1 % Increase in revenue 3.1 % Increase in current expenditure (excl. interest payments) – 1.6 % Decline in public investment 0.2 %
  • 26. Romania : contributions to change in fiscal balance (in % of GDP), 2001-05 Source: IMF Change in fiscal balance Change in fiscal balance 3.3 % Decline in interest payments on public debt 3.7 % Decline in revenue 2.2 % Decline in current expenditure (excl. interest payments) 1.5 % Decline in public investment 0.3 %
  • 27. Public investment (% of GDP) Source: AMECO (European Commission) Eurozone countries 2005
  • 28. 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”
  • 29. 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 Foundation October 12-13, 2006