Paper/Speech Details of Conference Program for the 14th NISPAcee Annual Conference Program Overview V. Working Group on Public Sector Finance and Accounting Author(s) Aleksander Aristovnik University of Ljubljana Ljubljana Slovenia Mr. Boštjan Berčič Title Sustainability of general government and local government fiscal balances in selected transition countries File Paper files are available only for conference participants, please login first. Presenter Abstract The sustainability of public finance has been an important issue for transition countries in the last fifteen years. Policy-makers in transition countries have been facing a combination of historical expenditure commitments, uncertainty about new revenue sources coupled with uncertainty about the general macroeconomic situation in the country. Indeed, the state of public finance usually acts as a litmus test of the progress achieved and the degree of internal consistency and soundness of transformation policy. In these circumstances, if fiscal policy is inconsistent there is a substantial and continuing risk that public deficits can leap out of control and eventually become unsustainable. Unsustainable government debt paths can eventually lead to sharp adjustments, if not to a crisis. Hence, fiscal sustainability is a highly desirable quality which should be measured on a regular basis in order to avoid unfavorable macroeconomic conditions. Moreover, fiscal policy sustainability has also become a recurrent theme for many transition countries (especially new EU member states) in the run-up to Economic and Monetary Union (EMU) since the Maastricht Treaty makes fiscal sustainability an explicit criterion for a country’s eligibility for EMU. In the paper, we review recent literature on fiscal sustainability with particular reference to problems that are specific to transition countries. While the original literature on fiscal sustainability chiefly focused on industrial countries there are by now few works that have focused on fiscal sustainability in transition countries (for some early attempts, see Buiter (1996) and Budina and van Wijnbergen (1997)). Consequently, the paper’s purpose is to assess the short-, medium- and long-term sustainability of fiscal policy on the national as well as on the local level in the great majority of transition countries which we divide into three main groups, i.e. Central and Eastern Europe (CEE), Southern and Eastern Europe (SEE) and the Commonwealth of Independent States (CIS). By using mainstream (primary fiscal gap) theory (proposed by Buiter (1983) and Blanchard (1990)), the analysis ensures some degree of restrictiveness. Indeed, given the looseness of the theoretical criteria for solvency, a non-increasing public debt to GDP ratio is seen as a practical sufficient condition for the sustainability of fiscal policy; a country is likely to remain solvent as long as this ratio is not growing. In this respect the primary fiscal gap, defined as the difference between the required primary fiscal balance to GDP ratio and the actual primary fiscal balance to GDP ratio, is calculated for selected transition countries. Based on simple mainstream theory measures of fiscal sustainability, the results indicate that fiscal sustainability seems to be a problem in many transition countries, particularly in CEE (e.g. Czech Republic, Hungary, and Poland) and the SEE region (e.g. Albania and Croatia). Moreover, when analyzing local government fiscal positions in CEE region, the situation is much better, with (medium-term) unsustainable position only found in Slovenia and Hungary. However, since we are dealing with an ex ante analysis on the grounds of ex post algebra of sustainability some caution should be exercised. In particular, we should expose the problem of the steady-state assumption as well as the presence of uncertainty and endogeneity of the variables included in the analysis.
