Sustainable growth, equity and fiscal balance

Finance ministers roundtable

Though optimism about a recovery may be rising, the global crisis has left deep scars and placed economies of all levels and sizes under severe strain. Achieving long-term, inclusive, growth is a key goal of OECD countries and a central theme of the Russian presidency of the G20. Reforms are essential for achieving that goal, though other measures, in fiscal policy for instance, could help too.

In our 11th OECD Observer roundtable, we asked the finance ministers of Russia, Finland, South Africa and the United Kingdom:

“What fiscal action are you taking to achieve sustainable growth,
while improving equity and balancing your country’s finances?”


Russian Federation
Building sound principles

Anton Siluanov, Minister of Finance


©OECD

After the crisis of 2008-2009 Russia like many others faced a dual task–to restore economic growth and at the same time to achieve fiscal consolidation. Actually the both problems were resolved–as early as 2011 Russia re-ran a budget surplus with GDP growth rate around 4.5%, while decreasing the level of budget expenditures.

This practice indicates that responsible fiscal policy can not only be consistent with economic growth, but also accommodate it. However, in many cases, overcoming the debt crisis consumes a lot of time and resources in the end.

Against this background, sound fiscal policy and debt management as the primary preconditions for sustainable economic growth were proposed for the discussion by Russia’s G20 presidency. Our government set a supplementary goal–to create institutional conditions to prevent budget risks and maintain macroeconomic stability.

An update of budgetary rules’ has been implemented this year. It provides for, first of all, defining the marginal amount of government expenditures based on the long-term average oil price (rather than on the forecast nominal price). Secondly, federal government net borrowing is limited to 1% GDP.

Under severe restrictions, the need emerged to raise the efficiency of expenses and redirect them to priority areas, including main structural reforms. From next year, the federal budget will be drawn up with the help of budgeting software, which will allow us to link budget outlays with target parameters of socio-economic development.

The three-year budget adoption will be extended to the regional level. As early as this year a long-term fiscal strategy will be worked out on the federal level, ensuring co-ordination between the limits of spending for certain projects and the total predicted amount of resources. Enhancing the state procurement system, budget institution network and the number of public officials, as well as improving the targeting of social safety net, should contribute to raising the effectiveness of budget spending.

Fiscal and budgetary instruments will be used simultaneously to promote economic growth. We are making the payment of taxes more convenient: in this regard, Russia has risen by 31 points in just one year in the World Bank Ease of Doing Business ranking. In order to attract investment, personal property and energy-efficient plant and machinery have been exempted from taxation; bonus depreciation mechanism has been improved.

We continue our efforts to promote “de-offshorisation” and to reduce the informal sector of the economy–international tax treaties are being improved and limitations on cash-flow are to be introduced. At the same time, the regulatory framework for public-private partnership is being modernised (which includes investing resources from the Sovereign Wealth Fund). The government took the decisions aimed at the making of the access for foreign companies to the Russian financial market easier and establishing a “mega-regulator” of the financial market, based on the Bank of Russia. We confidently expect that these new fiscal policy principles will provide the basis for long-term, sustainable economic development.

Visit www.minfin.ru/en


Finland
A sense of perseverance

Jutta Urpilainen, Minister of Finance


©Håkan Dahlström 

In Finland we want to improve the sustainability of public finances using three methods: by increasing the growth potential, prolonging working careers, and cutting the debt-to-GDP ratio by using the required fiscal policy measures.

Finland was among the first countries to adopt earned income tax credits (EITC) to promote employment. “Make-work-pay” policies were the central idea in developing the social benefit and tax systems when Finland was recovering from the previous recession. After the introduction of the EITC, successive governments have increased and widened the credit. For sure, we know that hundreds of thousands of new jobs have been created. However, it seems difficult– despite research–to show how much the EITC has actually improved employment.

In Finland, we have a long tradition of paying high taxes on earnings. In a way this is a good thing, since the tax is levied according to the ability to pay and therefore does not give rise to income inequality. As a contrast to taxes on earnings, the VAT and other consumption taxes (which are also actually labour taxes), which are regressive in nature, tend to increase income inequality over time.

It is important to keep income inequality low in order to maintain cohesion in society. It promotes co-operation and hence wellbeing and confidence. Even a small nation can be both economically and socially successful when the people are united.

I’m the minister of finance in a government which has to operate in an extremely difficult economic situation. There are not many tools left in the tax toolbox when almost all revenues are needed to keep society going and almost nothing is left to stimulate the economy. In spite of this, we have succeeded in working some magic. We wanted to boost firms to survive the tough times. The statutory corporate income tax is being cut by 4.5 percentage points and tax reliefs are given for R & D investments. These measures aim to promote long-term growth. Although we know that others have taken similar measures, at the end of the day, it is in our Finnish Sisu–our drive and perseverance drive–that we trust.

Visit www.vm.fi/english


South Africa
Lowering the costs of living

Pravin Gordhan, Minister of Finance


©South Africa Government Service 

The South Africa agenda is focused on national development, economic growth and fiscal sustainability. The public sector plays the leading role in ensuring that growth is inclusive. Our response to the global crisis has been to ensure the sustainability of public services, while improving South Africa’s competitiveness for faster and more inclusive growth.

The government’s National Development Plan (NDP) embraces the central priorities of public policy: eliminating poverty and reducing inequality with a focus on lowering the costs of living and doing business, increasing exports, creating more jobs and making economic growth more inclusive. A growing collaborative dialogue between government, the private sector, trade unions and civil society is needed to make the plan a reality.

South Africa’s fiscal framework seeks to achieve the following key objectives:

• Support for economic recovery: Since the recession of 2008, the budget has supported economic activity. Social spending continues to increase in real terms and moderate tax relief has been granted, especially for small business. But the fastest growing elements of expenditure include support for economic growth, especially infrastructure and job creation projects, as well as manufacturing competitiveness.

• Securing fiscal sustainability: South Africa’s fiscal response to the crisis has been large and sustained over a longer period. Fiscal space has narrowed but spending is set to growth at a moderate pace in line with the increase in potential output. Ensuring that we stabilise debt means that counter-cyclicality in the short term is balanced by a stronger medium-term path of consolidation. The need to restore fiscal sustainability also requires consideration of the revenue side of the budget, and the tax policy review currently under way will assess whether present tax policy is appropriate for long-term fiscal sustainability.

• Social wage: The NDP recognises that reducing the cost of living is essential for broadening economic participation and eliminating poverty. Alongside the “economic wage” earned through work, the “social wage” provided by government is a steadily rising contribution to the living conditions of working people and their families.

The best way to generate resources to implement the national vision is to grow the economy more rapidly. But we live in challenging times. A sound fiscal framework supports the sustainable financing of government spending, while progressive alignment between departmental budgets and the objectives of the NDP will bolster government’s contribution to development.

Visit www.treasury.gov.za


United Kingdom
A commitment to fairness

George Osborne, Chancellor of the Exchequer, United Kingdom


©Grigory Dukor/Reuters 

The UK economy is recovering from the most damaging financial crisis in generations after a decade of growth built on unsustainable debt. The historically high level of borrowing undermines fairness, growth, and economic stability in the UK. My economic strategy is designed to deliver strong, sustainable and balanced growth, while restoring the public finances to a sustainable path.

The government is delivering an ambitious programme of growth enhancing reforms to support a sustainable recovery. Our plan focuses on tax competitiveness, business growth, workforce skills, and rebalancing towards investment and exports.

Consistent with these aims, we are emphasising long-term investment in infrastructure by committing to publicly fund a pipeline of specific projects worth over £100 billion (over US$150 billion) by 2020. Our spending commitment means that public investment as a share of GDP will be higher on average over this parliament and the next, collectively, than under the previous government.

The economic strategy is underpinned by a commitment to fairness. Our policies ensure that those with the broadest shoulders continue to make the biggest contribution to fiscal consolidation. Analysis shows households in the top income quintile will make the greatest net contribution towards reducing the fiscal deficit.

We want to support those who aspire to work hard to support their families and grow their businesses. The government has brought forward the delivery of our commitment that the first £10,000 of income is free from income tax. By April 2014, 2.7 million low income individuals under 65 will have been lifted out of income tax altogether.

In addition, we are boosting investment and competitiveness through a major programme of corporate tax reform, including by reducing the main rate of corporation tax from 28% to 20% between 2010 and 2015.

The UK has taken a leading role in the OECD Base Erosion and Profit Shifting project which provides a coordinated and comprehensive approach to reform of the international tax rules to create a level playing field for all. To promote greater transparency, we are engaging with others to develop a new global standard for the automatic exchange of tax information.

The UK, like many other countries, has had to make some difficult decisions to promote growth while responsibly putting the public finances on a sustainable path. There is evidence that our economic strategy is working. Our public sector net borrowing has fallen by a third as a percentage of GDP since 2009-10. Over 1.3 million private sector jobs have been created since 2010. GDP growth in the latest quarter was at average trend levels. There is still a long way to go, but Britain is on the mend.

Visit www.hm-treasury.gov.uk

© OECD Observer No 295 Q2 2013




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