Public spending reforms

Czech Republic

April 8, 2013

Zuzana Šmídová, OECD

Lecture outline

• What is public spending/why does it need reform

• Fiscal sustainability and frameworks• Main spending items: -Pensions -Healthcare

2

What is public spending?

3

Provision of public goods

• Security, • Infrastructure, • Education, • Healthcare• Social benefits (pensions,

unemployment benefits, housing benefits, …)

How much do governments spend?

4

General government expenditure, % of GDP, 2012

How much do they collect?

5

General government receipts,

% of GDP, 2012

Ageing populations

6

Declining labour force at unchanged policies

7

How to make public expenditure more efficient?

• Fiscal policy framework

• Public finance/Budget management

and control

• Public pensions reform

• Public healthcare reform

Czech public finance development

Fiscal policy challenges …

• Election cycle

• Myopia

• Mandatory expenditures

• Pro-cyclicality

10

… and solutions

• Stability and Growth Pact (EU) and its latest upgrade Fiscal compact: deficit below 3%, structural deficit 1%, debt below 60% of GDP.

• Fiscal councils (e.g. UK, Sweden, Ireland… CR) and other wise men/advisory bodies (e.g. Netherlands’ CPB, Australia’s Productivity commission)

11

Fiscal rules – popular choice?

12

Current proposal for a constitutional debt brake

• Constitutional law on budgetary responsibility

• In the Parliament, http://www.psp.cz/sqw/text/tiskt.sqw?O=6&CT=821&CT1=0 (Budgetary committee)

• 60% of GDP debt brake with ‘alarm’ thresholds at 45%, 48%, 5o%

• Debt limit on sub-central governments

• Fiscal council appointed by the Parliament

13

Budget management and control• Transparency ( A citizen’s guide to state

budget) - http://www.mfcr.cz/cps/rde/xchg/mfcr/xsl/vf_sr_vladni_navrh_zakona.html,

• Ex-post assessment of policies (systematic assessment based on performance indicators)

• Tax expenditures (3.1% GDP) - e.g. tax deductable interest rate of mortgages, …

• Public procurement ( saving of 2.5% GDP?) - investment, purchase of private sector services

• Sub-central governments (regions, municipalities) - how many layers of government?

• Management of state assets - state owned enterprises ( ČEZ, Lesy, ČSA, airport, Ceske Drahy …)

• Supreme control office (NKÚ, www.nku.cz)

15

Budget management and control

Average population per municipality

2009-2010, thousands

Pension reform 2010-2013

• Public pension systems – consumption smoothing/distribution of income over life-cycle

• Increasing the statutory age of retirement

(today: 61, 60; born in 1990: 69 yrs) • Strengthening the link between the

contributions and benefits – but only up to a point

Pension reform 2010-2013• Motivation to remain active/working

longer

• Diversification of savings - introduction of a new (second) pillar :– PAYG (pay-as- you-go) defined benefit– funded defined contribution (second

pillar, “state contribution”)– funded defined contribution (third

pillar, employer contribution, state contribution)

• www.duchodovakalkulacka.mpsv.cz

18

Expenditure on healthcare, 2010 or latest

Healthcare reforms• Analysis of OECD countries healthcare

systems (Joumard et al., 2010) – no one “perfect/most efficient” healthcare system

• Rising expenditure – both demography but also progress/innovation

• Demand management (fees, soft/hard-gate keeping)

• Mutli-insurer system - “imitating competition”- govn’t to set and oversee the rules of the game

Literature• Kumar et al, Fiscal Rules: Anchoring

Expectations for Sustainable Public Finances, IMF, December 2009

• Rogoff K., Bertelsmann I.J., Rationale for fiscal policy councils: Theory and evidence

• Johansson, Å. et al. (2013), “Long-Term Growth Scenarios”, OECD Economics Department Working Papers

• Health at a glance Europe 2012, OECD Publishing

• OECD Economic Surveys: Czech Republic 2011, OECD Publishing

21