A Comparative Analysis of Fiscal Policy Changes in Selected European Union Countries outside the Eurozone

Szymanska, Agata Article A Comparative Analysis of Fiscal Policy Changes in Selected European Union Countries outside the Eurozone Comparative Economic Research. Central and Eastern Europe Provided in Cooperation with: Institute of Economics, University of Łódź Suggested Citation: Szymanska, Agata (2019) : A Comparative Analysis of Fiscal Policy Changes in Selected European Union Countries outside the Eurozone, Comparative Economic Research. Central and Eastern Europe, ISSN 2082-6737, De Gruyter, Warsaw, Vol. 22, Iss. 3, pp. 131-143, https://doi.org/10.2478/cer-2019-0027 This Version is available at: https://hdl.handle.net/10419/259212 Standard-Nutzungsbedingungen: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen. 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Central and Eastern Europe Volume 22, Number 3, 2019 http://doi.org/10.2478/cer‑2019‑0027 Agata Szymańska A Comparative Analysis of Fiscal Policy Changes in Selected European Union Countries outside the Eurozone1 Agata Szymańska Institute of Economics, Faculty of Economics and Sociology University of Lodz, Lodz, Poland e‑mail: [email protected] Abstract The aim of this article is to investigate the fiscal policy changes in six Central and East‑ ern European countries outside the Eurozone: Bulgaria, the Czech Republic, Croatia, Hungary, Poland and Romania. The analysis covers the period from 2004 to 2017. The study uses changes in the cyclically‑adjusted primary balance as a main indicator to assess the fiscal policy stance. The results indicate that, in general, over the period from 2004 to 2017, the fiscal stance in these countries was somewhat contractionary. Keywords: fiscal stance, cyclically‑adjusted primary balance, non‑Eurozone countries JEL: E62, H62 1 This work was supported by the Polish National Science Center under grant number DEC‑2014/15/B/HS4/01996. 132 Agata Szymańska Introduction Inrecent years, public finance imbalances have been growing inmany European Un‑ ion countries. This was influenced by, inter alia, the consequences ofthe latest (started in2008) economic and financial crisis, which seriously hampered GDP growth inthe European Union Member States, aswell asby numerous other conditions beyond thedirect control ofthe governments. The peripheral Eurozone countries suffered se‑ riously during this crisis and after it. The actions taken bythe EU member states con‑ tributed toincreasing the imbalance and, insome cases, determined the procyclical stance offiscal policy after this economic crisis started. However, the latest data show that the condition ofpublic finances inthe EU has been improving. Bythe end of2020, asizeable improvement inpublic finances incomparison to2009 isforecasted inthe Eurozone (European Commission 2018). Consistently basing fiscal policy onstabilisation objectives isimportant for fiscal authorities. Fiscal policy should bein acountercyclical position, that is, expansionary inbad times and contractionary during booms. The analysis ofthe changes inthe cy‑ clically‑adjusted components ofthe budget balance (especially the cyclically‑adjusted primary balance orthe structural primary balance) isone ofthe simplified approach‑ es used for fiscal position identification. Central and Eastern European countries asmembers ofthe EU, although outside the Eurozone, are ofparticular special interest, mainly from the point ofview oftheir future participation inthe euro area. Atpresent, the group ofEU countries outside the Eurozone includes six economies from the Central and Eastern Europe region: the Czech Republic, Hungary and Poland (those three countries joined the EU in2004), Bulgaria and Romania (accession tothe EU in2007), and Croatia (accession tothe EU in2013). The ability toconduct fiscal policy inacountercyclical manner isan impor‑ tant issue not only for countries participating inthe single currency area, but also for each individual country. The aim ofthis work isto assess the fiscal policy changes insix European Union countries outside the euro area. This article presents the evolution ofthe changes infiscal policy, including analysis ofthe loosening ortightening ofits restrictiveness. Inthis study, six countries are analysed: the Czech Republic, Hungary, Romania, Bul‑ garia, Poland and Croatia. The analysis covers the period from 2004 to2017, which isthe period between the most substantial enlargement ofthe EU (2004) and the year 2017 (2017 – the year with the latest available data). This study provides acomparative analysis ofthe fiscal policy stances during the pre‑crisis and post‑crisis periods. The investigation isbased on, among others, the discretionary component offiscal policy aggregates, that is, the component adjusted tothe cycle. 133 A Comparative Analysis of Fiscal Policy Changes in Selected European Union Countries… Assessment of short‑term fiscal stance According toPhilip and Janssen (2002, p.187), evaluations ofshort‑term fiscal policy often use terms such asa“tight (orloose) fiscal stance” or“contractionary (orexpan‑ sionary) fiscal policy”. The concept offiscal stance aims “tocapture governments’ discretionary policy actions” (European Central Bank 2016). Discretionary fiscal policy isdefined bythe European Commission (2009) asa“change inthe budget balance and inits compo‑ nents under the control ofgovernment.” The definition determines the measure ofthat policy, which isthe change inthe balance after the exclusion ofthe budgetary impact ofautomatic stabilisers (see, for example, European Commission 2009). There are two primary means ofmeasuring fiscal policy stance: the change inthecy‑ clically‑adjusted primary balance and the bottom‑upestimates ofdiscretionary fiscal policy measures (European Central Bank 2016). The bottom‑upestimates ofdiscre‑ tionary policy measures are based onsumming upall outcomes ofpolicy measures included inthe budget, which aims toclassify the impact ofindividual expenditure and tax measures (Ibid. pp.70–72). Because the well‑known definition ofdiscretionary fiscal policy excludes the impact ofthe business cycle and many other fixed expenditures, especially inthe form ofin‑ terest paid onpublic debt, the standard approach used toanalyse the fiscal stance isto investigate the changes inthe cyclically‑adjusted primary balance orthe structural pri‑ mary balance (European Commission 2016). The actual balance isnot agood indicator because itcontains the cyclical and structural impacts ofmany factors onthe final (i.e., budget balance) outcome. The literature indicates the overall balance asasuitable indi‑ cator for the analysis ofchanges infiscal policy; however, the measure needs tobe judged with caution (Davis 1995). The alternative, and simple, measures offiscal stancemay bebased onthe analysis ofchanges inacurrent fiscal balance, changes inaprimary balance, changes inacyclically‑adjusted orstructural balance, changes inadomestic fiscal balance orchanges inan operational balance (Davis 1995). However, aspresent‑ ed atthe beginning ofthis section, nowadays, meaningful precedence isgiven tothe cyclically‑adjusted primary balance orthe structural primary balance. Fiscal stance may beregarded aseither contractionary, expansionary orneutral, “depending onwhether the government decides todecrease (contractionary), increase (expansionary) orleave discretionary expenditures unchanged (neutral)” (European Commission 2016). Afiscal stance ofbetween –0.2 and 0.2 percentage points isof‑ ten recognised asbroadly neutral (Cimadomo 2005; European Central Bank 2018). Ingeneral, anegative change inthe structural orcyclically‑adjusted primary balance indicates anexpansionary fiscal policy, whereas apositive change indicates acontrac‑ tionary fiscal policy. Inthe context ofthe Eurozone, there isaconcept ofthe “euro area fiscal stance”. The euro area fiscal stance iscalculated asthe sum ofthe fiscal stances ofeach Eu‑ rozone member state. Taking into account the approach toits calculation, Ademmer 134 Agata Szymańska etal. (2016) argue that the aggregate fiscal stance isnot areasonable measure offis‑ cal stance for the euro area. They emphasise the relevance offiscal sustainability and business cycle needs, which appear atnational levels, especially owing tothe hetero‑ geneity ofthe business cycles among the Eurozone countries. Thus, itseems that the tightening fiscal policy insome countries and loosening inothers may provide the con‑ clusion about the neutral fiscal stance inthe Eurozone asawhole. Asaconsequence, the aggregated outcome may not beoptimal from the point ofview ofthe individual member ofthe euro area. Recent studies indicate that the (aggregate) euro area fiscal stance remained broad‑ ly unchanged before the global crisis (European Central Bank, 2018, among others). However, over 2008 to2010, the fiscal policy inthe euro area was expansionary, es‑ pecially owing tothe impact ofseveral stimulus measures, including the European Economic Recovery Plan. After aperiod ofsevere recession, the Eurozone took ac‑ tion inorder toprovide debt consolidation, correct excessive deficits and maintain debt sustainability. The result ofthis was that inthe years 2011–2013 the fiscal stance tightened, while in2014 itwas broadly neutral and even mildly expansionary in2015 (Bańkowski and Ferdinandusse 2017, pp.21–25). Fiscal policy in CEE countries – selected aspects in the context of fiscal stance The principal measure used inthe analysis offiscal stance isthe cyclically‑adjusted primary balance. Ingeneral, the cyclically‑adjusted primary balance iscalculated asan overall balance net ofthe cyclical component and interest payments, whereas the struc‑ tural primary balance isunderstood asthe actual budget balance net ofthe cyclical component, one‑off and other temporary measures and interest payments. The total budget balance isnot agood tool for discretionary stabilisation. Itincludes aset ofele‑ ments that are not directly related tocurrent policy conducted byfiscal authorities, like one‑off orinterest payments. These differences between actual (total) and structural balances, and other measures, are illustrated inFigure 1. Itpresents the composition ofthe total budget balance inthe six CEE countries calculated for the year 2016. In2016, only inthe Czech Republic were both the general government struc‑ tural balance and the general government actual balance positive. However, values close tozero for both variables were observed inBulgaria. In2016, the remaining four countries had adeficit, both structural and actual.The biggest actual deficit was inPoland and Romania. Moreover, the composition ofthe budget balance in‑ dicates anegative value ofthe primary balance and the structural primary balance inthese both countries. Figure 1 shows that inHungary and Romania the primary balance was influenced bythe negative one‑off measure (–0.1% ofGDP inHunga‑ ry and –0.4% ofGDP inRomania), whereas inCroatia itwas affected byapositive one‑off correction (0.1% ofGDP). The contribution ofthe interest payments was 135 A Comparative Analysis of Fiscal Policy Changes in Selected European Union Countries… the highest inCroatia and Hungary, suggesting the role ofthe “rigid” expenditures ininfluencing the budget balance. The statistical data show that Croatia and Roma‑ nia experienced dynamics indebt development during the post‑crisis period. Since 2005, the debt toGDP ratio inHungary has exceeded the reference value established atthe level of60% ofGDP. Inthe case ofCroatia, the extension has been ongoing since 2011. The lowest share ofgeneral government debt inGDP was inRomania (between 2004and2008) and inBulgaria (over the period 2009–2017), whereas the highest was inHungary (2004–2012) and Croatia (2013–2017). PB – primary balance, SPB – structural primary balance, CC – cyclical component, O-O&T – one-off and other temporary measures, IN – interest payments, SB – structural balance, TB – total balance Figure 1. Composition of general government budget balance in six CEE countries in 2016 Source: author’s work and calculation based on European Commission (2018a). In 2016, only in the Czech Republic were both the general government structural balance and the general government actual balance positive. However, values close to zero for both variables were observed in Bulgaria. In 2016, the remaining four countries had a deficit, both structural and actual. The biggest actual deficit was in Poland and Romania. Moreover, the composition of the budget balance indicates a negative value of the primary balance and the structural primary balance in these both countries. Figure 1 shows that in Hungary and Romania the primary balance was influenced by the negative one-off measure (- 0.1% of GDP in Hungary and -0.4% of GDP in Romania), whereas in Croatia it was affected by a positive one-off correction (0.1% of GDP). The contribution of the interest payments was the highest in Croatia and Hungary, suggesting the role of the “rigid” expenditures in influencing the budget balance. The statistical data show that Croatia and Romania experienced dynamics in debt development during the post-crisis period. Since 2005, the debt to GDP ratio in Hungary has exceeded the reference value established at the level of 60% of GDP. In the case of Croatia, the extension has been ongoing since 2011. The lowest share of general government debt in GDP was in Romania (between 2004 and 2008) and in Bulgaria (over the period 2009–2017), whereas the highest was in Hungary (2004–2012) and Croatia (2013–2017). -6 -4 -2 0 2 4 6 Bulgaria Czech Republic Croatia Hungary Poland Romania PB SPB CC O-O&T IN SB TB PB – primary balance, SPB – structural primary balance, CC – cyclical component, O‑O&T – one‑off and other temporary measures, IN – interest payments, SB – structural balance, TB – total balance Figure 1. Composition of general government budget balance in six CEE countries in 2016 Source: author’s work and calculation based on European Commission (2018a). Figure 2. Boxplots of general government gross consolidated debt (% of GDP) Source: author’s work based on AMECO database. 136 Agata Szymańska Figure 2 shows the asymmetry indebt development inthe six CEE countries out‑ side the Eurozone. Between 2007and2018, these countries experienced anincrease intheir debt asashare ofGDP; however, asmentioned, over 2006 to2010, Hunga‑ ry had the highest debt toGDP ratio. The presented data show that Croatia had the highest dispersion ofthe variable for debt, whereas the lowest was inPoland. Infour countries, the median value (aswell asthe maximum value) for the ratio ofgeneral government consolidated gross debt toGDP was below the Maastricht reference val‑ ue (60%) from 2004 to2017. The literature shows that sustainable public finance isan important issue for CEE countries. Some authors indicate that fiscal sustainability seems tobe aproblem inmany CEE and other transition countries (e.g. Aristovnik and Berčič 2007). Asare‑ sult, these countries need aset ofstructural reforms toimprove their ability togener‑ ate structural surpluses (e.g. Uryszek 2015). Fiscal policy changes in six CEE countries This section provides ananalysis ofchanges inthe cyclically‑adjusted primary bal‑ ance. Asmentioned previously, fiscal data comes from the AMECO database and covers yearly data from 2004 to2017. Inthis study, the cyclically‑adjusted primary balance iscalculated asthe difference between the total revenue ofthe general govern‑ ment adjusted for the cyclical component and the total expenditure, excluding inter‑ est, ofthe general government adjusted for the cyclical component (both adjustments based onpotential GDP, under the definition ofexcessive deficit procedure). The out‑ put gap data isderived from the European Commission (2018b) and presents the cal‑ culation ofthe output gap asa% ofpotential GDP. Figure 3 presents the changes inthe calculated measure ofthe cyclically‑adjusted primary balance (CAPB) for individual CEE countries. The analysis shows positive ornegative differences, that is, anapproximation ofthe restrictive (tightening) orex‑ pansive (loosening) fiscal policy stances, respectively. When only the direction ofchanges inCAPB istaken into account, some conclusions about the restrictiveness offiscal policy can beformulated. InRomania, significant ep‑ isodes with apositive difference incalculated CAPB (i.e., periods with restrictive fiscal policy stance) were seen for 2005 and after 2009till2015. Inthe case ofBulgaria, atight‑ ening inCAPB was observed in2004, 2006, 2010–2013and2015–2017, whereas inPo‑ land itwas in2010–2013and2015–2016, aswell asin 2005and2007 (2007 with asmall positive change). InCroatia, the positive fiscal policy stance wasin2005and2009, and since 2012, while inHungary the positive episodes occurred in2004and2007–2009, aswell asin 2012. Inthe Czech Republic, positive changesinthe calculated CAPB were observed in2004, 2007, 2010–2011, 2013and2015–2017. Clearly, the fiscal stanc‑ es ofthe individual countries did not cover the same periods. For example, in2012, the change in CAPB was contractionary infive ofthe analysed CEE countries owing 137 A Comparative Analysis of Fiscal Policy Changes in Selected European Union Countries… tothe Czech Republic, where the change inthe calculated CAPB was negative inthat year. Before the crisis (i.e., before 2009), changes inCAPB inBulgaria and Romania, ingeneral, were negative. Aspresented inFigure 3, during the first phase ofthe cri‑ sis (2010–2011), ofthe six CEE countries, the change in CAPB was expansionary only inCroatia and Hungary, and itwas contractionary inBulgaria, the Czech Republic, Poland and Romania. Expansionary change in CAPB isobserved after 2015 inRoma‑ nia and Hungary. of the general government adjusted for the cyclical component and the total expenditure, excluding interest, of the general government adjusted for the cyclical component (both adjustments based on potential GDP, under the definition of excessive deficit procedure). The output gap data is derived from the European Commission (2018b) and presents the calculation of the output gap as a % of potential GDP. Figure 3 presents the changes in the calculated measure of the cyclicallyadjusted primary balance (CAPB) for individual CEE countries. The analysis shows positive or negative differences, that is, an approximation of the restrictive (tightening) or expansive (loosening) fiscal policy stances, respectively. Figure 3. Fiscal policy stance (change in calculated CAPB) for individual CEE countries for 2004–2017 Source: author’s calculations based on AMECO database. When only the direction of changes in CAPB is taken into account, some conclusions about the restrictiveness of fiscal policy can be formulated. In Romania, significant episodes with a positive difference in calculated CAPB (i.e., periods with restrictive fiscal policy stance) were seen for 2005 and after 2009 till -3 -1 1 3 5 7 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Czech Republic Hungary Croatia -5 -3 -1 1 3 5 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Poland Bulgaria Romania Figure 3. Fiscal policy stance (change in calculated CAPB) for individual CEE countries for 2004–2017 Source: author’s calculations based on AMECO database. The comparison ofchanges inCAPB and the output gap allows for adistinction between countercyclical and procyclical positions offiscal policy. Ingeneral, fiscal policy stance iscountercyclical when itis expansionary inbad times (countercyclical loosening), contractionary ingood times (countercyclical tightening), whereas procy‑ clical – when itis expansionary ingood times (procyclical loosening), contractionary inbad times (procyclical tightening) (see e.g. IMF 2004, pp.111–117). Taking into ac‑ count the change inCAPB, which ranged between –0.2 to0.2 percentage points, itis possible toindicate the broadly neutral fiscal policy stance. Figure 4 presents the output gap and changes inCAPB for two countries: Bulgaria and Croatia. Ingeneral, after the crisis, the fiscal policy inthese two CEE countries was conducted inatightening manner. The detailed analysis shows that inBulgaria fiscal policy stance was generally contractionary, while inthe years 2012–2013and2015– 138 Agata Szymańska 2016 itrepresented procyclical tightening. The output gap inthe first stage ofthe glob‑ al economic crisis (2009–2010) was negative; however, the change inthe calculated CAPBin2009 with respect tothe preceding year represented expansionary fiscal stance, while in2010 itwas contractionary. Asimilar conclusion regarding the prevailing con‑ tractionary periods may beformulated towards Croatia – this country changed the path offiscal policy changes from procyclical loosening (2004, 2006–2008) topro‑ cyclical tightening (2012–2016). The fiscal policy stance can beregarded asneutral in2008and2013 inBulgaria, whereas inCroatia – in2008, 2010and2013 (i.e., the cal‑ culated change inCAPB was between –0.2 and 0.2 percentage points). 2015. In the case of Bulgaria, a tightening in CAPB was observed in 2004, 2006, 2010–2013 and 2015–2017, whereas in Poland it was in 2010–2013 and 2015– 2016, as well as in 2005 and 2007 (2007 with a small positive change). In Croatia, the positive fiscal policy stance was in 2005 and 2009, and since 2012, while in Hungary the positive episodes occurred in 2004 and 2007–2009, as well as in 2012. In the Czech Republic, positive changes in the calculated CAPB were observed in 2004, 2007, 2010–2011, 2013 and 2015–2017. Clearly, the fiscal stances of the individual countries did not cover the same periods. For example, in 2012, fiscal policy was contractionary in five of the analysed CEE countries owing to the Czech Republic, where the change in the calculated CAPB was negative in that year. Before the crisis (i.e., before 2009), changes in CAPB in Bulgaria and Romania, in general, were negative. As presented in Figure 3, during the first phase of the crisis (2010–2011), of the six CEE countries, the fiscal policy was expansionary only in Croatia and Hungary, and it was contractionary in Bulgaria, the Czech Republic, Poland and Romania. Expansionary fiscal policy is observed after 2015 in Romania and Hungary. The comparison of changes in CAPB and the output gap allows for a distinction between countercyclical and procyclical positions of fiscal policy. In general, fiscal policy stance is countercyclical when it is expansionary in bad times (countercyclical loosening), contractionary in good times (countercyclical tightening), whereas procyclical – when it is expansionary in good times (procyclical loosening), contractionary in bad times (procyclical tightening) (see e.g. IMF, 2004, pp. 111–117). Taking into account the change in CAPB, which ranged between -0.2 to 0.2 percentage points, it is possible to indicate the broadly neutral fiscal policy stance. 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 -6 -4 -2 0 2 4 6 -3 -2 -1 012345 change in CAPB output gap BULGARIA output gap as a % of potential GDP Figure 4. Changes in CAPB (in percentage points) and the output gap in Bulgaria and Croatia in 2004–2017 Source: author’s work based on the AMECO database and European Commission (2018b). Figure 4 presents the output gap and changes in CAPB for two countries: Bulgaria and Croatia. In general, after the crisis, the fiscal policy in these two CEE countries was conducted in a tightening manner. The detailed analysis shows that in Bulgaria fiscal policy stance was generally contractionary, while in the years 2012–2013 and 2015–2016 it represented procyclical tightening. The output gap in the first stage of the global economic crisis (2009–2010) was negative; however, the change in the calculated CAPB in 2009 with respect to the preceding year represented expansionary fiscal stance, while in 2010 it was contractionary. A similar conclusion regarding the prevailing contractionary periods may be formulated towards Croatia – this country changed the path of fiscal policy changes from procyclical loosening (2004, 2006–2008) to procyclical tightening (2012–2016). The fiscal policy stance can be regarded as neutral in 2008 and 2013 in Bulgaria, whereas in Croatia – in 2008, 2010 and 2013 (i.e., the calculated change in CAPB was between -0.2 and 0.2 percentage points). 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 -2 -1 0 1 2 3 4 5 -5 -3 -1 1357 change in CAPB output gap CROATIA output gap as a % of potential GDP Figure 4. Changes in CAPB (in percentage points) and the output gap in Bulgaria and Croatia in 2004–2017 Source: author’s work based on the AMECO database and European Commission (2018b). Inthe case ofthe Czech Republic (the upper panel ofFigure 5), itis difficult tomake any conclusions about aclear direction ofchanges; however, the fiscal policy stance inthat country, ingeneral, was contractionary. Inthe year ofthe Czech Republic’s ac‑ cession tothe EU (2004), the change inCAPB with respect tothe preceding year shows contractionary fiscal stance (moreover, in2004, the change inCAPB was the largest over the studied period of2004–2017), and inthe two following years the fiscal poli‑