- a comment to Anderson and Minarik -
Matthias Witt
German Technical Cooperation (gtz)

Public Finance Reform
Introduction
The devil’s in the details – Germany’s experiences with Fiscal Rules
Why stick to the rules? A comment on embeddedness
Fiscal Rules – reaking the debt cycle Third World
Development?

Public Finance Reform
The Organisation
The German Technical Cooperation (gtz) is a federal enterprise, founded in 1975 and based close to Frankfurt am Main gtz provides advisory services for political, economic, ecological and social development, thereby promoting complex reforms and change processes
The corporate objective is to improve people ´s living conditions on a sustainable basis
Our Clients
Major client is the German Federal Ministry for Economic Cooperation and Development
The GTZ also operates commissioned by other German ministries, partner-country governments, and international clients (European Commission, World Bank)
Worldwide operations for sustainable development
Activities in 130 countries, 9.400 employees
Resident representatives in 66 countries, mostly in Africa, Asia, Latin America and Eastern
Europe

Public Finance Reform
Two different fiscal rules applied
Golden rule in the German Basic Law and European SGP
Design of the national rule
Investment is defined as gross capital formation; no incentive to repay debt during booms
Debt service at 14.5% of recurrent expenditure; implicit debt at 270% of GDP
Help to limit deficit in ad times, fail to boost budget discipline in boom times
Fiscal Rule and the budget process
Cascading budgetary negotiations, no ceilings
Medium-term limits to fiscal discipline
Cost of German unification 17 years ago still considerable
Net transfers to Eastern Germany in 2003 at 6% of recurrent expenditure

Public Finance Reform
Credible sanctions raise politicians‘ respect for fiscal discipline
Political sanctions: German voters dislike lack of fiscal discipline
Legal enforcement – independent judgement on government policy
Conclusion: FRs must be transparent, easily understandble, and tight to a strict enforcement process
Harmonisation with monetary policy
Europe: Different economic spaces for fiscal and monetary policy
Way out: creating autonomous fiscal agencies?
Objective: Separate budget execution fom party politics
Examples from India, Malasia, Nigeria etc. show that

Public Finance Reform
Third World Debt currently low priority on the political agenda
Credibility of fiscal rules depends on institutional framework … and political room for manoeuver
Rise of Fiscal rules in Latin America
Structural surplus rule for the budget (Chile)
Commodity Stabilization Funds (Colombia, Chile)
Fiscal Responsibility Laws (Brazil, Argentina, Peru)
Limited experiences with fiscal rules in low income countries
Institutional capacity?
High dependency on international tranfers; aid in average 3050% of gov‘t expenditure (est.)
Recommendation to SBO: Consider fiscal rules in middle-income countries
Count on promising examples from Latin America
Countries in transition: Central and Eastern Europe
Middle East and Northern Africa

Public Finance Reform
For more information on gtz please visit us: www.gtz.de/public-finance