Tampere, 9 June 2011
Conference: Trends and Future of Sustainable Development
Innovative fiscal policy in the context of
sustainability
Olivér Kovács
Research fellow, ICEG European Center
Phd-student, University of Debrecen, Doctoral School of Economics
Outline
1. The major challenges of the European Union
2. Fiscal sustainability as a necessary prerequisite
Risks of a debt-crisis

Benevolent effects of fiscal sustainability

Dominating concept of fiscal sustainability

Innovative fiscal policy and the sustainability
3. The issue of fiscal institutionalisations
4. The case of Finland – Refining the concept of
innovative fiscal policy
5. Concluding remarks

The major challenges of the European Union
 Demographic dimension (side effects)
 Climate change
 Relatively low labour-productivity
 Sovereign debt-crisis
Economic
Social
Environmental
Fiscal sustainability as a necessar prerequisite
A potential definition for fiscal sustainability

What is the real burden?
Without sustainability: Risks of debt-crisis


Domestic dimension
International dimension
Fiscal sustainability: Benevolent effects
Raised awareness on intergenerational solidarity
Better fiscal flexibility (fiscal latitude)
Significantly improved efficiency of automatic stabilisers
Healthier capability to adaptive strategic planning
Dominant consideration of fiscal sustainability



define strict debt-to-GDP rate and deficit targets
use any type of fiscal consolidation to reach the deficit
targets (it requires social trust)
Therefore, encourage governments on the one hand


to introduce legislated fiscal rules,
on the other hand to set up independent fiscal bodies
with a wide range of authorities (e.g. giving political and
legal responsibility, as well) in order to increase the
credibility and transparency of fiscal policy, to stimulate
social trust, and last but not at all least to have control over
the meeting of fiscal rules.
Innovative fiscal policy and the fiscal sustainability



Fiscal sustainability needs two characters:
• Sustaining
• Disruptive
define strict debt-to-GDP rate and deficit targets  higher
level social, environmental and economic objectives 
intelligent manoeuvre
use expenditure based fiscal consolidations to get
potential expansionary effect and to reach the deficit
targets
encourage governments on the one hand


to introduce legislated fiscal rules,
on the other hand to set up independent fiscal bodies with
limited authorities (e.g. not giving political and legal
responsibility, as well), they are rather consulting than decision
making bodies.
Fiscal positions of the four groups (% of GDP)
Group 1: Austria, Belgium, The Netherlands and Slovenia. Group 2: Denmark, Germany, France, Italy,
Luxembourg, Sweden and United Kingdom. Group 3: Belgium, Denmark, Germany, Estonia, France, Italy,
Lithuania, The Netherlands, Portugal and Sweden. Group 4: Bulgaria, Cyprus, Czech Republic, Finland, Ireland,
Latvia, Malta, Poland, Romania, Slovakia.
The case of Finland – Refining the concept of
innovative fiscal policy
What did happen?
I. phase (1985-1990): financial liberalisation and economic boom
 overheating
II. phase (1990-1993): financial crisis, implosion of the SU 
depression
III. phase (after 1993): recovery was partly given by intelligent
fiscal policy
What did Finland do?
Predominantly: expenditure side fiscal consolidation
Reducing expenditures in social transfers, public sector wages,
salaries (But: pro- and anti-cyclical elements)
Coordinated expansionary fiscal policy: anti-cyclical R&D&I policy
Structural reform
Voluntarily used fiscal institutionalisation (unlegislated
expenditure ceiling rule, not having newly established
independent fiscal institutional anchor)
Finland’s fiscal position (% of GDP) (1988-2000)
(left axis: real GDP growth, budget balance; right axis: debt-to-GDP ratio)
Source: European Commission, Statistics Finland
Cyclically adjusted expenditures and revenues
(% of GDP) (1985-2005)
Source: European Commission, AMECA database
Functional breakdown of revenues
(in % of total taxation)
Source: Eurostat
Functional breakdown of expenditures
(in % of total expenditures)
Source: Eurostat
Total intramural R&D expenditure (GERD) by sectors
of performance
4.50
4.00
3.50
3.00
2.50
2.00
1.50
1.00
0.50
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
0.00
All sectors
Business enterprise
Government sector
Higher education sector
Source: Eurostat
Labour productivity of the total economy (1980-2003)
Value added per employed person, thousand 2002 euro, ppp
Source: OECD/STAN, Kaitila et al. (2006)
Conclusion


pro- and anti-cyclical fiscal policy were in tandem;
focus on the evolutionarily developed and mature
fields;


Fiscal institutionalisation was not quintessence.
additional resources stemming from the expenditure
side fiscal consolidation
Expansionary effect
Institutionalised fiscal
policy
trust/
consensus
Expenditureside fiscal
adjustment
trust/
consensus
reform
Thank you for your attention!
Olivér Kovács
okovacs@icegec.hu