Transcript | 2. lecture: Consolidation strategies (Ľudovít Ódor) - University for modern Slovakia

Welcome. Today’s lecture will focus on measures that should be taken so that public finance is set in order. We will have a look at those consolidation strategies that were successful over the past and at those that international institutions and experienced economists have been suggesting.

When expenses overrun the income within your own household, you are most likely to start saving or look for various possibilities of earning money. This works similarly with public finance. Based on the results it does matter whether you choose to consolidate through expenditures or income. Consolidation is considered successful when its results are sustainable at least within the interim horizon. In order to achieve this, it is important that consolidation does not affect the economic growth negatively. When looking for successful examples of decreasing public finance deficit from the past it is apparent that decreasing expenditures bring much better results than increasing taxes. Simply saying, saving concerns often saving on items that were not really too necessary or useful for the society. On the other hand increasing taxes not only increases income but often also distorts motivation of people to work or to invest.

Whatsoever, it does seem to matter, what income and expenditures we take into consideration. I have to confirm this. Studies of international institutions show clearly that hope for success is higher when we save on transfers (pensions, social allowances, subsidies) or on state consumption (administrative expenditures). It is common sense that tells us not to save on investments, which indeed, is not the best idea to do. When it comes to cuts within income, income taxes have the worst side effects because they directly penalize activity. Consumption taxes, e.g. value added tax, represent a better solution. However, the best solution is performed through such taxes that affect motivation of people the least, i.e. consumption taxes or real estate tax. Top of the list with better measures is represented by increasing non-tax revenues, especially if they concern diminishing of ineffective actions (higher dividends from the state enterprises which have already undergone recovery).

We cannot forget to take into account also the environment where the consolidation takes place. Following intuition, hope for success is higher, if measures are taken in times of easy monetary policy or in the times of bigger economic growth on the part of business partners.

It all seems to be simple at first sight. We have to endorse measures where decreasing expenditures is dominating, hence within transfers or state consumption if possible. One has to bear in mind that economic and political reality are two different worlds. Therefore we will look at consolidation strategies from an economic-political point of view in the second part of the lecture.

Most politicians use the following reasoning: “If we lower the deficit, the growth slows down; the unemployment will increase and we will lose elections.” Economists from Harvard have shown that this was not quite true.

1. Some trustworthy and successful consolidations paradoxically did not slow down economic activity.
2. Governments that performed consolidation on average did not have worse chances in following elections than those who were afraid to make adjustments in public finance. What is more, consolidating governments have often succeeded if the public perceived the difficulty of situation as well as the need to set order to state finance.

Even if the government takes the step to decrease public finance deficit, it does not mean that they have won straight away. The implementation stage is also important. As I have already mentioned, it is crucial that the public would perceive the importance of saving. It is necessary to explain why high debt represents a problem for a country. One may picture it either by the fact that countries with debts increase the living standard of their citizens slower or that they threaten the standard of living of future generations. There are numerous particular examples in both cases – theoretical as well as practical - and these have to be presented clearly to the citizens.

With regard to consolidation, it is always useful if there is a person in a particular country who bears this idea and engages his whole personal power for the benefit of consolidation. Such a consolidator should resign if the whole operation was unsuccessful. That would represent the severity of the issue and need for changes.

It is essential that quantitative mid-objectives are set. Phrases about the necessity of consolidation are not of much help. What helps is when individual measures are named together with calculations regarding their effect, which will lead to the wanted state of affairs. It is crucial to propose consolidation as a package. Measure endorsement may change the whole procedure gradually, whereas each proposal has a clearly defined group of lobbyists. They often mediate the set measures. Consolidation motto goes as follows: “If one interest party complains, you have got a problem, but if everybody complains, you have won”. For the claim that everybody needs to bring sacrifice is very strong.

From among the basic recommendations, structure changes are needed most of all in order to be successful. However, in order to adopt the package more easily, it is worth including global saving measures whereby each individual is affected in the same way.

Last but not least recommendation to be mentioned covers the area of communication. Single strategy needs to be introduced. When endorsing measures, it is no good to change the already stated reasons. Apart from that, the whole process needs to be transparent to its maximum. The public and financial markets have to receive all relevant information. Trust, that is to say, is developed over years, but one can lose it within a moment. Therefore, it is of no use to try performing accountancy tricks in order to decrease deficit.

To sum up today’s lecture, we covered the issues of what professionals and politicians should know about consolidation strategies. Next lecture will reveal what principles were used when performing consolidation strategies in Slovakia.