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8. lecture:How to recover public finance so that it would not get “infected” again? (Ľudovít Ódor)

Lecturer: Ľudovít Ódor | Thursday, 14. 7. 2011

Many countries have learnt from their own mistakes that during the past years or even centuries, they have been administering the economy of their countries quite irresponsibly. Now, they are forced to adopt tough measures which affect mainly the weaker classes of citizens who do not have financial reserves and are exposed to the risk of losing their jobs the most. Strikes, protests and rescue packages have become a common part of public discussion. Similarly to “the great inflation period” as the 70’s of the previous century were labeled, the years to follow could as well be called “the great debt period”. Moreover, the developed world will have to come to grips with lower economic growth as the consequence of the fading crisis and will also have to face costs resulting from population ageing. In such a situation, Slovakia will need to try its best to learn from others’ mistakes in order not to become a part of the black list kept by financial markets.

I strongly believe that neither bankruptcy, nor hyperinflation is a part of what our politicians view in their minds, therefore the first necessary step to take is the consolidation of public finance, hence reduction of deficit down to sustainable levels. Based on the experience from other countries it is good that more than a half of the measure is on the expenditure side and also the fact that while increasing taxes, the elimination of exceptions, indirect taxes and taxes that harm the economy the least, dominate. The effort to understand consolidation in a broader sense, hence via the “3S” strategy, might also be assessed positively: short-term and often global cuts should be supplemented by structure changes and measures, which increase the resilience of the system in a long-term horizon. This strategy was successful within 2002 – 2006. The situation now is a bit more complicated, but it is necessary to do the maximum for a thorough implementation of the appraised changes so that the costs in form of muting the economic activity were as low as possible.

However, what is the guarantee that high deficit will not return after some years and we will not find ourselves in a situation where numerous peripheral countries of the European Union are stranded now? It is a very important question because we know that politicians are prone to administer the economy with deficits. They like hazing the numbers, they do not always consider the consequences of the measures they take in long-term horizon and they yield to the influences of different interest groups. Often the best time for consolidation seems to be tomorrow. That is exactly why the sustainability of consolidation depends on the question to what extent we will be able to manage to restrict our tendency to use deficits as solution and how to achieve that the “budgetary vows” did not only last short-term.

Microeconomic studies have shown that chances for success are higher if we establish a mechanism of commitments in four simple steps: we set the goal, the fine, the referee and supporters. It is much more difficult for the epicure to baffle the intentions of the planner.

What if we transposed this knowledge into budgetary policy? We should make use of the debt crisis now when the politicians are even likely to consider mechanisms of commitments even with regard to themselves. This is also proposed by many international institutions. We find numerous recommendations concerning the adoption of national fiscal rules or e.g. proposals on the establishment of independent fiscal institutions.

I think that the best way is to adopt the Budgetary Responsibility Act and hence by constitutional majority vote if possible. Such an act would provide for the space to use all necessary ingredients. The aim would be represented by fiscal rules which would be linked to sanctions in case of non-compliance. The role of the referee would represent an independent Council for Budgetary Responsibility and the supporters would be the public by the means of having transparent and due information available. The fact that there is a professional parliamentary group which deals with such a question is a proof that this does not resemble a sci-fi scenario.

There is nothing more left but hope that there will be enough political will and courage and that it will be possible to bring this concept to life. No one claims that this illness of being prone to deficits will disappear, but I do hope that it will markedly reduce irresponsible way of administering of economy. Then, the threat of transposing financial burden up to the social standards of our children and grandchildren will be much lower. And that is in principle what we want to achieve. We need lobbyists for the not yet born tax payers.

Dear students, ladies and gentlemen. Thank you very much for your attention with which you have followed my lectures over the last trimester. I hope you have learnt some new facts and I wish you luck and a hope you will enjoy also other interesting lectures in the course of next trimesters. Goodbye.


3 comment(s). Display all comments.

Marián Prekop

Ďakujem za aktuálne prednášky v tomto trimestri a teším sa na nasledujúce zaujímavé témy. Dúfam, že vaše zámery sa vám podarí presadiť vo vláde aj v parlamente a uspešne ich zaviesť do života.
Držím palce.

21.07.2011 | 20:50:39
Pavel Šimon

Aj ja ďakujem za úsilie do nás vkladané.
Moje subjektívne odporúčanie: zvýšiť trošku náročnosť testov. Ja som v posledných piatich prednáškach najskôr urobil test a až potom som išiel čítať prednášku. I napriek tomu som minimálne “vyhovel”, sem tam dokonca “exceloval”.
A poznámka na záver: želám, nie len nám tu v škole, ale aj ostatným, nech to čo bolo prednášané sa začne objavovať aj v praxi.

14.07.2011 | 20:28:55
Daniela Leitmanová

Ďakujeme za obsažné prednášky a triezvy pohľad na vedenie národohospodárstva. Dúfajme, že legislatívne zámery v tejto oblasti sa stanú skutočnosťou.
Držme si palce !!

14.07.2011 | 19:54:05