Improving the quality of public finance – an analytical framework 2018 Ludwig Erhard Lecture

Marco Buti Director-General Economic and Financial Affairs,

Lisbon Council “The 2018 Summit: Beyond Austerity: Why Quality Public Finance is Key to Prosperity – and How Governments Can Deliver It” Brussels, 17 December Outline

Back to fundamentals: QPF in MUSGRAVE +

Allocation, Sustainability, Stabilisation and Redistribution: role of QPF

Delivery models at national and EU level

Conclusions MUSGRAVE + and QPF

• Allocation (QPF for improving efficient resource allocation and insurance models (UB)) • Sustainability (Population ageing challenges, ensuring National and fiscal sustainability, DSA) EU dimension • Stabilisation (delivery models) (EA and national fiscal stance) • Redistribution (QPF for pre and post market policies) Allocation Public spending and growth

60

50

40

31.6 29.3 31.4 30

20

2.9 3.1 2.3

10 13.9 14.5 13.9

0 2006 2011 2016

Growth-friendly Interest expenditures Other Composition of public spending, euro area, % of GDP Allocation Public investment: crucial for jobs and growth

Impact of the crisis in the euro area

• Crisis legacy: large investment gap in the euro area Source: AMECO

• A big part of the gap comes from construction

• Intangible investment makes the gap smaller Allocation Education: expenditure vs quality of education (Pisa scores) 530 EE

520 FI

IE 510 SI DE PL NL DK BE 500 PT UK CZ FR ES SE 490 AT IT LV 480 LT Input orientation LU HR 470 HU PISA mean score MT 460 SK EL 450 Output orientation 440 RO BG CY

430 0 2,000 4,000 6,000 8,000 10,000 12,000 14,000 16,000

Public expenditure per pupil on primary and secondary education (average 2006-2015) Allocation Health care: expenditure vs life expectancy

Production Function 86

84 ES FR

ELIT NL CY SE MT 82 UK AT BE DE IE FI PT SI DK LU

HR 80

CZ PL input orientation EE 78

Lifeexpectancy (adjusted) SK

HU DEA LV Boot 76 RO CI97.5 LTBG 80 74

output orientation 72 1000 1500 2000 2500 3000 3500 4000

Per capita health expenditure in PPP - Health PPP (adjusted)

Output: life expectancy at birth (adjusted for lifestyle) Input: per capita health expenditure in PPP (adjusted for lifestyle) Allocation Quality of public revenues: Tax burden on labour

Tax wedge on labour, single earner, average wage Tax wedge on labour, single earner, 50% of (2017) average wage (2017)

55 55

50 50

45 45

40 40

35 35

30 30

25 25

20 20

15 15

10 10

5 5

0 0

IT SI FI IE IT SI LT FI IE BE DE FR AT LV SK PT LT EL ES EE NL LU MT EU EA DE LV AT EE BE SK EL ES PT FR LU NL MT EU EA Income tax Employer contributions OECD Income tax OECD Employer contributions Employee contributions EU average Employee contributions Sustainability Debt developments in large EU countries

Government debt ratio (% of GDP) 9 Source: Ameco Sustainability Pension spending vs pension adequacy .6

SE DK CZ FI NL SK DE ES .55 CYPT FR LU EL UK IT EE PL

.5 HU MT BE IE AT

LT

.45 LV SI

RO

.4 HR Overall index of partadequacy incl. rate 55-64 BG .4 .5 .6 .7 .8 Relative public pension expenditures, % Stabilisation Fiscal stance: correcting pro-cyclicality Fiscal stance, EA, 2011-2019 (Commission 2018 autumn forecast) Stabilisation Rebuild fiscal buffers and use fiscal space where it exists The fiscal stance, fiscal sustainability challenges and the cyclical position in 2019 (Commission 2018 autumn forecast) 13 Stabilisation Strengthening automatic stabilizers Redistribution Tax and benefit systems to reduce income inequality and poverty

0.6 0.6

0.5 0.5

0.4 0.4

0.3 0.3

0.2 0.2

0.1 0.1

0 0

SK SE NL DK PL HU SI CZ LU EE LV AT BE DE FI LT FR UK IT ES PT IE EL EU OECD

Gini (disposable income, post taxes and transfers) Impact of taxes Impact of transfers Gini (market income, before taxes and transfers) Redistribution Better performing welfare systems

30

25 LV RO y = -0.4736x + 22.777 R² = 0.2473 poverty rate

- BG EL of - LT 20 ES risk

- EE IT At PT UK PL IE DE 15 CY MT BE LU HU FI AT DK FR SI SE SK 10 NL CZ

5 7 12 17 22 social protection expenditures excluding pensions (% GDP) Delivery models: national level Spending reviews

How can spending reviews enhance the quality of public finance?

1. Promoting allocative efficiency 2. Improving value for money 3. Freeing up fiscal space

Eurogroup’s Common Principles on spending reviews (September 2016) • Strong and sustained political commitment • Best practices in design, conduct and implementation • Monitoring and communication to the public • Consistency with budget planning and fiscal framework 16 Delivery models: EU level as a tool to improve QPF

• Considerations about the quality of public finance play a prominent role in the Country-Specific Recommendations • On the revenue side the main focus is on: • Lowering the tax burden on labour in a budget neutral way, especially by reducing tax wedge for low-wage earners combined with a shift to taxes least detrimental to growth - such as recurrent property and environmental taxes (directly recommended to 16 Member States) • Broadening tax base by removing distortive tax expenditures, broadening the tax base on consumption (20 Member States) • Improving tax compliance by applying specific measures and enacting broader compliance strategies (17 Member States) • On the expenditure side we promote: • Safeguarding growth-enhancing expenditure such as on research, innovation and education. Making space for productivity enhancing investment (8 Member States) • Increasing effectiveness of public spending, including by recommending spending reviews (15 Member States) Delivery models: EU level The European Semester as tool to improve QPF Level of implementation of QPF CSRs lags behind progress towards achieving the SGP-related targets and below the overall implementation of CSRs Conclusions

• Population ageing and the changing world of work call for strengthening the QPF. • Well-designed public spending and taxes support growth, sustainability and inclusiveness for all. • Composition matters for growth more than the deficit. • Restoring investment is essential for jobs and growth. • Spending reviews is a good way to monitor and evaluate policies at national level. • How does the EU help to improve QPF? Ø Sharing best practices Ø CSRs Ø Flexibility clauses in the SGP Ø New tools: New EU public good in MFF proposal, InvestEU, EISF, RDT Thank you for your attention!