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Fiscal Rules 'No Panacea', Warns An Idb Economist

By NATARIO McKENZIE

Tribune Business Reporter

nmckenzie@tribunemedia.net

FISCAL rules are "not a panacea" but can prevent misplaced government spending priorities, an Inter-American Development Bank (IDB) economist said yesterday.

Allan Wright, a Bahamas-based economist, speaking at a fiscal policy workshop hosted by the IDB and the Government, said fiscal rules have become "a popular mechanism by which to anchor fiscal policy, infuse fiscal discipline and promote credibility".

His comments came after Deputy Prime Minister, K Peter Turnquest, while speaking at the same workshop earlier this week, confirmed the Minnis administration's commitment to introduce fiscal rules legislation in February/March 2018 to prevent "runaway spending".

"The ultimate objective of fiscal rules is to promote sustainable growth, while at the same time controlling deficits and limiting debt accumulation," said Mr Wright.

"Ambiguities in the objectives and definition can lead to ineffective enforcement; hence a fiscal rule and its objective should be clearly defined.

"In the context of Caribbean countries, a delicate balance must be struck between the short-term and long-term objectives in the creation of any fiscal rule(s)," Mr Wright continued.

Mr Wright said the economic, political and institutional characteristics of a country are integral to the design of any fiscal rule.

"While there is no 'one-size-fits-all' approach, there are some broad principles that should guide the design of fiscal rules. Primarily, these include simplicity and transparency, credibility, and flexibility," he added.

Mr Wright said a country's policy objectives and priorities will determine the precise type of rule introduced, and the nature of supporting Fiscal Responsibility legislation.

"Countries that are highly indebted might require both a primary balance and a debt rule to firmly entrench medium-term fiscal and debt sustainability, as opposed to a country where only a spending rule might be fitting, given its relatively low level of indebtedness and little, if any, sustainability concerns," said Mr Wright.

"Institutional requirements will also vary by country. "For example, country-specific, medium-term objectives and budgetary arrangements must be considered. Global good practices suggest that the strength of fiscal institutions and an effective supporting medium-term budgetary architecture contribute significantly to the success or failure of fiscal rules."

Mr Wright added that in establishing fiscal rules "political will" is vital, and public consultation as well as stakeholder buy-in, crucial.

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