Leading EU and US researchers consider the 2010-2019 fiscal austerity destructive and call on policymakers to move to stimulating fiscal policies to achieve dynamic and inclusive economic growth. In the meantime, Ukraine’s budget policy was one of the toughest in the world in 2014-2019; the government is going to implement the same policy in 2022-2024, despite the changing world discourse and the actual results of fiscal consolidation.
Last year, fiscal support of the economy and the population, along with a sharp fall in government revenues, caused a dramatic increase in public debt and budget deficits throughout the world. According to the IMF, average overall fiscal deficits as a share of GDP in 2020 reached 11.7% in advanced economies, 9.8% in emerging market economies. Compared to 2019, in 2020 there was a 4-fold increase in deficits in advanced economies and a 2-fold increase in emerging market economies (see Table 1).
Against this background, the euro area had rather moderate indicators of the fiscal balance, which deteriorated from -0.6% of GDP in 2019 to -7.6% of GDP in 2020. The IMF forecasts that in 2021 in emerging market economies the average fiscal deficit will decrease from 9.8% to 7.7% of GDP, and in advanced economies – from 11.7% to 10.4%. At the same time, the fiscal balance in the euro area will be -6.7% of GDP in 2021.
Table 1. General government fiscal overall balance and general government debt in the country groups and specific countries as a % of GDP
|Country and Group of Countries||Overall Fiscal Balance||Gross Debt|
|Emerging Market Economies||-4.7||–9.8||–7.7||54.7||64.4||65.1|
|Low-Income Developing Countries||–3.9||-5.5||-4.9||44.3||49.5||48.6|
Considering the beginning of economic recovery in the USA and the EU, there has been more debate on curtailing fiscal support programs and returning to budget austerity in the coming years. However, realizing the devastating effects of such policies in the past, leading US and European economists signed a public letter “It’s time Europe stopped fetishising fiscal discipline”, which was published on June 15, 2021 in the Financial Times. The authors of the letter were F. Lerven, D. Gabor, R. Johnson, P. Heimberger, B. Broun, J. Toporowski, N. Lancastle, D. Tori, M. Vincent, N. Dodd, R. Veneziani., T. Fetzer, S. Stevano, G. Pastrello, S. Murawski, D. Ghosh, E. Berr, M. Sanders, A. Denis, A. Botta, A. Jackson, etc., a total of 142 people.
The authors of this open letter argue that Europe needs a brand new method to fiscal coverage, beginning with a recognition that too little deficit spending may cause irreversible social, financial and environmental injury. “Fiscal self-discipline” can immediate a everlasting fall in mixture demand and output, which unnecessarily stifles employment and family incomes.
According to the authors, the austerity policy pursued by the EU before the current crisis remodeled the the 2008 monetary shock into a protracted economic recession. Moreover, this fiscal policy did not fulfill its direct purpose: the ratio of public debt to GDP did not decrease for several years in a row because of everlasting financial scarring and related reductions in tax revenues. As a result, the EU experienced a decade of demand stagnation, performing properly beneath its productive potential.
The signatories of the letter to the Financial Times emphasize that in the future without a prudent fiscal expansion to increase productive investment and social protection of vulnerable citizens, aggregate demand will remain depressed and living standards will not improve. Therefore, as an alternative of fetishising fiscal self-discipline, the authorities should prioritise extra necessary social, financial and environmental outcomes — like creating well-paid inexperienced jobs, lifting hundreds of thousands out of poverty and implementing inexperienced infrastructure initiatives. The most relevant lesson of J.M. Keynes in this context is: “Take care of employment in the economy and then the budget will take care of itself.”
Experts from Deutsche Bank came to similar conclusions in their study “The Age of Disorder” (September 2020). They showed that tight fiscal policies had caused unsatisfactory economic growth in many countries; this is what fueled populist movements around the world and broke the EU’s structure. Predicting the future, Deutsche Bank experts note: COVID-19 has forced politicians to cross the rubicon on the application of expansionary fiscal policy and a long period of budget austerity is very likely to forever remain in history textbooks.
In Ukraine, the fiscal deficit according to the IMF in 2020 was 6.2% of GDP, which lags by 4.6 percentage points behind the world average and by 3.6 percentage points behind the average in emerging market economies. At the same time, public debt in Ukraine (60.7% of GDP) was also lower than the average level in emerging markets (64.4%) and significantly lagged behind advanced countries’ indicator (120.1% of GDP).
For assessing the degree of fiscal tightening in Ukraine, the standard indicators of fiscal policy analysis have been employed. One of the key indicators is the cyclically adjusted primary balance (CAPB) of the general government sector. At the first stage, it is calculated as the overall general government balance less interest payments on public debt. At the next stage, the primary fiscal balance is cleared from the influence of cyclical factors. The obtained positive balance of CAPB shows the net contribution of fiscal policy to the growth of aggregate demand. The negative balance, on the other hand, indicates a reduction in aggregate demand as a result of fiscal sector operations.
Table 2. Cyclically-adjusted primary balances (CAPBs) of the general government as a % of GDP.
|Emerging market economies and middle-income countries||-0.7||-0.9||-1.8||-2.1||-1.8||-2||-2.8||-6.2|
The data presented in table 2 allow deriving the following conclusions:
- Fiscal policy of Ukraine was restrictive for a long period of time (2015-2019) and only in 2020 it became moderately stimulating;
- Compared to other countries, fiscal policy in Ukraine was excessively tight throughout the study period, and in 2015 Ukraine had the tightest fiscal policy in the world, with CAPB at 4.9% of GDP.
- In 2020, the Ukrainian CAPB at the level of -1.8% of GDP lags behind the average in emerging markets (-6.2%) and in advanced countries (-7.6% of GDP), which again indicates the restrictive nature of fiscal policy in Ukraine, even after its significant loosing since the beginning of the corona-crisis.
In the medium term, the Budget Declaration of Ukraine forecasts a reduction of the budget deficit to 3.5% of GDP in 2022, then to 3% of GDP in 2023 and up to 2.7% of GDP in 2024. However, given the acute social and economic challenges, facing the country, a minimum deficit of budget is not economically justified. As previous experience indicates, continuous fiscal austerity keeps aggregate demand in a depressed state, provides no stimulus for private sector development, and leads to deterioration of human capital accumulation. At the same time, 2020-2021 demonstrate that low interest rates in financial markets allows emerging markets to apply strong fiscal stimulus, and the existing fiscal space is not a severe constraint on government stimulus.
Doctor of Economics, Scientific Director of the Growford Institute Tetiana Bogdan for LB.UA.