Fritz Zurbrügg, Director Swiss Federal Finance Administration - IFAC Sovereign Debt Seminar
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Fritz Zurbrügg, Director Swiss Federal Finance Administration - IFAC Sovereign Debt Seminar
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Fritz Zurbrügg, Director Swiss Federal Finance Administration - IFAC Sovereign Debt Seminar
- 1. Eidgenössisches Finanzdepartement EFD Eidgenössische Finanzverwaltung EFV The Sovereign Debt Crisis – Harbinger of Long-term Fiscal Challenges Fritz Zurbrügg Director, Federal Finance Administration FFA IFAC, Vienna 20. March, 2012 Eidgenössisches Finanzdepartement EFD Eidgenössische Finanzverwaltung EFV 1
- 2. Main Issues • Financial crisis – underscoring the importance of sustainable public finances • Fiscal burdens of financial crises vs. ageing • Garnering support for early action Eidgenössisches Finanzdepartement EFD Long term Challenges / Fritz Zurbrügg - IFAC Vienna, 20. Eidgenössische Finanzverwaltung EFV March, 2011 2
- 3. Sovereign Debt Crisis – From Emerging to Advanced Economies • Rapid increase in debt levels in advanced economies % GDP Source: OECD Economic Outlook 90 Eidgenössisches Finanzdepartement EFD Long term Challenges / Fritz Zurbrügg - IFAC Vienna, 20. Eidgenössische Finanzverwaltung EFV March, 2011 3
- 4. Sovereign Debt – Switzerland Spared Until Now Deficit and debt ratios 2000-2015 (as a % of GDP): G-20 (excl. emerging mkts.) and Switzerland (2011-15: estimate) 120 G-20 100 80 60 4 CH 40 0 CH -4 G-20 -8 -12 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 Defizitquote (linke Skala) Schuldenquote (rechte Skala) deficit ratio (lhs) Debt ratio (rhs) Sources: IMF, FFA Eidgenössisches Finanzdepartement EFD Long term Challenges / Fritz Zurbrügg - IFAC Vienna, 20. Eidgenössische Finanzverwaltung EFV March, 2011 4
- 5. Sovereign Debt Issues • Sovereign debt issues - largely ignored in advanced economies before the financial crisis • Fiscal policy - reactive and thereby failing to create fiscal space for future challenges • Current debt crisis has exacerbated well-known future fiscal challenges Eidgenössisches Finanzdepartement EFD Long term Challenges / Fritz Zurbrügg - IFAC Vienna, 20. Eidgenössische Finanzverwaltung EFV March, 2011 5
- 6. Demographics – The Real Problem Source: IMF, 2009 • The crisis has been bad, but the worst is still to come Eidgenössisches Finanzdepartement EFD Long term Challenges / Fritz Zurbrügg - IFAC Vienna, 20. Eidgenössische Finanzverwaltung EFV March, 2011 6
- 7. Demographics – Switzerland not Spared • Gross debt 2009-2060 (as a % of GDP) Eidgenössisches Finanzdepartement EFD Long term Challenges / Fritz Zurbrügg - IFAC Vienna, 20. Eidgenössische Finanzverwaltung EFV March, 2011 7
- 8. Age-related Spending • * Switzerland: 2009. Source: EU-Commission, FFA Eidgenössisches Finanzdepartement EFD Long term Challenges / Fritz Zurbrügg - IFAC Vienna, 20. Eidgenössische Finanzverwaltung EFV March, 2011 8
- 9. Ageing – A Multifaceted Challenge • Pressure on public finances: pensions and long term care • Pressure also on private savings returns (babyboomers will save less…) • A drag on growth? (lack of investment due to a lack of savings) • Switzerland is not spared, but has a better starting position than many Eidgenössisches Finanzdepartement EFD Long term Challenges / Fritz Zurbrügg - IFAC Vienna, 20. Eidgenössische Finanzverwaltung EFV March, 2011 9
- 10. Early Action is Key • Fiscal rules: • Changes incentives with respect to deficit spending • Timing is crucial: prevent bad management in good times and allow for flexibility in downturns • Focus on short term: no panacea but creates fiscal space for long term • Long-term action: • Ensure sustainable pension and health financing • Promote growth Eidgenössisches Finanzdepartement EFD Long term Challenges / Fritz Zurbrügg - IFAC Vienna, 20. Eidgenössische Finanzverwaltung EFV March, 2011 10
Notas do Editor
- Sovereign debt crisis has brought attention to the issue of fiscal policy and fiscal sustainabilityCurrent crisis just one aspectIt’s necessary to anticipate evolutions
- A reasonable fiscal policy should be restrictive during good times so as to have enough fiscal space to allow for deficits in times of recession.In the last years, this was not applied; the outbreak of the crisis has quickly led to a marked increase of public debt in several industrial countries.Thanks to its fiscal rule (debt brake) and a less severe economic downturn, Switzerland is an exception.Financial crisis has shown that the way from sound finances to rising public debt can be very short.
- Before the financial crisis, interest in fiscal policy had faded as it could not be used as a practical tool for economic policy like monetary policy. The crisis has brought back interest.Question now is how to ensure sound public finances in the long term, while keeping enough flexilibility to manage the short term without reverting to disruptive policies (sharp restriction of policy during a recession).In many places, fiscal policy has failed with respect to this. Countries have fallen into the trap of neglecting public finances to find themselves in a situation where the room for manoeuvre has disappeared when it was needed most.The problem is not new, but the financial crisis has revealed it.
- Fiscal space / room for manoeuvre might be needed even more in the future.Chart shows a comparison of the cost of the crisis in comparison to the estimated long term cost of demographic change. The cost of the current crisis seems very modest compared to what is still to come.Data is a bit old, unfortunately, and the crisis is not over yet, but the message is clear: The extent of demographic factors should not be ignored. A rising life expectancy and increasing numbers of retiring baby boomers create a pressure on spending for old age insurance, health care and (specially) long-term care. Notwendigkeit von strukturellen Reformen Finanzpolitisches Ziel: Agieren statt reagieren
- A study conducted by our ministry shows that Switzerland might have avoided the worst of the finanical crisis (so far), but it is equally concerned by demographic challenges:The projections show the effect of current demographic trends on future spending, revenues and debt. This allows to calculate fiscal gaps. Large uncertainties are being dealt by calculating these values for different scenarios (e.g. higher or lower growth).General government debt is bound to increase if no measures are taken. The increase will be most notable with social insurances and local governments that are involved in spending for long-term care.
- A comparison with selected European countries shows that demographic challenge will have an impact on many industrial countries. Demographic related spending is bound to increase.Comparisons are difficult though. Results depend on initial hypotheses. In the present case, the growth scenario for Switzerland for instance is different from that of other countries (less optimistic). In addition, social insurance systems and the financing of health spending can vary substantially across countries. (Switerland has a large share of private - but regulated and compulsory - spending for both health care and pensions (KVG, 2.Säule).
- To summarize:Pensions and health care spending, particularly long-term care will create a long lasting pressure on public finance.Pressure might also be felt on private savings, as retired babyboomers will save less.If low savings leads to a scarcity of funds for investments, this might also lead to a drag on economic growth.A sound fiscal position represents a better starting position to face upcoming challenges.
- Fiscal rules can increase the fiscal room for manoeuvre. They can succeed if they manage to reduce incentives towards fiscal deficits by institutions and policymakers.Timing is very important when introducing a fiscal rule. A recession and large structural deficits might be a difficult starting point. When the economy recovers is a better time to implement budget cuts and improve the financial situation. An excessively pro-cyclical fiscal stance can thus be avoided. More flexibility can then be provided in downturns.A perfect fiscal rule is hard to design, but even a second best rule might still be preferable to an often markedly pro-cyclical policy without such a rule. It cannot resolve all problems however, particulalrly in relation to long term challenges. Social security reforms will not necessarily be pushed forward by a fiscal rule with a short to medium term time horizon.Long-haul reforms are therefore needed independantly from a fiscal rule targeting the budget: Reforms in favor of economic growth and the financial stability of institutions such as pensions and health care systems. Need to act early, cost of inaction is more reforms later.