Chapter 2

Fiscal developments

Fiscal tightening in the CEB and SEE regions has contributed to the slow-down in growth caused by the euro area turmoil, as countries in these regions continue to implement austerity measures. Fiscal consolidation was on a scale comparable to that in the eurozone in 2011 (see Chart 2.7) and is forecast to follow a similar trajectory over the coming years despite much lower levels of debt (see Chart 2.8). While the ratio of public debt to GDP in transition countries increased significantly following the global financial crisis in 2008, it remains well below 60 per cent in the majority of the region. The notable exception in the CEB region is Hungary, which has an 80 per cent ratio and which saw its structural balance deteriorate in 2011 (although its actual balance was in surplus due to the one-off effect of the nationalisation of private pension funds).

Fiscal tightening in the CEB and SEE countries has been primarily expenditure-based (see Chart 2.9). Governments have implemented a range of policies including raising the retirement age (in Bulgaria and Poland), restraining public-sector wage growth (in Latvia, Poland and Slovenia) and passing legislation limiting deficits at the national and local level (in Poland). Efforts to raise revenue, including through the introduction of new taxes, the removal of tax exemptions and increases in VAT, have generally been undermined by weakening economic conditions (Poland being the main exception).

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Further east pro-cyclical fiscal policy, together with strong growth, resulted in more expansionary policies in 2011. Output gaps are positively correlated with changes in expenditure in a number of economies, including some commodity‑producing countries in central Asia (see Chart 2.10). Spending also turned out mildly pro‑cyclical in Russia, which nonetheless saw a substantial increase in its cyclically adjusted balance in 2011. The country’s fiscal position has been bolstered by stable oil revenues, but it remains vulnerable to a decline in global energy prices.

In some countries reforms aimed at consolidation have been undermined by expansionary spending increases in the run-up to elections. In Mongolia, which held elections in June 2012, annual unconditional cash transfers to the population, to the tune of 7 per cent of GDP, added substantially to government spending. Prior to elections in the second half of 2012, public sector wages were increased in Belarus, while governments in Georgia and Ukraine announced plans to raise pensions. 

In the SEMED region governments have sought to curtail spending in 2012, following large increases in subsidies, social welfare spending and public-sector wages during the political turmoil in 2011. Fuel and energy prices were increased in Morocco, and the authorities have announced further reforms to administered prices and subsidies. Similar measures encountered popular resistance in Jordan and have yet to be implemented in Egypt.

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