« Fixing the Foundations: A Global Call to Action on PFM! | Main | The PFM Blog Top Ten of 2011: A diverse bunch……. »

December 27, 2011

Fiscal Consolidation Plans in OECD Countries: What Do They Mean for the Role of the State?

Posted by Natalia Nolan Flecha[1]

Times are challenging and “austerity” is the watchword. After all, the pressure is on- with the OECD estimating that, on average, a total fiscal surplus of nearly 4% of potential GDP will be needed over the next 15 years just to stabilise public debt levels. Nearly 7.5% will be needed over the same period to reduce debt-to-GDP ratios to the Maastricht-approved level of 60% of GDP.

With their backs against the wall, what choices are governments making regarding their (current and future) obligations to citizens and firms? Where are governments holding their ground, and where are they willing to retreat and make more room for other service providers? Choices taken now could be telling and, to those looking for signs of what’s to come, may even provide some clues into the changing role of the State in a post-crisis world.

A 2011 survey of OECD member countries’ fiscal consolidation plans shows some interesting trends. Noteworthy was that, on average, more than two-thirds of planned retrenchment efforts will take the form of spending cuts (as opposed to revenue raising measures). Operational cuts were a staple of all countries surveyed; on average making up 27% of countries’ total retrenchment efforts. These included across-the-board reductions and/or freezes on such line items as staff wages, IT, procurement, as well as expected efficiency gains from mergers and restructuring of public sector organisations. Second, “big ticket items” also emerged as important targets of finance ministries. As of the end of 2010, 20 of the 30 OECD countries who participated in the study had announced cuts to social protection spending (e.g., pensions, unemployment and other social benefits). Health was next in line, with 15 countries reporting planned reductions here. In total, these two government functions accounted for about half of total general government spending in pre-crisis times.

Let’s take a closer look at these key areas that emerged on the 2010 consolidation agenda. But first, an important disclaimer is in order. Information on countries’ consolidation efforts refer to those announced by the end of 2010. In quite a few countries these plans have evolved considerably in the past year both in size and constitution. The OECD is currently updating its database with a new survey and plans to release results in the summer of 2012.

Operational cuts

Almost all OECD countries have marked operational expenditures for savings. France reported a 10% cut to such costs, the Netherlands announced EUR 6 billion in savings here by 2015, and in Greece reductions of 0.8% of GDP are targeted for the year 2011 alone. All ministries in the UK should be prepared to feel a pinch of up to 42% reductions in operational spending by 2014; furthermore, the country’s ‘Quango’ Reform went into effect in the spring of this year, placing limits on the operational expenditures of arms’-length agencies and thereby closing a loophole for any ministries tempted to transfer their shopping lists elsewhere. The true impact of these cutbacks on service provision is still to be seen. Avoiding declines in either the quantity or quality of public services will depend heavily on the talent of public managers to adapt quickly to changing circumstances, boost efficiency and find innovative solutions.

Pensions

A closer look at the results of the OECD survey reveals a bandwagon of pensions reformers; a logical trend, given the projected rise in pension costs in many countries due to increasingly “top heavy” age pyramids.  Of the 11 OECD members with higher than average pension spending, the majority (eight to be exact) have announced pension reforms as part of their consolidation efforts (Austria, the Czech Republic, France, Italy, Greece, Poland, Portugal, and Spain).  Furthermore, Australia and the United Kingdom seemed to be contemplating pre-emptive reforms to curb growing costs, although their total pensions spending remained below that of the OECD average. With some exceptions (Greece, Italy) the majority of these initial reforms announced as part of consolidation efforts consisted of freezes and/or cuts to “extra” or special forms of benefits.

Health

Health spending also featured prominently in consolidation plans announced in 2010, although the surprising finding was where- geographically speaking. Of the 13 countries with growing and higher-than-average spending, only Belgium, France, Italy, Ireland and the Slovak Republic announced health cuts as part of consolidation. The remaining reformers were countries with below average (albeit rising) health care costs, including Estonia, Hungary, Greece, the Netherlands, Portugal, and Spain. The OECD estimates that simply improving the efficiency of heath care systems could save nearly 2% of GDP in 2017, leading one to ask whether some OECD countries are missing an opportunity.

To sum up….

It’s still early days to make definitive conclusions about where the future of public services is heading, but some interesting trends do seem to emerge from the 2011 survey.

The first is that, although accounting for nearly 13% of government spending, education was largely spared in 2010 (with only Austria, Denmark, the Netherlands, New Zealand and Switzerland countries proposing cuts in this sector). And in all five of these countries, the cuts were announced in a context of an expected decrease in demand as the share of the school-aged population will drop in most OECD countries by 2025, by as much as six percentage points in some countries.  Even in these countries, with the exception of Switzerland, most savings will be realised from reductions to operational spending rather than specific programmes.

Second, there seems to be no relationship between the need for consolidation in pensions and health and the size of public spending in these areas. Several prominent “social spenders” (read: the Nordic countries) have not needed consolidation. Likewise, look at the case of Ireland which is reforming pensions despite lower and decreasing rates of spending here. For that matter, there seems to be no relationship between consolidation needs and total government spending in general. As the below figure suggests, the size of fiscal consolidation needs across countries is related to government’s ability to match revenues to expenditures—not the overall size of government relative to the economy.

If one were looking to fiscal consolidation plans to offer clues on the changing role of the state, one would find a mixed bag. The role of the state in the post-crisis world may indeed change in the coming years. But, as we have seen, it will likely vary by country with governments’ policies naturally depending on their particular circumstances and needs. The verdict is not out yet, but coming to terms with the outcomes of these measures will be key. If fiscal consolidation plans are to succeed, governments and citizens must agree on the role of government in providing services. After all, it is citizens and firms, through their tax contributions, which will be expected to bear the costs of consolidation and contribute to the continued functioning of public services.

Download Graphs

Further reading

OECD (2011), Government at a Glance 2011, OECD Publishing, Paris.

OECD (2011), OECD Journal on Budgeting, Volume 2011, Issue 2, special feature “Restoring public finances: Fiscal consolidation in OECD countries”, OECD Publishing, Paris.


[1] Natalia Nolan Flecha is an analyst at the OECD working in the Government at a Glance programme.  Prior to joining the OECD, she worked at the World Bank on public sector reform projects in the justice sector, and has worked on public management issues at various consulting firms. Natalia holds Master's degree in public and economic policy from the London School of Economics.

Note: The posts on the IMF PFM Blog should not be reported as representing the views of the IMF. The views expressed are those of the authors and do not necessarily represent those of the IMF or IMF policy.

TrackBack

TrackBack URL for this entry:
http://www.typepad.com/services/trackback/6a00e54ef00595883401543908b1db970c

Listed below are links to weblogs that reference Fiscal Consolidation Plans in OECD Countries: What Do They Mean for the Role of the State?:

Comments

Verify your Comment

Previewing your Comment

This is only a preview. Your comment has not yet been posted.

Working...
Your comment could not be posted. Error type:
Your comment has been saved. Comments are moderated and will not appear until approved by the author. Post another comment

The letters and numbers you entered did not match the image. Please try again.

As a final step before posting your comment, enter the letters and numbers you see in the image below. This prevents automated programs from posting comments.

Having trouble reading this image? View an alternate.

Working...

Post a comment

Comments are moderated, and will not appear until the author has approved them.

Back to top of page
©2007 IMF. All Rights Reserved. About Us | Terms of Use