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The literature on fiscal institutions has established a connection between the design of fiscal institutions and a country's political fundamentals. The paper includes a review of the party and electoral systems in the Central and Eastern European countries (the CEECs) and then reaches conclusions on what modes of fiscal governance ('commitment', 'delegation', 'fiefdom') these countries should have developed based on their political fundamentals. Two major conclusions stand out. First, all of the countries have multi-dimensional social cleavage space which, together with the dominance of proportional electoral systems, suggests diverse party systems. This is a recipe for multi-party governments. Indeed, coalition governments have been dominant in the CEECs suggesting in turn that the majority of these countries should be leaning towards commitment approach. Second, the collapse of communism and consequent social changes led rather unsurprisingly to a certain political turmoil. This was evident especially during the first half of the 1990s. Some countries were affected more than others. Party structures have been in a constant change and reforms in the electoral laws have not been uncommon resulting in some countries to frequent shifts between different government types. This suggests that these countries have not been able to develop a coherent way to tackle the common pool resource problem. The reality largely confirms these expectations. The results therefore indicate that no 'onesize-fits-all' solutions exist in fiscal management. Consequently, the design of such institutions should pay due attention to the political factors, alongside with the economic ones. The results indicate further that a certain degree of political stability is a prerequisite for stable fiscal conditions. [Urheber s. Copyright]

Following accession to the European Union the big issue for the Czech Republic is to strengthen growth prospects. Growth potential at present is somewhat above 3%, implying a moderate pace of catch-up to living standards in the EU and elsewhere. There is room for greater ambition in growth performance, and it is welcome to see this reflected in the programme of the new Czech government. This Survey underscores four main challenges. Fiscal consolidation is the dominant challenge for macroeconomic policy, and is not only necessary to cope with ageing and to bring down the tax burden but is also needed to fulfil euro-area entry conditions. A welcome programme of fiscal reform has begun, including proposals for a system of multi-year aggregate spending ceilings and significant expenditure cuts. However, to date, mainly revenue-raising measures have been implemented while the full impact of expenditure measures is yet to be realised. The attempt to secure broad political consensus on pension reform is commendable, but it must be underscored that whatever reform is finally implemented, it will have to bring considerable fiscal savings. Health-care reform also has to deliver savings, but concrete proposals have yet to be made. To facilitate assessment of the true fiscal position, extra-budgetary funds need to be more fully integrated in mainstream government budgeting procedures. Also, with the further decentralisation of public services, the need for good budgeting practices and accountability in regional and municipal governments is all the more important. The Central Bank and the Ministry of Finance have formulated a transparent strategy for entering the euro area, that foresees minimising the time spent in ERM II. Annual reports will assess the economic conditions in relation to the Maastricht criteria and a request to enter ERM II will only be made if the probability of a positive first assessment by the EU authorities is high. The choice of a 3% inflation target for the run-up to euro entry is justifiable on me

Following accession to the European Union the big issue for the Czech Republic is to strengthen growth prospects. Growth potential at present is somewhat above 3%, implying a moderate pace of catch-up to living standards in the EU and elsewhere. There is room for greater ambition in growth performance, and it is welcome to see this reflected in the programme of the new Czech government. This Survey underscores four main challenges. Fiscal consolidation is the dominant challenge for macroeconomic policy, and is not only necessary to cope with ageing and to bring down the tax burden but is also needed to fulfil euro-area entry conditions. A welcome programme of fiscal reform has begun, including proposals for a system of multi-year aggregate spending ceilings and significant expenditure cuts. However, to date, mainly revenue-raising measures have been implemented while the full impact of expenditure measures is yet to be realised. The attempt to secure broad political consensus on pension reform is commendable, but it must be underscored that whatever reform is finally implemented, it will have to bring considerable fiscal savings. Health-care reform also has to deliver savings, but concrete proposals have yet to be made. To facilitate assessment of the true fiscal position, extra-budgetary funds need to be more fully integrated in mainstream government budgeting procedures. Also, with the further decentralisation of public services, the need for good budgeting practices and accountability in regional and municipal governments is all the more important. The Central Bank and the Ministry of Finance have formulated a transparent strategy for entering the euro area, that foresees minimising the time spent in ERM II. Annual reports will assess the economic conditions in relation to the Maastricht criteria and a request to enter ERM II will only be made if the probability of a positive first assessment by the EU authorities is high. The choice of a 3% inflation target for the run-up to euro entry is justifiable on me

This study focuses on the most important drivers of the swift current account rebalancing which is taking place in Estonia and considers the possible way forward. After very large deficits in the boom years (2005-2007), Estonia's current account balance turned positive in the downturn, as domestic demand severely contracted. It should shift back into deficit when domestic demand eventually resumes, with a speed and extent dependent on the country's further efforts to increase productivity and competitiveness.

This series provides concise analysis of a topical economic issue concerning one or more Member States set within the broader economic and policy debate. Written by the staff of the Directorate General for Economic and Financial Affairs, the views expressed represent exclusively the positions of the authors and do not necessarily represent those of the Commission.

Given the consolidation needs and the provisions of the new fiscal rule, budgetary planning in Germany has become more demanding. Fiscal projections are already difficult since the link between total tax revenue and economic activity is observed to be unstable. This Country Focus identifies three key drivers behind total tax revenue developments: (1) the composition of the GDP growth - if economic growth is driven by less "tax-rich" components, such as exports, the revenue-to-GDP ratio tends to decline, (2) frequent and often complex discretionary policy interventions and (3) other factors such as fiscal drag effects or changes in the behaviour of tax subjects. The new fiscal rule could help give budgetary policy a longer-term orientation, as it necessitates a clearer and stable fiscal strategy. Given non-negligible residual effects in the past and the risk that unexpected developments might lead to high consolidation requirements in the short-term, the new rule requires greater fiscal prudence ex ante.

Romania's domestic demand boom over the past few years has led to rapidly widening current account deficits, reaching an estimated 13½% of GDP in 2008. High private sector dissaving has been exacerbated by a procycylical fiscal policy, with the public deficit likely to exceed 3% of GDP in 2008. Correcting these imbalances has been complicated by the international financial crisis and its spillovers to the real economy. To rebuild investor confidence, the new government will need to urgently reverse Romania's expansionary fiscal policy and pass a credible fiscal consolidation package.

Measuring public sector efficiency is not generally straightforward and presents a difficult empirical issue, specifically in terms of adequate measurement of costs and outcomes. This Country Focus attempts to measure the efficiency of public spending in Malta by applying two alternative non-parametric techniques: the Full Disposal Hull (FDH) and the Data Envelopment Analysis (DEA). The analysis is restricted to public spending on education and healthcare. Apart from their important contribution to welfare and economic growth, these two expenditure components together represent around 30% of total general government expenditure in Malta, suggesting that even incremental gains can lead to important improvements in budgetary resource allocations. For expenditure on education, the findings show that, whereas public expenditure in Malta appears relatively efficient at the primary and secondary levels of schooling, it is less so at the tertiary level. In the case of expenditure on health care, the results show that, even in the context of poor outcomes for the remaining Member States, the efficiency of public healthcare expenditure in Malta is weak .

The UK's self-sufficiency in fossil fuels shields public finances from the negative effects of higher oil prices on general economic activity. Changes in the international price of oil affect government revenues from the corporate and household sectors. Taxes on oil production are estimated to increase by around 0.1% of GDP for every $10 increase in the oil price. The increase in tax revenue on profits from oil production is partly mitigated by the fall in profits of the oil-consuming industries. Nevertheless, even if the non-oil corporate sector were to absorb the entire increase in production costs through a reduction in profit margins, the net impact on corporate taxation would remain non-negligible, at 0.05% of GDP. On the demand side, we estimate a weaker effect of changes in oil prices on taxation revenues in the UK, as the reduction in fuel duty revenues following an increase in the crude oil price would offset higher revenues from VAT. The estimates on the budgetary impact of changes in oil prices underline the role of taxation regimes on oil production and energy demand, as well as the effect of changes in oil prices on the distribution of profits across industrial sectors and on the composition of household spending.

The dominance of electoral considerations in determining budgetary outcomes has been evident in Hungary over the last 15 years, with government deficits reaching their highest levels in election years (1994, 1998, 2002 and 2006). This deterioration of public finances has largely been possible due to the weakness of fiscal governance. In the current decade, fiscal laxity was particularly strong until mid-2006; the country was even said to be suffering from a form of “fiscal alcoholism”. In this Country Focus it is argued that the recently unveiled comprehensive proposal to reform Hungarian public finances is an important step towards curing these institutional weaknesses, even though there is still room for improvement. It is crucial that the reform is based on a broad political consensus so as to ensure its credibility and durability.

Since the early 1990s Croatia has managed a rather successful transition process with solid growth, low inflation and exchange rate stability. Better integration into international financial markets, capital account liberalisation and banking sector reform have facilitated access to foreign financing and opened the country to strong and persistent capital inflows. A significant increase in Croatia's external debt over the last few years, and a recent widening of the current account deficit, have attracted the attention of policymakers and external observers alike. This Country Focus argues that a rise in external indebtedness has made Croatia more vulnerable to potential shocks, but also finds that sizeable foreign assets of the banking system and evidence about the existence of unrecorded foreign exchange holdings by the private non-banking sector mitigate external risks. Current account deficits have been driven by strong investment growth rather than a decline in domestic savings, thus providing some reassurance on sustainability issues. The Country Focus concludes that, in the specific setting of Croatia, further fiscal consolidation remains a key instrument to address external vulnerabilities and allow for a much needed further expansion of private-sector activities. In this context, deeper structural reforms could trigger a stronger supply response, raise potential output and improve competitiveness on a broader front.

This Country Focus studies the impact of changes in government expenditure in Hungary over the period 1997Q1 to 2005Q4 using a structural vector-autoregressive model. The results suggest that discretionary shifts in government expenditure have a mixed impact on the economy. In particular, while households are found to respond positively to expansionary government spending leading to an increase in their income, our findings point to a negative reaction on the part of the corporate sector. Overall, increasing government expenditure is found to lead to a contraction in GDP. Private employment is also found to fall back.

The way in which monetary and fiscal policy interact has an impact on the policy mix. A standard finding in the economic literature on strategic interactions between the fiscal and monetary authorities is that lack of cooperation can lead to a suboptimal policy mix. This is in particular the outcome of a Stackelberg game between the two policy-makers, with the government as the leader and the monetary authority as the follower – which appears to be a realistic description of the current institutional arrangements in Poland. This Country Focus examines whether these theoretical considerations are relevant to developments in fiscal and monetary policy in Poland since 1999. The suboptimal policy mix that characterises much of the period under review can be interpreted in part as the outcome of non-cooperative behaviour as predicted by the leader-follower model. Clearly, lack of fiscal consolidation and persistent uncertainties about fiscal policy have weighed heavily on monetary policy decisions. However, shifts in the monetary stance also reflect the National Bank of Poland’s reaction to changing economic conditions from which its response to changes in fiscal policy alone is difficult to disentangle. Poland’s recent experience suggests that a credible commitment to fiscal discipline and greater predictability of fiscal plans would help improve the policy mix.

Member States receive funds for agriculture, structural development (e.g. infrastructure works) and internal policies (e.g. training, research, environmental protection), but in exchange have to make a contribution to the EU budget. Given the overall low level of income per head as compared to the rest of the EU, the ten new Member States receive a considerable amount of transfers with a view to fostering their catching-up process. While it is often argued that EU accession increases a country’s budget deficit, the calculations show that the fiscal impact of the EU financial flows in the medium-term should be favourable. Nevertheless, the challenges in restructuring budgetary and administrative procedures to be able to absorb the projected payments in the EU financial framework should be recognised.

Public finances in Sweden remain strong by EU standards. The national rules-based framework that guides Swedish fiscal policy has contributed to this solid performance. These rules, which complement the EU rules, provide for an ambitious surplus objective for the general government (2% of GDP on average over the cycle), multi-annual nominal expenditure ceilings for central government and a balanced budget requirement for local government. The framework has been successful in promoting prudent fiscal policy, helping Sweden to comfortably comply with EU Stability and Growth Pact (SGP) requirements. Nevertheless, despite the overall positive performance there has lately been increasing pressure in different parts of the framework.