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Working Paper Summaries (WP/93/1 - WP/93/54)
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Summary of WP/93/22: “Fiscal Policy and the Economic Restructuring of Economies in Transition”

Author(s):
International Monetary Fund
Published Date:
August 1993
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This paper discusses several important fiscal issues faced by previously centrally planned economies in their transition to market-based systems.

It shows that in countries that are currently defining the explicit role of the government, where the budget needs to assume some of the social responsibilities that had been carried out by the state enterprises, and where “property rights” within the public sector are still vague and being established, the budget deficit has far less informational value than generally assumed. The budget deficit--calculated on the basis of the relationship between budgetary revenue and expenditure--often differs widely from the true public sector fiscal deficit and may even move in a different direction. In these situations, total credit expansion will be a more important guide to macroeconomic policy than the deficit. The paper argues that if limits on the budget deficit are too tight, they may create inverse incentives for policymakers that may actually slow down the transition. Although tax reform and the containment of public spending remain important goals, the paper concludes that fiscal policy should be assessed on the basis of specific structural reforms rather than on the basis of its impact on the budget deficit.

The paper discusses various tax issues, in particular, the inevitable reduction in the tax/GDP ratio during the transition, the need for simplicity in tax reform, and the importance of tax administration. It emphasizes that simply transplanting the fiscal institutions of advanced industrial countries to economies in transition may lead to costly mistakes.

The paper also discusses several public expenditure issues, including the need to reduce and streamline social expenditure, which continues to be too high and inappropriately allocated; the probability that public spending will fall more slowly than public revenue; and the need to create efficient institutions to manage public spending. The importance of modern budget and treasury offices is highlighted.

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