The recent experience of Central and Eastern Europe provides a number of useful lessons in fiscal consolidation for the new independent states of the former Soviet Union during their transformation to a market economy. The relevance of these lessons is largely determined by the macroeconomic, structural, and institutional context in which fiscal policy is conducted. In general, the new states seem to suffer greater macroeconomic disequilibria and microeconomic distortions than do the economies of Central and Eastern Europe. Compared with most of these economies, the new states have experienced more severe initial imbalances, are relatively less open, have a far more concentrated industrial structure yet less integrated commodity and factor markets, are less equipped to formulate and implement macroeconomic policies and to build market-based institutions, and, for the most part, are more vulnerable to centrifugal forces toward fiscal decentralization.
The lessons that seem particularly relevant for the new independent states can be grouped in five areas. First, a front-loaded fiscal adjustment should be implemented, eliminating or narrowing significantly budget deficits financed by the domestic banking system. Second, consistent with this adjustment and with criteria of allocative efficiency and fairness, tax reform should aim at broadening bases and lowering marginal rates and should be sequenced largely in accordance with administrative constraints. Third, in line with the same criteria, deep cuts in consumer and producer subsidies and in transfers to loss-making enterprises should be accompanied by the creation of targeted transfers to deserving households. In addition, there are medium-term reform tasks in the areas of social security, infrastructure investment, and public expenditure management. Fourth, revenue shortfalls or expenditure overruns, owing in part to an unanticipated fall in output and to administrative weaknesses, should be met with contingency measures ranging from nondistortionary indirect tax increases to cash rationing of outlays. Finally, elimination of submerged fiscal imbalances, stemming from quasi-fiscal activities conducted mainly by state-owned nonfinancial enterprises and commercial banks, is just as important as correcting the measured budget deficit.