Abstract
This paper analyzes the recent economic developments in Moldova by reviewing the real, fiscal, and external sectors developments; money banking; and structural policies. The study provides a statistical analysis on the composition of fiscal adjustments in the country, and describes the recent trends in social spending and social indicators in Moldova and in other transition economies in the 1990s, the methodology for estimating efficiency in public spending on education and health care, and assesses the current account determination in the country.
III. The Composition of Fiscal Adjustments in Moldova, 1994-1999: A Statistical Analysis15
A. Introduction
74. In 1999 Moldova achieved an impressive consolidation of the general government budget. The fiscal imbalance16 was considerably reduced as a result of large expenditure curtailments.17 This decline in public outlays has been larger than the amount required to compensate the fall in total revenues that occurred in the aftermath of the Russian crisis. The fiscal consolidation significantly reduced the general government size, bringing it closer to the median size of public sectors in transition economies. Moreover, most of the adjustment measures aimed at improving the composition of expenditures, targeting part of the social benefits to the poor and reallocating the scarce available resources to more productive uses.
75. The fiscal adjustment was also unprecedented. Moldova has experienced a long period of economic turbulence and political instability after its independence. Some transitory improvement in the fiscal position took place during a comprehensive financial stabilization program supported by a stand-by arrangement with the Fund in 1993-1995, and as a consequence of positive economic growth in 1997. However, both external factors and weak implementation of structural reforms hampered a long-lasting fiscal consolidation and resulted in large fluctuations of the deficit. In a context of dropping output and soaring inflation, public finances deteriorated as public spending rose uncontrolled, particularly in the large and mostly inefficient public sector, because of poorly targeted energy subsidies, and due to the bloated health care and education sectors. In the same period, revenues declined because poor macroeconomic performance narrowed the tax base and widened the informal sector, fostering high levels of tax evasion (Carasciuc, 1999). In addition, poor tax administration, weak enforcement capacity, and overall poor governance were among the most important determinants of a large increase in the stock of tax arrears.
76. The purpose of this chapter is to assess whether the size and the composition of the recent fiscal adjustment could lead to a permanent consolidation of the budget, so as to support sustained economic growth over the medium term. The main conclusion resulting from the empirical analysis is that both the size and the composition of the adjustment process are consistent with a long-lasting consolidation. However, the presence of several outstanding structural weaknesses in the general government sector may lead to a deterioration of the budget if fiscal policy is not kept sufficiently tight in the medium term.
77. In the remaining part of the chapter an attempt is made to analyze the changes in the size and the composition of the general government deficit of Moldova, between 1994 and 1999. In particular, the study deals with the quality of the 1999 fiscal retrenchment. Section B presents the recent trends in the budget, according to alternative definitions of fiscal deficit. The breakdown of public expenditures and revenues by category is shown in Section C, and it is used to assess the factors contributing to the fiscal unbalance during the period. Section IV describes a simple statistical methodology that can be used to estimate the fiscal adjustment size and its components. Section E discusses the results of the decomposition exercise, the following section deals with the outstanding fiscal policy issues, and the last section concludes.
B. Trends in Fiscal Deficit
78. Moldova’s fiscal performance between 1993 and 199918 has been mixed, with a large fall in the deficit occurring in 1999 and a peak in fiscal unbalance in 1994 (Table 14). However, despite the oscillations, the fiscal deficit measures have exhibited a moderate downward trend since 1994 (Figure 5). The fiscal deficit was relatively low at the beginning of the period, but soon rose as a consequence of a steep increase in public spending, primarily in the social sphere (e.g., education, health care and some minor social assistance schemes) and by the Social Fund.19 In the following years, the public finance position improved slightly. In particular, in 1997 the budget benefited from the increase in revenue collection brought by the only year of real GDP growth (1.3 percent on an annual basis) since independence. However, the decline in the deficit was immediately reversed in 1998 when the effects of the Russian crisis hit Moldova hardly. The main cause of the large unbalance was the upsurge in public spending while total revenues remained nearly stable. Finally, in 1999 Moldova achieved a low fiscal deficit level. This result was achieved through a large retrenchment of commitments in almost all expenditure categories, including the social sector and public investment. At the same time, however, general government revenues fell sharply, primarily as a result of the weak macroeconomic performance.
Moldova: Fiscal Deficit According to Different Definitions, 1993-99
(In percent of GDP)
Coefficient of variation. Ratio of standard deviation to the average in the 1994-99 period, in percent.
Moldova: Fiscal Deficit According to Different Definitions, 1993-99
(In percent of GDP)
| 1993 | 1994 | 1995 | 1996 | 1997 | 1998 | 1999 | cv 1/ | |||
|---|---|---|---|---|---|---|---|---|---|---|
| Including grants | ||||||||||
| With project loan spending | ||||||||||
| Total - cash | 7.6 | 9.1 | 5.8 | 7.0 | 9.3 | 5.7 | 5.4 | 22.6 | ||
| Total - commitment | 6.4 | 11.1 | 7.7 | 11.2 | 6.4 | 10.6 | 5.3 | 26.9 | ||
| Primary - cash | 6.6 | 6.1 | 2.3 | 4.3 | 5.6 | 1.6 | −1.2 | 80.4 | ||
| Primary - commitment | 5.4 | 8.1 | 4.2 | 8.4 | 2.7 | 6.5 | −1.3 | 70.9 | ||
| Without project Loan spending | ||||||||||
| Total - cash | 7.6 | 9.1 | 5.8 | 7.0 | 9.2 | 3.6 | 2.8 | 39.5 | ||
| Total - commitment | 6.4 | 11.1 | 7.7 | 11.2 | 6.3 | 8.6 | 2.6 | 37.0 | ||
| Primary - cash | 6.6 | 6.1 | 2.3 | 4.3 | 5.5 | −0.4 | −3.9 | 151.7 | ||
| Primary - commitment | 5.4 | 8.1 | 4.2 | 8.4 | 2.6 | 4.5 | −4.0 | 103.8 | ||
| Excluding grants | ||||||||||
| With project loan spending | ||||||||||
| Total - cash | 7.6 | 9.5 | 6.1 | 7.0 | 9.3 | 5.7 | 6.3 | 20.7 | ||
| Total - commitment | 6.4 | 11.5 | 8.0 | 11.2 | 6.4 | 10.6 | 6.2 | 24.3 | ||
| Primary - cash | 6.6 | 6.5 | 2.6 | 4.3 | 5.6 | 1.6 | −0.3 | 68.7 | ||
| Primary - commitment | 5.4 | 8.5 | 4.5 | 8.4 | 2.7 | 6.5 | −0.4 | 63.1 | ||
| Without project loan spending | ||||||||||
| Fiscal deficit - cash | 7.6 | 9.5 | 6.1 | 7.0 | 9.2 | 3.6 | 3.6 | 35.9 | ||
| Fiscal deficit - commitment | 6.4 | 11.5 | 8.0 | 11.2 | 6.3 | 8.6 | 3.5 | 33.4 | ||
| Primary deficit - cash | 6.6 | 6.5 | 2.6 | 4.3 | 5.5 | −0.4 | −3.0 | 129.1 | ||
| Primary deficit - commitment | 5.4 | 8.5 | 4.5 | 8.4 | 2.6 | 4.5 | −3.1 | 92.3 | ||
Coefficient of variation. Ratio of standard deviation to the average in the 1994-99 period, in percent.
Moldova: Fiscal Deficit According to Different Definitions, 1993-99
(In percent of GDP)
| 1993 | 1994 | 1995 | 1996 | 1997 | 1998 | 1999 | cv 1/ | |||
|---|---|---|---|---|---|---|---|---|---|---|
| Including grants | ||||||||||
| With project loan spending | ||||||||||
| Total - cash | 7.6 | 9.1 | 5.8 | 7.0 | 9.3 | 5.7 | 5.4 | 22.6 | ||
| Total - commitment | 6.4 | 11.1 | 7.7 | 11.2 | 6.4 | 10.6 | 5.3 | 26.9 | ||
| Primary - cash | 6.6 | 6.1 | 2.3 | 4.3 | 5.6 | 1.6 | −1.2 | 80.4 | ||
| Primary - commitment | 5.4 | 8.1 | 4.2 | 8.4 | 2.7 | 6.5 | −1.3 | 70.9 | ||
| Without project Loan spending | ||||||||||
| Total - cash | 7.6 | 9.1 | 5.8 | 7.0 | 9.2 | 3.6 | 2.8 | 39.5 | ||
| Total - commitment | 6.4 | 11.1 | 7.7 | 11.2 | 6.3 | 8.6 | 2.6 | 37.0 | ||
| Primary - cash | 6.6 | 6.1 | 2.3 | 4.3 | 5.5 | −0.4 | −3.9 | 151.7 | ||
| Primary - commitment | 5.4 | 8.1 | 4.2 | 8.4 | 2.6 | 4.5 | −4.0 | 103.8 | ||
| Excluding grants | ||||||||||
| With project loan spending | ||||||||||
| Total - cash | 7.6 | 9.5 | 6.1 | 7.0 | 9.3 | 5.7 | 6.3 | 20.7 | ||
| Total - commitment | 6.4 | 11.5 | 8.0 | 11.2 | 6.4 | 10.6 | 6.2 | 24.3 | ||
| Primary - cash | 6.6 | 6.5 | 2.6 | 4.3 | 5.6 | 1.6 | −0.3 | 68.7 | ||
| Primary - commitment | 5.4 | 8.5 | 4.5 | 8.4 | 2.7 | 6.5 | −0.4 | 63.1 | ||
| Without project loan spending | ||||||||||
| Fiscal deficit - cash | 7.6 | 9.5 | 6.1 | 7.0 | 9.2 | 3.6 | 3.6 | 35.9 | ||
| Fiscal deficit - commitment | 6.4 | 11.5 | 8.0 | 11.2 | 6.3 | 8.6 | 3.5 | 33.4 | ||
| Primary deficit - cash | 6.6 | 6.5 | 2.6 | 4.3 | 5.5 | −0.4 | −3.0 | 129.1 | ||
| Primary deficit - commitment | 5.4 | 8.5 | 4.5 | 8.4 | 2.6 | 4.5 | −3.1 | 92.3 | ||
Coefficient of variation. Ratio of standard deviation to the average in the 1994-99 period, in percent.
Moldova: General Government Fiscal Deficit Trends, 1993-1999
(In percent of GDP)
Citation: IMF Staff Country Reports 2001, 022; 10.5089/9781451824957.002.A003
Sources: Moldovan authorities; and Fund staff estimates.79. The accumulation of arrears on domestic payments has been used to smooth the fiscal deficit fluctuations over the entire period. In general, the overall fiscal deficit on cash basis shows a less volatile time profile20 relative to the commitment deficit (Table 14). In fact, the accumulation of domestic expenditure arrears has been widely used as a deficit financing item by Moldovan authorities when revenues were not sufficient to pay expenditure obligations. As a result, a large stock of arrears, mostly on social benefits and wages, were built up during the period, reaching MdI 1.1 billion in the end-year.21
80. The large size of fiscal consolidation can be observed in the primary fiscal deficit. This is a result of the growing incidence of public debt service in total public outlays, which, in turn, is a consequence of the sharp increase in both domestic and external debt.22 The fiscal deficit, excluding interest spending, shows the steepest decline among the different fiscal balance indicators. On cash basis, the primary balance reached a surplus of 1.2 percent of GDP, up from a deficit of 6.6 percent of GDP in 1993. The most rapid decline in the indicator can be observed for the primary fiscal balance on a commitment basis, which reached a surplus of 1.3 percent of GDP, after a peak deficit of nearly 8 percent of GDP in 1994.
81. When the deficit is measured excluding grants and project loan spending, its downward trend is steeper, and the size of the 1999 consolidation is larger, than in any other case. This evidence suggests that the fiscal adjustment has been based mostly on discretionary fiscal policy measures. On a cash basis, the total deficit went down to 3.6 percent of GDP, from a peak of 9.5 percent of GDP in 1994. On a commitment basis, it reached 3.5 percent of GDP in the end-year, down from nearly 12 percent in 1994. The corresponding primary surplus reached 3 percent of GDP on a cash basis and 3.1 percent of GDP on a commitment deficit in 1999, up from a deficit of 6.5 percent and 8.5 percent of GDP in 1994, respectively.
82. The observed trends in fiscal deficit resulted from different trends in the budget components. Until 1998, revenues remained relatively stable as a share of GDP, in particular when defined exclusive of grants (Table 15). On the expenditure side, commitments remained well above 40 percent of GDP, but payments fluctuated between 39 and 43 percent of GDP. In fact, the increase in many public spending programs, especially in the social sector was very difficult to control. The gap between social contributions and Social Fund expenditures, a crucial item in the Moldovan budget, was widened since 1996 and reached a peak of around 4 percent of GDP in 1997 (Figure 6)23 In 1999, the fall in total revenues was more than balanced by the curtailment of expenditure commitments. Total revenues, excluding grants, fell to 25.4 percent of GDP, down from 32.3 percent in 1998, in part as a consequence of the drastic reduction in the in-kind collection of social contributions and the fall in offsetting operations.24 As a consequence, the authorities decided to cut public expenditure commitments. In 1999, total expenditure fell to nearly 33 percent of GDP and primary expenditure reached 26 percent of GDP.
Moldova: Revenues and Expenditures of the General Government Budget According to Different Definitions, 1993-99
(In percent of GDP)
Including net lending.
Moldova: Revenues and Expenditures of the General Government Budget According to Different Definitions, 1993-99
(In percent of GDP)
| 1993 | 1994 | 1995 | 1996 | 1997 | 1998 | 1999 | ||
|---|---|---|---|---|---|---|---|---|
| Revenues | ||||||||
| Including grants | 22.8 | 33.5 | 33.9 | 31.7 | 33.9 | 33.1 | 27.3 | |
| Excluding grants | 22.8 | 32.7 | 33.2 | 31.3 | 31.5 | 32.3 | 25.4 | |
| Expenditures 1/ | ||||||||
| Total - cash | 30.5 | 42.6 | 39.7 | 38.7 | 43.2 | 38.7 | 32.7 | |
| Total - commitment | 31.7 | 44.6 | 41.6 | 42.8 | 40.3 | 43.7 | 32.6 | |
| Primary - cash | 29.4 | 39.7 | 36.2 | 36.0 | 39.5 | 34.7 | 26.1 | |
| Primary - commitment | 30.6 | 41.7 | 38.1 | 40.1 | 36.6 | 39.6 | 26.0 | |
Including net lending.
Moldova: Revenues and Expenditures of the General Government Budget According to Different Definitions, 1993-99
(In percent of GDP)
| 1993 | 1994 | 1995 | 1996 | 1997 | 1998 | 1999 | ||
|---|---|---|---|---|---|---|---|---|
| Revenues | ||||||||
| Including grants | 22.8 | 33.5 | 33.9 | 31.7 | 33.9 | 33.1 | 27.3 | |
| Excluding grants | 22.8 | 32.7 | 33.2 | 31.3 | 31.5 | 32.3 | 25.4 | |
| Expenditures 1/ | ||||||||
| Total - cash | 30.5 | 42.6 | 39.7 | 38.7 | 43.2 | 38.7 | 32.7 | |
| Total - commitment | 31.7 | 44.6 | 41.6 | 42.8 | 40.3 | 43.7 | 32.6 | |
| Primary - cash | 29.4 | 39.7 | 36.2 | 36.0 | 39.5 | 34.7 | 26.1 | |
| Primary - commitment | 30.6 | 41.7 | 38.1 | 40.1 | 36.6 | 39.6 | 26.0 | |
Including net lending.
Moldova: Social Fund Contributions and Expenditures, 1993-99
(In percent of GDP)
Citation: IMF Staff Country Reports 2001, 022; 10.5089/9781451824957.002.A003
Sources: Moldovan authorities; and Fund staff estimates.1/ Social Fund contributions minus Social Fund expenditures.C. Composition of Revenues and Expenditures
83. The composition of revenues and expenditures has changed sharply in the 1994-99 period as a result of the deep revision in fiscal policy that has taken place since independence (Tables 16 and Table 17). Important reforms of the tax system were introduced in order to broaden the tax base, to simplify tax administration, and to bring the tax rates in line with the ones prevailing in other countries. Overall, direct taxes (including profit tax and personal income tax) fell as a share of total general government revenues, indirect taxes25 remained relatively stable, social contributions decreased slightly, and other revenues26 increased (Figure 7). The rise in the share of the latter is mostly due to improvements in the collection of foreign trade taxes and higher nontax revenues (including net profits transferred from the central bank to the state budget). Total expenditures as well, went through a significant compositional change (Figure 8). The share of social spending in the total fell to 30 percent in 1999, down from 47 percent in 1993. Most of this decline took place in the 1994-98 period. Social spending reached a share of 33 percent in terms of total expenditures in 1998; a reduction by 14 percent compared with 1993. Interest spending exhibited an uninterrupted upward trend in the same period, reaching 20 percent of total spending in the end-year, up from 4 percent in 1994. Social Fund expenditures were also increasingly important in the general government budget because of the growth in both the number of beneficiaries and the value of the benefits they received. Finally, the incidence of the remaining expenditure categories (including public investments and project loan spending) fell to slightly more than 10 percent of total public outlays. A large share of total reduction took place in 1999, when the total weight of capital outlays fell by 3 percent relative to 1998 as a result of a large cut in public investment programs.
Moldova: Revenues and Expenditures of the General Government Budget, 1993-99
(Cash basis, in percent of GDP)
Includes profit tax and personal income tax.
Include VAT and excise tax.
Includes land tax, real estate tax, natural resources tax, state tax, and private tax.
Includes public expenditure for health care, education and some minor social assistance schemes.
Includes administrative, military, indexation of deposits, environment, and unallocated expenditures.
Moldova: Revenues and Expenditures of the General Government Budget, 1993-99
(Cash basis, in percent of GDP)
| 1993 | 1994 | 1995 | 1996 | 1997 | 1998 | 1999 | ||||
|---|---|---|---|---|---|---|---|---|---|---|
| Revenues | 22.8 | 33.5 | 33.9 | 31.7 | 33.9 | 33.1 | 27.3 | |||
| Tax revenues | 21.0 | 26.4 | 28.8 | 27.4 | 29.9 | 28.3 | 22.2 | |||
| Direct taxes1/ | 6.2 | 8.7 | 7.9 | 6.5 | 5.2 | 3.9 | 3.3 | |||
| Indirect2/ | 7.4 | 7.9 | 10.0 | 9.2 | 14.4 | 14.5 | 10.1 | |||
| Foreign trade taxes | 0.9 | 0.5 | 0.7 | 1.1 | 1.3 | 1.1 | 1.7 | |||
| Social fund contributions | 5.8 | 8.6 | 8.5 | 8.6 | 7.2 | 7.6 | 5.7 | |||
| Other taxes 3/ | 0.8 | 0.7 | 1.7 | 2.0 | 1.8 | 1.3 | 1.5 | |||
| Non-tax revenues and grants | 1.8 | 7.1 | 5.1 | 4.3 | 4.0 | 4.8 | 5.1 | |||
| Expenditures and net lending | 30.5 | 42.6 | 39.7 | 38.7 | 43.2 | 38.7 | 32.7 | |||
| Expenditures | 29.8 | 40.2 | 38.8 | 40.2 | 42.9 | 38.4 | 33.1 | |||
| National economy | 1.4 | 2.4 | 2.2 | 2.0 | 3.6 | 2.7 | 2.1 | |||
| Social sphere4/ | 14.3 | 17.3 | 14.8 | 17.3 | 16.4 | 12.9 | 9.8 | |||
| Interest | 1.1 | 3.0 | 3.5 | 2.8 | 3.7 | 4.1 | 6.6 | |||
| Domestic | 0.8 | 2.2 | 2.3 | 1.5 | 2.1 | 2.4 | 3.2 | |||
| Foreign | 0.2 | 0.8 | 1.2 | 1.3 | 1.6 | 1.7 | 3.4 | |||
| Capital expenditures | 2.8 | 2.0 | 1.8 | 1.7 | 2.3 | 2.0 | 0.8 | |||
| Other expenditures5/ | 5.8 | 7.1 | 7.0 | 7.5 | 6.4 | 6.0 | 4.7 | |||
| Social fund expenditures | 4.4 | 8.2 | 8.6 | 8.7 | 10.4 | 8.8 | 6.5 | |||
| Project loan spending | 0.0 | 0.0 | 0.0 | 0.0 | 0.1 | 2.0 | 2.7 | |||
| Net lending | 0.5 | 2.0 | 0.9 | −1.5 | 0.3 | 0.3 | −0.3 | |||
Includes profit tax and personal income tax.
Include VAT and excise tax.
Includes land tax, real estate tax, natural resources tax, state tax, and private tax.
Includes public expenditure for health care, education and some minor social assistance schemes.
Includes administrative, military, indexation of deposits, environment, and unallocated expenditures.
Moldova: Revenues and Expenditures of the General Government Budget, 1993-99
(Cash basis, in percent of GDP)
| 1993 | 1994 | 1995 | 1996 | 1997 | 1998 | 1999 | ||||
|---|---|---|---|---|---|---|---|---|---|---|
| Revenues | 22.8 | 33.5 | 33.9 | 31.7 | 33.9 | 33.1 | 27.3 | |||
| Tax revenues | 21.0 | 26.4 | 28.8 | 27.4 | 29.9 | 28.3 | 22.2 | |||
| Direct taxes1/ | 6.2 | 8.7 | 7.9 | 6.5 | 5.2 | 3.9 | 3.3 | |||
| Indirect2/ | 7.4 | 7.9 | 10.0 | 9.2 | 14.4 | 14.5 | 10.1 | |||
| Foreign trade taxes | 0.9 | 0.5 | 0.7 | 1.1 | 1.3 | 1.1 | 1.7 | |||
| Social fund contributions | 5.8 | 8.6 | 8.5 | 8.6 | 7.2 | 7.6 | 5.7 | |||
| Other taxes 3/ | 0.8 | 0.7 | 1.7 | 2.0 | 1.8 | 1.3 | 1.5 | |||
| Non-tax revenues and grants | 1.8 | 7.1 | 5.1 | 4.3 | 4.0 | 4.8 | 5.1 | |||
| Expenditures and net lending | 30.5 | 42.6 | 39.7 | 38.7 | 43.2 | 38.7 | 32.7 | |||
| Expenditures | 29.8 | 40.2 | 38.8 | 40.2 | 42.9 | 38.4 | 33.1 | |||
| National economy | 1.4 | 2.4 | 2.2 | 2.0 | 3.6 | 2.7 | 2.1 | |||
| Social sphere4/ | 14.3 | 17.3 | 14.8 | 17.3 | 16.4 | 12.9 | 9.8 | |||
| Interest | 1.1 | 3.0 | 3.5 | 2.8 | 3.7 | 4.1 | 6.6 | |||
| Domestic | 0.8 | 2.2 | 2.3 | 1.5 | 2.1 | 2.4 | 3.2 | |||
| Foreign | 0.2 | 0.8 | 1.2 | 1.3 | 1.6 | 1.7 | 3.4 | |||
| Capital expenditures | 2.8 | 2.0 | 1.8 | 1.7 | 2.3 | 2.0 | 0.8 | |||
| Other expenditures5/ | 5.8 | 7.1 | 7.0 | 7.5 | 6.4 | 6.0 | 4.7 | |||
| Social fund expenditures | 4.4 | 8.2 | 8.6 | 8.7 | 10.4 | 8.8 | 6.5 | |||
| Project loan spending | 0.0 | 0.0 | 0.0 | 0.0 | 0.1 | 2.0 | 2.7 | |||
| Net lending | 0.5 | 2.0 | 0.9 | −1.5 | 0.3 | 0.3 | −0.3 | |||
Includes profit tax and personal income tax.
Include VAT and excise tax.
Includes land tax, real estate tax, natural resources tax, state tax, and private tax.
Includes public expenditure for health care, education and some minor social assistance schemes.
Includes administrative, military, indexation of deposits, environment, and unallocated expenditures.
Moldova: Breakdown of Revenues and Expenditures of the General Government Budget, 1993-99
(Cash basis, in percent of total revenues and total expenditure and net lending)
Includes profit tax and personal income tax.
Include VAT and excise tax.
Includes land tax, real estate tax, natural resources tax, state tax, and private tax.
Includes public expenditure for health care, education and some minor social assistance schemes.
Includes administrative, military, indexation of deposits, environment, and unallocated expenditures.
Moldova: Breakdown of Revenues and Expenditures of the General Government Budget, 1993-99
(Cash basis, in percent of total revenues and total expenditure and net lending)
| 1993 | 1994 | 1995 | 1996 | 1997 | 1998 | 1999 | ||||
|---|---|---|---|---|---|---|---|---|---|---|
| Revenues | 100.0 | 100.0 | 100.0 | 100.0 | 100.0 | 100.0 | 100.0 | |||
| Tax revenues | 92.0 | 78.7 | 84.9 | 86.4 | 88.2 | 85.5 | 81.4 | |||
| Direct taxes1/ | 27.0 | 26.0 | 23.2 | 20.7 | 15.3 | 11.7 | 12.1 | |||
| Indirect2/ | 32.4 | 23.5 | 29.5 | 29.0 | 42.5 | 43.7 | 37.0 | |||
| Foreign trade taxes | 3.9 | 1.6 | 2.0 | 3.4 | 3.7 | 3.2 | 6.2 | |||
| Social fund contributions | 25.4 | 25.6 | 25.0 | 27.2 | 21.2 | 22.8 | 20.9 | |||
| Other taxes3/ | 3.5 | 2.0 | 5.1 | 6.2 | 5.4 | 4.0 | 5.3 | |||
| Non-tax revenues and grants | 7.8 | 21.3 | 15.1 | 13.6 | 11.8 | 14.5 | 18.6 | |||
| Expenditures and net lending | 100.0 | 100.0 | 100.0 | 100.0 | 100.0 | 100.0 | 100.0 | |||
| Expenditures | 97.7 | 94.2 | 97.8 | 103.8 | 99.3 | 99.3 | 101.0 | |||
| National economy | 4.5 | 5.7 | 5.6 | 5.2 | 8.2 | 7.0 | 6.4 | |||
| Social sphere 4/ | 47.0 | 40.6 | 37.2 | 44.8 | 38.0 | 33.3 | 29.8 | |||
| Interest | 3.5 | 7.0 | 8.9 | 7.1 | 8.6 | 10.5 | 20.2 | |||
| Domestic | 2.8 | 5.1 | 5.8 | 3.9 | 4.9 | 6.1 | 9.8 | |||
| Foreign | 0.8 | 1.9 | 3.1 | 3.2 | 3.8 | 4.4 | 10.4 | |||
| Capital expenditures | 9.1 | 4.7 | 4.5 | 4.3 | 5.4 | 5.1 | 2.3 | |||
| Other expenditures5/ | 19.2 | 16.6 | 17.7 | 19.3 | 14.7 | 15.4 | 14.3 | |||
| Social fund expenditures | 14.3 | 19.3 | 21.7 | 22.4 | 24.2 | 22.7 | 19.8 | |||
| Project loan spending | 0.0 | 0.0 | 0.0 | 0.0 | 0.2 | 5.3 | 8.2 | |||
| Net lending | 1.5 | 4.7 | 2.4 | −4.0 | 0.7 | 0.8 | −1.0 | |||
Includes profit tax and personal income tax.
Include VAT and excise tax.
Includes land tax, real estate tax, natural resources tax, state tax, and private tax.
Includes public expenditure for health care, education and some minor social assistance schemes.
Includes administrative, military, indexation of deposits, environment, and unallocated expenditures.
Moldova: Breakdown of Revenues and Expenditures of the General Government Budget, 1993-99
(Cash basis, in percent of total revenues and total expenditure and net lending)
| 1993 | 1994 | 1995 | 1996 | 1997 | 1998 | 1999 | ||||
|---|---|---|---|---|---|---|---|---|---|---|
| Revenues | 100.0 | 100.0 | 100.0 | 100.0 | 100.0 | 100.0 | 100.0 | |||
| Tax revenues | 92.0 | 78.7 | 84.9 | 86.4 | 88.2 | 85.5 | 81.4 | |||
| Direct taxes1/ | 27.0 | 26.0 | 23.2 | 20.7 | 15.3 | 11.7 | 12.1 | |||
| Indirect2/ | 32.4 | 23.5 | 29.5 | 29.0 | 42.5 | 43.7 | 37.0 | |||
| Foreign trade taxes | 3.9 | 1.6 | 2.0 | 3.4 | 3.7 | 3.2 | 6.2 | |||
| Social fund contributions | 25.4 | 25.6 | 25.0 | 27.2 | 21.2 | 22.8 | 20.9 | |||
| Other taxes3/ | 3.5 | 2.0 | 5.1 | 6.2 | 5.4 | 4.0 | 5.3 | |||
| Non-tax revenues and grants | 7.8 | 21.3 | 15.1 | 13.6 | 11.8 | 14.5 | 18.6 | |||
| Expenditures and net lending | 100.0 | 100.0 | 100.0 | 100.0 | 100.0 | 100.0 | 100.0 | |||
| Expenditures | 97.7 | 94.2 | 97.8 | 103.8 | 99.3 | 99.3 | 101.0 | |||
| National economy | 4.5 | 5.7 | 5.6 | 5.2 | 8.2 | 7.0 | 6.4 | |||
| Social sphere 4/ | 47.0 | 40.6 | 37.2 | 44.8 | 38.0 | 33.3 | 29.8 | |||
| Interest | 3.5 | 7.0 | 8.9 | 7.1 | 8.6 | 10.5 | 20.2 | |||
| Domestic | 2.8 | 5.1 | 5.8 | 3.9 | 4.9 | 6.1 | 9.8 | |||
| Foreign | 0.8 | 1.9 | 3.1 | 3.2 | 3.8 | 4.4 | 10.4 | |||
| Capital expenditures | 9.1 | 4.7 | 4.5 | 4.3 | 5.4 | 5.1 | 2.3 | |||
| Other expenditures5/ | 19.2 | 16.6 | 17.7 | 19.3 | 14.7 | 15.4 | 14.3 | |||
| Social fund expenditures | 14.3 | 19.3 | 21.7 | 22.4 | 24.2 | 22.7 | 19.8 | |||
| Project loan spending | 0.0 | 0.0 | 0.0 | 0.0 | 0.2 | 5.3 | 8.2 | |||
| Net lending | 1.5 | 4.7 | 2.4 | −4.0 | 0.7 | 0.8 | −1.0 | |||
Includes profit tax and personal income tax.
Include VAT and excise tax.
Includes land tax, real estate tax, natural resources tax, state tax, and private tax.
Includes public expenditure for health care, education and some minor social assistance schemes.
Includes administrative, military, indexation of deposits, environment, and unallocated expenditures.
Moldova: Breakdown of General Government Revenues in 1994, 1998, and 1999
(In percent of total revenues)
Citation: IMF Staff Country Reports 2001, 022; 10.5089/9781451824957.002.A003
Source: Moldovan authorities; and Fund staff estimates.1/ Includes foreign trade tax, property and land taxes, and non tax revenues and grants.Moldova: Breakdown of General Government Expenditures in 1994, 1998, and 1999
(In percent of total expenditures)
Citation: IMF Staff Country Reports 2001, 022; 10.5089/9781451824957.002.A003
Source: Moldovan authorities; and Fund staff estimates.1/ Includes project loan spending, expenditures for national economy, capital expenditures, net lending, administrative, military, and other unallocated categories.84. As a result of the 1999 fiscal adjustment, the structure of general government revenues was largely modified, while the composition of public spending changed less relative to 1998. On revenue side, the share of indirect taxes fell to 37 percent of total revenues, down from 44 percent in 1998. Direct taxes and social contributions remained almost stable at their 1998 levels, while the weight of the remaining revenues rose sharply. On expenditure side, to the contrary, all categories exhibited small changes in their share to total spending, relative to 1998. Nondiscretionary interest spending, however, reached 20 percent of the total, as a consequence of the growing burden of public debt service and both capital outlays and project loan spending significantly reduced their incidence on the total.
D. Size and Composition of Fiscal Adjustment: Methodology
85. According to the economic literature, both the size and the composition of fiscal adjustment are relevant to its long-lasting success. A good quality fiscal adjustment can trigger positive macroeconomic effects that lead to sustainable growth. In general, fiscal adjustments are more likely to be successful when they rely on non-priority expenditure cuts and small, or no, tax increases, with negligible disincentive impact (see Box 1).
Quality of Fiscal Consolidation
According to country experiences, both the adjustment size and its composition are relevant to assess the quality of fiscal consolidation (Tanzi, 1989; Abed et al., 1998). In order to be successful, the reduction in fiscal deficit has to be durable over time and should have a positive impact on public policy efficiency. In general, fiscal adjustments that rely mostly on revenue increases, resulting from higher tax ratios with strong microeconomic disincentive effects or based on across-the-board cuts in expenditures, including capital spending, are less likely to be long-lasting. On the contrary, fiscal retrenchments based on the curtailment of selected expenditure categories, including wages and transfers and non-productive expenditure items, are more likely to be successful in the long run (Mackenzie, Orsmond and Gerson, 1997). The positive impact of fiscal adjustments is especially strong when the tax burden on households is kept stable, or even reduced. The reason why the latter type of adjustment is likely to be permanent and more conducive to growth is based on several well known arguments (Alesina and Perotti, 1997). First, large fiscal adjustment may have important credibility effects that will decrease the size of public debt service as a result of reduced risk premia on interest rates. Second, expenditure cuts and a reduction in the size of government could raise consumption, as they generate expectations of lower taxes in the future. Thirdly, a small fiscal deficit and low tax rates could have a positive impact on both labor supply and demand (e.g., by reducing the disincentive to work and the cost of labor, respectively). In addition, lower production costs can enhance the competitive position of the country in the world market, with a direct positive impact on the external position.
86. It is therefore important to measure the composition of the fiscal adjustment in Moldova, in order to assess the quality of the consolidation that took place in the 1994-99 period. A simple statistical approach to the measurement of the composition of fiscal adjustment requires the definition of:
the period when the consolidation occurred. In the case of Moldova the adjustment took place primarily in one single year, during 1999. However, a moderate downward trend, although discontinuous, in many fiscal deficit indicators can be observed in the 1994-99 period. Thus, two alternative periods can be chosen in order to assess the size and the composition of the adjustment process: 1994-99 and 1998-99.
the measure of fiscal position. Alternative measures of change in fiscal stance includes overall and primary deficit both on a cash and a commitment basis. Primary deficit measures are more suited to be linked to discretionary changes in fiscal policy than overall deficit. Grants and project loan spending should be also excluded when the actual change in the fiscal stance is to be measured. In fact, the former revenues and expenditure items are related to additional, extraordinary resources transferred to the budget and cannot be considered completely under the control of the government in terms of fiscal policy.
the size of the adjustment. A simple measure of the size of adjustment is given by:
Δt,p = Dt+p - Dt
where D is a measure of fiscal deficit as a ratio to GDP, Δt,p is the size of adjustment, t is the year when the consolidation process started and p is the length of the consolidation period.
a measure of the factors contributing to fiscal adjustment. The above definition of fiscal adjustment size can be decomposed into the effects of the change in the ratio of public spending to GDP (G) and the change in the revenues to GDP ratio (T), with i and j being the indexes for a generic expenditure and revenues category, respectively:
hence, the contribution of expenditures27 to total fiscal adjustment (α) is:
and the relative contribution (β) of each expenditure28 category i to the contribution of public outlays is:
E. Empirical Results
87. The size of fiscal adjustment is large, although it differs widely depending on the definition of fiscal unbalance adopted. For the 1994-99 period, the estimates point at a consolidation not smaller than 4 percent of GDP in the lowest case, when total cash deficit includes grants. In the highest case, the size of consolidation in primary commitment deficit excluding grants and project loan spending is as high as 12 percent of GDP (Table 18). When the sample is restricted to the 1998-99 period, the size of fiscal consolidation falls to nearly zero, in the case of cash total deficit, if grants and project loan spending are excluded. In the highest case (primary commitment deficit including grants and project loan spending), the adjustment reaches 9.4 percent of GDP. The size of fiscal consolidation is larger for primary deficit than for total deficit, as non-interest spending contributed to the most relevant share of public expenditure curtailment. Moreover, the size of fiscal adjustment grows when grants and project loan expenditures are excluded from the definition of fiscal budget. Finally, the largest size of budget consolidation can be observed when the deficit is defined on a commitment basis, as opposed to cash deficit.
Moldova: Size of Fiscal Adjustment and Contribution of Revenues and Expenditures, 1994-99 and 1998-99
(In percent of GDP)
Contribution of public expenditures to the fiscal adjustment.
Moldova: Size of Fiscal Adjustment and Contribution of Revenues and Expenditures, 1994-99 and 1998-99
(In percent of GDP)
| 1994-99 | 1998-99 | ||||||||
|---|---|---|---|---|---|---|---|---|---|
| Size | Contribution | Size | Contribution | ||||||
| Revenues | Expenditures | α 1/ | Revenues | Expenditures | α 1/ | ||||
| Including grants and project loan spending | |||||||||
| Total - cash | −3.7 | 6.2 | −9.9 | 2.7 | −0.2 | 5.8 | −6.0 | 25.8 | |
| Total - commitment | −5.8 | 6.2 | −12.0 | 2.1 | −5.3 | 5.8 | −11.0 | 2.1 | |
| Primary - cash | −7.3 | 6.2 | −13.5 | 1.9 | −2.5 | 5.8 | −8.5 | 3.1 | |
| Primary - commitment | −9.4 | 6.2 | −15.6 | 1.7 | −7.8 | 5.8 | −13.6 | 1.7 | |
| Excluding grants and project loan spending | |||||||||
| Total - cash | −5.8 | 7.3 | −9.9 | 1.7 | 0.0 | 6.9 | −6.0 | −644.3 | |
| Total - commitment | −7.9 | 7.3 | −12.0 | 1.5 | −5.0 | 6.9 | −11.0 | 2.2 | |
| Primary - cash | −9.4 | 7.3 | −13.5 | 1.4 | −2.5 | 6.9 | −8.5 | 3.4 | |
| Primary - commitment | −11.6 | 7.3 | −15.6 | 1.4 | −7.6 | 6.9 | −13.6 | 1.8 | |
Contribution of public expenditures to the fiscal adjustment.
Moldova: Size of Fiscal Adjustment and Contribution of Revenues and Expenditures, 1994-99 and 1998-99
(In percent of GDP)
| 1994-99 | 1998-99 | ||||||||
|---|---|---|---|---|---|---|---|---|---|
| Size | Contribution | Size | Contribution | ||||||
| Revenues | Expenditures | α 1/ | Revenues | Expenditures | α 1/ | ||||
| Including grants and project loan spending | |||||||||
| Total - cash | −3.7 | 6.2 | −9.9 | 2.7 | −0.2 | 5.8 | −6.0 | 25.8 | |
| Total - commitment | −5.8 | 6.2 | −12.0 | 2.1 | −5.3 | 5.8 | −11.0 | 2.1 | |
| Primary - cash | −7.3 | 6.2 | −13.5 | 1.9 | −2.5 | 5.8 | −8.5 | 3.1 | |
| Primary - commitment | −9.4 | 6.2 | −15.6 | 1.7 | −7.8 | 5.8 | −13.6 | 1.7 | |
| Excluding grants and project loan spending | |||||||||
| Total - cash | −5.8 | 7.3 | −9.9 | 1.7 | 0.0 | 6.9 | −6.0 | −644.3 | |
| Total - commitment | −7.9 | 7.3 | −12.0 | 1.5 | −5.0 | 6.9 | −11.0 | 2.2 | |
| Primary - cash | −9.4 | 7.3 | −13.5 | 1.4 | −2.5 | 6.9 | −8.5 | 3.4 | |
| Primary - commitment | −11.6 | 7.3 | −15.6 | 1.4 | −7.6 | 6.9 | −13.6 | 1.8 | |
Contribution of public expenditures to the fiscal adjustment.
88. The estimate of the extent of fiscal consolidation is robust to the elimination of the cyclical factors that can affect the deficit. The size of the adjustment grows when measured in terms of a cyclically adjusted budget indicator (Chand, 1991).29 The latter can be defined as the level of fiscal unbalance that results, once the effects on government revenues and expenditures of cyclical macroeconomic fluctuations are taken into account. The changes in the adjusted fiscal deficit can be associated with the changes in the fiscal stance that reflect exclusively policy decisions. For any indicator of fiscal unbalance, the fiscal adjustment measured by the revised indicator is larger than the one based on the actual deficit (Table 19). In the period 1994-99, and to a lesser extent in 1998-99, the impact of public policy on fiscal retrenchment has been partially compensated by negative cyclical macroeconomic factors. Had those factor not been in place, the size of fiscal consolidation would have been larger.
Moldova: Size of Fiscal Adjustment, Deficit Corrected for Cyclical Effects, 1994-99 and 1998-99.
(In percent of GDP)
Including grants and project loan spending.
Excluding grants and project loan spending.
Fiscal deficit net of cyclical effects.
Moldova: Size of Fiscal Adjustment, Deficit Corrected for Cyclical Effects, 1994-99 and 1998-99.
(In percent of GDP)
| 1994-99 | 1998-99 | ||||||
|---|---|---|---|---|---|---|---|
| Actual | Adjusted 3/ | Difference | Actual | Adjusted 3/ | Difference | ||
| Overall | |||||||
| Cash1/ | −3.7 | −6.5 | 2.9 | −0.2 | −4.9 | 4.7 | |
| Commitment 1/ | −5.5 | −13.8 | 8.0 | −5.3 | −6.9 | 1.6 | |
| Cash2/ | −5.8 | −10.1 | 4.3 | 0.0 | −0.3 | 0.3 | |
| Commitment2/ | −7.9 | −12.7 | 4.7 | −5.0 | −5.7 | 0.7 | |
| Primary | |||||||
| Cash 1/ | −7.3 | −14.5 | 7.2 | −2.8 | −4.0 | 1.3 | |
| Commitment1/ | −9.4 | −17.1 | 7.7 | −7.8 | −9.5 | 1.7 | |
| Cash2/ | −9.4 | −13.4 | 4.0 | −2.5 | −2.9 | 0.3 | |
| Commitment2/ | −11.6 | −16.0 | 4.4 | −7.6 | −8.3 | 0.7 | |
Including grants and project loan spending.
Excluding grants and project loan spending.
Fiscal deficit net of cyclical effects.
Moldova: Size of Fiscal Adjustment, Deficit Corrected for Cyclical Effects, 1994-99 and 1998-99.
(In percent of GDP)
| 1994-99 | 1998-99 | ||||||
|---|---|---|---|---|---|---|---|
| Actual | Adjusted 3/ | Difference | Actual | Adjusted 3/ | Difference | ||
| Overall | |||||||
| Cash1/ | −3.7 | −6.5 | 2.9 | −0.2 | −4.9 | 4.7 | |
| Commitment 1/ | −5.5 | −13.8 | 8.0 | −5.3 | −6.9 | 1.6 | |
| Cash2/ | −5.8 | −10.1 | 4.3 | 0.0 | −0.3 | 0.3 | |
| Commitment2/ | −7.9 | −12.7 | 4.7 | −5.0 | −5.7 | 0.7 | |
| Primary | |||||||
| Cash 1/ | −7.3 | −14.5 | 7.2 | −2.8 | −4.0 | 1.3 | |
| Commitment1/ | −9.4 | −17.1 | 7.7 | −7.8 | −9.5 | 1.7 | |
| Cash2/ | −9.4 | −13.4 | 4.0 | −2.5 | −2.9 | 0.3 | |
| Commitment2/ | −11.6 | −16.0 | 4.4 | −7.6 | −8.3 | 0.7 | |
Including grants and project loan spending.
Excluding grants and project loan spending.
Fiscal deficit net of cyclical effects.
89. Public expenditure cuts have been the most important factor contributing to fiscal consolidation, while the net impact of revenue changes widened the deficit (Table 20). The fiscal adjustment relied mostly on expenditure cuts that ranged between 10 percent of GDP and 14 percent of GDP in the 1994-99 period and from 6 percent to 9 percent of GDP in the 1998-99 period. Total revenue changes raised the deficit by 6 percent of GDP (7 percent of GDP excluding grants) in both periods. The largest contribution of public expenditure to fiscal consolidation can be observed for primary deficit on a commitment basis, whatever the definition of the adjustment period.
Moldova: Composition of Cash Deficit Adjustment, Including Grants and Project Loan Spending, 1994-99 and 1998-99.
(In percent of GDP)
Includes profit tax and personal income tax.
Include VAT and excise tax.
Includes land tax, real estate tax, natural resources tax, state tax, and private tax.
Includes public expenditure for health care, education and some minor social assistance schemes.
Includes extrabudgetary funds, administrative, military, indexation of deposits, environment, and unallocated.
Residual term included to take into account of rounding errors.
Relative weights of revenue and expenditure categories to total revenue and expenditure contributions.
Ratio of relative to total contribution of revenues and expenditures.
Moldova: Composition of Cash Deficit Adjustment, Including Grants and Project Loan Spending, 1994-99 and 1998-99.
(In percent of GDP)
| 1994-99 | 1998-99 | ||||||||
|---|---|---|---|---|---|---|---|---|---|
| Contribution | β7/ | β/α8/ | Contribution | β7/ | β/α8/ | ||||
| Revenues | 6.2 | 100 | −171 | 5.8 | 100 | −2374 | |||
| Tax revenues | 4.2 | 67 | −114 | 6.0 | 105 | −2486 | |||
| Direct taxes1/ | 5.4 | 87 | −148 | 0.6 | 10 | −239 | |||
| Indirect2/ | −2.2 | −36 | 61 | 4.4 | 76 | −1799 | |||
| Foreign trade taxes | −1.1 | −18 | 31 | −0.6 | −11 | 260 | |||
| Social fund contributions | 2.9 | 46 | −79 | 1.8 | 32 | −760 | |||
| Other taxes3/ | −0.8 | −13 | 22 | −0.1 | −2 | 52 | |||
| Non-tax revenues and grants | 2.1 | 33 | −57 | −0.3 | −5 | 113 | |||
| Expenditures and net lending | −9.9 | 100 | 271 | −6.0 | 100 | 2465 | |||
| Expenditures | −7.1 | 72 | 194 | −5.4 | 90 | 2214 | |||
| National economy | −0.4 | 4 | 10 | −0.6 | 10 | 253 | |||
| Social sphere 4/ | −7.5 | 76 | 206 | −3.1 | 52 | 1283 | |||
| Interest | 3.6 | −37 | −99 | 2.5 | −43 | −1048 | |||
| Domestic | 1.0 | −10 | −28 | 0.8 | −14 | −345 | |||
| Foreign | 2.6 | −26 | −71 | 1.7 | −2S | −700 | |||
| Capital expenditures | −1.3 | 13 | 34 | −1.2 | 21 | 508 | |||
| Other expenditures5/ | −2.4 | 24 | 65 | −1.3 | 21 | 529 | |||
| Social fund expenditures | −1.7 | 18 | 47 | −2.3 | 39 | 954 | |||
| Project loan spending | 2.7 | −27 | −73 | 0.6 | −11 | −267 | |||
| Net lending | −2.3 | 24 | 64 | −0.6 | 10 | 253 | |||
| Residual6/ | −0.5 | 5 | 12 | 0.0 | 0 | −1 | |||
| Total size of adjustment | −3.7 | … | 100 | −0.2 | … | 100 | |||
Includes profit tax and personal income tax.
Include VAT and excise tax.
Includes land tax, real estate tax, natural resources tax, state tax, and private tax.
Includes public expenditure for health care, education and some minor social assistance schemes.
Includes extrabudgetary funds, administrative, military, indexation of deposits, environment, and unallocated.
Residual term included to take into account of rounding errors.
Relative weights of revenue and expenditure categories to total revenue and expenditure contributions.
Ratio of relative to total contribution of revenues and expenditures.
Moldova: Composition of Cash Deficit Adjustment, Including Grants and Project Loan Spending, 1994-99 and 1998-99.
(In percent of GDP)
| 1994-99 | 1998-99 | ||||||||
|---|---|---|---|---|---|---|---|---|---|
| Contribution | β7/ | β/α8/ | Contribution | β7/ | β/α8/ | ||||
| Revenues | 6.2 | 100 | −171 | 5.8 | 100 | −2374 | |||
| Tax revenues | 4.2 | 67 | −114 | 6.0 | 105 | −2486 | |||
| Direct taxes1/ | 5.4 | 87 | −148 | 0.6 | 10 | −239 | |||
| Indirect2/ | −2.2 | −36 | 61 | 4.4 | 76 | −1799 | |||
| Foreign trade taxes | −1.1 | −18 | 31 | −0.6 | −11 | 260 | |||
| Social fund contributions | 2.9 | 46 | −79 | 1.8 | 32 | −760 | |||
| Other taxes3/ | −0.8 | −13 | 22 | −0.1 | −2 | 52 | |||
| Non-tax revenues and grants | 2.1 | 33 | −57 | −0.3 | −5 | 113 | |||
| Expenditures and net lending | −9.9 | 100 | 271 | −6.0 | 100 | 2465 | |||
| Expenditures | −7.1 | 72 | 194 | −5.4 | 90 | 2214 | |||
| National economy | −0.4 | 4 | 10 | −0.6 | 10 | 253 | |||
| Social sphere 4/ | −7.5 | 76 | 206 | −3.1 | 52 | 1283 | |||
| Interest | 3.6 | −37 | −99 | 2.5 | −43 | −1048 | |||
| Domestic | 1.0 | −10 | −28 | 0.8 | −14 | −345 | |||
| Foreign | 2.6 | −26 | −71 | 1.7 | −2S | −700 | |||
| Capital expenditures | −1.3 | 13 | 34 | −1.2 | 21 | 508 | |||
| Other expenditures5/ | −2.4 | 24 | 65 | −1.3 | 21 | 529 | |||
| Social fund expenditures | −1.7 | 18 | 47 | −2.3 | 39 | 954 | |||
| Project loan spending | 2.7 | −27 | −73 | 0.6 | −11 | −267 | |||
| Net lending | −2.3 | 24 | 64 | −0.6 | 10 | 253 | |||
| Residual6/ | −0.5 | 5 | 12 | 0.0 | 0 | −1 | |||
| Total size of adjustment | −3.7 | … | 100 | −0.2 | … | 100 | |||
Includes profit tax and personal income tax.
Include VAT and excise tax.
Includes land tax, real estate tax, natural resources tax, state tax, and private tax.
Includes public expenditure for health care, education and some minor social assistance schemes.
Includes extrabudgetary funds, administrative, military, indexation of deposits, environment, and unallocated.
Residual term included to take into account of rounding errors.
Relative weights of revenue and expenditure categories to total revenue and expenditure contributions.
Ratio of relative to total contribution of revenues and expenditures.
90. According to the breakdown of total contributions by revenue and expenditure category, the composition of fiscal adjustment in Moldova is mostly consistent with a long-lasting budget consolidation30 (Figure 9 and Table 20). Cuts in social spending and in capital outlays and increases in the collection of indirect tax revenues are the most significant factors positively affecting the adjustment size, based on the overall deficit definition. Lower revenues from direct taxes and social contributions, and higher interest spending are the most relevant factors that tended to increase the deficit. When primary deficit is considered, the contribution of social spending to the fiscal adjustment is above 50 percent of total public expenditure contribution. On revenue side, the increase in the collection of indirect taxes is not sufficient to fully compensate the fall in direct taxes and social contributions (Table 21).
Moldova: Contribution of Revenues and Expenditures to the Fiscal Adjustment, 1994-99
(In percent of GDP)
Citation: IMF Staff Country Reports 2001, 022; 10.5089/9781451824957.002.A003
Source: Moldovan authorities, and Fund staff estimates.1/ Includes foreign trade tax, property and land taxes, non tax revenues and grants.2/ Includes project loan spending, expenditures for national economy, capital expenditures, net lending, administrative, military and other unallocated categories.Moldova: Composition of Primary Deficit Adjustment, Excluding Grants and Project Loan Spending, 1994-99 and 1998-99.
(In percent of GDP)
Includes profit tax and personal income tax.
Include VAT and excise tax.
Includes land tax, real estate tax, natural resources tax, state tax, and private tax.
Includes public expenditure for health care, education and some minor social assistance schemes.
Includes extrabudgetary funds, administrative, military, indexation of deposits, environment, and unallocated.
Residual term included to take into account of rounding errors.
Relative weights of revenue and expenditure categories to total revenue and expenditure contributions.
Ratio of relative to total contribution of revenues and expenditures.
Moldova: Composition of Primary Deficit Adjustment, Excluding Grants and Project Loan Spending, 1994-99 and 1998-99.
(In percent of GDP)
| 1994-99 | 1998-99 | |||||||
|---|---|---|---|---|---|---|---|---|
| Contribution | β7/ | β/α89/ | Contribution | β7/ | β/α8/ | |||
| Revenues | 7.3 | 100 | −78 | 6.9 | 100 | −277 | ||
| Tax revenues | 4.2 | 57 | −44 | 6.0 | 87 | −241 | ||
| Direct taxes1/ | 5.4 | 74 | −58 | 4.4 | 63 | −175 | ||
| Indirect2/ | −2.2 | −30 | 24 | −0.6 | −9 | 25 | ||
| Foreign trade taxes | −1.1 | −16 | 12 | 1.8 | 27 | −74 | ||
| Social fund contributions | 2.9 | 39 | −31 | −0.1 | −2 | 5 | ||
| Other taxes3/ | −0.8 | −11 | 8 | −0.3 | −4 | 11 | ||
| Non-tax revenues and grants | 3.2 | 43 | −34 | 0.9 | 13 | −36 | ||
| Expenditures and net lending | −13.5 | 100 | 143 | −8.5 | 100 | 341 | ||
| Expenditures | −13.3 | 98 | 141 | −8.6 | 100 | 342 | ||
| National economy | −0.4 | 3 | 4 | −0.6 | 7 | 25 | ||
| Social sphere 4/ | −7.5 | 56 | 80 | −3.1 | 37 | 125 | ||
| Capital expenditures | −1.3 | 9 | 13 | −1.2 | 14 | 49 | ||
| Other expenditures5/ | −2.4 | 18 | 25 | −1.3 | 15 | 51 | ||
| Social fund expenditures | −1.7 | 13 | 18 | −2.3 | 27 | 93 | ||
| Project loan spending | 2.7 | −20 | −28 | 0.6 | −8 | −26 | ||
| Net lending | −2.3 | 17 | 25 | −0.6 | 7 | 25 | ||
| Residual6/ | 2.1 | −15 | −22 | 0.6 | −8 | −26 | ||
| Total size of adjustment | −9.4 | … | 100 | −2.5 | … | 100 | ||
Includes profit tax and personal income tax.
Include VAT and excise tax.
Includes land tax, real estate tax, natural resources tax, state tax, and private tax.
Includes public expenditure for health care, education and some minor social assistance schemes.
Includes extrabudgetary funds, administrative, military, indexation of deposits, environment, and unallocated.
Residual term included to take into account of rounding errors.
Relative weights of revenue and expenditure categories to total revenue and expenditure contributions.
Ratio of relative to total contribution of revenues and expenditures.
Moldova: Composition of Primary Deficit Adjustment, Excluding Grants and Project Loan Spending, 1994-99 and 1998-99.
(In percent of GDP)
| 1994-99 | 1998-99 | |||||||
|---|---|---|---|---|---|---|---|---|
| Contribution | β7/ | β/α89/ | Contribution | β7/ | β/α8/ | |||
| Revenues | 7.3 | 100 | −78 | 6.9 | 100 | −277 | ||
| Tax revenues | 4.2 | 57 | −44 | 6.0 | 87 | −241 | ||
| Direct taxes1/ | 5.4 | 74 | −58 | 4.4 | 63 | −175 | ||
| Indirect2/ | −2.2 | −30 | 24 | −0.6 | −9 | 25 | ||
| Foreign trade taxes | −1.1 | −16 | 12 | 1.8 | 27 | −74 | ||
| Social fund contributions | 2.9 | 39 | −31 | −0.1 | −2 | 5 | ||
| Other taxes3/ | −0.8 | −11 | 8 | −0.3 | −4 | 11 | ||
| Non-tax revenues and grants | 3.2 | 43 | −34 | 0.9 | 13 | −36 | ||
| Expenditures and net lending | −13.5 | 100 | 143 | −8.5 | 100 | 341 | ||
| Expenditures | −13.3 | 98 | 141 | −8.6 | 100 | 342 | ||
| National economy | −0.4 | 3 | 4 | −0.6 | 7 | 25 | ||
| Social sphere 4/ | −7.5 | 56 | 80 | −3.1 | 37 | 125 | ||
| Capital expenditures | −1.3 | 9 | 13 | −1.2 | 14 | 49 | ||
| Other expenditures5/ | −2.4 | 18 | 25 | −1.3 | 15 | 51 | ||
| Social fund expenditures | −1.7 | 13 | 18 | −2.3 | 27 | 93 | ||
| Project loan spending | 2.7 | −20 | −28 | 0.6 | −8 | −26 | ||
| Net lending | −2.3 | 17 | 25 | −0.6 | 7 | 25 | ||
| Residual6/ | 2.1 | −15 | −22 | 0.6 | −8 | −26 | ||
| Total size of adjustment | −9.4 | … | 100 | −2.5 | … | 100 | ||
Includes profit tax and personal income tax.
Include VAT and excise tax.
Includes land tax, real estate tax, natural resources tax, state tax, and private tax.
Includes public expenditure for health care, education and some minor social assistance schemes.
Includes extrabudgetary funds, administrative, military, indexation of deposits, environment, and unallocated.
Residual term included to take into account of rounding errors.
Relative weights of revenue and expenditure categories to total revenue and expenditure contributions.
Ratio of relative to total contribution of revenues and expenditures.
91. Some differences appear when the 1998-1999 fiscal adjustment is considered in greater detail. As compared with the 1994-1999 results, the size of fiscal consolidation in 1999 has been smaller and the negative contribution of revenues much more relevant. This result is primarily due to lower indirect tax revenues, mostly because of the fall in VAT collection, while foreign trade taxes and nontax revenues contributed positively to fiscal consolidation. However, this result has been partially caused by an increase in grants. On expenditure side, all categories (except interest spending) contributed positively to the deficit reduction. The largest share of contribution is accounted by social spending curtailment (37 percent) and by the reduction in Social Fund expenditures (Table 21). As a result of the 1999 fiscal adjustment, the public expenditure ratio in Moldova converged to a level consistent with its per capita GDP in a sample of Baltic, Russia and other former Soviet Union countries (BRO), as is shown in Figure 10.
General Government Expenditures and per Capita GDP in BRO Countries, 1999
Citation: IMF Staff Country Reports 2001, 022; 10.5089/9781451824957.002.A003
Sources: Moldovan authorities; and Fund staff estimates.1/ Before fiscal consolidation.2/ After fiscal consolidation.F. Outstanding Issues
92. Despite the fact that the empirical results illustrated in the preceding section point to the good quality of Moldovan fiscal adjustment, there are still several weaknesses in fiscal policy. Fiscal vulnerability could reverse the positive effects of the 1999 consolidation, if no adequate policies will counteract it. Among the outstanding fiscal issues, the most relevant are poor revenue collection capacity, a large stock of domestic expenditure arrears, the low level of capital outlays, and the steady growth in Social Fund and interest spending:
The fluctuations observed in tax revenue collection over the period of analysis, can be only partially explained by cyclical factors. Overall, weak tax administration and poor collection enforcement brought to a concentration of high tax burdens among few taxpayers or restricted income categories (Carasciuc, 1999). In many cases (e.g., VAT), tax bases are narrowed by exemptions and the use of multiple rates. This affects both the amount of revenues collected and the administration of the tax system.
The level of Social Fund expenditure and its rate of growth are not yet completely under control. An important reform of the pension system, which will strengthen the link between contributions and benefits is currently under implementation, in collaboration with the World Bank. However, despite the value of pension benefits is continuing to fall in real terms because of the lack of indexation to price changes, and social contribution rates are very high,31 Social Fund expenditures are one of the fastest increasing items in the budget. In addition, many social insurance and social assistance benefits provided by the Social Fund are still weak-targeted and poorly designed. As a consequence, a huge number of benefits is provided to large sectors of the population, but the average value of benefits is relatively low.
The curtailment of public investment programs may bring to serious deterioration of important infrastructure, thereby hampering economic growth. Public investments were drastically reduced in 1999 and now account for slightly more than 2 percent of total public spending. As a ratio to GDP, capital outlays are less than 1 percent.32 Compared with a sample of similar low-income countries, where capital outlays accounted for 15-20 percent of total public expenditures, Moldova’s position is clearly at variance. Although the elimination of many investment activities was based on their low cost-effectiveness, essential public investments in social infrastructure may need to be expanded in the medium term.
The stock of arrears continues to be a heavy burden for the budget. Arrears on domestic expenditure, mostly on pensions and wages, reached their peak value in 1999 at 8.1 percent of GDP. The fastest accumulation of arrears took place primarily in 1996 and in 1998, and it slowed down in the rest of the period, but the size of the stock is still very large.
Interest spending is rapidly growing as a share of total public expenditures. The large amount of both domestic and foreign interests is going to constrain a significant part of spending decisions in the next years. Interest spending is rapidly growing as a consequence of high interest rates, reflecting country-risk premia, and the large stock of public debt.
G. Conclusions
93. In 1999 Moldova went through a large and unprecedented fiscal consolidation process. Despite the moderate downward sloped trend in all deficit measures since 1994, the fiscal retrenchment occurred in 1999 is clearly sizeable. The size of the adjustment is robust to alternative definitions of fiscal balance and to the elimination of the effects of cyclical macroeconomic fluctuations. Public expenditure commitments were significantly reduced in order to compensate for the fall in tax revenue collection, occurred in the aftermath of the Russian crisis. Most of the expenditure cuts resulted from the elimination of excess capacity in the bloated health care and education sectors.33 Nonpriority public investment programs were canceled and public employment was radically streamlined. Overall, public expenditures were brought in line with the current levels of many low-income BRO countries, facing similar financial constraints.
94. According to the results of the empirical analysis, both the size and the composition of the 1999 fiscal adjustment could be consistent with a long-lasting budget consolidation if a tight fiscal policy will be maintained in the next years. Many policy measures adopted in 1999 could be conducive to higher growth, by reducing the public sector crowding-out of private investment. In addition, the fall in the size of the large and non-effective social sector could free resources that may be allocated to public investment projects and to protect the most vulnerable groups of the population.34
95. According to recent empirical evidence in country with large government sizes, substantial fiscal adjustments can be conducive to higher economic growth when fiscal consolidation results from the permanent elimination of unproductive expenditures and the stabilization of revenues. In the case of Moldova, the overall evidence on the 1999 fiscal retrenchment is that previous actions were necessary, but they are not a sufficient condition to achieve permanent fiscal consolidation. Despite the large expenditure cuts implemented in the social sector and for civil service, important reforms are still required to strengthen revenue collection, to monitor public spending, to improve its allocation toward more productive uses and to make it more equitable.
References
Abed G. et al., 1998, Fiscal Reforms in Low-Income Countries. Experience Under IMF-Supported Programs, IMF Occasional Paper No. 160 (Washington, D.C.: International Monetary Fund).
Alesina Alberto and Roberto Perotti, 1997, Fiscal Adjustment in OECD Countries: Composition and Macroeconomic Effects, IMF Staff Papers Vol. 44 (2) (Washington, D.C.: International Monetary Fund).
Carasciuc Lilia, 1999, Corruption in Moldova: Macroeconomic Impact, (Chisinau, Moldova: Center for Strategic Studies and Reforms).
Chand, Sheetal K., 1993, “Fiscal Impulse Measures and Their Fiscal Impact” in How to Measure the Fiscal Deficit ed. by Mario I. Blejer and Adrienne Cheasty (Washington, D.C.: International Monetary Fund).
De Mello, Luiz, 1999, Fiscal Federalism and Government Size in Transition Economies: The Case of Moldova, IMF Working Paper No. 99/176 (Washington, D.C.: International Monetary Fund).
Ize, Alain, 1993, Measurement of Fiscal Performance in IMF-Supported Programs: Some Methodological Issues in How to Measure the Fiscal Deficit ed. by Mario I. Blejer and Adrienne Cheasty (Washington, D.C.: International Monetary Fund).
Mackenzie, George A., David W.H. Orsmond, and Philip R. Gerson (1997) The Composition of Fiscal Adjustment and Growth. Lessons from Fiscal Reforms in Eight Economies, IMF Occasional Paper No. 149 (Washington, D.C.: International Monetary Fund).
Tanzi, V., 1989, “Fiscal Policy, Growth, and the Design of Stabilization Programs” in Fiscal Policy, Stabilization and Growth in Developing Countries ed. by Mario I. Blejer and Ke-young Chu (Washington, D.C.: International Monetary Fund).
World Bank, 1999, Moldova. Poverty Assessment, Poverty Reduction and Economic Management (ECSPE). Eastern Europe and Central Asia Region, (Washington, D.C.: World Bank).
Prepared by Emanuele Baldacci
Different measures of fiscal unbalance can be used to assess the performance of fiscal policy in Moldova. Authorities’ standard budget presentation includes grants among total revenues and excludes public spending related to foreign-financed project loans. An alternative definition of fiscal deficit could exclude grants from total revenues, since the former are not directly under the control of the authority. In addition, according to a more comprehensive definition of the general government sector, project loan expenditures should be included in total public outlays. Fiscal deficit can be also measured on a cash basis and on a commitment basis (i.e., excluding domestic and foreign expenditure arrears). In this chapter the most comprehensive definition of commitment fiscal deficit (including grants and project loan spending) is used, unless otherwise specified. However, the alternative definitions of fiscal deficit have been used in some cases, in order to assess the robustness of fiscal adjustment estimates.
The focus in this chapter is on the general government sector. This includes local and central government and the Social Fund. Consolidated general government data have been recently revised to include foreign-financed project spending. Moreover, privatization receipts up to 1999 have been reclassified from nontax revenues to a financing item.
The data sample used in the analysis does not include year 1992. This year is particularly influenced by the political, economic and institutional changes brought by the independence in 1991, after the collapse of the former Soviet Union. The fiscal deficit for 1992 was 25 percent of GDP, a value well above the average fiscal deficit in the 1993-99 period.
In Moldova the Social Fund provides pensions insurance, family allowances, unemployment and social assistance benefits.
As measured by the coefficient of variation of the time series.
The stock of domestic arrears has been growing continuously since 1993, except for 1997.
In Moldova, a large public debt (including energy arrears) has been built up since independence, reaching 127 percent of GDP in 1999. The domestic component of this debt increased rapidly to 26.4 percent of GDP until 1998 but fell to 21.4 percent in the following year.
Once state transfers are included among total revenues, however, the Social Fund budget is in balance.
In the 1996-98 period, netting operations amounted to more than 35 percent of total revenues. From 1998 to 1999, tax offsets were reduced from 24 percent to 10 percent of tax revenues.
VAT and excise taxes.
Including foreign trade tax, property tax, land tax, and non tax revenues.
A similar formula can be used to measure the contribution of revenues.
The contribution of a specific category of revenues can be calculated accordingly.
The cyclically adjusted fiscal deficit (CADt) in a given year t can be obtained defining gt-1 and tt-1 as the corresponding preceding year ratios to GDP of expenditure and revenues, and
Unfortunately, the relative contributions to fiscal adjustment of revenues and expenditures by category can be estimated only for the cash deficit. In fact, the breakdown of domestic expenditure arrears by economic and functional classification is not available in Moldova for the sample analyzed.
Social contribution rates are set at level that are well above those currently used in many high-income countries.
This figures do not include public investments financed by World Bank project loans.
See chapter IV for an analysis of social spending efficiency in Moldova, before the 1999 fiscal adjustment.
Moldova’s poverty head-count ratio is 20 percent when a definition of relative poverty is used and the poverty line is set at 40 percent of average consumption (World Bank, 1999). Poverty is particularly high among large households, people living in the rural areas and those with low educational attainments.
