5.2 Lessons from previous fiscal adjustments
The experiences of past fiscal adjustment processes illustrate the value of framing an approach to fiscal decision making that endeavours to guide policy decisions. It is evident from past experiences that despite best intentions, fiscal policy plans can deviate from initial objectives for several reasons. Some of the facts and lessons from previous fiscal adjustments illustrate this and can be summarised as follows:
- The motivation for reforms can differ and include a desire to reduce deficits, tackle external current account imbalances, reduce rising interest costs, and more recently, medium-term and long-term concerns about fiscal sustainability associated with an ageing population (Mauro, 2011).
- Government budget plans can encounter significant surprises, especially arising from events that impact on economic growth and in turn taxation revenue and unexpected expenditure, which have sizable impacts on the ability of governments to realise their fiscal plans. As a result government budget plans need to be sufficiently flexible to accommodate shocks, but resilient enough to preserve medium term objectives (Mauro, 2011).
- Public support for reforms, public communication of the budget strategy, and explaining how the government would respond under unforeseen circumstances, can be helpful to ensuring reform plans can be sustained (Mauro, 2011).
- Stronger economic growth can assist with fiscal consolidation but fiscal consolidation will largely come from improvements in a government's primary balance (Sutherland et. al., 2012; Mauro, 2011; Treasury, 2006; 2009).
- Most fiscal adjustment plans include expenditure reductions, and expenditure reductions have tended to be more durable than revenue increases (Sutherland et. al., 2012).
- Most large consolidations have involved both expenditure reductions and tax increases Expenditure cuts have tended to be not as large as planned, and revenue increases larger than planned. This has often been because of revenue measures being introduced due to problems implementing spending cuts, or temporary factors such as stronger than expected economic growth (Sutherland et. al., 2012; Mauro, 2011).
- Governments tend to protect expenditure that is likely to enhance productivity and economic growth, such as education, transport and communications expenditure, and cut back on social security (welfare) payments as well as spending on defence, housing, and cultural affairs. Health, public services and environmental protection tend to hold their own during fiscal consolidations. This contrasts somewhat with the New Zealand experience where government expenditure on economic activities (including transportation and communications) was reduced relative to other areas from the mid-1980s and public health expenditure has tended to be protected during fiscal adjustments (Sanz, 2011).
