Friday, September 11, 2009

What can we learn from Chile, Sweden, and Hungary?

How to control government spending:
One way to bolster trust would be to put fiscal policy on the same footing as monetary policy, by outsourcing budgetary decisions to independent councils with a mandate to preserve fiscal solvency.
A fiscal council could monitor compliance with a budget-balance target, consistent with a stable or falling debt burden, leaving politicians to make tax and spending decisions within those limits. That sort of set-up has been adopted in Chile and Sweden.
Another convert is Hungary. George Kopits, the head of its fiscal council, says a good fiscal-stability framework has four main features. The first is a numerical policy rule, such as a target for the debt ratio or, as in Chile, a pledge to run a budget surplus of 1% of GDP over the business cycle. The second is a set of “procedural” rules, such as a cap on public-sector pay growth or—as in Hungary now and America until 2002—a “pay-go” rule that says new spending schemes have to be funded by tax increases or cuts in other programmes.

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