Public Finance Workshop on Fiscal-Structural Reforms
Opening Remarks by Banco de Portugal Governor, Carlos da Silva Costa1
Lisbon, 3 July 2017
Good morning ladies and gentlemen,
It is a great pleasure to be here today to open this workshop on 'Fiscal-structural
reforms: towards economic growth and the sustainability of public finances'. On behalf
of Banco de Portugal and the organising team, a very warm welcome to you all!
As you are aware, this workshop, hosted by Banco de Portugal, was organised in the
context of the annual meeting away from Frankfurt of the Working Group on Public
Finances of the European System of Central Banks. The workshop gathers here today an
outstanding group of fiscal experts coming from central banks, fiscal councils, and other
national and international institutions.
Let me take this opportunity to reaffirm in particular the importance of fiscal councils
and other independent fiscal watchdogs for the pursuit of sound public finances in our
countries.
Global economic activity is gradually recovering. However, structural challenges persist
in many countries, including low productivity growth, high unemployment, insufficient
levels of investment, high public and private indebtedness as well as weaknesses in the
financial sector.
How can structural reforms help?
These reforms are key to improving long-term economic growth prospects and to
reducing our economies' vulnerabilities to future adverse shocks. However, it should
also be taken into consideration that they may be associated with some negative effects
in the short and medium term, as reform implementation is not without economic and
social costs.
Structural reforms may be linked to fiscal policies through various channels. This
workshop will focus on a specific subset of structural reforms, namely fiscal-structural
reforms. Fiscal-structural reforms encompass areas like taxation, social security and
pension systems, healthcare, education, justice, the institutional framework and public
finance management, among others. They should be distinguished from the standard
use of discretionary fiscal policy to fulfil short- to medium-term objectives.
The post-crisis period has witnessed a reduction in fiscal imbalances in Europe.
However, debt ratios remain at record highs and risks to the sustainability of public
finances persist in several countries. Fiscal space for expansionary policies is limited and
further consolidation is needed.
Against this background, fiscal-structural reforms gain prominence as an approach to
improve the efficiency and quality of public finances. Indeed, if well designed and
implemented, they can support inclusive economic growth, ensuring their long-run
sustainability.
Notwithstanding their potential benefits, the implementation of effective fiscal-
structural reforms faces several tough challenges.
First, they should preferably be part of a broad package of other necessary structural
reforms. As such, the assessment of the potential impact on the economy is usually
complex and requires a comprehensive approach. The technical expertise to make a
correct assessment of the likely effects of reform is paramount for an efficient design.
Second, and closely related to the previous point, the planning of such reforms has to
take into account the institutional and legal framework in each country. Indeed, the
political decision-making process, the type of government, the existing domestic laws,
in particular at constitutional level, and external rules like those included in the Stability
and Growth Pact for European Union members, are important aspects to be taken into
account. Sometimes, the improvement of this institutional and legal framework is in
itself an important prerequisite for the feasibility and success of other reforms.
Third, the technical expertise required for the planning of reforms should have a strong
base in the country implementing them, along with 'national champions' supporting the
reforms on their own merits. Domestic "ownership" is critical. Reforms should never be
understood by society as an imposition from abroad, either from the IMF or from the
European institutions.
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Fourth, careful attention needs to be paid to the communication strategy and
redistributive mitigation measures. Both are key to ensuring adequate support from the
public and to containing populist appeals targeted at those parts of society that are
potentially most adversely affected by the reforms. Indeed, some of these reforms may
involve long implementation periods, with transitional arrangements, and often lead to
changes in the distribution of income and wealth. This may create pockets of discontent
in spite of the clear overall benefits for the society. Lack of understanding of these
challenges by decision-makers may seriously jeopardise the expected outcomes.
Last but not least, the length of the political cycle often proves insufficient to provide
the right incentives for the effective implementation of fiscal-structural reforms.
Therefore, broader agreements across the political spectrum, if possible, significantly
increase the likelihood of reform success. However, by their nature and especially in
those countries most in need of them, such agreements have been quite hard to achieve
lately.
All in all, I am convinced that sustainable public finances and better long-run economic
performance pose significant challenges that should be tackled without delay. The long-
term benefits of structural reforms decided today will far outweigh their short- and
medium-term costs, in particular if reforms are appropriately designed in order to
mitigate the latter while not jeopardising the former.
Today we have gathered here all the ingredients for a rich and fruitful debate on the
topics I have touched upon.
I thank you all for your participation and wish you a very pleasant and constructive
workshop.
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