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The Budget Deficit in Transition: A Cautionary Note Author(s): Vito

The Budget Deficit in Transition: A Cautionary Note Author(s): Vito

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The Budget Deficit in Transition: A Cautionary NoteAuthor(s): Vito TanziSource:
Staff Papers - International Monetary Fund,
Vol. 40, No. 3 (Sep., 1993), pp. 697-707Published by: Palgrave Macmillan Journals on behalf of the International Monetary FundStable URL:
Accessed: 07/10/2009 05:27
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IMFStaffPapersVol.40,No. 3(September1993)?1993InternationalMonetaryFund
ShorterPaperTheBudgetDeficitinTransition
ACautionaryNote
VITO TANZI*
Thispaperdiscussesmajorfiscalissuesfaced bythepreviouslycentrallyplannedeconomiesintheirtransition tomarketeconomies. Itfocusesontheextent to whichthebudgetdeficitshouldguidepolicyandthein-teractionsbetweenfiscalpolicyandotheraspectsofthemacroeconomy.[JELH2,H3, H5,H6, P2,P3]
URINGCENTRALLANNING,
twas notreally meaningfultospeakof/fiscal policyandpublicfinance sincetheseconcepts implytheexis-tenceofprivatefinance and thus asignificant privatesector.1 In thatera,allwaspublicin away.However,many"fiscal"functions,asdefinedinmarketeconomies,were carried out notby governmentbutbystateenterprises.Theseenterprisesoftenprovidedto their workershousing,hospitalcare,vocationaltraining,kindergartenfacilities,shops,pen-sions,variousforms of welfareassistance,employment,andsoforth.Theywerealsoresponsibleformuch"public"investment. Because thestateenterpriseswererequiredtohire workerseven whentheydid notneedthem,officialunemploymentwas nonexistent. As aconsequence,noprogramsexisted toprotect unemployedworkers. Ineconomies intransition,stateenterprisesare stillcarryingoutmanyofthese fiscal
*Vito Tanzi isDirector ofthe FiscalAffairsDepartment.Heholdsadoctorate
fromHarvardUniversity.Veryusefulcommentswerereceived romS.J.Anjaria,GerardBelanger,GuillermoCalvo,CarloCottarelli,ManuelGuitian,GeorgeIden,JohnOdling-Smee,ndseveralcolleagueswithinheFiscalAffairsDepart-
ment.The author issolely responsibleforthe viewsexpressed.'Recallthat,inmarketeconomies,publicsectoractivityislargelyjustifiedby(private)market failure.SeeStiglitz(1989)andMusgrave(1959).697
 
VITOTANZI
functionsand are stillhoardingworkers.For thetransformationomar-ket economiesto becompleted,mostlegitimatesocial functionsmustbe shiftedfrom the stateenterpriseso thegovernment.Asthis shifttakesplace, spendingbytheenterpriseswill fallandspendingbythegovernmentwillrise.2Inspiteof occasionaldivergentviews,mosteconomistsagreethat,inmarketeconomies,the fiscal deficitis a usefulguideforassessingiscalpolicy.Alargedeficitndicates hat(unlessastrongcase to thecontrarycanbemade)fiscalpolicyshould become more restrictive.Theconceptof fiscaldeficitimpliesthatgovernmentactivitiescan besharplydelin-eatedfrom those of theprivateector.3Thus,expendituresndrevenuesareeitherpublicorprivate.The measureof the fiscaldeficitrequireshatthedifferencebetweenwhatthepublicsectorspendsand what t collectscan beaccuratelyalculated.With fullemployment,fthepublicsectorspendsmore,theprivatesector mustspendless,unlesstheeconomyisableto attractoreignsaving.Thus,theexistenceof a fiscaldeficitmpliessome(unwanted)crowdingout of theprivatesectorunlessRicardianequivalenceor aKeynesianmultipliercan be assumedtooperate.
I.BudgetDeficit LimitsandPerverseIncentives
There are severalreasonsorcautionwhenusingthisconcepttoguidepolicyactionduringhetransition.Someofthese reasonsareconceptual.Othersdeal withmeasurementproblems.Still othersoriginateromthepossibilityhatstrict imitson aninadequatemeasureof thefiscal deficitmaycreateperversencentives,whichmayslowdownhetransformation.TransferringSocialExpenditureResponsibilityStateenterprisesneconomiesn transition ontinueodominateeco-nomicactivityandprovidesocialservicestoworkersand their families.Someof theseservices areprovidednplaceofhigher moneywages.Othersareprovidednplaceofhigherbudgetary xpenditure.Inotherwords,theseenterprisescontinuetoperformsome functions that inmarketeconomiesarefinancedthroughhegovernmentbudget.The transitionoa marketeconomyrequireshatthebudgetassumetheresponsibilityor thosesocial functionsthatthecountrywishesto
2
Thisdoesnotimplythat thegovernmentneedstoassumeall thefunctionsnowcarriedoutbytheenterprises.3Italsoimpliesthat the fiscal activities of thegovernmentcan beseparatedfromthemonetaryactivities. Forexample,thefiscalactivities of central banksmust be assessedaspartoffiscalpolicy.
698

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