EIB Papers Volume 13. n°1/2008 - European Investment Bank

Figure 4. Per-capita GDP growth and total investment, 2000-2005
Average real per capita GDP growth
10
8
6
4
2
Poland
Lithuania
Romania
Hungary
Efficiency frontier
Average linear fit
Slovenia
Czech Republic
16 18 20 22 24 26
Average total investment in percent of GDP
Sources: Eurostat (2007) and IMF (2006a)
Note: Data refer to averages by country in 2000-2005. The efficiency frontier is indicative of the highest per capita GDP
growth that can be achieved at a given level of total investment.
3. Fiscal adjustment and public investment in the new member states
Latvia
Slovak Republic
Estonia
How much fiscal adjustment has taken place in the NMS and how has it been achieved? While
the experience has been uneven, many of the NMS now face fairly high levels of public debt and
heightened macroeconomic vulnerability indicators. The need to bring down fiscal deficits and
public debt has constrained the room for higher public investment. Experiences from around
the world suggest that, often, governments try to achieve adjustment by increasing taxes and
cutting public investment, rather than curtail current spending (IMF 2005). However, when fiscal
adjustment relies on measures of poor quality, growth prospects may be compromised. This section
looks particularly at whether the NMS have relied on public investment cuts to implement fiscal
adjustment.
Recent fiscal outcomes in the NMS have varied significantly, with some countries implementing
sizable fiscal adjustment. Fiscal balances in all countries displayed considerable vulnerability to
the large recession that followed the Asian crisis in 1997. However, developments have differed
substantially since the early 2000s (Table 3). The Baltic countries made significant progress in
reducing their fiscal deficits between 1999 and 2006. For instance, Estonia and Latvia registered a
budget surplus in 2006. In contrast, the CEEs have shown more inertia in improving their budgetary
positions. In particular, Hungary stands out as the NMS with the largest fiscal imbalances measured
by either fiscal deficit or public debt levels, followed by Poland. Other CEEs have been able to bring
deficit levels and debt levels to below the reference value under the Stability and Growth Pact.
Of the most recent NMS, Bulgaria achieved strong fiscal outcomes over the last few years, while
Romania posted fiscal deficits but still had comparably lower debt levels (Figure 5).
Since the 1990s, expenditure and revenue reforms have played different roles in fiscal retrenchment
efforts. During the 1990s, fiscal adjustment in the NMS relied primarily on expenditure cuts. Several
NMS pursued tax reforms that lowered the overall tax burden, and general government revenues
have declined in the Baltic countries and Slovakia to around 35 percent of GDP. Expenditures in these
The Baltic countries
have greatly improved
budgetary positions,
most Central and
Eastern European
countries less so.
EIB PAPERS Volume13 N°1 2008 121