Fiscal transition in the Baltics
Pautola, Niina (10.02.1997)
Numero
2/1997Julkaisija
Suomen PankkiBank of Finland
1997
Julkaisun pysyvä osoite on
https://urn.fi/URN:NBN:fi:bof-201408113054Tiivistelmä
In market economies we can clearly make a distinction between the area of public finance and the area of private finance.In the centrally planned economies the distinction between private and public finance did not actually exist, because all economic activities as well as all finance were public.Given that, one can argue that transition from a centrally-planned to a market economy includes a radical fiscal restructuring. In principle, fiscal policy in transition economies was aimed at promoting economic recovery and creating favourable conditions for economic operators while maintaining reasonable social security. The fiscal stability was seen as an important signal of the government's commitment to economic stabilization.This, in turn, would increase public confidence in government.After the brake-up of the Soviet Union, most of the successor states experienced large fiscal deficits.Compared to other countries of the FSU, the Baltic states were able to maintain rather moderate deficits.One explanation for this can be that the initial fiscal position in all three Baltic states was better than in Russia and the transition economies in central Europe, and partly because of the early budget reforms in 1990-91.The Baltic countries practised tight fiscal policies right from the start of their independence.Another explanation for the Baltics' better success in maintaining fiscal stability can be explained by the fact that during the old Soviet system, the Baltic countries, especially Latvia and Lithuania, contributed large net transfers to the Soviet Union's budget.Once the Soviet Union collapsed, these transfers were abolished and the Baltic countries's financial balances improved significantly.The initial surplus in the fiscal accounts and better revenue performance made it easier to implement strict cash rationing as a means for expenditure control.Tight cas rationing has been an effective way to cut spending.Moreover, an additional factor explaining the success in expenditure policies has been the development of social security benefits.The shares of these transfers have remained fairly stable in all three Baltic states. Finally, it seems that Baltic governments have also been quite successful in reducing subsidies to very low levels.Despite the success, all three Baltic states have had trouble collecting budget revenues.Tax administration as well as control and payment mechanisms are still underdeveloped.In addition, due to a fact that many new private firms were not captured in the tax net, both taxes on wages and salaries, and VAT and other indirect taxes, may not have been fully collected from them.Budget revenues have further been negatively affected due to increase in tax arrears and falling profitability in state enterprises. Although the Baltic the Baltic countries managed to keep their fiscal deficits at quite low levels, deficits still emerged and therefore financing for these deficits had to be found.In respect of domestic financing, the government deficit has been mainly financed in the form of government bonds.The level of foreign financing, however, has been low due to a limited access to foreign capital markets. The future challange for economic policy in the Baltic countries is to ensure the availability of resources necessary to maintain growth, In this respect, fiscal policy should encourage savings, because they form the base for financing the high levels of investment required for sustained economic growth.One of the future challanges in all Baltic countries is the collecting of timely accurate, and accessible fiscal data that are consistent with the international standard of government finance statistics methodology.Also, we cannot ignore that social safety nets are under severe strain as a result of weak financial and administrative capacity.Further efforcts will focus also on tax policy; on improving the effectiveness of taxes by further broad
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