They boldly went where no government has gone before
Page 13 Bank Package III superseded Bank Package I, which ceased on 30 September 2010. Bank Package III saw the start of a return to normal marketeconomic conditions without a government guarantee, in which unsecured creditors could anticipate losses if an institution became distressed. However, since, contrary to expectations, other countries deferred the setting-up of similar schemes, Denmark ended up being “left alone” with the approach to handling distressed banks introduced by Bank Package III. An alternative solution in the form of an extension of the unlimited guarantee with Bank Package I would have dragged out normalisation of the sector further still. It subsequently became clear that Bank Package III per se did not give the financial institutions sufficient incentives to enter into private solutions.
The operative part (page 18).
“Hence, the Danish Budget Act (budgetloven) has introduced caps on government, municipal and regional spending. Due to these caps, the planned and actual development in spending in each individual year has been restricted, as the caps for the following year must be reduced if exceeded by a corresponding amount. To provide the right incentive to stay within the financial limits, including complying with the caps on spending, municipal and regional sanctions have been introduced. These rules make collective and individual off-setting against the block grant possible.
The Budget Act also implements the provisions of the fiscal compact on a budget balance rule and an automatic correction mechanism. The budget balance rule is deemed to have been complied with if the annual structural deficit is at the same level as the Danish medium-term budgetary objective, however with a lower limit for the structural deficit of 0.5 per cent of GDP. In case a deviation from the rule is deemed to exist, such deviation must be corrected. Moreover, legislation stipulates that The
Economic Council must be an “independent watchdog” in relation to fiscal policy and caps on spending. Hence, The Economic Council must assess, on an ongoing basis, whether the caps on spending are balanced with the medium-term projection and whether the caps on spending are exceeded.”
To be contrasted with the Irish system of budgetary preparation which has seen no appreciable change whatsoever!
@DOCM
I have noticed a number of posts from you lamenting lack of developments on Ireland’s fiscal framework.
Are you aware of the Fiscal Responsibility Act establishing a Budgetary Rule quite similar to the Danish rule you discuss above? (It also puts the Irish Fiscal Council on a Statutory basis.) The Act is available here:
Ireland has also legislated a new system of expenditure ceilings. This came into force under the Ministers and Secretaries (Amendment) Act 2013. This act also made provision for a macro economic forecast endorsement requirement by IFAC (required under the two-pack).
It should also be noted that Ireland’s fiscal framework is also substantiallly strengthened under the revised SGP, both arm corrective (including a new debt rule that can triggher an EDP) and preventitive arm (including a new expenditure rule). Details on the revised SGP are available here:
I am fully aware of all these developments. But where is the beef?
Weeks away from a difficult budget, the debate is about the “negotiations” between sparring coalition partners on the size of the overall budget reduction when it should be based on a line-by-line examination of overall spending – subject to publicly discussed expenditure ceilings – and in the body responsible under the Constitution; the Dáil.
I am not saying that we will not get there. But adopting legislation in response to pressure from the EU is one thing, changing the mindset that continues to see continuing the present budgetary approach as sufficient to the budgetary crisis is another. The Danes, facing a “crisis” in no way comparable to our own, had no such difficulty.
Maybe that is the explanation. “It’ll be alright on the night [or on the morning of the budget in this instance]” could be turned into the national motto.
@ John McHale
FYI a paper – which I posted on another thread – on the Swedish experience on fiscal consolidation set in the context of advice being given to Portugal.
The Danes are effectively following the same path as the Swedes.
Ireland may well stumble in the same direction, especially if the Seanad is abolished, which seems likely, not because it has any role but because of the blatant excessive concentration of power in the Executive being made even more blatantly obvious.
5 replies on “New Report on the Financial Crisis”
They boldly went where no government has gone before
Page 13 Bank Package III superseded Bank Package I, which ceased on 30 September 2010. Bank Package III saw the start of a return to normal marketeconomic conditions without a government guarantee, in which unsecured creditors could anticipate losses if an institution became distressed. However, since, contrary to expectations, other countries deferred the setting-up of similar schemes, Denmark ended up being “left alone” with the approach to handling distressed banks introduced by Bank Package III. An alternative solution in the form of an extension of the unlimited guarantee with Bank Package I would have dragged out normalisation of the sector further still. It subsequently became clear that Bank Package III per se did not give the financial institutions sufficient incentives to enter into private solutions.
The operative part (page 18).
“Hence, the Danish Budget Act (budgetloven) has introduced caps on government, municipal and regional spending. Due to these caps, the planned and actual development in spending in each individual year has been restricted, as the caps for the following year must be reduced if exceeded by a corresponding amount. To provide the right incentive to stay within the financial limits, including complying with the caps on spending, municipal and regional sanctions have been introduced. These rules make collective and individual off-setting against the block grant possible.
The Budget Act also implements the provisions of the fiscal compact on a budget balance rule and an automatic correction mechanism. The budget balance rule is deemed to have been complied with if the annual structural deficit is at the same level as the Danish medium-term budgetary objective, however with a lower limit for the structural deficit of 0.5 per cent of GDP. In case a deviation from the rule is deemed to exist, such deviation must be corrected. Moreover, legislation stipulates that The
Economic Council must be an “independent watchdog” in relation to fiscal policy and caps on spending. Hence, The Economic Council must assess, on an ongoing basis, whether the caps on spending are balanced with the medium-term projection and whether the caps on spending are exceeded.”
To be contrasted with the Irish system of budgetary preparation which has seen no appreciable change whatsoever!
@DOCM
I have noticed a number of posts from you lamenting lack of developments on Ireland’s fiscal framework.
Are you aware of the Fiscal Responsibility Act establishing a Budgetary Rule quite similar to the Danish rule you discuss above? (It also puts the Irish Fiscal Council on a Statutory basis.) The Act is available here:
http://www.irishstatutebook.ie/pdf/2012/en.act.2012.0039.pdf
Ireland has also legislated a new system of expenditure ceilings. This came into force under the Ministers and Secretaries (Amendment) Act 2013. This act also made provision for a macro economic forecast endorsement requirement by IFAC (required under the two-pack).
http://www.irishstatutebook.ie/pdf/2013/en.act.2013.0029.pdf
It should also be noted that Ireland’s fiscal framework is also substantiallly strengthened under the revised SGP, both arm corrective (including a new debt rule that can triggher an EDP) and preventitive arm (including a new expenditure rule). Details on the revised SGP are available here:
http://ec.europa.eu/economy_finance/publications/occasional_paper/2013/op151_en.htm
@ John McHale
I am fully aware of all these developments. But where is the beef?
Weeks away from a difficult budget, the debate is about the “negotiations” between sparring coalition partners on the size of the overall budget reduction when it should be based on a line-by-line examination of overall spending – subject to publicly discussed expenditure ceilings – and in the body responsible under the Constitution; the Dáil.
I am not saying that we will not get there. But adopting legislation in response to pressure from the EU is one thing, changing the mindset that continues to see continuing the present budgetary approach as sufficient to the budgetary crisis is another. The Danes, facing a “crisis” in no way comparable to our own, had no such difficulty.
Maybe that is the explanation. “It’ll be alright on the night [or on the morning of the budget in this instance]” could be turned into the national motto.
@ John McHale
FYI a paper – which I posted on another thread – on the Swedish experience on fiscal consolidation set in the context of advice being given to Portugal.
http://www.bportugal.pt/pt-PT/OBancoeoEurosistema/Eventos/Documents/LJonung_paper.pdf
The Danes are effectively following the same path as the Swedes.
Ireland may well stumble in the same direction, especially if the Seanad is abolished, which seems likely, not because it has any role but because of the blatant excessive concentration of power in the Executive being made even more blatantly obvious.