SWP-727 Deficits, Debt, and Savings Structure of OECD Countries, with Trends from 1965 to 1981 Leonardo Hakim Christine Wallich WORLD BANK STAFF WORKING PAPERS Number 727 IFILE COPY  & 的 勾 •戶叫 必 倡 邸 O U 只， 黑aO 丰6魚 A 叩潤中 一、•，闕d 〕。i!,,：〕 〔嬝屆纏i:i暑 之’斗于夢 露綢藝’ 藝廈籐 澎零 中 p & 的 畸j &a 塌 中 口 Copyright (0 1985 The International Bank for Reconstruction and Development/THE WORLD BANK 1818 H Street, N.W. Washington, D.C. 20433, U.S.A. All rights reserved Manufactured in the United States of America First printing March 1985 This is a working document published informally by the World Bank. To present the results of research with the least possible delay, the typescript has not been prepared in accordance with the procedures appropriate to formal printed texts, and the World Bank accepts no responsibility for errors. The publication is supplied at a token charge to defray part of the cost of manufacture and distribution. The World Bank does not accept responsibility for the views expressed herein, which are those of the authors and should not be attributed to the World Bank or to its affiliated organizations. The findings, interpretations, and conclusions are the results of research supported by the Bank; they do not necessarily represent official policy of the Bank. The designations employed, the presentation of material, and any maps used in this document are solely for the convenience of the reader and do not imply the expression of any opinion whatsoever on the part of the World Bank or its affiliates concerning the legal status of any country, territory, city, area, or of its authorities, or concerning the delimitation of its boundaries, or national affiliation. The full range of World Bank publications, both free and for sale, is described in the Catalog of Publications; the continuing research program is outlined in Abstracts of Current Studies. Both booklets are updated annually; the most recent edition of each is available without charge from the Publications Sales Unit, Department T, The World Bank, 1818 H Street, N.W, Washington, D.C. 20433, U.S.A., or from the European Office of the Bank, 66 avenue d'l&na, 75116 Paris, France. This paper was prepared as a background study for Part I of World Development Report 1984 (New York: Oxford University Press for the World Bank). Leonardo Hakim is on the staff of the Institute for International Finance (Washington, D.C.) and a consultant to the World Bank. Christine Wallich is with the Bank's Financial Policy and Analysis Department. Library of Congress Cataloging in Publication Data Hakim, Leonardo. Deficits, debt, and savings structure of OECD countries, with trends from 1965 to 1981. (World Bank staff working papers ; no. 727) Bibliography: p. 1. Finance, Public. 2. Organization for Economic Co-operation and Development. I. Wallich, Christine, 1952- . II. Title. III. Series. HJ236.H25 1985 336'.091717 85-6288 ISBN 0-8213-0522-0 ABSTRACT Much has been made of the possible impact of OECD macroeconomic policy on financial flows available to developing countries. Specifically, the low domestic savings rates in many countries, together with governments' own demands for funds in credit markets, may have raised the overall cost of funds, "crowding-out" developing countries. This paper reviews some of the evidence and concludes that the crowding-out hypothesis is not likely. While government budget deficits and borrowing have indeed been large in recent years, revenues and expenditures, when cyclically adjusted, come very close to being in balance. At non-recessionary levels of income, therefore, expenditure and revenue policies are approximately appropriate. Moreover, a close examination of expenditure categories and taxation policies does not reveal a "structural" imbalance, such that future deficits, or growing deficits, are ineviatble. The causes of the decline in OECD savings rates are also examined and are found to lie, to some extent, in disincentives which operate at various levels to discourage savings, but not to structural, or inexorable demographic, causes. CONDENSE On a beaucoup fait état des conséquences que pourrait avoir la politique macroéconomique de l'OCDE sur les flux financiers à la disposi- tion des pays en développement. Plus précisément, la faiblesse des taux d'épargne intérieure observée dans de nombreux pays, et la demande de crédit émanant des gouvernements eux-mêmes, a peut-être fait monter le prix de l'argent, "évinçant" les pays en développement. Après avoir examiné certains faits, les auteurs de ce document concluent que l'hypothèse de l'éviction est peu probable. En effet, en dépit de l'ampleur des déficits budgétaires et des emprunts des gouverne- ments ces dernières années, les recettes et les dépenses, corrigées de la conjoncture, sont très près de s'équilibrer. Par conséquent, pour un niveau de revenu ne reflétant pas une situation de récession, les politi- ques de recettes et de dépenses sont relativement appropriées. De plus, si on examine étroitement les catégories de dépenses et les politiques fiscales, on n'observe pas de déséquilibre "structurel" tel que des déficits, ou l'accroissement des déficits, soient inévitables à l'avenir. Les auteurs recherchent également les causes du fléchissement des taux d'épargne de l'OCDE et les trouvent en partie dans les facteurs de dissuasion qui interviennent à différents niveaux pour décourager l'épargne, mais non pas dans des phénomènes structurels ou des faits démographiques inexorables. EXTRACTO Mucho se ha dicho acerca de los posibles efectos de las políticas macroeconómicas de la OCDE sobre las corrientes financieras a que tienen acceso los países en desarrollo. Específicamente, es posible que los bajos niveles de ahorro interno en muchos países, junto con la demanda de los propios gobiernos de fondos provenientes de los mercados de crédito, hayan aumentado el costo global de los fondos, desplazando así de ellos a los países en desarrollo. En este trabajo se examinan algunos de los elementos de juicio y se llega a la conclusión de que la hipótesis de desplazamiento es poco probable. Si bien los déficit presupuestarios y empréstitos de los gobiernos han sido en verdad cuantiosos en los últimos aios, los ingresos y gastos, una vez ajustados cíclicamente, llegan muy cerca del punto de equilibrio. Por lo tanto, con niveles de ingresos no recesionarios, las políticas de gastos e ingresos son aproximadamente adecuadas. Por lo demás, un análisis detallado de las categorías de gastos y políticas tributarias no revela un desequilibrio "estructural" que haga inevitables los déficit futuros o el crecimiento de los déficit. Se examinan también las causas de la disminución del ahorro en los países de la OCDE y se concluye que ellas yacen, en cierta medida, en los desincentivos que actúan en diversos niveles y desalientan el ahorro; no se pueden atribuir a razones estructurales o de índole demográfica inexorable.  Table of Contents Pages Introduction ................................. .............1..... Revenue Trends .. ................. ...........o... o . .... 2 Trends in Government Revenues ........................... 2 Concern Over Growth in Public Sector Revenues .............. 4 Expenditures and Expenditure Trends ....................... 6 Level of Expenditures ............. ............. 6 Changing Composition of Expenditures........ . ......8........8 Social Goods Expenditures - Levels and Statistical Profile .. 10 Growth in Transfer Programs and Income Maintenance ....... .12 Determinants of Social Goods and Income Maintenance Expenditure .................... .... ..... 15 Health Expenditures ........ o .............. 17 Education .... . ....... .............................. 21 Pensions and Social Insurance ............................... 21 Unemployment Compensation and Insurance ................... 25 Equity Impact of Social Expenditures......... ............. 26 Outlook to 1990 and Beyond ............... .... 30 Debt Interest ...... .... . . ................. ..........38 Public Debt...... ....... ............... . 40 Nominal Interest Rates............ . ... .. ...... 41 Trends in Deficits ................... ... 46 The Deficits ....... .......... . o . ... 46 Structural vs. Cyclical Deficit........ .......... ........ 53 Trends in Savings and Changing Sources of Savings ............... 60 Trends in Savings ............................... ........ 60 Sources of Savings.. . ................. . 65 Government Savings ....... ............................ 68 Household Savings ................................ ......... 68 Corporate Savings ... .................. ...... ..... ..... 78 Uses of Savings: Net Sectoral Balances ...... ....... 80 Sectoral Balances....... . ....... . .... . ....... 83 Deficits and Savings ...................................... 86 Listing of Tables Pages The Composition of General Government Revenues Table I11.1 .............................. 3 Shares of Total General Government Expenditure Table 111.2 ................................... ....... 7 Government Expenditures: As Percent of GNP Table 111.3 ... . . . .................... 9 Social Goods Expenditure Shares in Total Public Outlay Table III.4 -....... . - o o. .o-......... ....... ......... 11 Growth Rates of Social Goods Expenditures Table 111.5 ................................ ................. 12 Transfer and Income Maintenance Expenditures Table 111.6 ........................................ ........ 13 The Determinants of Growth in Social Expenditure Table 111.7 .... ............. .16 The Growth of Real Expenditure on Health Care: 1960-1980 Table 111.8 ...................... ... 19 Relative Per Capita Public Expenditures on the Aged in OECD Countries, late 1970s Table 111.9 -................... ......... 20 Replacement Rates for Social Security Pensions Table III.10 ........... o... . o o ...... 23 Age Distribution of Total Population (%) Seven Major OECD Countries Table III.11 . .o. . . . . . o. . ..o ...... .. . . . .... 24 Implications of the Economic Scenarios Table III.12 ... . . . o. oo . . . ..o............ o. . .. 32 Balancing the Budget: Social and Transfer Expenditures Table 111.13 ............... ..... 34 Alternative Scenarios to 1990 Table III.14 ......... o .... .... .. 36 Share of General Government Debt Interest Payments in Total Government Spending Table III.15 ... ... .. 0 ..G.P R o..... 39 Debt to GNP Ratios - DECD Table III.16 .. . . . . . . . ................ . . . . . . 39 - 11 - Nominal Long-Term Interest Rates Table 111.17 ........................... 41 Central Government Debt in Six Major OECD Countries Table 111.18 ............................ ........ 43 General Government Financial Balances Table 111.19 ...o.................. 49 Government Expenditures and Fianancial Balances (OECD) Table 111.20 ................................................. 52 General Government Debt Held by Domestic and Foreign Sectors Table 111.21 ........ . ..... ....... 52 Potential Output Budget Balances Table 111.22 .................................................. 56 Net Savings in OECD as % GDP Table 111.23 .................................... 62 Net Savings - Trends and Changes Table 111.24 ................. ...... .64 Composition of Net Savings Table 111.25... .......... 66 Empirical Estimates of the Interest Elasticity of Household Savings in the United States Table 111.26. .............. ...69 Inflation and Saving: Results of Empirical Studies for Other OECD Countries Table III.27(a) ............................... 72 Inflation and Saving: Results of Empirical Studies for the United States Table III.27(b). ....... .......... ....... .... 73 Demographic Changes: 1950-2000 Table 111.28 .............. ........... 75 Time Series Estimates of the Effects Of Mandatory Public Pension Schemes on Personal Savings (Consumption) Table III.29(a),..... .... .. .... ... .. ..o. o .-....... . .. . .. . . .. 76 Time Series Estimates of the Effects of Mandatory Public Pension Schemes on Household Savings (Consumption) Table III.29(b). . ... . ............... 77 - iii - Net Corporate Savings as % of Total Net Savings Table 111.30........................................... ...... 79 OECD: Gross Capital Formation and Savings Table 111.31 ................................................ 80 Annual Growth in Output Table 111.32 ................................................. 81 Seven Major Countries: % of Total Capital Formation by Sector Table 111.33 ............................................... 83 Sectoral Financial Balance in the Seven Major OECD Countries Table 111.34 ............................................... 84 OECD Net Lending to the Rest of the World Table 111.35 .................. ............................. 85 Central Government Fianancial Deficits Table 111.36 ............................................... 87 Listing of Charts Pages Ratio of General Government Revenue to GNP Chart III.1 ..................................... ............ 2 The Growth of Social Expenditure and Other Public Expenditure: 1960-81 Chart 111.2 .................................................. 14 Social Expenditure Benefits, Total Personal Taxation and Net Benefits as a Percentage of Gross Income Chart 111.3 ............................ ..... 28 Seven Major OECD Countties Budget Deficits as % of GDP Chart 111.4 ................................................ 50 Structural Budget Deficit - Seven Major OECD Countries Chart 111.5 .................................................. 54 Public Expenditure and Total Tax Revenue Chart 111.6 ................................................ 58 OECD Savings Rates Chart 111.7 ..................... . ............ 63 Sectoral Shares of Savings as % of GDP: 1964-1981 Chart 111.8 .................................................. 67 Savings Rates and Budget Deficits as % of GDP Chart 111.9 ............... .................. 88  Introduction This Paper surveys the role of the public sector revenues expenditures, budget deficits and debt in the context of trends in national savings, to provide some quantification of the likely crowding out of private investment if current trends in deficits and savings continue. Section I outlines revenue trends, Section II those in public expenditures, Section III the resulting trends in budget deficits, Section IV those in national savings, and the final section looks at the relationships of projected deficits to trends in savings. -2- Trends in Government Revenues Trends in OECD central government revenues show that the share of income taken by the central government has risen substantially in the past period. Chart 1 outlines the trends for individual OECD countries since 1960. Dramatic increases have taken place across the board. Overall for OECD countries taken together, the government's current revenues as a percentage of GDP were only 28.3% in 1960. However, since then, this share, which includes social security taxes and contributions, has risen from 31.9% in 1970 to 37.2% in 1982. Dtigram I RATIO OF GENERAL GOVERNMENT EXPENDITURE AND REVENUE TO GNP RATIO OF TOTAL EXPEN0ITURE TO GNP 3 IN OR LATEST AVAILLE1A& 10 A 50 60 tso ~~I0 -20-0 -30 _j -30 -- d RATIO OF TOTAL REVENWE TO GAP S...,, H IS-l,,,*AIK.,,,S.. SS~ I,SS. ~s,..& II.Isiss'41,K - 3 - Table III.1 outlines the trends in the composition of government current receipts. The role played by direct taxes (personal and corporate incomes taxes plus social security taxes) increased from 16.8% of GDP in 1965 to almost 24.6% of GNP in 1982. As a result, the fraction direct taxes contributed rose from 57% of total government current revenues in 1965 to over 65% of government revenues in 1982. Meanwhile, indirect tax burden decreased, from 13.0% of GDP in 1965 to 10.5% of GDP in 1982. While the share of government revenues has increased as a portion of GDP, the increase in government revenues has not been sufficient to match the growth in government expenditures. This, as well as the differential growth rates of the various revenue components away from indirect towards direct taxes, especially personal income taxes and social security charges, has had political repercussions and has made the job of fiscal policy much harder. Table III.1: HE 0J4P0SITION OF GENERAL GOVERNMENT EVENUES AS % OF GDP 1965 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 Receipts Direct Taxes 11.2 12.1 12.0 12.3 12.5 13.4 12.6 13.0 13.4 13.4 13.6 13.9 14.1 13.8 Indirect Taxes 13.0 10.9 10.9 10.7 10.5 10.3 10.1 10.1 10.2 10.0 10.0 10.3 10.6 10.5 Social Security Contributions 5.6 7.5 7.7 7.9 8.3 8.8 9.3 9.5 9.7 9.7 10.0 10.2 10.5 10.8 Other Receipts 1.5 2.5 2.5 2.4 2.5 2.6 2.7 2.8 2.9 3.0 3.0 3.3 3.5 3.8 Qrrent Receipts Total 29.2 31.9 31.8 32.2 32.7 33.9 33.7 34.5 34.9 34.9 35.7 36.6 37.1 37.2 NME: Totals may not add due to rounding. Source: OEO National Accounts, Table 9, and Price and Chauraqui, op.cit. -4- The reason for this changing composition was the shrinking buoy- ancy of indirect taxes, which in many countries, grew less rapidly than GDP, and the greater buoyancy of direct taxes. Taxes on households rose faster than other types of direct taxes, implying a decline in direct corporate taxes. Social security taxes grew even more rapidly than other direct taxes. Where indirect taxes have shown buoyancy, this has in many countries, been due to the introduction of energy taxes in the 1970's. Both oil exporters and oil importing countries have introduced energy tax or royalties. For example, energy taxes are the primary indirect tax in the UK, contributing 2.1% of GDP to the UK government receipts in 1981. Other countries have also introduced energy taxes, notably, the US, where their contribution was 1.3% of GDP, the Netherlands (3.6%) and Norway (4.0%).1/ It is probably valid to say that, in the absence of these energy taxes, the overall burden of direct taxes would have been higher still. Concern Over Growth in Public Sector Revenues With the rising tax burden, there is now an increasing reluctance among a number of OECD governments to garner additional revenues through "fiscal drag".2/ In some ten of the 21 OECD countries, including the UK, France and the Netherlands, there is now explicit indexing of the personal 1/ OECD Working Paper CPE/WPI(83)1. 2/ See Price and Chouraqui, op. cit. - 5 - income tax. In three others, Belgium, Spain and Switzerland, indexing exists in a de facto manner, although it is not always applied. In the U.S., indexing is expected to be introduced in 1985, barring policy changes. This would leave only eight countries (including Japan and Germany) un-indexed. These trends suggest that, in general, the prospects of increased responsiveness of tax revenues to GNP is reduced. It has been estimated that the elasticity of revenues to GNP, once full indexation of income taxes takes place, could reduce the tax elasticity to less than one. Coupled with this concern over direct taxes, there is substantial resistance to increasing indirect taxes, because of their inflationary impact, especially when inflationary expectations are latent. To summarize, there appears to have been a secular change in both the level and composition of government receipts in the seventies and also in the responsiveness of revenues to GDP growth as a result of indexation provisions on direct taxes, and inflationary concerns preventing increases in indirect taxes. As a result, concerns are surfacing over a possible "tax threshold."3/ 3/ State and local taxes have not been included in the discussion. The conclusion becomes stronger, if they are. - 6 - II. Expenditures and Expenditure Trends This section analyses trends in general government public expend- iture. The section begins by examining the changes over time in the overall level of public expenditures relative to GNP. Then the changes which have taken place in the composition of expenditures, disaggregating expenditures into broad categories of public sector outlays, are examined. The determinants of each of these expenditure levels are analyzed, and an assessment of the extent to which cyclical factors, such as slow growth and unemployment, have contributed to these levels of expenditure as compared to the contribution made by structural factors such as the demographic changes including growth in the non-working population, and programmatic factors such as commitments made to growing benefit levels. Level of Expenditures The level of public expenditures in relation to GDP has risen substantially since the 1960s for most OECD countries, from 28.7% of GDP in 1960 to over 40.6% of GDP in 1982. While this summary statistic obscures the inter-country differences in expenditure levels, the trend of increase has been common across countries. In Sweden, the share of expenditures have risen from 31% of GDP in 1960 to 68% in 1980; in Germany the increase has been from 32.0% of GDP in 1960 to 48% of GNP in 1982. In Japan, where the proportion of government expenditure in GDP was lowest, the level has doubled from 18% of GDP in 1960 to 35.2% in 1982, the same level as the U.S. -7- Table 111.2: SHARES OF 1T7TAL GENERAL GOVER*MNT EXPENDITURE IN GDP/GNP (Percent) 1960 1965 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981* 1982* Uhited States 27.8 28.0 32.2 32.2 31.9 31.2 32.9 35.4 34.4 33.5 33.1 32.8 33.2 33.6 35.5 Japan 18.3 18.6 19.3 20.8 21.8 22.1 24.5 27.3 27.9 29.0 31.1 31.6 32.7 33.6 35.2 Germany 32.0 36.3 37.6 38.9 39.7 40.5 43.4 47.1 46.4 46.5 46.5 46.4 46.9 47.9 48.3 France 34.6 38.4 38.9 38.3 38.3 38.5 39.7 43.5 44.0 44.2 45.2 44.7 46.7 49.4 51.3 United Kingdom 32.6 36.4 39.3 38.4 40.0 41.1 45.2 46.9 46.1 44.1 43.7 43.5 45.4 46.4 46.5 Italy 30.1 34.3 34.2 36.6 38.6 37.8 37.9 43.2 42.2 42.5 46.1 45.5 46.1 51.5 54.0 Canada 28.9 29.1 35.7 36.6 37.2 36.0 37.4 40.8 39.6 40.6 41.0 39.3 40.7 41.7 46.4 Total for Major Seven Countries 28.7 30.0 32.6 33.0 33.1 32.9 34.8 38.0 37.2 36.8 37.3 37.5 37.8 38.9 40.6 a/ Weighted averages: calculated from the total GDP and total outlays of general goverments for the group of countries, with both aggregates expressed in US dollars at current ewchange rates. Source: Charouqui and Price, op. cit., and National Accounts of OECD Countries and where marked (*) Secretariate estimates. The data in this table are measured according to the standard definitions of the OEQD-United Nations system of accounts, so that they are comparable across countries. Total general government spex is defined as current disbursements (including capital consumption) plus gross investment. It is the sLu of lines 23, 28, 29 and 30 less line 26 in Table 9 of National Accounts of OECD Countries, Volune II, 1962-1979. - 8- Changing Composition of Expenditures In addition to rapid increases in the overall level of public expenditures the higher level has been accompanied by a change in the composition of expenditures as well. Table 111.3 shows trends in the components of public expenditure since the early 1950's. Defense expenditures have fallen sharply from their high levels of the 1950;s, and presently comprise some 3.4% of GDP. Outlays on social goods, here defined as education, health, housing has risen substantially. Expenditures on education rose from 3.1% of GDP in 1954 to 5.3%, and 5.4% in 1973 and 1980, respectively. The rapid increase in health expenditures is striking, from 1.3% of GDP in 1954 to 3.3% in 1973, and to 4.3% by 1980. Growth in housing expenditures has also taken place, from 0.5% of GDP in 1954 .to 1.4% in 1980. Total outlays on social goods have risen from 4.9% of GDP in 1954, to 9.7% in 1973 and 11.1% in 1980. Income maintenance payments, which includes pensions, sickness, family allowances and unemployment transfer payments have also increased. Pension expenditures have tripled, and now, at 7.6% of GDP represent the largest expenditure category. Sickness expenditures have also risen; Family allowances, by contrast, have not increased, falling from 0.8% of GNP in 1973 to 0.6% in 1980. Unemployment expenditure have undergone a striking rise--now making up 2.6% of GNP. The final expenditure category--public debt interest has also increased from 1.6% of GNP in 1954, to 1.9% in 1973 to 2.9% in 1980, the latter a 53% increase in 7 years. - 9 - Table 111.3: GENERAL GOVERNMENT EXPENDITURE AS PERCENT OF GNP (Average, Seven Major OECD Countries) 1954 1973 1980 Total Expenditure 28.5 32.8 37.7 Defense 9.6 4.0 3.3 General Government 4.7 3.5 3.9 Social Goods 4.9 9.7 11.1 Education 3.1 5.3 5.4 Health 1.3 3.3 4.3 Housing 0.5 1.1 1.4 Income Maintenance 5.6 10.0 12.3 Pensions 2.9 6.2 7.6 Sickness 0.3 0.4 1.1 Family Allocations 0.7 0.8 0.6 Unemployment Compensation 0.5 0.4 2.6 Other 1.7 2.2 4.0 Economic Services 6.2 3.7 Capital Transactions .. 3.6 1.6 Subsidies .. 1.7 0.9 Other .. 0.9 1.2 Public Debt Interest 1.6 1.9 2.9 Source: CPE/WPI(82)1, and World Bank Estimates. 1954 from National Accounts of OECD Countries, 1950-1968, supplemented as follows: 1954 welfare state expenditures for European countries from J.F. Dewhurst and Associates, Europe's Needs and Resources, Twentieth Century Fund, New York 1961, p. 313 and 336 for education, p. 383 for medical care, pp. 222 and 235, for housing, p. 391 for pensions, p. 393 for sickness and family payments, p. 386 for unemployment benefits and p. 399 for total transfer payments (including health). Japan 1954 from I. Emi, Government Fiscal Activity and Economic Growth in Japan, 1868-1960, Kinokuniya, Tokyo, 1963, pp. 173 and 179, and I. Ohkawa and M. Shinohara, - Patterns of Japanese Economic Development, Yale, 1979, pp. 372 and 378. USA 1954 from The National Income and Product Accounts of the United States, 1929-1974, U.S. Dept. of Commerce, pp. 94, 128 and 131. - 10 - Expenditure elasticities are higher than the revenue elasticities4/; the overall expenditure elasticity is 1.25, for the 1970-80 period. Defense expenditures have grown, but only about as rapidly as GNP. (This may have increased since 1980). The largest elasticity attaches to "income maintenance programs", and of these, it is the increase in pension expenditures which has been the largest factor. Income maintenance programs have grown almost 40% faster than GNP. Next most rapidly growing have been interest expenditures, with an elasticity of 1.37. This was followed by health expenditures, with an elasticity of 1.3. Education expenditures increased at a faster rate than GNP, some with a 1.14 elasticity. Social Goods Expenditures - Levels and Statistical Profile Government outlays on "social goods" have grown rapidly in almost all OECD countries. Included in this category are expenditures on: health, education, sickness, and housing. Table 111.4 shows the proportion of total expenditures in these 3 areas from 1960-1980, for the major OECD countries. In 1960, education outlays absorbed 12.6% of total government spending, followed by health (6.3). By 1980, these had risen to 15.0, 13.0, respectively. For each country shown in Table 111.4, governments' social goods expenditures also increased as a percent of GNP in the period 1960-81. For the major countries, the share nearly doubled, from 6.12% of GDP in 1960 to 12.1% in 1981. Thus, one eighth of all the resources generated in OECD countries are presently being directed towards social goods expenditures. In relation to total public expenditures, 4/ CPE/WPI/(82)4 - 11 - outlays on social goods rose from 20.2 of total public expenditure in 1960 to just under 30% of public expenditure in 1981. Table 111.4: SOCIAL GOODS EXPENDITURE SHARES IN TOTAL PUBLIC OUTLAY (PERCENTAGE SHARES IN 1960 AND 1981) Total Social Year Education Health Sickness Goods U.S.A. 1960 12.8 4.6 0.8 18.2 1981 16.4 11.7 0.6 28.7 Japan 1960 23.6 8.0 0.9 32.5 1981 16.5 15.4 1.1 33.0 Germany 1960 7.8 9.8 3.3 20.9 1981 10.6 13.9 1.3 25.8 Canada 1960 10.4 8.3 n.a. 18.7 1981 14.8 14.2 n.a. 29.0 France 1960 n.a. 7.1 3.2 10.3 1981 n.a. 13.2 2.4 15.6 Italy 1960 12.7 9.4 0.6 22.7 1981 14.1 13.5 1.9 29.5 U.K. 1960 10.5 10.1 1.7 22.3 1981 13.1 12.0 0.5 25.6 Total: 1960 12.6 6.3 7.3 20.2 1981 15.0 13.0 1.1 29.1 NOTES: (1) Average for 7 major countries only. Source: SME/SAIR/SE/83.01, pp. 6-7. Disaggregating by subperiod, Table 111.5 shows the change in overall trends in social goods expenditure since 1960. From 1960-70 public sector social goods expenditure grew at an average rate of 9.9% per annum. Since 1970 to the present, their rate of growth has increased, to closer to 12.6% per annum. - 12 - Table 111.5: GROWTH RATES OF SOCIAL GOODS EXPENDITURES (Percent) 1960-1970 1970-1980 U.S. 10.9 13.1 Japan 7.0 19.3 Germany 9.9 11.1 France 12.6 16.9 U.K. 10.3 18.6 Italy 13.6 20.7 Canada 13.2 14.7 OECD Average* 9.9 12.6 *1960, 1970, and 1980 weights were used respectively. Source: World Bank Estimates; National Accounts Statistics, SME/SAIR/SE/83.01 Growth in Transfer and Income Maintenance Programs Table 111.6, derived from an OECD study of social expenditures5/ summarizes the changed shares of the sub-components of transfer and income maintenance expenditure in the years 1960 and 1981 for the seven major OECD countries. Taking the countries together, the following picture emerges for transfer expenditure in this period. In 1960, pension expenditure was the largest sub-component of total expenditure (16%). Family benefits absorbed 2.1% of total expenditure, with unemployment taking the smallest share, 2.0%. The ordering has changed little since then, although the percentage shares of some of the sub-component has. The pension share has risen slightly to 20.7% of social expenditures, followed by expenditure on family allowances (2.8) and unemployment at 2.4% of public expenditure. 5/ SME/SAIR/SE/83.09 - 13 - Table 111.6: TRANSFER AND INCOME MAINTENANCE EXPENDITURES (as Percent of of Total Public Expenditure) Year Pension Unemployment Family Others Total U.S.A. 1960 15.1 2.3 0.8 2.7 20.9 1981 20.5 1.8 1.2 5.9 29.4 Japan 1960 13.7 1.4 0.0 4.2 19.3 1981 16.5 1.1 5.7 0.6 23.9 Germany 1960 31.3 1.3 0.7 11.1 44.4 1981 26.4 3.3 2.6 7.9 40.2 Canada 1960 9.5 5.0 4.6 3.7 22.8 1981 11.1 5.8 1.6 5.3 23.8 France 1960 17.5 0.4 11.1 0.4 29.4 1981 24.4 3.9 4.4 0.5 33.2 Italy 1960 16.0 0.6 8.3 12.7 37.6 1981 28.9 1.3 2.6 1.9 34.7 U.K. 1960 12.2 0.8 1.7 4.6 19.3 1981 16.4 3.3 3.3 6.0 29.0 TOTAL: 1960 16.1 2.0 2.1 4.0 44.4 1981 20.7 2.3 2.8 4.4 59.3 Note: (1) Average for 7 major countries only. Source: SME/SAIR/SE/83.01, pp. 6-7. - 14 - Combining social goods outlays, and transfers, the share rose from 44.3% (1960) to 60% (1981) of total expenditures. These trends are outlined in the attached chart. CHART 111.2 The Growth of Social Expenditure and Other Public Expenditure: 1960-81 (Averages for the Seven Major OECD Countries) %26, 24 22 20 ocial exter.diture 181 Other oublic expendture 14 12 S o u rc0 0 0 SM E/ SA IR/S A* V - 0 W% fb - %0A- - t-n K P- t- tv N P - 4D Source: SME/SAIR/SE/83. - 15 - Determinants of Social and Income Maintenance Expenditures The specific determinants of expenditure levels in each of the subcomponents discussed earlier vary by country. However, there are strategic factors common to all countries, which together determine expendi- ture levels. These include: demographic factors, levels of eligibility and coverage, demand or takeup of benefits, levels of benefits, and economic conditions. Inflation is an important determinant of expenditures, as are improvements in technology. The magnitude of these elements have been quan- tified in an OECD study6! (see Table 111.7). In both periods, the primary contributor to increased social goods expenditures as well as transfers was increased benefit levels. Moreover, real increases in benefit levels were more important than the effects of increases in prices on benefit levels. In the 1960-75 period, eligibility growth or increases in coverage, and demographic change equally contributed just over 40% of the increase of total expenditure up to 1975 and higher benefit levels contributed 60%. In the past 6 years, 1975-81, demographic factors contributed about 18% to increases in social expenditure; eligibility factors only 5%, and increased average benefit levels about 73%. The relative impact of these factors of course varies according to the program. The following sections seek to analyze the factors contri- buting to growth in individual expenditure programs. Finally, some prognosis is made to trends to 1990, given past patterns, assumptions about future demographic trends, and finally, political and managerial changes which might affect future levels. 6/ SME/SAIR/SE/83.01 - 16 - Table III. 7: TIE IEERMENANS OF GIIH IN SOCIAL AND TRANSMER EX OIUE Four Main Programs in the Seven larger Econmes Average Amial Growth Rates at Constant Prices Total Total Real Increases, of which: Qages Qunges in in Real Percent Real loiLnal Denographic Benefit Relative In- of GF Expaditure Expenditure change Eligibility levels Prices crease Program (1) (2) (3) (4) (5) (6) (7) (8) 1960 Growth Rates - 1960 to 1975 Social Goods Education 4.2 6.1 14.7 0.29 1.90 3.83 2.19 1.60 Health 2.7 9.6 17.1 1.03 0.60 7.83 2.19 5.52 Iname Maintm Pensions 4.5 8.4 14.3 2.23 1.62 4.35 0.00 4.35 Unemploymnt 0.4 12.0 18.2 5.08 0.00 6.60 0.00 6.60 Other 2.5 7.7 13.5 - - - - - Total Social and InCoIM Maintenance 14.3 8.0 14.6 1.36 1.43 5.03 1.28 3.71 Exenditure 1975 Growth Rates - 1975 to 1981 Social Goods Education 5.1 1.8 12.9 -1.74 0.20 3.40 1.28 2.00 Health 5.1 3.1 14.2 0.26 0.00 3.10 1.28 1.80 incom Maintenance Pensions 7.3 6.6 17.0 1.77 0.78 3.94 0.00 3.94 Unemployment 1.1 6.4 15.7 7.84 -2.30 1.00 0.00 1.00 Other 3.4 3.6 13.6 - - - - - Total Social and Incone 22.0 4.2 - 0.75 0.22 3.38 0.70 2.65 Maintenanm Expenditure Source: E/SAIR/SI,/83.01/ pg. 19 and, SME/SAIR/SEV83.9 pg. 35, and based a unveighted averages for the seven larger economles: U.S.A., Japan, Genany,France, United Kirgiom, and Italy. Data are taken fran Statistical and Technical Annex and fron the correspondirg papers on Health, Education, Old-Age Pensions and Unemployment Insurance. The estimates above should be read as an approxiate breakdown only of the main changes in the tw periods 1960 to 1975 and 1975 to 1981. - 17 - Determinants of Expenditures on Social Goods: Health expenditures Three principal features of the development of overall expendi- tures health services have been (1) rapid growth of expenditure by individuals, (2) changes in the way health expenditure have been financed, leading to a substantial increase in the share financed by government, (3) rapid improvement in technology.7! The rapid growth in expenditures, as Table 111.7 illustrated, has had most to do with increases in "benefit levels", i.e., health expendi- tures per person. In the 1960-75 period, real average benefits grew at over 5.5% per annum, in 1975-81, of 1.8%, accounting for 55% of the increase in health expenditures. At the same time, the price of health care increased relative to other prices (the increases in health care costs were 50% greater than the overall expenditure deflator), so that a fraction of these higher expenditures were compensating for higher costs (or higher quality and standards) of health care. In both periods the importance of demographic factors was very small (less than 10%). Technical change has increasingly been associated with greater hospital use and hospitals now account for over 50% of total health care costs and 40% of public-financed costs, and specialization of secondary personnel. In many OECD countries, all this has developed in a cost vacuum, with little thought given to the costliness of procedure, and little political thought has been directed to the "screening" of access to 7/ SME/SAIR/SE/83.09 - 18 - health procedures.8/ The result has been increasing concentration of health services, with an estimated 50% of total health expenditure consumed by 3-4%9/ of the total population. This unwillingness to decide who shall receive publically-paid-for care, instead, allowing access of all, has contributed significantly to the uncontrolled expansion of per-individual health care costs. Coupled with this, have been the proclivities of the health care profession, who also encouraged "best practice" medicine to be the standard which patients demand without any consideration of costs. Table 111.8 outlines the components of real expenditure on health since 1960. 8/ In this context, it is interesting to note that improved access has been reflected in both greater numbers of hosiptal admissions and longer stay per admission: This is so in spite of higher incomes and "better health" since 1960. The footnote table makes this clear: TRENDS IN HOSPITAL UTILIZATION 1960-1980 (Average for Seven Major OECD Countries) 1960 1975 1980 Admission rates (admissions per 1000 population) 9.5 13.1 13.5 Average length of stay (days per admission) 15.1 19.6 18.6 Source: SME/SAIR/SE/83.04 9/ SME/SAIR/SE/83.09, Pg. 16. - 19 - Table 111.8: THE GROWTH OF REAL EXPENDITURE ON HEALTH CARE: 1960-1980 (Average for six major OECD countries aJ Percent Per Annum Percent 1960 1975 Composition -to- -to- in 1980 1975 1980 Private expenditure 24.3 4.1 3.2 Public Expenditure of which 75.7 9.6 4.2 Hospital Services 37.9 7.2 3.4 Ambulatory Care 17.3 7.2 3.4 Pharmaceuticals 7.6 10.1 6.1 Other 12.9 Total Expenditure 100.0 7.6 4.0 a/ The six countries concerned are Canada, France, Germany, Italy, United Kingdom, United States. Source: SME/SAIR/SE/83.09, pg. 39, and Expenditure on Health Under Economic Constraints; Part II Estimates of Expenditure; Costs and Selected Indicators. OECD 1983: MAS(83)4. Pharmaceutical costs have risen the most rapidly, with large drug costs in part the result of capitalization of enormous R&D expenditures into drug prices and into the prices of medical machinery, followed by growth of hospital services next. Increases in eligibility contributed less to increased expenditure in the 1970s; largely because desired coverage had been achieved in most OECD countries by the end of the 1960s, a period in which rapid extension of coverage took place, with the introduction of public programs in a number of countries. By the 1970s, either employment linked private insurance, or universal access health services covered the bulk of the OECD population. - 20 - However, demographic factors contribute about 10% of total growth of health care expenditure, and the proportion of health care expenditure following on demographic change is expected to rise in the future. Table 111.9 outlines the relative public expenditure on the aged, as a percent of expenditure on the population under 65. Table 111.9: RELATIVE PER CAPITA PUBLIC EXPENDITURE ON THE AGED IN OECD COUNTRIES, LATE 1970s (Ratio of Expenditure, People 65+ to Population 0-64) Ambulatory Hospital Care Medicines Canada (1978) 7 2 n.a. Finland (1976) 5 2 n.a. France (1978) 5 2 4 Japan (1979) 4 n.a. n.a. United Kingdom (1978) 4 1 3 United States (1978) 8 9 6 Sources: SME/SAIR/SE/83.04, pg. 19, and Surveys quoted in the document for the Ad Hoc Experts Group on Health Policy and Health Systems in March 1982 (SME/SAIR/HI/81.03). As Table 111.9 indicates, expenditures on aged population are some 4-8 times greater than expenditure on under 64 population for hospital care, and for ambulatory care, they are twice as great, on average. With average old age population growing in OECD countries by about 1/2% p.a. (far less than population growth), the potential upwards pressure in public health expenditure is sizeable, unless changes on health care delivery are made. The table also shows a striking variance in expenditures across countries. Notably, expenditures in the U.S. on the aged are some two - 21 - times higher than the average for the other countries, whether on hospital care, ambulatory care or medicines. While some of this may be due to quality" of care, it also has to do with cost-structures and pricing of health care. The variance suggests that there is scope for containing this category of expenditure, without compromising quality. Determinants of Social Goods Expenditure: Education In virtually all OECD countries, the proportion of the populace of educable age is shrinking. In the past, growth of expenditure on education increased at 6.1% per annum, but since 1975, expenditure on education has decelerated substantially, growing at only 1.8% per annum. As with health expenditure, education benefit levels--or increases in real expenditure per pupil--were the primary cause of this increase. The difference before and after 1975 was that in the recent period, demographic factors, such as the decline in births and school age population, reduced by half the impact of the increases in benefit levels on overall education expenditures. Determinants of Income Maintenance and Transfer Expenditures: Pensions and Social Insurance Expenditure on pensions and social security is both the largest sub-component of OECD goverments' expenditure, and also the fastest growing. As a percent of public sector expenditure in OECD countries, pensions now absorb 19.4% (8.8% of GDP), and have increased at a rate of over 6% in real terms since 1975. - 22 - Social security expenditure is largely a function of the number of beneficiaries and the level of pension paid them. The former, in turn, is related to the number of the aged population, and those aged who are eligible for this transfer program. In accounting for increased expenditure levels, it is clear from Table I11.10 that the bulk of increased expenditure is due to rapid growth in benefit levels, i.e., in the real value of pensions paid, which may be a function of past earnings and labor participation (in semi-insurance systems) or some publicly determined pension level (in the universal schemes). In either case, pensions are frequently related to or tied to previous earnings, the so-called "replacement ratio". Table III.10 shows how replacement ratios have risen since 1965. The increase has averaged 50% over the 15-year period, or 4% increase in real terms per annum. In a number of countries, this was due to advantageous changes in the pension indexation formula, or in the earnings base used to calculate previous earnings levels (France, Japan, UK, Italy). In others, it has been the result of the introduction of new schemes (Sweden). In two countries (Denmark and Japan), there has been an erosion of pension level since 1965, and in Germany since 1969. It is interesting to note that social security benefit levels were entirely protected from inflation; on average, changes in relative prices did not adversely affect real benefit levels. - 23 - Table III.10: REPLACEMENT RATES FOR SOCIAL SECURITY PENSIONS (Single Person, % of Past Income) 1965 1969 1975 1980 Index 1965=100 Canada 21 24 33 34 161 Denmark 35 31 29 29 83 Sweden 31 42 57 68 219 France 49 41 60 66 135 Germany 48 55 51 49 102 Italy 60 62 61 69 115 Japan - 29 37 54 86* Netherlands 35 43 43 44 126 United Kingdom 23 27 31 31 135 United States 29 30 38 44 152 Note: See the sources for more details of the replacement rate computation. * 1960 = 100 Sources: SME/SAIR/SE/83.06, pg. 4, and Haanes-Olsen (1978) and Aldrich (1982), and World Bank Estimates. Demographic changes also had an impact on growth in social security expenditure, accounting for just under 30% of the increase in social security expenditure. The proportion of overall growth due to demographic factors was slightly greater in the latter period, this though differs substantially by country. In a number of OECD countries, (Australia, New Zealand, Italy) there is virtually no aging of the population. In future years, after 2000, demographic factors will be the most important factor contributing to overall pension expenditure levels. Increases in eligibility have contributed least to growth in social security expenditures in the latter 1975-81 period. This reflects the fact that increases in coverage, introduction of new schemes, reduction - 24 - in pensionable age and provisions of early retirement had, in most OECD countries, all been introduced by 1975. The implications of this for future levels of social security expenditure are outlined at the end of this section. Briefly, however, with social security expenditure the largest percentage of public social expenditure, and the fastest growing, the demographic changes overtaking OECD countries suggest that social security expenditure may at some point have to be constrained. This burden will not develop in the near future, as the demographic component of social security expenditure, over the next 10-20 years, will remain relatively stable. The major growth is expected after the turn of the century. Only in Japan is an aging population already a reality. Table III.11 shows the proportion of the population expected to be in the 65+ age group in the present and in the years 2000 and 2020 rising from 11.3% in 1980 to 16.5% in 2020. Table III.11: AGE DISTRIBUTION OF TOTAL POPULATION (%) SEVEN MAJOR OECD COUNTRIES Age Group 1980 2000 2020 0 - 19 31.6 27.0 26.0 19 - 64 57.1 58.7 57.5 Over 65 11.3 13.4 16.5 Source: "Short-term population projection, 1980-2020, and long-term projection, 2000 to stationary stage, by age and sex for all countries of the World." Prepared by PHN, World Bank, August 1983. - 25 - Attempts to reduce pension expenditure have revolved around two measures: the first is increases in retirement age (i.e., reduction of eligibility) or adjustments to pensions which provide incentives to retire later (normally, the trend has been the opposite: towards a lowering of the retirement age. In the US the present plan is to raise the retirement age to 66 in the year 2000. This type of adjustment will not have a major effect in the shortrun. Another measure is reduction in the rate of increase of benefits. Typically this would take place via a change in the indexation formula. Germany, the U.S., the U.K. have done this; the former two countries have corrected for past overindexation. Determinants of Transfer Payments: Unemployment Compensation and Insurance Unemployment insurance expenditure make up a relatively small, but growing share of GNP. In 1960, unemployment expenditure made up 0.4 percent of GDP; by 1975, it had almost tripled to 1.1%. In the period to 1975, it was thus the fastest growing sub-component of social expenditures, growing at 12% per annum. From 1975 to 1981, expenditure growth was less rapid, although in the 1982-83 period, it has again increased. Contributing to the rapid growth to 1975 were, almost equally, increased benefit levels and demographic changes. In the recent period, demographic changes--i.e., growth in the labor force, have been the primary force behind growth in expenditures. Also striking from Table 111.7 is the negative impact on expenditures due to reduced eligibility in the post-1975 period, as growing numbers of workers became unemployed for longer periods and benefits ran out. - 26 - Social Goods and Transfer Expenditures" Controlling Future Growth Equity Impact of Social Expenditures The general consensus on the impact the "welfare state" has had in reducing poverty and income inequality would clearly be that the old, the poor, are better off. There is, however, evidence that the increasing expenditure in the 1960's and 1970's has not been accompanied by the equity gains one might expect, as reflected in, for example, lower morbidity rates, lower mortality rates or increased equality in the distribution of income.10 It appears that the underlying inequities in the distribution of income and wealth are stubborn and that redistributive social programs have limited ability to reduce or change them. In sum, the consensus seems to be that government involvement of a more limited sort, at far lessercost could have achieved very nearly the same results. Efficiency One point which has repeatedly been made is that the gross costs of social programs are substantially greater than the net benefits to recipients. The table below outlines the gross expenditures and net benefits flowing to different levels of the income distribution. What is clear is that social goods expenditures and transfer payments assist not only the very poor, or even the fairly poor, but that much of the benefit actually goes to those middle classes whose taxes finance the 10/ See, for example, discussion in SME/SAIR/SE/83.3, and EEC Poverty Report, 1981; Public Expenditure on Income Maintenance Programs, UECD, 1976; W Beckerman, Income Maintenance Programs and Their Impact on Poverty, ILO, 1979; among others. - 27 - expenditure.11/ This is true of pensions, education, and health, but also of unemployment benefits. This pattern has been quite firmly established in a variety of OECD countries, including Canada, the U.S., and the UK. 11/ SME/SAIR/SE/83.3, pp. 6-7 - 28 - CHART 111.3 Social Expenditure Benefits, Total Personal Taxation and Net Benefits as a Percentage of Gross Income (Averages for the seven major OECD countries) (+) Social Expenditure Benefits Net Benefits O. J1 'Gross Incom (-) (-) Total Personal Taxation SOURCE: SME/SAIR/SE/83.09, pg. 48 - 29 - What the chart shows is that, in principle, the same redistri- bution (net flow) could be achieved with much reduced gross flows. What makes any shift in redistribution difficult, however, is precisely that across almost all levels of the income distribution, there is dependency on these social programs and these constituencies are important. As our OECD study points out, income-support benefits are often extended to the non- poor, so as to avoid high marginal tax rates and accompanying disencentives implied by rapid withdrawal of benefits as incomes rise. Stigler12/ has concluded that this sort of "churning" of resources is necessary if a political consensus in favor of redistribution policy is to evolve. The middle class will not continue paying for social programs if they, too, do not have some access. This may explain the absence of "tax revolt" in many European countries where access to public social services is broad based, by contrast to the US,where health programs, higher education grants and medicare are limited to those satisfying fairly strict eligibility criteria. These inefficiencies have highlighted another concern, namely the excess burden" inefficiencies which social programs generate. The behavioral changes on the part of recipients which result from government intervention, in turn often feed back on higher costs. These inefficiencies are most often pointed out in the case of health care, where service may be over-consumed as the user's perception of the value of the service is divorced from the cost of providing it,3/ in unemployment 12/ G.J. Stigler, "Directors' Law of Public Income Redistribution" Journal of Law and Economics, 13, 1970. 13/ An OECD study SME/SAIR/SE/83.04 offers the example of sending children to hospital because taking them to a doctor interferes with parents' work time. - 30 - insurance which has been alleged 14/ to induce the unemployed to increase their job search time and their period of unemployment, and in the case of pensions, have induced a trend to earlier retirement. In each case, these behavioral changes increase the costs and extension of the publicly financed programs. Outlook to 1990 and Beyond Growth of social and transfer expenditure in the 1980's and 1990's, and the pressures this growth will engender, will be a function of policy changes, economic conditions and demographic changes. The former determine both the economic base which will be available to generate the resources required, as well as the rate at which (indexed) expenditures grow. The latter determine the structural changes in the level of demand for committed benefits which may be expected. Drawing on OECD studies, this section discusses the outlook to 1990 for the level of social and transfer expenditures in OECD countries, given certain assumptions about economic growth and demographic change. The economic outlook is detailed in the footnote below. Footnote 2 outlines demographic assumptions. The outcomes are presented in Table 111.13. 14/ Feldstein ..... - 31 - Footnote 1: Economic Climate: 1960-1990 (Weighted average for seven major OECD countries) 1982-90 1982-90 Pessimistic Optimistic Growth Rate of (%) 1960-75 1975-82 Scenario Scenario Real GDP 4.25 2.67 2.80 3.70 Employment 0.94 1.03 0.84 1.31 Productivity 3.28 1.63 2.00 2.35 Unemployment Rate at End of Period 5.30 8.00 8.00 5.60 Source: SME/SAIR/SE/83.02 Footnote 2: Demographic Changes: 1950-2000 Industrialized Countries of which: Year Dependency Ratio < 14 > 65 1950 35.4 27.8 7.6 1979 44.3 40.5 3.8 2000 34.6 34.2 13.1 Source: U.N. (ESA/P/WP.6J, Jan 1980) The study assumes that the level of social and transfer expenditure relative to GNP (22.8% in major OECD countries in 1982) has reached a threshold level and will not be increased. 15/ It also assumes that there will be no increased coverage and that eligibility will not increase, as the extension of most social programs in OECD countries is already large. Demographic changes, however, are incorporated, as are 15/ SME/SAIR/SE/83.01 - 32 - increases in the relative prices of social expenditure (especially health and education), which are assumed to increase 1% more rapidly than the general price level. Social and Transfer Expenditures in 1990 Table 111.12: IMPLICATIONS OF THE EONCNIC SCENARIOS (Averages for the seven major OECD countries) of which: Percent Change in Total Change in Dengraphic Eligibi- Benefit of GDP Relative Prices Real Expenditure Change lity Levels PrograMM (1) (2) (3) (4) (5) (6) 1982 Growth Rates - Optimistic Scenario: 3.7 per cent GDP Growth Social Expenditure Education 4.8 1.0 3.4 - 0.51 - 3.9 Health 5.2 1.0 4.2 0.25 - 3.9 Incone Maintenance Pensions 8.8 0.0 4.4 1.42 - 2.9 Uneployment 1.2 0.0 - 2.7 - 5.70 - 2.9 Total Social and Transfer Expenditure 22.8 0.5 3.7 0.22 - 3.5 1982 Growth Rates - Pessimistic Scenario 2.8 per cent GDP Growth Social Expenditures Education 4.8 1.0 2.2 - 0.51 - 2.7 Health 5.2 1.0 3.0 0.25 - 2.7 Incon Maintenance Pensions 8.8 0.0 3.1 1.42 - 1.7 Unemployment 1.2 0.0 1.7 0.03 - 1.7 Total Social and Transfer Expenditure 22.8 0.5 2.8 0.56 - 2.2 Source: Secretariate estimates, SME/SAIR/SE/83.01 - 33 - Because demographic changes and movements in relative prices are adverse, holding the ratio of social and transfer expenditure to GNP constant implies a decline in the rate of increase of real benefits (Column 6) relative to GNP. In the scenario which is optimistic about growth (the scenario with lower unemployment, higher productivity growth and GNP growthg 1% higher than under pessimistic scenario), the decline in real benefit growth is of the order of 0.2% per annum. In other words, real benefit levels grow 3.5% per annum while GDP grows 3.7% per annum. Historical growth of real average benefit levels in from 1960-75 was 3.7%, from 1975-81, 2.65% per annum. In the pessimistic scenario (unemployment at 1982 levels, GNP growth at 1980-82 rates) the growth of real benefit levels, given a constant share of social expenditure to GNP, and given demographic change, is 0.6% per annum less than the growth of GDP. That is, real benefit levels grow 2.2% per annum, while GDP grows at 2.8%. Most likely these slower rates of growth would be achieved by an (under) indexing of benefits to less than real earnings growth. As the OECD study points out, these figures are broad averages across all social and transfer programs, and across countries. The actual changes in expenditure levels which take place are likely to vary by country and by program, in line with each country's priorities and constraints. The conclusion, however, that only a small reduction in the real growth of benefit levels can achieve a stabilization of expenditures relative to GNP is encouraging. Expenditure growth at a rate which implied real benefit growth at the same rate as GNP, on the other hand, would imply a 25% share in GDP by 1990. This share would be greater still if governments desired to increase coverage or eligibility. - 34- There are two important caveats to this conclusion. The first is that there may in fact be substantial increases in demand for these social goods from new sectors of the population who have previously not had access, or not had adequate access. The analysis hence has assumed that these demands can be contained and that there will be no increases in coverage or eligibility. (Alternatively, through better targetting, these demands could be met with no increases in costs.) The second caveat is that the analysis refers to a "steady state" scenario. If for example, there is a sharp supply-side shock to the system, and income falls, expenditure levels will probably remain nearly constant, and their share will rise in consequence. The previous example assumed that the ratio of social expenditure to GNP would remain constant at its 1982 level. A more stringent set of measures implemented by governments wishing to constrain social expenditures might place the burden of budgetary adjustment on social expenditures. The table below indicates the cut in social expenditure required to balance overall OECD budgets. Table 111.13: BALANCING THE BUDGET: SOCIAL AND TRANSFER EXPENDITURES Social and Social Exp. Government Transfer as % GDP to Deficit Expenditures Deficit as Balance Year % of GDP % of GDP % of Soc. Exp. Budget 1982 -4.2a/ 22.8 18.0 18.6 1981 -2.8 22.8 b/ 12.0 20.0 1980 -2.5 22.8 F/ 11.0 20.3 1979 -1.9 22.8 5/ 8.3 20.9 a/ Source: Table 28 b/ World Bank Estimates. - 35 - If the burden of budgetary adjustment were to be put on social and transfer expenditures, a decline of some 18% would be required in the social expenditure category, from 22.8% of GDP to 18% of GDP. The question of course is whether budgetary policy can be made by full adjustment on the expenditure side. Yet another alternative is to examine the implication of a zero real increase in benefit levels (i.e., constant benefit levels). In this instance, benefit levels would be adjusted to any increase in relative prices and overall expenditure would also rise in line with demographic movements. However, there would be no real increase in benefits levels. Again, no increases in coverage are assumed. Table 111.14 outlines the implications for social expenditure as a share of GDP. - 36 - Table 111.14: ALTERNATIVE SCENARIOS TO 1990 Four Main Prograns in the Seven Larger Economies Average Annual Growth Rates at Constant Prices of which: Nominal of which: Growth of total real Real Percent expenditures Degraphic Benefit Relative In- of GDP to 1990 change Eligibility Levels Prices crease Program (1) (2) (3) (4) 1 (5) (6) (7) 1990 Optimistic Scenario: 3.7% tDP Growth_ Social Goods Education 3.7 0.50 -0.51 - 1.0 1.0 0.0 Health 4.3 1.25 0.25 - 1.0 1.0 0.0 Transfer Paynt Pensions 7.3 1.42 1.42 - 0.0 0.0 0.0 Unemployment 0.6 -5.70 -5.70 - 0.0 0.0 0.0 Total Social Expenditure 17.1 0.7? 0.22 - 0.5 0.5 0.0 1990 Pessim.stic Scenario 2.8% GDP Growth Social Goods Education 4.0 0.05 -0.51 - 1.0 1.0 0.0 Health 4.6 1.25 0.25 - 1.0 1.0 0.0 Transfer Paynents Pensions 7.9 1.42 1.42 - 0.0 0.0 0.0 Unemployment 0.7 +0.30 0.03 - 0.0 0.0 0.0 Total Social Ependiture 18.5 1.06 0.56 - 0.5 0.5 0.0 Source: World Bank Estimates - 37 - If no real increase in average benefit levels takes place, social expenditure could be reduced to some 17% of GNP by 1990, on the demographic assumptions outlined earlier, and given the optimistic GNP growth of 3.7%. If average real benefit levels are not permitted to grow and expenditures rise only to cover demographic changes and relative price increases, but GDP grows at the slower rate of 2.8%, the share will fall to 18.5% of GDP. Conclusions In sum, it appears that there is some slack in social and transfer expenditure programs. If real benefit levels remain constant in real terms, the social expenditure burden can be substantially reduced. If the share remains constant, real average benefits can grow by 3.5%, only 0.2% less than the rate of growth of real earnings implying that recipients do share in the fruits of economic growth. What will be required is political will, and development of policy alternatives, especially better targetting. All these elements will be required, because such a shift will imply a change from past trends in benefit growth and in people's expectations of entitlements. Implied in the optimistic scenario is a growth of real benefit levels of 3.5%, compared with a growth rate in 1960-75 of 3.7%. Nonetheless, the optimistic scenario implies faster growth in benefit levels (2.8%) than actually took place in 1975-81. The more restrictive scenarios imply a more radical change from past trends, i.e., the zero real benefit increase represents quite a departure even from the 2.8% growth rate of benefits from 1975-81. - 38 - The feasibility of this rests, as noted earlier, on two crucial assumptions, namely (i) that new entitlements are not granted (or if they are, that targetting compensates for any such changes). No increases in coverage or If governments find this impossible to stick with, then the future augurs much less well for containing budget deficits through expenditures policy. And (ii) no further supply shocks take place. The following section completes the examination of OECD expendi- ture trends with a discussion of trends in interest payments. Debt Interest Table 6 indicated the share of government debt interest payments in total government expenditure. After government expenditure on the very broad category of "social goods and transfers", the largest share of public outlays goes to debt interest. The overall OECD average is close to equalling outlays on defense expenditure for many countries. This is a tremendous change from the not too recent past, when interest on the public debt was generally half its present level. Table 18 shows this trend since .1970. 16/ For major OECD countries, the share of interest in government expenditure rose 56%, from 4.9% of expenditure to 8.8% of expenditure. For some countries, such as Japan, the UK, and Australia, was about half again as high, and in a few countries (Canada, Belgium, Italy) the proportion approached 18% in 1982. 16/ Chouraqui and Price, op. cit. - 39 - Table 111.15: SHARE OF GENERAL OVERNMENT DEBI INIEREST PAYMENTS IN TUTAL GOVER4ENT SPENDING Percent 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 United States 3.8 3.6 3.3 3.8 3.5 3.5 3.9 3.8 4.0 3.8 4.2 5.3 5.8 Japan 4.9 4.5 5.0 5.8 5.3 5.8 7.2 8.7 9.8 11.1 12.6 13.6 14.8 Germany 3.0 2.9 2.9 3.1 3.2 3.2 3.6 4.0 3.9 4.1 4.5 5.2 6.1 France 3.3 3.0 2.6 2.4 2.6 3.3 3.1 3.3 3.4 3.7 3.8 4.7 4.5 United Kingdom 12.3 11.4 10.8 11.2 11.5 10.1 11.0 11.5 11.4 12.0 12.3 12.3 12.2 Italy 5.4 5.6 5.9 6.7 7.9 10.4 11.7 12.7 14.0 14.1 15.0 15.5 17.2 Canada 11.6 11.7 11.7 11.9 10.9 10.7 11.7 11.9 12.9 14.1 14.1 15.6 16.6 Total Major Seven Countries 4.9 4.7 4.6 5.0 4.9 5.0 5.7 6.1 6.4 6.7 7.3 8.2 8.8 Source: Chouraqui and Price, op. cit. Table 111.16: DEBT TO GNP RATIOS - OECD Total Public Central Government Debt Debt 1960 1965 1970 1975 1980 (1) 1975 1980 (1) Australia 59.8 49.7 39.6 24.7 - - - Austria - - 9.1 10.5 19.1 24.1 33.4 Belgium 70.2 58.5 48.9 40.7 57.9 50.4 71.8 Canada 44.6 36.7 29.2 22.6 28.4 - - Denmark 23.3 12.6 7.2 - - 15.6 44.1 Finland 8.9 11.4 8.4 3.0 9.2 - - France 28.4 17.4 12.6 8.9 10.1 15.0 14.0 Germany 7.4 7.2 7.0 10.5 15.6 24.8 31.4 Ireland 61.0 72.6 67.1 71.4 - 72.7 89.5 Italy 37.0 32.3 35.9 53.7 60.8 58.4 49.5 Japan 6.0 4.3 6.8 10.4 24.6 17.8 41.9 Netherlands 44.0 31.9 28.6 22.3 31.5 40.7 48.9 Norway 28.4 22.8 23.7 27.9 - 35.7 48.6 Spain - - 11.4 7.8 7.7 - - Sweden 31.5 19.2 21.2 24.4 34.1 35.4 53.2 Switzerland 15.5 7.9 5.7 7.3 8.0 28.3 26.6 United Kingdom - - 52.9 42.9 40.1 68.3 57.2 United States 46.6 37.6 29.3 28.1 28.0 49.1 47.4 Mean 34.2 28.1 24.7 24.5 26.8 37.1 45.1 Source: CPE/WP1/(82)4, pg. 58 and IMF International Financial Statistics-Central Government and Bundesministerium Der Finanzen, Finanzbericht, 1982-General Government - 40 - This rapid growth was a function of 3 factors: (i) rapid growth of government deficits financed by borrowing, (ii) increases in nominal interest rates during the period, and (iii) declining inflation which has resulted in higher real interest rates. The discussion which follows draws on OECD studies of this area. 17/ Public Debt The first factor is perhaps the most important. OECD debt and deficits are discussed in greater detail in Section D. Briefly, however, the growth of outstanding debt has been rapid in recent years. Table 19 shows the ratios of central government debt to GDP, from 1960-1980, and total government debt for the years 1975 and 1981. Central government debt to GDP ratios decreased from 1960 to 1970, largely because of the erosion of real debt levels due to inflation, and then increased between 1975 and 1980. (See also Table 21). Most countries shown experienced an increase in their central government debt/GNP ratios between 1975 and 1981. Total government debt to GNP ratios have also risen in the past 5 years. Likely future growth in this ratio is a function of future growth in government deficits and the manner in which governments chose to finance them, and future inflation. The alternatives and likely trends are discussed further in Section D on trends in OECD deficits. 17/ Charouqui and Price, op. cit., CPE/WP1/(82)4, and CPE/WP1/(81)1. - 41 - Nominal Interest Rates As a result of the higher nominal interest rates prevalent in OECD in the recent past, the interest burden component of government expenditure rose substantially. Table 111.17 shows trends in the long-term bond rate of major OECD countries. With the exception of countries such as Germany and Japan, these have tripled, or doubled, between 1965 and 1982. Table 111.17: NOMINAL LONG-TERM INTEREST RATES 1965-82 United United Year Canada France Germany Italy Japan Kingdom States 1965 5.21 5.270 7.100 6.940 6.560 4.270 1966 5.69 5.400 8.100 6.540 6.860 6.940 4.770 1967 5.94 5.660 7.000 6.610 6.910 6.800 5.010 1968 6.75 5.860 6.500 6.700 7.030 7.550 5.460 1969 7.58 7.640 6.800 6.850 7.090 9.040 6.330 1970 7.91 8.060 8.300 9.010 7.190 9.220 6.860 1971 6.95 7.740 8.000 8.340 7.280 8.900 6.120 1972 7.23 7.350 7.900 7.470 6.700 8.910 6.010 1973 7.56 8.250 9.300 7.420 7.260 10.720 7.120 1974 8.90 10.490 10.400 9.870 9.260 14.770 8.060 1975 9.04 9.490 8.500 11.540 9.200 14.390 8.190 1976 9.18 9.160 7.800 13.080 8.720 14.430 7.870 1977 8.70 9.610 6.200 14.620 7.330 12.730 7.670 1978 9.30 8.960 5.800 13.700 6.090 12.470 8.490 1979 10.26 9.480 7.400 14.050 7.690 12.990 9.330 1980 12.49 12.990 8.500 16.110 9.220 13.790 11.390 1981 15.22 15.663 10.383 20.578 8.660 14.742 13.718 1982 14.76 15.561 8.950 20.895 8.055 12.880 12.917 Source: IFS, Long-term bond yields. - 42 - The higher real interest rates which have been required recently for the government to raise debt are due to a variety of factors. Because inflationary expectations are still high inspite of the restrictive monetary environment, bond holders require higher real yields for the risk they take on. This insistence on higher real yields is reinforced by the fact of growing government debt which carries with it fears that the debt will be monetized, causing higher inflation. In sum, new debt is issued, and refinanced debt is rolled over, at higher real rates and is now beginning to put pressure on even low inflation countries such as Japan, Germany and Austria. Moreover, as real interest rates rise and the interest burden is financed, it is capitalized into outstanding debt, and the effect rapidly becomes cumulative. OECD has carried out a study estimating the contribution to the growth of the debt, made by these factors. 18/ The components are outlined in Table 111.18 26 which shows the contribution of (1) inflation, (2) interest payments, and (3) borrowing requirements, to increased indebtedness, for 6 OECD countries. Statistics are not comparable with those in Table 111.16 as this latter study refers exclusively to central government debt. In column (1), the table shows the proportion of government debt to GNP. The second column outlines the total change in the share. Column (3) begins the disaggregating, showing the estimates of the effect of inflation on (reducing) the real value of the debt/GDP ratio. In all cases, the impact of inflation has been to erode the real value of the debt, sometimes quite substantially, as in the UK and Canada. 18/ CME/WP1/(81)1 - 43 - Table 111.18 Central Goyenment Debt in Six Maior OED Camries a/ Chwes 1972-1979 Firumcial Share Cange due co:c/ Average Years b( of in Interest Borrowirg Real GDP Share Inflation Pavewants Requirwent Return Perentage a GDP/CNP at Mrket Prion Per ct United States 1972/3 20.3 -1.7 -1.0 +1.1 -0.6 40.5 1973/4 18.9 -1.4 -1.4 +1.1 -0.7 -1.0 1974/5 2D.2 +1.3 -1.5 +1.2 +1.3 -2.0 1975/6 22.5 +2.3 -1.3 +1.2 +3.1 -0.5 1976/7 21.9 -0.6 -1.5 +1.7 40.4 40.5 1977/8 20.4 -1.5 -1.4 +1.4 -0.4 Nil 1978/9 19.1 -1.3 -1.5 +1.2 -0.1 -1.5 1979/80 20.1 -1.0 -1.5 +1.3 +1.2 -1.0 1972/3 11.8 +2.1 -0.6 40.4 +3.7 -1.5 1973/4 11.2 -0.6 -1.5 40.5 +1.1 -9.0 1974/5 11.6 40.4 -2.0 40.5 +1.6 -12.5 1975/6 14.4 +2.8 -1.1 40.6 +3.2 -4.5 1976/7 17.9 +3.5 -1.2 40.8 +4.4 -3.0 1977/8 23.8 +5.9 -1.2 +1.2 +6.8 Nil 1978/9 29.4 +5.6 40.9 +1.4 +6.7 +2.0 1979/80 33.9 44.5 -1.4 +1.7 +5.0 +1.0 c7..RY 1972 6.7 0.1 -0.4 40.4 40.1 NL1 1973 6.7 Q.0 -0.4 +0.4 +0.3 Nil 1974 7.3 40.6 40.4 4).4 40.7 Nl 1975 10.5 +3.2 -0.4 40.5 +3.0 40.1 1976 11.4 40.9 -0.5 40.6 +1.2 +1.0 1977 12.5 +1.1 -0.4 40.7 +1.2 +2.0 1978 13.8 +1.3 -0.3 40.8 +1.4 +3.5 1979 14.4 40.6 -0.6 40.8 +1.1 +2.0 1980 15.3 40.8 -0.8 40.8 +1.0 40.5 Frnc 8.0 -2.1 -0.6 40.4 -1.5 -1.5 1973 7.0 -1.0 -0.6 40.4 -0.5 -2.0 1974 6.9 -0.1 -0.8 +0.4 40.4 -6.5 1975 8.5 +1.6 -0.7 40.6 +1.7 -1.5 1976 8.0 -0.5 -0.7 +0.6 Nil -1.5 1977 8.0 N1 -0.7 40.7 40.2 -).5 1978 8.8 40.8 -0.7 +0.7 +1.1 Nil 1979 9.1 40.3 40.8 40.8 40.7 -1.0 198D -1.1 Uniced xtrqdom 1972/3 46.7 -5.5 -3.3 +1.9 -1.6 -2.5 1973/4 44.4 -2.3 -4.2 +1.6 40.8 -5.5 1974/5 42.8 -1.6 -7.2 +1.5 44.2 -13.0 1975/6 42.6 -0.2 41.1 +1.4 +7.1 -15.5 1976/7 44.0 +1.4 -5.4 +2.2 +5.2 -7.5 1977/8 43.6 -0.4 -5.3 +2.5 +3.3 -6.5 1978/9 44.9 +1.3 -3.4 +2.9 +3.8 -1.0 1979/8) 41.9 -3.0 -5.7 +3.1 40.8 -6.0 Cada 1972/3 38.9 -1.8 -2.1 +2.1 +1.0 NL1 1973/4 35.0 -3.9 -3.0 +2.0 40.1 -2.5 1974/5 33.4 -1.6 -3.4 +1.9 +1.9 -4.3 1975/6 33.7 40.3 -3.0 +2.1 +2.2 -2.5 1976/7 33.5 -0.2 -2.4 +2.3 +.8 ML1 1977/8 - 36.3 +2.8 -2.5 +2.4 +3.3 Nil 1978/9 37.5 +1.2 -3.0 +2.6 +2.1 -1.0 1979/80 35.5 -2.0 -3.2 +3.0 -0.5 -0.5 aS United States: Federal vernmnt debt held by the public, less foreign and state holdings; United Kingdom: total cencral governmenc liabilities to the domestic sector; Canada: total federal liability, excluding foreign holders. Japan nd Germany total central goverTment debt outstanding; France: 'Dette Interieure'. b/ United States: July-Juns until 1975/76; October-September from 1976/7; , United Kingdom, Canada: April-March; Germany, France: calendar years. a/ Component changes do not add to total change since the effect of relative price changes and real GDP growth is excluded. (See Annex 2.) Sources: OZCD estimates - CPE/WdPI/(81)1 - 44 - In column 4, the estimated effects of debt interest payments are shown. As noted earlier, higher real interest rates have been required to compensate bond-holders for potentially higher risk of taking a capital loss on their bonds. In the past ten years, in most countries, the effect of real interest rates on debt to GDP ratios has been larger than that of increased borrowing requirements. Exceptions to this are Germany and Japan, whose debt and GDP ratios rose most. Finally, the increased public sector deficits have, been a contributor to overall growth of debt as well. The role of the higher borrowing requirement, net of interest payments, is shown in column 5. Finally, the last column shows real rates of return on central government debt. In most countries, (Germany excepted) the real rate of return on government debt has been negative for almost a decade. There is some evidence that it is becoming less so, however. Tentative figures for 1982 and 1983 (not shown) suggest that real rates are becoming highly positive, and as a result, are contributing substantially to growth in government debt. Summary Social expenditures and debt interest have been the largest factors accounting for the growth in budget deficits. This survey suggests that both of these factors have structural elements, but that there is some room for containing, especially in social expenditures. Interest expenditures, of course, have a dynamic of their own. - 45 - This summarizes trends in the important components of government expenditure since 1970. The following section will look at and discuss the trends in, and implications for, government deficits. - 46- The Deficits There is widespread concern among many OECD countries that the present level of budget deficits is unsustainable, and many of them have taken steps to correct this. The topic of sustainability of budget deficits is analyzed in a number of OECD studies.19/ In general the aim in all OECD countries is to bring budget deficits down to historically 'normal' levels. However, these aims have been more difficult to achieve in practice than in principle. The US, for example, has gone from a target policy of "budget balance in 1984" to a target deficit of no more than 2% of GDP in 1988. Table 111.19 and Chart D1 show actual government deficits since 1971 for 7 OECD countries and the total for OECD as a whole. The evolution since the 1970s, over the first and second oil shocks has been quite striking. From before 1970, when deficits were on the order of negative 0.5% of GDP to 0.5% of GDP, i.e., more or less balanced, the trend has changed dramatically. In 1975, the average deficit of the major 7 OECD countries was -4.3% of GDP. As OECD point out, after the first oil shock, deficits generally increased as governments took the adjustment burden on themselves, rather than forcing the adjustment onto the private sector. Subsequently, however, the inflationary consequences of this led to unacceptable weaknesses in currencies and trade balances, and a consequent need to reverse the policies. In the more recent years, however, the very slow recovery has led to an increase in public sector 19/ Chouraqui and Price, op. cit., CPE/WP1/(81)1, and SME/SAIR/SE/83.09. - 47 - deficits to 1983. This is partly the result of the non-accommodative monetary policies which have been followed in some larger OECD countries, with the consequent growth in the interest burden. Another factor has been the interaction of monetary and fiscal policies in prolonging slow recovery. However, the slow growth has also meant that income and employ- ment-related revenues have been reduced while expenditure patterns have exhibited rigidities. While almost all OECD governments have adopted balanced budget targets for 1984 or 1985, the persistence of the deficits in OECD countries has stymied many governments. There is a fear that spending and revenue patterns may be structural in nature, and that the policy prescription of old can no longer be used. There is question whether new prescriptions may be called for, and above all, whether the deficits will 'disappear' when the recovery gathers steam. Another feature of government deficits in recent years, representing a major change from previous trends, is the component of deficit which is financing government consumption expenditures. Deficits which finance government capital expenditures are nothing new, although typically government current savings had also contributed to capital formation. Nonetheless, in the 1970's government current savings have not contributed greatly to financing the deficit in all major OECD countries.20/ On average, the contribution of government current savings to the overall financial deficits was 65%. In the 1980s, government 20/ See CPE/WP1/(81)1. - 48 - current savings to the overall financial deficits was 65%. In the 1980s, government current dissaving has been the rule, as Table III. indicates, so that in the 1980s, deficits were at least in part, due to higher government consumption, with any global expenditure reductions typically directed at government capital expenditures, i.e., investment and not government consumption. - 49 - Table 1II.19: GENERAL GOVERNMENT FINANCIAL BALANCES a/ Surplus or Deficit (-) as Percentage of Nominal GNP/GDP at Market Price 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 United Statesb/ -1.7 -0.3 0.5 -0.2 -4.2 -2.1 -0.9 0 0.6 -1.3 -1.0 -3.8 Japanby/ 1.4 0.4 0.5 0.4 -2.6 -3.8 -3.8 -5.5 -4.8 -4.5 -4.0 -4.1 Germany -0.1 -0.5 1.2 -1.4 -5.7 -3.4 -2.4 -2.5 -2.7 -3.2 -4.0 -3.9 France 0.7 0.8 0.9 0.6 -2.2 -0.5 -0.8 -1.9 -0.7 0.3 -1.9 -2.6 United Kingdom 1.5 -1.2 -2.7 -3.8 -4.6 -4.9 -3.2 -4.2 -3.2 -3.3 -2.5 -2.0 Italy -7.1 -9.2 -8.5 -8.1 -11.7 -9.0 -8.0 -9.7 -9.5 -8.0 -11.7 -12.0 Canada 0.1 0.1 1.0 1.9 -2.4 -1.7 -2.6 -3.1 -1.9 -2.1 -1.4 -5.5 Total Major Seven Countriesc/ -0.8 -0.7 -0.1 -0.8 -4.3 -3.0 -2.2 -2.4 -1.8 -2.5 -2.6 -4.1 Australia 2.4 2.2 0.6 2.0 -1.8 -2.0 0 -1.9 -1.5 -1.0 -0.1 0.4 Austria 1.5 2.0 1.3 1.3 -2.5 -3.7 -2.4 -2.8 -2.5 -2.0 -1.8 -2.5 Belgium -3.0 -4.0 -3.5 -2.6 -4.7 -5.4 -5.5 -5.9 -6.9 -9.3 -13.1 -12.2 Denmark 3.7 4.6 5.8 1.5 -1.2 -0.2 -0.5 -0.2 -1.6 -3.2 -7.1 -9.1 Netherlands -0.5 0 1.1 -0.1 -2.6 -2.2 -1.8 -2.7 -3.7 -3.9 -4.9 -5.6 Norway 4.3 4.5 5.7 4.6 3.8 3.1 1.6 0.6 1.9 5.7 4.8 4.4 Spain -0.6 0.3 1.1 0.2 0 -0.3 -0.6 -1.8 -1.7 -2.1 -3.3 5.9 Sweden 5.2 4.4 4.1 2.0 2.8 4.5 1.7 -0.5 -3.0 -4.0 -5.3 -6.9 Total Smaller Countries/ 1.1 1.2 1.5 1.0 -0.9 -0.9 -0.9 -2.1 -2.6 -2.8 -3.9 -4.9 Total of Above OECD Countriesc/ -0.5 -0.4 0.1 -0.5 -3.8 -2.7 -2.1 -2.3 -1.9 -2.5 -2.8 -4.2 a/ On a SNA basis, except for the United States, United Kingdom, and Italy, which are on a national income account basis. "Financial balances" are equivalent to "net lending", a negative sign indicating net government borrowing. The general government borrowing requirement is equal to the financial balance plus financial transactions and accruals adjustments. b/ As a percentage of GNP. 7/ 1981 GDP weighted. Source: National Accounts of OECD Countries, national sources (see footnote a/ above) and OECD Secretariat estimates. - 50 - CHART 111.4 Seven Major OECD Countries Budget Deficits as % of GDP % 6: 1960 1965 1970 1975 1980 Source: SME/SATB/SE/83 02, pg. 46. - 51 - The implication of the consumption-based deficits for future growth and capital formation are worrisome, because deficits will not then be financed out of future growth. As OECD points out, where economic growth is less than the real interest rate, deficits will imply borrowing to finance interest payments on the public debt.21/ Table 111.20 provides corroborating evidence, showing the shrinking proportion of government investment as a share of GDP, relative to total government expenditure. From 13.1% of total government expenditure in 1970, government investment expenditure fell to 8.1% in 1982. And in FY82, for the major OECD countries, 40% of the deficit was due to current dissavings. If this is a purely cyclical phenomenon, which will reverse itself with a return to economic health, the present level of actual deficits is of less concern, as it represents counter-cyclical macro-economic policy. In general, public sector reliance on external financing was greater at the end of the decade than at the outset. As the table shows, between 1971 and 1981, the proportion of OECD central government debt held overseas rose nearly 30% from 11.0% of the total to 13.5%. In the case of the United States, the increase is especially striking--between 1/3 and 1/4 of all government debt is presently held abroad. As a share of OECD GDP, the proportion of foreign debt grew from 2.5% almost to 3% of GDP, an increase of 20%. In sum, OECD has increasingly drawn on capital inflows from the foreign section for financing of government deficits; in many countries this has been an important factor in helping to keep domestic interest rates down. 21/ OECD Occasional Studies, June 1983. - 52 - Table II. 20: GMVER NIDT EKPENDITURES AND FINANCIAL BALANCES a/ (OECD) 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 Current Expenditures, Total 29.0 29.6 30.0 29.8 31.6 34.4 34.2 34.2 34.4 34.4 35.9 37.2 39.0 Saving c/ 2.9 2.3 2.3 2.8 2.2 -1.0 0.0 0.6 0.3 0.9 0.2 -0.2 -1.7 Gross Investment c/ 4.2 4.3 4.2 4.2 4.1 4.2 3.9 3.8 3.8 3.9 3.8 3.7 3.5 Net Capital Transfers Received c/ -0.3 -0.4 -0.3 -0.4 -0.4 -0.5 -0.5 -0.5 -0.5 -0.5 -0.5 -0.5 -0.6 Financial Balance 0.2 -0.5 -0.4 0.1 -0.5 -3.9 -2.7 -2.2 -2.3 -1.9 -2.5 -2.8 -4.2 Gross Investment as % Total Expenditures 12.6 12.6 12.2 12.3 11.4 10.8 10.2 10.0 9.9 10.1 9.5 9.0 8.1 a/ Aggregate for the najor seven countries plus Australia, Austria, Belgiun, Demark, the Netherlands, Norway, Spain, and Sweden: 1981 GDP/GNP weights. b/ Other current transfers received and rent, dividends and interest. c/ Weighted average excluding the United States; because of this, the conponents will not add to the totals. Source: See Table 1 Another factor which represents a shift from the past, is the growing fraction of OECD debt which is held abroad. Table 111.21 outlines these changed shares. Table 111.21: CENTRAL GDERIDTI DEBT HELD BY DOWMESTC AND FOREIGN SECRS Year-end value as % of GDP % of Total Debt Held by Government Debt Domestic Sector Foreign Sector Held by Foreign Sector 1971 1981 . 1971 1981 . 1971 1981 United States 16.6 15.1 . 3.1 4.7 . 15.7 23.8 Japan 9.6 27.3 . 0.2 0.3 . 0.2 0.3 Gernany 7.0 14.6 . 0.2 2.9 . 2.8 16.6 France 9.3 10.7 . 0.9 0.5 . 10.2 4.0 United Kingdom 52.9 42.5 . 13.0 5.2 . 20.0 10.9 Italy a/ 40.1 51.3 . 0.7 1.2 . 1.7 2.2 Canada 41.5 37.8 . 0.3 1.5 . 0.7 3.8 Australia a/ 24.2 15.6 . 4.6 3.6 . 15.9 18.7 7 Country Average 20.0 20.6 2.5 2.97 11.0 13.5 a/ Total public sector debt. b/ 1980. c/ 1973. d/ Less than .1%. e/ 1972. f/ 1979. United States - fiscal year ending June until 1976, ending September from 1977 an; Japan - fiscal year ending Germany, France - calendar year; United Kingdom - fiscal year ending March; Italy, calendar year; Canada - fis ending March; Australia - fiscal year ending June; Austria, Belgiun - calendar year; Demark - fiscal year end until 1977, calendar year fran 1978; Finland - calendar year; Ireland - fiscal year ending March until 1974, c S 97 ther - calendar year; New Zealand - fiscal year ending March; Norway, Porttgal, Spain, Source: ECD - Couraqui and Price. Weighted by GDP. - 53 - Structural vs Cyclical Deficits A recent OECD study22/ has attempted to separate the effects of the structural components of these government deficits, from those which have been cyclically induced by the recession and economies' slow recovery. The questions examined include "to what extent do OECD countries face 'structural' problems with respect to deficits"?, and "are the levels of structural deficit compatible with governments", other economic object- ives, such as price stability, employment output growth?' The study attempts to measure the nature and size of structural budget deficits. Overall, in brief, their assessment has been that the deterior- ation in budget deficits is primarily due to the impact of inflation, slow growth and unemployment. These three factors, in the past, would probably have been classified as purely cyclical. Recent thinking, however, suggests that they have structural components and contribute to structural deficits. Chart 111.5 presents the structural budget deficit for major OECD countries, combined.3/ The structural deficit is defined as the deficit which would result at "potential output", i.e., they are "full-employment" deficits. The trends differ by countries. Taken together, however, from 1970 to 1983, OECD countries deficits, when adjusted for cyclical factor, 22/ CPE/WPI (81)1, and CPE/WP1(83)2. 23/ Source: CPE/WP1(81)1, and CPE/WP1 (83)2, respectively. - 54 - were negative throughout the period, except 1970, ranging from negative -.1% of GDP to -2.0% of GDP (1976). In the last few years, since 1980, the structural deficit, overall for OECD has been smaller than in the past. In 1983, the structural deficit is estimated at -0.6% of OECD potential GNP, or very near being in balance. Structural surpluses exist in a number of countries including UK and France. And throughout the past decade, until 1983 the U.S. was in structural surplus. CHART 111.5 Seven Major OECD Countries percentage of 1 Cyclics-ly-adjUStEd Mudret Baince - 55 - Disaggregating, revenue and expenditures from 1970-75, structural public expenditures increased from 31% of potential output to just under 35% (see Table 111.22). In the second half of the decade, expenditures rose again, reaching 36% by 1980. Contributing to this was a steady growth in social security payments (column 4) from 9% to 12% of potential GDP, and an increase in the interest bill, from 1.9% to 4.8% of potential GNP (column 6). On the revenue side, full employment revenues did increase throughout the decade, from 31.7% of potential GDP to 35.6% of GDP in 1983. And at almost every point in the decade, 'full employment' expenditures exceeded, sometimes by a substantial margin of as much as 2 percentage points, 'full employment' revenues. This suggests that the contribution of expenditure rigidities is perhaps a factor in determining the long run gap between revenues and expenditures.24/ 24/ In the United States, tax reductions have also been responsible. - 56 - Table 111.22: IRUIENTIAL CUIPUT 3JIXEr BALANCES 'UlAL MAJOR SEVEN COUNIREIS AS % OF GDP (1970 - 1983) Actual Cyclically Adjusted Balance of Which 1981 GDP/GNP Weights & 1kchange Rates kidget Social Interest Inflation Year Balance Revenues EKpenditures Security Balance Bill Adjustment 1970 31.7 31.1 8.9 0.5 1.9 - 1971 -0.8 31.3 31.4 9.3 -0.1 1.8 1.8 1972 -0.7 31.8 32.2 9.7 -0.4 1.8 1.6 1973 -0.1 32.3 32.9 10.2 -0.6 2.0 2.6 1974 -0.8 33.4 33.6 10.4 -0.2 2.1 4.4 1975 -4.3 32.5 34.5 11.1 -2.0 2.2 3.9 1976 -3.0 33.3 34.6 11.4 -1.3 2.4 2.9 1977 -2.2 33.7 34.6 11.5 -0.9 2.5 3.1 1978 -2.4 33.6 35.2 11.8 -1.6 2.7 2.7 1979 -1.7 34.2 35.3 11.9 -1.1 3.0 3.8 1980 -2.4 35.0 35.9 12.0 -1.0 3.3 5.0 1981 -2.6 35.9 36.3 12.1 -0.4 3.8 4.0 1982 -3.7 35.9 36.1 12.1 -0.2 4.4 2.8 1983 -4.5 35.6 36.2 12.0 -0.6 4.8 2.6 a/ (EC) estimates and forecasts Source: CPE/WP/(83)2. 1981 (UP/(NP Weights & Echange Rates Control of Structural deficits The need to reduce structural deficits has been given a great deal of weight. In general, measures taken by OECD countries to reduce structural deficits have been partially successful. At full employment since 1981 the size of the structural OECD deficit has, in fact, been quite small. Its noted earlier, the 1983 estimate represents the failure of the US to contain its deficit, which is now structurally estimated at (-) 0.8% as well as that of Japan, with an estimated structural deficit of negative (-) 1.8% of potential GDP. In other OECD countries, the estimated structural deficit was close to zero (Germany and Canada) or in surplus (the United Kingdom and France). - 57 - Despite the reduction in structural deficits as measured, actual deficits have continued to grow, reaching in 1983, (-) 4.5% GDP. In this measure, a large cyclical component is responsible for the actual deficits. In 1983, less than 15% of the actual deficit was due, in the estimate of OECD25/, to structural factors. Nonetheless, there is reason to fear future growth in these actual deficits, even ignoring, for the moment, any impact they may have on financial markets. The actual deficit can feed back into the structural deficit in two ways. The first is via its impact on higher debt and interest charges. The second is via the impact that prolonged recessions and high interest rates may have on capital formation and future growth. Thus, it is possible that the actual, "cyclical" deficit be converted into a structural one, as potential growth is affected by the deflationary policies followed to reduce the actual deficits. This results from the alleged effects of the level of actual deficits on capital formation and the effects of the structure of revenues and expenditure on efficiency of resource allocation. This concern that large actual deficits may have structural implications arise because concern over the private sector responses, includes savings propensities, to these deficits. In the US, the impact of the prospect of prolonged high borrowing requirements of the government has already been manifested in the level of long term interest rates which results from 'expectations'. Large deficits, which rapidly add to the stock of government debt, cannot be acommodated in investor portfolio preferences and balances, except at substantially higher interest rates. The potential crowding out is discussed in Section E and F. 25/ CPE/WP1 (83)2. - 58 - CHART 111.6 (Averages for the Seven Major OECD Countries) % 44, 42 tI 40 ~ 38 Public Expenditure i - 34 Total Tax Revenue 32 307 m__ Public Exne.diture and Total Tax Revenue Source: CPE/WPI/83/2, pg. 46. - 59 - Summary The structural balance figures shown in Table 111.22 corroborate the discussion of revenue and expenditures elasticities, and suggest that the deficit problems cannot be solved simply by increasing taxes. If expenditures increase structurally at a rate faster than GNP because of entitlement origins and the cumulative impact of debt interest, then raising taxes cannot close the deficits. If expenditure growth can be maintained at constant levels, (i.e., grow at the same rate as GNP, or less) then taxes can do the job. The analysis in section C suggested that public expenditures especially on entitlement program subsidies and health have been growing rapidly, but that reductions in these expenditures, especially pricing changes are feasible. If the changes can be made to bring expenditures in line in a structural sense with revenues, future structural deficits can be contained, tax increases to match expenditure cuts may also be necessary. - 60 - Trends in Savings 27, Examination of the savings rate in the 1960-82 period suggests that the apparent downward trend in savings ratios since 1975 represents the more relevant trend for analysis and projections. While fluctuation in savings rates have been procyclical, and a decline in savings ratios is expected and normal during periods of recession and an increase during the recovery periods, the analysis of the trends would support the notion of a structural shift in savings ratios. In Table 111.23 the savings rate in OECD appears to have fluctuated with changes in income over the cycle, but around a declining savings trend. The OECD average savings rate dropped from 13.11% of GDP in the 1960-74 period to 10.1% of GDP in the 1975-81 period. This is below the 12.2% of GDP savings rate for the entire 1961-81 period. There is also evidence that the savings rate at the bottom of the recent recession was 27/ In this section trends in net savings are examined. In discussing savings behavior and behavioral determinants, net savings is the relevant concept. Net savings is defined as gross savings less capital consumption allowances. Gross savings thus include net savings and capital consumption. Because capital consumption allowances are not a behavioral variable, but determined by legal and tax structures in the country concerned, the gross savings concept is less interesting in analysizing changes in savings trends. Gross saving across countries is relatively constant and shows virtually no trend over time. Capital consumption allowances, or depreciation, are relatively more important in lower than in high savings countries. During the 1970's, capital consumption exceeded net savings by large margins in the U.S., and the U.K. In countries with the much faster rates of capital formation, capital consumption was smaller than net savings, and also less important relative to national disposable income. - 61 - lower (8.9% of GDP) than in the previous recession (9.8%), and that at cyclical highs, savings were also lower (11.05% of GDP in 1979 as compared to 13.2% in 1968). This shift in the trend of savings for the whole of OECD requires an examination of the savings rates in the different countries and an analysis of the components of savings in each country.28! 28/ This section examines only the standard national accounts savings data, which (see passim) do not take into account country institutional differences. Savings rates need to be adjusted, inter-alia, for indirect taxes, pensions, consumer durables purchases, etc. There have however been attempts at explaining the differences of the savings ratio in different OECD countries to take in to account the importance of institutional factors which the accounting rules in the SNA do not incorporate in detail. Blades (Occasional Studies, OECD, June 1983, Alternative Measures of Savings) examines household savings ratios and incorporates a variety of changes to the SNA accounting rules. The coefficient of variation of individual country savings rates using the SNA gross savings ratio is 36%. The coefficient is reduced to 26% when corporate net savings are included or incorporating households and all enterprises in the sector. The coefficient of variation rises to 50% if the adjustment is made to exclude unincorporated enterprises from the household sector, and the coefficient of variation is reduced to 19% when expenditures of consumer durables are included in the savings component. The increased stability of the savings ratio, which includes consumer durables as capital, results in a marked reduction in the difference in savings rates between countries. Nevertheless, despite the adjustments, the data on savings still shows a trend towards a reduction in national savings ratios since 1975. - 62 - Table III. 23: NET SAVINGS RATES IN OECD (As percent of GDP) Year S/GDP 1960 12.49 1961 12.11 1962 12.37 1963 12.28 1964 10.8 1965 13.0 1966 12.6 1967 11.9 1968 12.3 peak of cycle 1969 12.9 1970 12.3 1971 12.0 1972 12.2 1973 14.1 1974 11.9 1975 8.9 bottom of cycle 1976 9.6 1977 10.4 1978 11.4 peak of cycle 1979 10.9 1980 9.5 1981 8.5 bottom of cycle Growth Rates of Net Savings 1960-81: 12.18% p.a. 1960-74: 13.11% p.a. 1975-81: 10.17% p.a. Source: OECD National Accounts (World Bank estimates). - 63 - CHART 111.7 OECD Savings Rcites 1964-1gE 14- 12t v L 64 65 66 67 1S 69 70 71 72 73 74 75 76 77 78 79 10 B1 Source: Table 1. - 64 - Table 111.24 shows trends in the net national savings rate in 23 OECD countries, for two periods. In the first column, trends in the 1960-73 period are shown. Column two shows savings trends over the longer period, 1960-79. Column 3 indicates the direction of the change in trend, if any, from the 1960-73 period to the 1973-79 period. Table 111.24 Savings: Trends and Changes Changes in Trends in Net Savings Ratios Savings Trend 1960-1973 1960-1979 73-79 Japan +0.35 No trend - Germany -0.24 -0.46 - France +0.19 -0.18 - Italy -0.27 -0.30 - U.K. +0.18 -0.18 - U.S. No trend -0.23 - Canada +0.35 No trend - Switzerland +0.16 No trend - Netherlands No trend -0.33 - Austria +0.42 No trend - Greece +0.84 +0.38 - Australia +0.35 No trend - New Zealand No trend (1971-1979) - Spain +0.43 No trend - Denmark +0.49 -0.43 - Belgium +0.51 No trend - Norway No trend -0.32 - Iceland No trend No trend No trend Sweden No trend -0.39 Finland No trend No trend No trend Ireland +0.39 +0.28 Turkey No trend (1966-1976) No trend - - negative trend. Source: CPE/WP1/(81)9. - 65 - A negative change in the trend, shown in column 3, is reflected in (i) a movement from a positive trend to no trend, (ii) a reduction in a positive trend value, or (iii) a falling trend which becomes more pronounced. During the 1973-1979 period there were no rising trends in OECD net savings. Conditions appear to have worsened in the 1980-1983 period. Although the periods here are broken into pre- and post-1973, the fall in the savings rate became more acute after 1975. While in some countries the saving rate has recovered from the very low 1975 value, in the majority, the savings rates have remained low or decreased even further. Sources of Savings The national savings ratio is comprised of the savings rates in the three principal subsectors in the economy--households, business and the general government. These are weighted--with their weights determined by the sectoral shares in national income--to provide the overall total. A comprehensive analysis of the savings ratio and the shift in the trend requires of an analysis of the sectoral savings ratio and of sectoral shares. Sectoral savings in OECD can be regarded as the surplus on "current transactions accounts" available for financing real capital formation, lending abroad, or lending to other domestic sectors, where this surplus is used to finance investment or current expenditures. - 66 - The primary sources of funds for investment are private and corporate savings, budgetary surpluses arising from govenment accounts, and borrowings from the rest of the world. Table 111.25 and Chart 111.8 indicate the sectoral shares of savings as a percent of total GDP.29/ Table 111.25: COMPOSITION OF NET SAVINGS--OECD** (As percent of GDP) Year Total Corporate Government Household 1964 10.8 3.4 2.0 5.4 1965 13.0 3.7 2.5 6.6 1966 12.6 3.5 2.3 6.4 1967 11.9 3.2 1.4 6.9 1968 12.3 3.0 2.2 6.4 1969 12.9 2.4 3.6 6.3 1970 12.3 2.5 2.3 7.4 1971 12.0 2.6 1.9 7.6 1972 12.2 2.9 1.9 7.5 1973 14.1 2.7 2.8 8.7 1974 11.9 0.7 2.1 9.2 1975 8.9 0.7 -1.3 9.6 1976 9.6 1.4 -0.2 8.5 1977 10.4 1.9 0.4 8.2 1978 11.4 2.4 0.4 8.6 1979 10.9 2.1 0.9 8.0 1980 9.5 1.2 0.3 8.1 1981 8.5 0.6 -0.2 8.2 * The OECD national accounts include in the household sector both the households themselves and "non-profit institutions serving households in the total of "household savings". ** Seven countries. Source: OECD National Accounts (World Bank estimates). The table suggests that the drop in the net savings of the OECD corresponds to increasing dissavings in the government sector which have not been compensated by corresponding increases in house-hold or corporate savings. Household savings ratios increased in 1974 and 1975, while the corporate sector, which showed a deterioration of its financial position 29/ The data is based on the classification in the "OECD National Accounts Statistics", Table 7, for each OECD country, for 1960-1981. Estimates for 1982 and 1983 have been made. - 67 - in 1974, improved balance sheets in 1975 by contracting investment and inventory expenditures. After 1975, the household savings ratio in the major OECD countries had been declining and corporate sectors' own generation of savings has declined, and is substantially below the levels of the mid-1960s, or 1970s. CHART 111.8 Sectoral Shares of Savings as % of GDP 1964-1981 Seven Major OECD Countries (Net Savings) ~J A . /Households *..- .l saving :- I I T Corporate saving I 1 / 2- i ll V 77 * Government Saving -'- 65 6a I7C 97 17 3747 a7 a7 0 - 68 - Government Savings During the 1975-1981 period, net government current (dis)savings as a percentage of GDP in the seven major OECD countries was negative in 4 out of 6 years. When government investments are included, government's overall dissavings was greater still.30 Household Savings As Table 111.24 indicates, household savings have fallen since 1975. This is due to a complex interaction of microeconomic as well as macroeconomic factors--which ex-ante one may assume to have affected savings behavior. These include, for example, inflation, unemployment, level of real and nominal interest rates, demographic changes, income growth. Table 111.26 outlines the results of a selection of empirical studies of the interest elasticity of the savings rate. In general the results suggest that the relationship is positive, though small, i.e., higher interest rates stimulate higher savings. Results however are sensitive to the specifications. A related factor is the availability of credit which generally appear in the U.S., especially, to be negatively related to savings. The results would therefore support the view that savings will return to a (higher) structural level, once households adjust to, and remain convinced that positive returns can be earned on their savings. 30/ Price and Chouraqui, op. cit. Table 111.26: E4PIRICAL ESTIMATES OF THE INTEREST ELASTICITY OF HOUSEHOLD SAVINGS IN THE UMITED STATES (Author) Houthakker Juster Juster Howrey Wright Taylor Taylor Helen Watchel Taylor Weber Blinder Springer Mishkin Boskin Howard Hymnas Glyfason (1967, 69) (1970) (1971) (1972) (1972) (1975) (1970,75) (1975) (1975,77) (1976) (1978) (1978) (1978) (1981) 1. Interest Elasticity of Saving a/ 0.2 MEG 0.8 1.76 0.28 POS NEG 0.03 NEG/POS NS 0.4 NS NS 0.3 2. Dependent Variable b/ CON SAV SAV CON SAV SAV CON CON CON CON CON SAV SAV CON 3. Interest Rate C/ No NCm NM N 1N NOM N04 REAL N04 NO REAL N04 NON N04 4. Estimation Method d/ OLS OLS OLS NONL OLS OLS NON/NL OLSe/ OLSO/ OLS/INST*/ OLS/INS1-/ OLSe/ OLS OLSO/ 5. Periodicity of Data f/ ANN QRT QRT ANN QRT QRT ANN ANN QRT QRT ANN QRT ANN QRT 6. Sampler Period 1905-49 1953-66 1953-69 1948-65 1954-72 1953-73 1930-65 1947-72 1955-71 1952-74 1929-69 1965-76 1951-74 1952-78 1929-59 1930-70 NOTES: a/ POS = Positive, NEG - Negative. (No numerical estimates can be obtained.), NS - Not Statistically Significant. b/ CON = Consumption Function, SAV = Saving Function. c/ NOM * Nominal, REAL - Real. d/ OLS - Ordinary Least Squares, INST = Instrumental Variables, MONL = Nonlinear, ML - Maximum Likelihood. */ With Cochrane-Orcutt autocorrelation correction where necessary. f/ ANN = Annual, QRT - Quarterly. Source: CPE/WPI(81)9. - 70 - The relationship between savings and inflation has also been difficult to quantify. In a period of inflation, savings could be expected to decrease since the incentive is to accelerate purchases of goods, and switch from money, which is loosing its purchasing value, to commodities. Money illusion about inflationary increases in income may also stimulate consumption. If during periods of inflation, interest rates do not adjust, this is yet another damper on savings incentives. On the other hand, if real interest rates are maintained or increased, then the incentive is to shift towards financial instruments instead of commodities. Positive effects on savings derive from the fact that inflation also generates uncertainty. If the expectations of households are that antiinflationary policies will be put into effect, households will expect increased unemployment and a fall in income growth. This uncertainty will make it rational to increase savings. Finally, there may be attempts to re-establish levels of real wealth, a "target" savings phenomenon which might act to increase savings. This appears to have taken place in U.K.31/ The results outlined in the tables which follow are sensitive to the period measured. In those studies which include the period to 1980, the effect on savings, of inflation is either negative, or inconclusive. This suggests that the observed decline in the savings rate in the 1878 to the present period is less due to structural factors than to micro-economic responses. 31/ See Bank of England Quarterly Review, 1983. - 71 - The role of budget deficits in the overall savings picture comes into play inter alia via the effects these might have on inflation, and inflationary expectations. The latter would arise as the result of fears that the deficits would be monetized. The attached table presents the results of number of studies using the expected inflation variable. The results are not entirely conclusive, but there is evidence that there is a negative relationship also between expected inflation and savings. - 72 - Table 111.27(a): INFLATION AND SAVING RESULTS OF EMPIRICAL STUDIES FOR OTHER OECD COUNTRIES Davidson Koskela- Hendry - Yon Deaton Howard et al Shiba Viren Urgern Sternberg (1977) (1978) (1978) (1979) (1980) (1980) 1. Effect of Inflation on Savings a/ POS POS b/ POS POS POS pOS h/ 2. Estimating Equation b/ SAY SAY CON SAY SAY CON 3. Inflation Rate d/ ACT ACT/EXP ACT ACT ACT -h/ 4. Estimation Method e/ OLS OLS OLS OLS OLS OLS 5. Country UK CANADA, JAPAN UK JAPAN FINLAND UK GER4ANY, UK 6. Periodicity g/ QRT QRT QRT ANN QRT/ANN CRT 7. Sample Period 1955-74 ... 1958-70 1966-75 1959-76 1964-76 NOTES: a/ POS = Positive; NEG = Negative; ... = Inconclusive. b/ These effects are attributed primarily to uncertainty by the authors. c/ CON = Consumption Function, SAY = Saving Function. d/ ACT = Actual, E)P = Expected. e/ OLS = Ordinary Least Squares, INST = Instrumental Variables, NONL = Nonlinear, ML = Maximum Likelihood. f/ With Cochrane-Orcutt autocorrelation correction where necessary. j/ ANN = Annual, QRT - Quarterly. h/ No Inflation variable is explicitly included in the regression equation, but the incane measure used as explanatory variable Is adjuted for inflation Induced changes in financial wealth. Source: CPE/WPI(81)9. - 73 - Table Ill .27.b: IFLATION AND SAYING; RESULTS OF BIPIRICAL STUDIES FOR THE UNITED STATES Branson- Houthakker Juster Juster Howrey St. LOuIS Klevorick Taylor Watchel Taylor Springer Oaton Wachtel Boskin Howard Hymans FED Glyfason (1969) (1970) (1972) (1975) (1975,77) (1977) (1977) (1978) (1978) (1978) (1979) (1981) 1. Effect of Inflation of Savings 5/ NEG FOS NEG/pOSb/ pSb/ OS/NEG FOS poSb/ pOSb/ pOSb/ NEG ... NEG 2. Estimating Equation b/ CON SAY SAY SAY ON SAY SAY CON SAY SAY SAY CON 3. Inflation Rate d/ ACT ACT ACT/EXP ACT/E)P EF ACT ACT/REAL EXP ACT/E)P E)IP ACT/EXP ACT/EXP 4. Estimation Method :/ OLS/INST OLS OLS OLS OLSf/ OLS OLS OLS/INSTf/ OLS1/ OLS OLS OLSf/ 5. Periodicity of Date g/ QRT RT QRT RT QRT QT T ANN QT ANN QT T 6. Sampler Period 1955-65 1953-6 1953-71 1953-73 1955-71 1954-74 1955-74 1929-69 1965-76 1951-74 1955-78 1952-78 NOTES: a/ POS * Positive; NEG - Negative; ... - Inconclusive. b/ These effects are attributed primarily to uncertainty by the authors. C/ CON = Consumption Function; SAY - Saving Function. / ACT * Actual; EW * Expected. / OLS - Ordinary Level Squares; INST * Instrumental Variables. / With Cochran*-Orcutt autocorrelation correction where necessary. 9/ ANN - Annual; QRT * Quarterly. Source: CFE/WPI(81)9. - 74 - A third factor affecting saving is the demographic structure of the population. The life cycle hypothesis of savings is based on a number of demographic factors. Among them are increases in life expectancy, which would cause the household savings ratio of a growing population to rise, since each individual requires higher wealth accumulation to finance a constant consumption stream over the extended retirement period. The retirement age when it is reduced, will increase household savings ratios since each individual would require a larger stock of wealth to finance consumption. The age distribution of the population will determine ceteris paribus, that the savings ratio will depend on the distribution of households of certain ages in the total number of households. An increase in the ratio of the 18 to 64 working age group as a percent of the total population would increase savings, and the shift from old (dissavers) to young (savers) will increasing savings. Empirically, OECD has experienced an aging of the population, with further aging expected. The table below outlines changes in OECD population which might be expected to influence savings rates. The table shows a substantial projected increase in the proportion of the aged population (dissavers) relative to the working population. The aged increase from 3.8% of total industrialized country working population in 1979 to 13.1% by the year 2000. This is a structural factor of which account must be taken. - 75 - Table 111.28: DEMOGRAPHIC CHANGES: 1950-2000 Industrialized Countries % of Working Population Year < 14 years of age > 65 years of age 1950 27.8 7.6 1979 40.5 3.8 2000 34.2 13.1 Source: U.N. (ESA/P/WP.6J, Jan 1980). Family size will affect savings as larger family affects the overall time profile of consumption and savings (see Leff, 1969). Also noted by OECD, in the average age of entry into the job market and the period of formal education of young people which will effect the dependency period of the young and the aggregate saving ratio. The increases in female participation increases the number of households with two earners. Whether this demographic change has positive or negative effects on savings depends on the access to consumer credit, the need for precautionary assets, and the substitution of home produced goods and services by commercial output. OECD (1979) indicates a tendency for a lowering of the savings ratio as a result of higher female labor force participation. One of the most studied factors among savings determinants is the impact of pension schemes and social security. The theoretical relationship suggests that if life-cycle savings motivations predominate, working generations have little motivation to save for retirement, which is - 76 - Table 111.29.a: TIME SERIES ESTIMATES OF THE EFFECTS OF MANDATCRY PUSLIC FENSION SCHNES ON PERSONAL SAVINGS (CONSUMPTION) (United States - Estimates) Feldstein Munnel Ia/ Barro a/ Derby a/ Lelmer-Lesnoy (1974) (1974) (1977) (1978) (1980) 1. Dependent Variable b/ CON CON SAY SAY CON CON CON CON CON 2. Regression Coefficient on 0.021 0.029 -0.030 -0.058 0.014 0.014 0.017 0.011 -0.002 Grass Social Security (3.4) (0.83) (2.60) (1.40) (1.40) (0.39) (1.31) (0.59) (0.26) Wealth Variable (t-value) Much weaker (and statistical ly insifinitcant ) effect No effect 3. Estimated Depressing Effect on 50% or higher than Feldstein (1974 results) Personal Savings (as a percentage of actual savings, approximate average value) 4. Sampler Period 1929-71c/ 1947-71 1929-69c/ 1946-69 1929-74c/ 1947-74 1929-74c/ 1947-74 1930-74/ NOTES: a/ Representative results have been chosen according to Esposito (1978). - / CON = Consumption Function; SAY * Saving Function. C/ Excludes the period 1941-46. Source: CPE/WP1(81)9. - 77 - Table III.29.b: TIME SERIES ESTIMATES OF THE EFFECTS OF MANDATORY PUBLIC FENSION SCH84ES ON HOUSEHOLD SAVINGS (CONSUMPTION) (Other OeC0 Countries) Pereiman/PestIeau Wrage Boyle/Murray Pfaff et al Markowskl/Palmer 1. Author(s) a/ (1981) (1980) (1979) (1978) (1980) 2. Country Belgium Canada Canada Germany Sweden 3. Dependent Variable b/ CON SAY SAY SAY c/ SAY c/ SAY 4. Regression Coefficient on Social Security Variable (t-statistics) (1) Social Security Wealth 0.028 -0.008 -0.0310/ POS/NEG f/ - (1.9) (-0.85) (1.79) (II) Social Security Benefits - - - - -0.199 -111.6!/ (-1.33) (2.5) (ill) Social Security Contributions - - - - - - 5. Implied Depressing Effect on Savings (as percent of actual saving, approximate) 40% h/ h/ ... 15% 30% 1/ 6. Sample Period 1954-77 1953-75 1953-75 1954-75 1960-77 1952-75 NOTES: a/ Representative results. - / CON = Consumption Function; SAY * Saving Function. C/ Serious misspecification reduces usefulness of results (important explanatory variables are missing from regression equation). d/ Canadian Pension Plan wealth. a/ Old Age Security wealth. / Both positive and negative coefficients (all statistically insiginifcant at 95 percent level) were obtained for different combinations of additional explanatory variables. 9/ The benefit variable used is an estimate of the contribution of expected future pensions to permanent Income; cf. Markowskl/Palmer (1979) for a detailed description of the variable. h/ Information given insufficient to calculate this figure. 1/ According to the study quoted, the depressing effect on personal savings as more than canpensated by asset formation of the Social Security fund so that net effect on national savings was positive. Source: CPE/WP1(81)9. - 78 - provided for through pensions. Clearly there is no one for one substitution between pensions and private savings, as the characteristics, (e.g., liquidity) of each are different, and no such one for one reduction should be expected. Moreover, since pensions do not, typically, fully replace part income, there is remains some motivation for savings. Empirically, the results presented in Table 111.29 are mixed. In some countries there is evidence of reduced household savings, in others, the relationship is difficult to confirm. The reduction of private savings translates into lower national savings because public pension schemes are typically unfunded. To summarize, these determinants suggest mixed effects, and no clear picture emerges for future savings. Corporate Savings - During the 1964-1981 period, the corporate sector has generated a declining share of total net savings. For the period, the results for the major 7 countries are presented in Table 111.30. OECD corporate savings made up, on average 28% of total savings in 1964, 19.3% in 1970, and 13.6% in 1981. The decrease in the share of corporate savings in the total net savings is not yet explained, although there are a number of hypotheses. One factor may be the (still sparse) evidence on declining trends in profitability in the OECD corporate sector. Higher rates of inflation during the 1974-1981 period are another possible explanation.32/ Higher 32/ John Lintner: Inflation and Security Returns, Journal of Finance, May 1975. - 79 - inflation, through its effects on profit rates, reduces the portion of retained earnings used for internal financing. During the 1973-1981 period the realized rate of return in the six major countries [U.S., Japan, Germany, France, UK and Canada] fell from 20 to 13% while the share of gross operating surplus fell from 32 to 28%. These developments have been affected by both cyclical and secular factors. The secular decline in profitability coincides with the slow down in the growth of productivity in most of the OECD nations. Inflation would also have effects on profitability since non-indexed tax systems lead to a taxation of real and capital and wealth. Table 111.30 Net Corporate Savings as X of Total Net Savings 1964 1965 1966 1967 1966 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 Canada 45.4 42.5 35.7 37.9 41.0 35.3 34.2 38.2 39.5 43.6 42.5 48.6 46.0 51.7 55.0 60.8 57.5 40.0 France 14.3 14.1 16.8 17.5 20.1 22.2 16.7 16.4 17.2 16.4 3.4 -3.5 -8.3 2.9 7.7 9.7 0.02 -16.6 Carmany 27.8 28.5 27.6 30.7 29.1 18.4 19.2 15.9 12.8 8.9 5.8 0.8 9.8 5.1 16.3 14.4 3.0 -7.6 Italy 2.4 10.3 14.9 11.9 16.7 16.4 6.9 2.9 4.0 5.6 2.b -20.6 -7.2 -7.4 -6.1 6.0 8.9 -5.8 Japan - - - - - - 31.6 23.1 24.4 16.6 -2.1 -2.9 4.8 5.7 13.5 12.0 9.3 2.9 United Kingdom 49.6 41.0 28.7 26.3 27.4 21.0 10.5 21.5 33.4 38.4 2.1 -10.1 23.9 50.9 48.4 29.0 -0.3 -8.3 United States 36.3 37.6 38.6 38.6 33.6 24.9 27.9 26.0 31.6 22.3 9.2 31.8 35.2 38.7 34.4 27.6 24.7 22.9 OECD - 7 Countries 28.0 35.5 36.0 35.4 30.8 22.8 19.3 24.2 22.7 20.3 6.8 18.5 23.4 25.4 25.0 21.8 15.6 13.6 Average Shares: 1964-81 10.8% 1964-81 23.67% 1964-73 27.5% Sources OECD National Accounts, Table 7. Lines 1.1 and 1. - 80 - Uses of Savings: Net Sectoral Balances A comparison of gross fixed capital formation as a percent of GDP in the larger OECD countries since 1960 and gross savings as a percent of GDP provide the starting point for the examination of the uses of savings in the OECD. Table 111.31: OECD: GROSS CAPITAL FORMATION AND SAVINGS Surplus (+) Deficit (-) Gross Fixed Capital Gross Savings With the Rest of Net Savings Formation as Per- As Percent of the World as % As Percent Year cent of GDP GDP of GDP of GDP 1960 19.5 21.6 - 12.49 1961 19.8 21.2 - 12.11 1962 20.0 21.4 - 12.37 1963 20.2 21.5 - 12.28 1964 20.7 22.2 - 13.23 1965 20.9 22.9 - 13.74 1966 20.8 22.5 - 13.38 1967 20.5 22.0 - 12.76 1968 20.7 22.4 - 13.18 1969 21.1 23.2 - 13.87 1970 21.3 22.9 - 13.55 1971 21.6 22.5 - 13.05 1972 22.1. 23.1 - 14.75 1973 23.0 24.9 .32 14.75 1974 22.4 23.3 -.7 12.78 1975 21.1 20.8 +.04 9.81 1976 20.9 21.5 -.4 10.31 1977 21.3 22.1 -.5 10.46 1978 22.0 23.2 +.02 11.04 1979 22.2 23.2 -.05 11.05 1980 21.8 21.9 -1.02 9.65 1981 21.2 21.4 -.7 8.90 Source: OECD National Accounts, Table 1. - 81 - Table 111.32 shows growth rates of GNP, capital formation and savings, at current and constant prices. Table 111.32 OECD ANNUAL GROWTH IN OUTPUT (GPD), INVESTMENT AND GROSS SAVINGS 1960-1981 Current Prices Constant (1975) Prices Gross GDP Investment Savings 1979 Exchange Rates (Fixed Capital Gross Formation) GDP INV Savings 1961 9.0 6.8 5.0 4.7 7.1 3.1 1962 9.6 8.5 9.1 5.3 6.7 6.0 1963 8.8 7.7 7.3 4.8 6.2 5.1 1964 12.2 9.3 13.7 6.3 9.4 10.8 1965 9.5 8.8 11.1 5.2 6.7 7.7 1966 9.1 9.3 7.6 5.3 5.8 4.8 1967 5.0 6.9 4.9 3.8 2.8 2.7 1968 10.1 9.7 11.6 5.4 7.0 8.4 1969 12.3 10.4 14.0 5.3 6.8 8.8 1970 11.2 9.4 9.7 3.3 4.2 2.4 1971 11.1 10.0 7.9 3.7 4.8 1.4 1972 12.1 11.3 12.4 5.4 6.6 7.3 1973 16.6 14.2 20.8 6.0 7.5 11.2 1974 10.5 12.6 6.2 0.8 -4.7 -8.1 1975 4.7 10.7 -1.2 -0.2 -5.5 -10.7 1976 11.9 13.3 15.4 4.82 3.8 6.9 1977 13.0 12.2 12.9 3.8 4.6 8.6 1978 13.6 12.5 15.8 3.9 5.4 3.4 1979 14.3 13.0 13.8 3.1 3.8 3.3 1980 11.1 13.3 7.3 1.2 -0.9 -4.2 1981 9.5 12.4 8.5 1.5 -0.2 -1.2 Real Real Growth Nominal Fixed Capital Gross Real Fixed Capital Gross Rates GDP Formation Savings GDP Formation Savings 1960-81 11.25 10.5 9.8 3.97 4.2 1.5 1960-74 9.76 9.6 10.0 4.96 6.2 5.1 1974-81 11.07 12.4 9.2 2.36 0.8 0.8 Source: 0ECD National Accounts, Table 1 (UPI). - 82 - It shows that, in real terms corrected by a common deflator at 1975 prices and dollar exchange rates the weakness in OECD output growth is correlated with a slowdown in fixed capital formation and in savings, here shown as gross savings. The downward trends that were apparent in net savings are paralelled in the trend for the variables shown for the period 1974-1981. During the 1960-1981 period, the growth rate in capital formation in the OECD averaged 4.2 per annum. In the 1960-74 period the average was 6.2%. The average rate for the 1974-81 period has been less than 1.% (0.8) for fixed capital formation. These outcomes result in part from the large drop in investment and savings in 1974 and 1975. Taking gross savings and investment together both have grown at parallel rates in real terms over the latter period. This makes it difficult to demonstrate that lower investment derives from lower savings, suggesting that overall economic conditions have been important. Table 111.33 shows the sectoral composition of capital formation. Broadly, the sectoral shares have exhibited stability over the period, and there is little evidence of a shift in the share of investment, as between corporate, government and households. The corporate share of investment has remained stable at 55% of total investment with government investment at 11-12% and households at 30-33% of the total. What this suggests is that any decline in corporate investment should be attributed to overall economic conditions, and not to absorbtion of available shares of financing by governments or households. - 83 - Table 111.33 Seven Major Countries: % of Total Capital Formation By Sector Corporate Government Household 1964 49.9 14.9 34.6 1965 51.6 14.3 33.2 1966 53.7 14.7 30.7 1967 54.0 15.4 29.6 1968 54.0 14.8 30.2 1969 56.5 13.5 29.0 1970 55.4 14.0 30.4 1971 52.4 14.0 33.0 1972 52.7 12.2 35.0 1973 54.7 11.9 33.3 1974 58.7 12.9 28.3 1975 53.9 14.8 31.2 1976 57.0 12.1 30.7 1977 54.8 11.2 33.9 1978 53.8 12.1 34.0 1979 55.9 11.5 32.5 1980 55.4 12.7 31.8 1981 55.9 11.3 32.6 Source: OECD National Accounts, Vol. II, Table 7. Sectoral Balances Table 111.34 outlines the net savings position, or sectoral balance, of each sector. It is derived by subtracting from each sector's gross savings, the "capital formation" of that sector, to arrive at the sector's net savings or dissavings position. - 84 - Table 111.34 Sectoral Financial Balances in the Seven Major OECD Countries, 1973-82 a/ Surplus or Deficit (-) as Percentage of Nominal GDP 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 United States 6/ General government sector 0.6 -0.3 -4.2 -2.1 -0.9 0 0.6 -1.3 -1.0 -3.8 of which: Federal government -0.4 -0.8 -4.5 -3.1 -2.4 -1.4 -0.7 -2.3 -2.0 4.8 Household sector 2.8 4.0 4.7 2.7 1.2 1.2 1.4 2.4 3.1 3.9 Corporate sector c/ -2.9 -3.3 0.7 -0.2 -1.0 -1.9 -2.0 -0.9 -2.0 -0.2 Foreign sector -0.5 -0.3 -1.2 -0.3 0.7 0.7 0.1 -0.3 -0.1 0.2 Japan b/ General government sector 0.7 0.4 -2.8 -3.8 -3.8 -5.9 -4.4 -3.9 -4.0 -4.0 of which: Central government 0.0 -1.8 -4.2 -4.5 -5.5 -6.2 -5.6 -5.5 -5.6 Household sector 8.0 9.9 9.6 10.7 9.9 9.7 8.5 7.9 11.6 11.9 Corporate sector c/ -8.7 -11.2 -6.9 -6.2 -4.6 -2.0 -5.0 -5.0 -7.2 -7.1 Foreign sector 0 1.0 0.1 -0.7 -1.5 -1.7 0.9 1.1 -0.4 -0.6 Germany General government sector 1.2 -1.4 -5.7 -3.4 -2.4 -2.5 -2.7 -3.2 -4.0 -3.9 of which: Central government 0.0 -0.5 -3.0 -2.3 -1.5 -1.6 -1.5 -1.7 -2.4 -2.1 Household sector 7.9 8.6 9.4 7.8 7.0 6.7 7.0 7.3 7.9 7.9 Corporate sector c/ -7.8 -4.7 -2.7 -3.6 -3.9 2.8 -5.2 -6.3 -5.1 -3.4 Foreign sector -1.3 -2.6 -1.0 -0.8 -0.7 -1.3 0.9 2.1 1.2 -0.4 France General government sector 0.9 0.6 -2.2 -0.5 -0.8 -1.9 -0.7 0.3 -1.9 -2.6 of which: Central government 1.2 0.9 -1.9 -0.1 -0.7 -1.3 -0.8 -0.2 -1.1 -1.9 Household sector 3.5 3.7 5.7 3.8 4.3 5.2 3.6 2.8 3.7 3.7 Corporate sector c/ -4.6 -6.8 -3.6 -5.0 -4.2 -2.8 -3.0 -4.6 -3.6 -2.9 Foreign sector 0.2 2.4 0.1 1.6 0.8 -0.5 0.1 1.4 1.5 2.1 United Kingdom General government sector -2.7 -3.8 -4.6 -4.9 -3.2 -4.2 -3.2 -3.3 -2.5 -2.0 of which: Central government 0.1 -0.4 -2.3 -3.4 -2.0 -3.2 -2.1 -2.1 -2.4 -2.4 Household sector 4.0 5.1 5.4 4.8 3.8 5.6 6.7 8.2 6.6 4.5 Corporate sector c/ -2.7 -5.3 -2.3 -0.6 -0.8 -0.7 -4.0 -3.6 -1.7 -1.0 Foreign sector 1.4 4.0 1.4 0.7 0.2 -0.6 0.4 -1.3 -2.4 -1.5 WItal1 ralgovernment sector -7.0 -7.0 -11.7 -9.0 -8.0 -9.7 -9.5 -8.0 -11.7 -12.0 of which: Ceral government -5.3 -4.0 -7.4 -4.6 -4.9 -11.0 -9.1 -7.4 -9.8 -10.5 Household sector 11.9 12.1 17.5 13.7 14.2 15.2 13.3 9.6 10.6 11.3 Corporate sector e/ -6.7 -9.8 -6.1 -6.2 -5.1 -3.1 -2.1 -4.0 -1.2 -0.9 Foreign sector 1.8 4.7 0.3 1.5 -1.1 -2.4 -1.7 2.4 2.3 1.6 Canada General government sector 1.0 1.9 -2.4 -1.7 -2.6 -3.1 -1.9 -2.1 -1.5 -5.5 of which: federal government 0.3 0.8 -2.3 -1.8 -3.5 -4.6 -3.5 -3.5 -2.4 -6.0 Household sector 3.9 5.0 5.1 3.9 4.2 5.3 5.1 6.1 6.5 8.0 Corporate sector c/ -4.8 -7.9 -5.5 -4.2 -3.7 -4.3 -5.1 -4.3 -6.6 -1.7 Foreign sector -0.1 1.0 2.9 2.0 2.1 -2.1 1.9 0.4 1.6 -0.8 7ounr Average General.gov ent 0.1 -0.4 -4.3 -3.0 -2.3 -2.5 -2.0 -2.4 -2.8 -4.1 Household sector 4.7 5.8 6.8 +5.6 4.8 5.2 4.8 5.0 +6.1 +6.4 Corporate sector -4.9 -6.2 -2.3 -2.9 -2.8 -2.3 -3.0 -3.0 -3.5 -2.2 Foreign sector +0.1 +0.8 -0.2 +0.3 +0.2 -0.4 +0.2 +0.4 +0.2 +0.1 a/ On a SNA basis except for the United States and the United Kingdom which are on a national income account basis. For explanationa concerning methodology see annex 'Sources and Methods" OECD Economic Outlook No. 32. The sue of the three domestic sectors my not equal the foreign sector due to rounding. b/ As a percentage of nominal GNP. c/ Including public corporations and financial institutions. Sources: National Accounts of OECD Countries and OECD Secretariat estimates, net lending to the rest of the world. Table 67. Note: Foreign sector: (-) * capital outflows; (+) - inflow. - 85 - Table 111.35 OECD NET LENDING TO THE REST OF THE WORLD - AS A % OF SAVINGS AS A % OF OECD 1973 1974 1975 1976 1977 1978 1979 1980 1981 Net Lending as % of Savings 2.2 -5.72 0.4 -4.3 -5.02 +0.2 -4.2 -10.5 -8.8 Net Lending as % of GDP +.32 -.7 +.04 -.4 -.5 +.02 -.05 -1.02 -0.7 Memo item: OPEC Surplus % OECD GDP* +1.4 +1.0 0.6 0.6 0.4 0.1 0.5 1.00 0.8 * Surplus of capital surplus oil exporting countries. Source: OECD National Accounts and Table 7; World Bank Estimates, Net borrowing from outside OECD has averaged about 4.2% of savings and about 2% of the gross fixed capital formation. The recent trend since 1974 reflects a systematic decline in OECD net lending and a reversal from net lender to a net borrower position. - 86 - Deficits and Savings Taken from an OECD study, Table 111.36 examines national savings in relation to government absorbtion of savings.33/ The table shows the claims of government borrowings on the private savings available, from 1970-83. Shown are: (i) actual budget deficits as a fraction of gross savings; (ii) actual budget deficits as a fraction of net savings; and (iii) actual deficits as a fraction of gross savings at full employment GDP, i.e., "potential savings." For the seven major OECD countries taken together, the government deficit absorbs 51.7% of net savings, and 21.2% of gross savings in 1983. This range varies widely among countries, with the US deficit absorbing some 60% of private net savings in 1982, and a low of 20.9% of net savings absorbed by the government sector in Japan. The largest fraction is absorbed in Italy, where the government absorbs some 75% of net savings. The extent of government absorbtion of saving represents a striking change from past trends--in 1970, OECD government deficits absorbed less than 1% of gross savings. By 1975, this had risen to 44.8%, and, by 1983, to 51.7%. The chart which follows depicts these trends in government deficits and in national saving graphically. There has been a substantial narrowing of the gap between the domestic savings available and the deficits required to be financed. This gap has, to some extent been filled by foreign savings. 33/ CPE/WP1I/(83)2 and Chouraqui and Price, op-cit. TABLE 111.36 GENERAL oDVERNmENT FINANCIAL IEFICITS (as a Percentage of Private Savinga/) 1970 1911 1972 1973 - 1974 1975 1976 1977 1913 1979 1980 1981 1982c/ 1983c/ UNITED STATES Actual Grossb/ 5.9 10.3 2.0 -2.8 1.1 22.9 12.4 5.4 -0.2 -3.6 7.6 5.6 20.6 24.2 Actual Net 13.3 22.2 4.6 -5.7 2.7 52.4 30.6 13.5 -0.5 -9.6 22.9 16.2 55.5 60.2 Potential Gross -0.9 2.8 -0.7 0.2 -5.2 5.0 -2.2 -3.4 -4.5 -7.3 -3.6 -8.2 -5.9 5.0 JAPAN Actual Gross -5.7 -4.4 -1.2 -1.6 -1.2 9.5 12.1 13.1 18.2 16.6 15.0 14.4 13.3 9.5 Actual Net -9.3 -7.7 -2.0 -2.7 -2.1 17.11 20.6 23.0 31.0 29.8 27.5 28.0 28.1 20.9 Potential Gross -5.3 -5.0 -1.2 -0.2 -1.7 7.1 10.0 11.3 17.2 16.7 15.3 13.8 11.4 7.4 GERMANY Actual Gross -0.9 0.8 2.5 -6.0 6.3 26.5 16.6 12.5 12.2 13.1 15.4 19.8 21.1 21.4 Actual Net -1.6 1.4 4.6 -11.9 12.6 55.9 35.5 28.9 26.2 28.1 36.3 48.9 55.2 61.8 Potential Gross 0.9 0.8 2.4 -4.2 4.5 18.2 12.7 8.6 9.9 12.9 13.9 12.7 6.0 0.3 FRANCE Actual Gross -4.4 -3.5 -3.7 -4.4 -3.1 10.7 2.5 4.2 8.8 3.3 -1.8 8.8 15.3 16.1 Actual Net -7.9 -6.1 -6.3 -7.5 -5.9 20.2 5.8 8.5 16.7 6.5 -4.2 21.8 34.5 36.7 Potential Gross -8.0 -5.9 -3.7 -3.2 -5.2 -0.7 -9.3 -9.9 -5.1 -11.3 -22.2 -20.7 -16.1 -18.0 UNITED ICINGDON Actual Gross -21.3 -10.8 7.2 14.0 23.4 28.4 27.9 16.5 19.8 15.5 16.9 13.6 13.4 13.5 Actual Net -48.1 -25.9 14.0 24.8 54.7 70.0 61.5 34.0 38.2 31.8 39.1 36.1 43.9 57.6 Potential Gross -21.3 -12.3 3.2 18.6 21.6 17.7 19.2 11.0 23.1 19.0 10.0 -4.7 -9.8 -10.4 ITALY Actual Gross 20.9 28.9 35.7 32.6 31.7 43.5 33.4 29.9 35.1 33.3 32.6 44.8 45.1 45.4 Actual Net 31.2 42.4 51.2 47.2 48.7 69.4 52.4 47.9 54.2 50.5 51.4 70.9 71.7 74.4 Potential Gross 21.5 27.5 33.8 32.4 31.7 38.8 30.0 25.5 30.0 29.4 29.6 40.5 36.2 34.3 CANADA Actual Gross -5.5 -0.8 -0.4 -5.3 -9.8 12.5 8.5 13.6 15.5 9.3 9.7 6.2 30.5 30.6 Actual Net -13.6 -2.0 -1.0 -10.5 -19.1 24.1 16.1 27.4 29.5 17.2 18.0 11.9 55.4 54.2 Potential Gross -8.8 -0.8 1.9 1.3 -4.8 12.2 10.1 11.6 13.4 6.6 2.1 -2.7 2.1 1.3 TOTAL SEVEN COUNTRIES4/ Actual Gross 0.5 4.4 3.1 0.1 3.8 21.0 14.1 10.0 9.3 6.4 11.0 11.7 20.1 21.2 Actual Net 0.9 8.6 5.5 -0.9 7.7 44.8 30.1 20.4 16.6 10.4 25.3 26.5 48.8 51.7 Potential Gross -2.8 0.5 1.6 2.6 0.5 9.4 4.8 3.2 5.6 3.3 3.0 -0.1 -0.2 3.1 a/ (+) . financial deficit; (-) - financial surplus. Gross private savings - households + business savings net of stock appreciation, where data aree available (for the United States, United Kingdom and Canada), but before allowance for capital consumption. Net private savings - gross savings after deducting capital consumption. b/ Actual gross - ratio of actual general government net lending to actual gross private savings; actual net - ratio of actual general g6vernment net lending to actual net private saings; potential gross - ratio of general government net lending at potential output to OECD estimate of private gross savings at potential output. c/ OECD estimates and forecasts. I/ 1981 GNP/GDP weights and exchange rates. Source: CPB/IPl(83)2 Tables. - 88 - CHART 111.9 SAVINGS RATES AND BUDGET DEFICITS AS % OF GDP OECD 1970-1981 12- Savings/GDP 41-1 t - .. ... .. - I •3-4 Budget deficit GDP 1970 1971 1972 1973 1974 1975 1976 1977 197" 1979 19W-i 19&1 Suc E Sore OEC NainlAcutIttsic,Vl ,Tbe ,7 BIBLIOGRAPHY The Growth of Social Expenditure: Overview and Main Issues, OECD, SME/SAIR/SE/83.09, dated 08/18/83, (Note by the Secretariat) Expenditure on Health Services, OECD, SME/SAIR/SE/83.04, dated 04/30/83, (Note by the Secretariat) Medium-Term Financial Strategy: The Coordination of Fiscal and Monetary Policies, OECD Working Paper No. 9, dated July, 1983, by: Jean-Claude Chouraqui and Robert Price, Monetary and Fiscal Policy Division Structural Budget Deficits and Fiscal Policy Responses to the Recession, OECD, CPE/WPl(83)1, dated 03/04/83, (Note by the Secretariat) Consequences of Public Sector Size and Growth - Summary and Issues for Discussion, OECD, dated 09/27/83, (Note by the Secretariat) The Growth of Social Expenditure: Recent Trends and Implications for the 1980s, OECD, SME/SAIR/SE/83.01, dated 05/12/83, (Note by the Secretariat) The Role of the Public Sector, OECD, CPE/WP1(82)4, dated 09/29/83, (Note by the Secretariat) International Differences and Trend Changes in Saving Ratios, OECD, CPE/WP1(81)9, dated 09/28/81, (Note by the Secretariat) Structural Budget Deficits and Fiscal Policy Responses to the Recession, OECD, CPE/WPl(83)1, dated 03/04/83, (Note by the Secretariat) Public Sector Deficits: Problems and Policy Issues, OECD, CPE/WPl(81)1, dated 04/03/81, (Note by the Secretariat) Consequences of Public Sector Size and Growth, OECD, CPE/WPI(83)8, dated 09/28/83, (Note by the Secretariat) The Control of Social Expenditure: Policies and Problems, OECD, SME/SAIR/SE/83.03, dated 05/17/83, (Note by the Secretariat) The Role of the Public Sector - Issues for Discussion, OECD, CPE/WPl(82)5, dated 10/07/82 Profit Rates in OECD Countries, OECD, DES/NI/82.6, dated 03/16/82, (Note by the Secretariat) The Present Unemployment Problem, OECD, CPE/WPl(83)6, dated 05/24/83, (Note by the Secretariat) (Bibliography, Cont'd) - 2 - Unemployment Compensation, OECD, SME/SAIR/SE/83.07, dated 05/12/83, (Note by the Secretariat) Old-Age Pensions, OECD, SME/SAIR/SE/83.06, dated 05/02/83, (Note by the Secretariat) Expenditure on Education, OECD, SME/SAIR/SE/83.05, dated 08/12/83, (Note by the Secretariat) Statistical and Technical Annex, OECD, SME/SAIR/SE/83.02, dated 06/16/83, (Note by the Secretariat) OECD -Economic Outlook- Nos. 31, 32, 33. Occasional Studies, June 1983, OECD, "Perspectives on Macroeconomic Performance in the 1970's", "Public Sector Deficits, Problems and Implications" OECD National Accounts, 1954-1983 Federal Reserve Board "Public Policy and Capital Formation Feldstein .............. Feldstein .............. World Bank An Analysis of Developing NEW PublicationsCountry Adjustment FUbic tinsExperiences in the 1970s: Low- Compounding and Discounting of Related Income Asia Tables for Project Analysis Christine Wallich (with a Guide to Their Interest Staff Working Paper No. 487. 1981. 43 Applications) pages (including references). Second Edition, Revised and Stock No. WP 0487. $3. Expanded Adjustment Experience and Aspects of Development Bank J, Price Gittinger Growth Prospects of the Semi- Management Project planners and analysts will find Industrial Countries William Diamond and V. S. this book a convenient and time-sav- Frederick Jaspersen ing reference for the preparation and Staff Working Paper No. 477. 1981. 132development projects. Six- (includoring apeNdixe7.s11.m12ealt oelsvelpmenth ba.the bookge decimal tables for I percent through 50 pages (includingpercent show the compounding factor Stock No. WP 0477. $5. is divided into eight sections, each for I and for I per annum, the sinking dealing with one aspect of manage- fund factor, the discount factor, the Adjustment in Low-Income ment of its problems, and of the var- present worth of an annuity factor, Africa ious ways of dealing with them. and the capital recovery factor. The Robert Liebenthal EDI Series in Economic Development. The first edition of this book underwent Staff Working Paper No. 486. 1981. 62 Johns Hopkins University Press, 1982. seven printings in ten years and was pages (including bibliography). 2nd printing, 1983. 311 pages. translated into Arabic, Chinese, Stok o.WP 48. 3.LC 81-48174. ISBN 0-8018-2571-7, Stock French, and Spanish. This new edi- Stock No. WP 0486. $3.narrow-intal compound- No. JH 2571, $29.95 hardcover; ISBN 0- igtbe de o ihritrs Aggregate Demand and 8018-2572-5, Stock No. JH 2572, $12.95 igtes aded forehigeriteest Macroeconomic Imbalances in paperback. rat udte pe eles a Thailand: Simulations with the Capital Accumulation in guide to using sme c ton SIAM 1 Model Eastern and Southern Africa: A discussed, and an annotated bibliog- Wafik Grais Decade of Setbacks raphy increases the proven usefulness Staff Working Paper No. 448. 1981. 132 Ravi Gulhati and Gautam Datta of its predecessor, both in the class- pages (including 3 appendixes). Analyzes the magnitude of the setback room and at the project site. Stock No. WP 0448. $5. in capital accumulation in eastern and May 1984. About 208 pages. southern Africa. This phenomenon is ISBN 0-8018-2409-5. Stock No. BK 2409. examined in twenty-eight statistical ta- $10.95. NEW bles. The authors sample sixteen coun- Translations of this new edition will be tries and rely on expert observations to available in 1985. Still available are the explore the proximate causes of the following translations of the first edition: Alternative Mechanisms for setbacks. French: Tables d'interets corposs et d'ac- Financing Social Security World Bank Staff Working Paper No. 562. tualisation. Economica, 4th printing, Parthasarathi Shome and Lyn 1983. 74 pages. 1979. Squire 1SBN 0-8213-0169-1. Stock No. WP 0562. ISBN 2-7178-0205-3, Stock No. IB 0542, Reviews, clarifies, and evaluates theo- $3. $6. retical literature about the effect of so- cial security on capital accumulation Capital Market Imperfections Spanish. Tablas de interes compuesto y de and labor supply. Analyzes empirical and Economic Development descuento para evaluacidn de proyectos. studies using U.S. data, the impact of Vinayak V. Bhatt and Alan R. Roe Editorial Tecnos, 1973; 4th printing, 1980. pay-as-you-go financed and fully Staff Working Paper No. 338. 1979. 87 ISBN 84-309-07165, Stock No. IB 0526 funded social security schemes, and tages (including footnotes). $6. characteristics of optimal social secu- Stock No. WP 0338. $3. rity systems. This study provides a starting point for everyone interested The Changing Nature of Export A Conceptual Approach to the in the relevance of existing theories for financing social security in developing For Developing pCountis thelDevelopin Cou trie countries.. Staff Working Paper No. 625. 1983. 62 Albert C. Cizauskas Robert Z. Aliber pages. Staff Working Paper No. 409. 1980. 43 Staff Working Paper No. 421. 1980. 25 ISBN 0-8213-0292-2.Stock No. WP 0625. pages (including 3 annexes). pages (including appendix, references). $3. Stock No. WP 0409. $3. Stock No. WP 0421. $3. NEW Staff Working Paper No. 632. 1984. 144 Growth and Structural pages- Adjustment in East Asia Development Finance Stock No. WP 0632. $5 Parvez Hasan Companies, State and Privately Staff Working Paper No. 529. 1982. 42 Owned: A Review NEW pages. David L. Gordon ISBN 0-8213-0102-0. Stock No. WP 0529. An informative guide to the function and design of development finance Stabilization Policies in Interest Rate Management in companies as they are set up in devel- Argentina, Chile, and Developin Countries: Theo oping countries. Case histories high- Uruguay: Applications of the light the differences among these com- to the Simulation Results for panies-their institutional structure, South Korea management style, financial perfor- Balance of Payments mance, and other features. Looks at Edited by Nicolas Ardito Barletta, Swe e an Wignberten the problems of resource mobilization Mario 1. Blejer, and Luis Landau deposit rates raise output and lower and strategies to overcome them. Twenty-eight leading international inflation in the short run, and increase Staff Working Paper No. 578. 1983. 84 economists and regional specialists re- growth through their favorable impact pages. view the salient characteristics of the on savings rates. It concludes that this ISBN 0-8213-0226-4. Stock No. WP 0578. monetary approach to the balance of theory depends heavily on the as- $3. payments, examine the variations in sumption that portfolio shifts into time its application, and evaluate its suc- deposits come out of unproductive as- Development Prospects of cesses and failures. Emphasizes the sets, providing less intermediation Capital Surplus Oil-Exporting empirical evidence and dynamic as- than the banking system. Impact of Countries:pects and costs. Provides an important changes in time deposit rates on infla- Saudties rabK i, LiAE a examination of economic policies and tion, capital, capital accumulation and Qatar, Sauditheir effects in a region that looms medium term growth are discussed, Rudolf Habluitzel large in current deliberations about in- and empirical relevance is demon- Staff Working Paper No. 483. 1982. 53 terational indebtedness and finance. strated through simulation runs with a pages (including statistical tables). June 1984. About 240 pages. macroeconomic model of South Korea. Stock No. WP 0483. $3. ISBN 0-8213-0305-8. $17.50 paperback. World Bank Staff Working Paper No. 593. Developments in and Prospectspages. Deveopmntsin nd Pospcts Enegy rice, Sbsttuton,ISBN 0-8213-0188-8. Stock No. WP 0593. for the External Debt of the and Optimal Borrowing in the Developing Countries: 1970-80 Short Run: An Analysis of and Beyond Adjustment in Oil-importing International Adjustment in Nicholas C. Hope Developing Countries the 1980s Staff Working Paper No. 488. 1981. 70 Ricardo Martin and Marcelo Vijay Joshi pages (including 2 annexes, references). Selowsky Staff Working Paper No. 485. 1982. 57 Stock No. WP 0488. $3. Staff Working Paper No. 466. 1981. 77 pages. pages (including footnotes, references). ISBN 0-82134)062-8. Stock No. 0485. $3. Stock No. WP 0466. $3. NEW NWExchange Rate Adjustment NEW Domestic Resource under Generalized Currency Links between Taxes and Mobilization in Pakistan: Floating: Comparative Analysis Economic Growth: Some Selected Issues among Developing Countries Nizar Jetha, Shamshad Akhtar, Romeo M. Bautista and M. Govinda Rao Staff Working Paper No. 436. 1980. 99 Keith Marsden Fouses on the relationship between pages (including appendix). Reviews the experience with growth taxation and the three main compo- Stock No. WP 0436. $3. and taxation in twenty developing and nents of savings. Emphasizes tax re- developed countries, spanning a wide form with a view to raising additional A General Equilibrium spectrum of incomes. Do countries revenues and encouraging household Analysis of Foreign Exchange with lower taxes experience more and business savings. Proposals for tax Shortages in a Developing rapid expansion of investment, pro- reform take account of equity consid-govern- erations a t o eep tax-in- Economy ment services? This provocative paper de sotions in the alld oeain-of Kemal Dervis, Jaime de Melo, and sheds new light on this and other key duced distortionsim hihlights Sherman Robinson questions especially relevant to devel- resources to a minimum. Highlights Staff Working Paper No. 443. 1981. 32 opment economists. It also examines appropriate policies on current ex- penditures, subsidies, user charges, pages (including references). the mechanisms by which fiscal poli- public enterprise pricing, self-financing Stock No. WP 0443. $3. cies may affect growth rates. of investment by public enterprises. Staff Working Paper No. 605. 1983. 48 Includes three annexes that examine pages. direct taxes, indirect taxes, and tax Prices subject to change without notice ISBN 0-8213-0215-9. Stock No. WP 0605. changes in Pakistan's 1983/84 budget, and may vary by country. $3. NEWThe Policy Experience of Private Bank Lending to Twelve Less Developed Developing Countries Municipal Accounting for Countries, 1973-1978 Richard O'Brien Developing Countries Bela Balassa Staff Working Paper No. 482. 1981. 60 David C. Jones Staff Working Paper No. 449. 1981. 36 pages (including appendix, bibliography). This manual is based on British prac- pages (including appendix). Stock No. WP 0482. $3. tices and terminology of municipal ac- Stock No. WP 0 Private Capital Flows to counting, modified to suit the needs of other countries, especially those lack- The Political Structure of the Developing Countries and ing a core of appropriately trained ac- New Protectionism Their Determinations: countants. Provides the basic princi- Douglas R ples of municipal accounting for those with little or no bookkeeping experi- Staff Working Paper No. 471. 1981. 57 Experience, and Future ence and proceeds through successive pages (including references). Prospects levels of difficulty to some of the most Stock No. WP 0471. $3. Alex Fleming advanced concepts currently in use, Staff Working Paper No. 484. 1981. 41 including the pooling of loans. An im- pages. portant feature is the multitude of practical applications and examples of forms and records. Private Direct Foreign A joint publication of the Chartered Price Distortions and Growth Investment in Developing Institute of Public Finance and Ac- in Developing Countries Countries countancy and the World Bank. Ramgopal Agarwala K. Bilerbeck and Y. Yasugi June 1984. About 900 pages. Sixteen informative tables trace the Staff Working Paper No. 348. 1979, 101 ISBN 0-8213-0350-3. Stock No. BK 0350. distortion in prices of foreign exchange pages (including 2 annexes). $30. and other factors affecting the growth Stock No. WP 0348. $5. of developing countries. Based on sta- The Nature of Credit Markets tistics from thirty-one developing in Developing Countries: A countries. NEW Framework for Policy Analysis Staff Working Paper No. 575. 1983. 78 Arvind Virmani pages. Savings Mobilization through Staff Working Paper No. 524. 1982. 204 ISBN 0-8213-0242-6. Stock No. WP 0575. Social Security: The Case of pages. $3. Chile, 1916-1977 ISBN 0-8213-0019-9. Stock No. WP 0524. Chnstine Wallich $5. ricng Plic fo Devlop ent Describes the savings mobilization po- The Newly Industrializing Management tential in Chile and in five Asian pro- Developing Countries after the Gerald M. Meier grams. Some sort of social security OilPresupposing no formal training in program functions in almost al devel- OilCriiseconomics, it explains the essential oping countries. Programs are often Bela Balassa elements of a price system, the func- costly, whether measured in relation Staff Working Paper No. 437. 1980. 57 tions of prices, the various policies to GNP, government expenditure, pages (including appendix). that a government might pursue in government revenue, or the wage bill. Stock No. WP 0437. $3. cases of market failure, and the princi- This paper compares the successful ples of public pricing of goods and systems. Notes on the Analysis of services provided by government en- Staff Working Paper No. 553. 1983. 109 Capital Flows to Developing terprises. It also provides the would-be pages. Nations and the "Recycling" practitioner with an appreciation of the ISBN 0-8213-0123-3. Stock No. WP 0553. Problemunderlying logical structure of cost- Problembenefit project appraisal. To give sub- Ralph C. Bryant stance to the applied and policy di Short-Run Macro-Economic Staff Working Paper No. 476. 1981. 67 mensions, many of the readings are pages. drawn from the experience of develo- Adjustment Policies in South Stock No. WP 0476. $3. ment practitioners and relate to such Korea: A Quantitative Analysis important sectors as agriculture, in- Sweder van Wijnbergen Notes on the Mechanics of dustry, power, urban services, foreign Staff Working Paper No. 510. 1981. 182 Growth and Debt trade, and employment.-The principles pages (including 3 appendixes). Benjamin B. King ~~~outlined are therefore relevant to a IB -2300-.SokN.W 50 Benjamin B. KinghotodeeomnprbesISN083-0-8StcNoW'Ol. A practical model to explore the way $5. in which capital inflow from abroad af- The Johns Hopkins University Press. 1983. fects economic growth. 272 pages (including bibliography and in- dex). The Johns Hopkins University Press, 1968. LC 82-7716. ISBN 0-8018-2803-1, Stock 69 pages (including 4 annexes). No. JH 2803, $35 hardcover; ISBN 0- LC 68-8701. ISBN 0-8018-0338-1, Stock 8028-2804-X, Stock No. JH 2804, $12.95 Prices subject to change without notice No. JH 0338. $5 paperback. paperback. and may var by countr. State Finances in India A three-volume set of papers that ex- plores a range of issues relating to the nature of intergovernmental fiscal rela- tions in India. "The primary Source for World Debt Tables Vol. I: Revenue Sharing in India medium- and long-term Christine Wallich Vol. II: India-Studies in State Fi- nancesdeveloping countries. Christine Wallich Vol. III: The Measurement of Tax Ef- Suhas Ketkar, Asia-Pacific fort of State Governments, 1973-1976 Economist and Vice President, Raja J. Chelliah and Narain Sinha Marine Midland Bank, NA. Staff Working Paper No. 523. 1982. vol. 1, 85 pages, vol. II, 186 pages, vol. III, 85 pages. 6,6 ften the only reliable ISBN 0-8213-0013-X. vol. 1, Stock No. WP 1523, $3, vol. II, Stock No. WP source of information for 2523, $5, vol. III, Stock no. WP 3523, $3. countries for which data ________________is hard to come by ... Used quantitatively for macroeconomic detail as well as qualitatively in Structural Adjustment Policies reports discussing the debt picture. I find the in Developing Economies projected servicig payments a strong feature." Bela Balassa BelaBalssaJonathan KCayes, International Staff Working Paper No. 464. 1981. 36 Economist, Republic pages. National Bank of New York Stock No. WP 0464. $3. Structural Aspects of Turkish World Debt Tables, 1983-84 Edition Inflation: 195041979 The World Bank's invaluable reference Also available for the first time.. M. Ataman Aksov guide to the external debt of develop- Staff Working Paper No. 540. 1982. 118 ing countries. Essential planning tool page$. for economists, bankers, country risk Debt and the Developing ISBN 0-82M3-0098-9. Stock No. WP 0540. analysts, financial consultants and all World: Current Trends s. those interested in the global system of trade and payments. Provides data and Prospects on the external debt of 103 developing Includes an overview and summary ta- Thailand: An Analysis of countries augmented by information, bles from the 1983-84 edition. Structural and Non-Structural where available, on major economic 1984. 64 pages. Adjustments aggregates plus indicators used to ana-SokN Arne Drud, Wafik Grais, and lyze debt and creditworthiness. Shows . BK 039, $6.50. Dusan Vujovic statistical tables by country, including Companion computerized data Staff Working Paper No. 513. 1982. figures for external public debt out- pagesstanding, commitments, disburse- page (inludng apendx).ments, service payments, and net bor- Includes all debt information given in ISBN 0-8213-0023-7. Stock No. WP 0513. rowings. Reports on private the unabridged volume, and, where S3. nonguaranteed debt of 19 countries, available, offers continuous historical Gives aggregate position of 13 major series for 1970-82 and projected debt- borrowers-countries with disbursed service payments for 1983-92. Write for Trends in Rural Savings and and outstanding medium- and long- sample purchase agreement. Private Capital Formation in term total debt in excess of $13.5 bil- (9-track, phase-encoded, recording India lion at the end of 1982. Includes pen- density 1600 bpi) Raj Krishna and G.S. odic supplements as fresh data are re- Stock No. IB 0500, $5,000 (service bur- Arne Dud, Waik Gras,ean Raychaudhuri cie.eaus for reselling to their clients); Stock World Bank Staff Working Paper No. 382. 1984. 328 pages. No. B 0667, $2,000 (banks and commer- 1980. 43 pages (including 2 tables, 3 ap- Stock No. BK 0315 $75 (annual subscrip- cial corporations); Stock No. B 0666, $500 pendixes, references). t ion) (universities and libraries). Stock No. WP 0382. $3. 5 The World Bank Publications Order Form SEND TO: YOUR LOCAL DISTRIBUTOR OR TO WORLD BANK PUBLICATIONS (See the other side of this form.) P.O. BOX 37525 WASHINGTON, D.C. 20013 U.S.A. Date Name Ship to: (Enter if different from purchaser) Title Name Firm Title Address Firm City State - Postal Code Address Country - 'Ilephone ) City State_ Postal Code Purchaser Reference No. Country Ilephone Check your method of payment. Enclosed is my O Check O International Money Order O Unesco Coupons O International Postal Coupon. Make payable to World Bank Publications for U. S. dollars unless you are ordering from your local distributor. Charge my O VISA O MasterCard 0 American Express 0 Choice. (Credit cards accepted only for orders addressed to World Bank Publications.) Credit Card Account Number Expiration Date Signature O Invoice me and please reference my Purchase Order No. Please ship me the items listed below. Customer Internal Stock Number Author/ Title Routing Code Quantity Unit Price Total Amount 5 All prices subject to change. Prices may vary by country. Allow 6-8 weeks for delivery. Subtotal Cost $ 'Ibtal copies Air mail surcharge if desired ($2.00 each) $ Postage and handling for more than two complimentary items ($2.00 each) $ 'Tbtal $ ISRem Thank you for your order. DsrbtrofW rdAttn: Mr. Giancarlo BgziAttn: Mr. J.M. Hernandez Vi aaroa4 Castello 37 Distributors of World VaLmroa4 Bank Publications 50121 Madrid ARGENTINA Florence SRI LANKA AND THE MALDIVES Carlos Hirsch, SRL, JAPAN Lake House Bookshop Attn: Ms. Monica Bustos Eastern Book Service Att: Mr. Victor Walatara Florida 165 4* p Attn: Mr. Terumasa Hirano 41 Wad Ramanavake Mawatha Galeria Guemes 37-3, Hongo 3-Chome, Bunkyo-ku 113 Colombo 2 Buenos Aires 1307 Tokyo SWEDEN AUSTRALIA, PAPUA NEW GUINEA, KENYA ABCE Fritzes Kungl, Hovbokhandel FIJI, SOLOMON ISLANDS, Africa Book Services (E.A.) Ltd. Attn: Mr. Eide Segerback WETR AO,ADAttn: Mr. M.B. Dar Regeriingsgatan 1, Box 16356 WESTERN SAMOA, AND45245 -103 tockholm VANUATU The Australian Financial Review SWITZERLAND Information Service (AFRIS) KOREA, REPUBLIC OF Librairie Pavot Attn: Mr. David Jamieson Pan Korea Book Corporation Attn: Mr. fenri de Perrot 235-243 Jones Street Attn Mr. Yoon-Sun Kim 6, rue Grenus Broadway P.O. Box 101 Kwanghwamun 1211 Geneva Sydney, NSW 20001 Seoul TANZANIA BELGIUM MALAYSIA Oxford University Press Publications des Nations Unies University of Malaya Cooperative Attn: Mr. Anthony Theobold Attn: Mr. Jean de Lannoy Bookshop Ltd. Maktaba Road, P.O. Box 5299 av. du Roi 202 Attn: Mr. Mohammed Fahim Htj Dar es Salaam 1060 Brussels Yacob THAILAND CANDAP.O. Box 1127, jalan Pantai Baru Central Depatment Store, Head Office CANADA Kuala Lumpur Attn: Mrs. Wana Le Diffuseurd Attn: Mrs. Suzanne Vermette MEXICO 306 Silom Roa C.P. 85, Boucherville J4B 5E6 INFOTEC Bangkok Quebec Attn: Mr. Jorge Cepeda Thailand Management Association COSA RCASan Lorenzo 153-11, Col. del Valle, Attn: Mrs. Sunan COSTA RICA Deleg. Benito Juarez 308 Siiom Road Libreria Trel'os 010Mxc,DF ago Attn: Mr. Hugo Chamberlain Calle 11-13, Av. Fernandez Guell MIDDLE EAST TUNISIA San Jose Middle East Marketing Research Soci t6 Tunisienne de Diffusion DENMARKBureau Attn: M. Slaheddine Ben Hamida DENARKAttn: Mr. George Vassilou 5 Avenue cle Carthage Sanfundslitteratur Attn: Mr. Wilfried Roloff Matris Blg 3vTuni Rosenderns Alle 11 iosi A TURKEY DK-1970 Copenhagen V. Cs Haset Kita AS. EGYPT, Arab Republic of (granch offices in Bahrain, Greece, 4 tk Cadei Al Ahram Morocco, Kuwait, United Arab 469,-stal Al Galaa Street Emirates, Jordan) Cairo NETHERLANDS UNITED KINGDOM AND MBE BV NORTHERN IRELAND FINLAND Attn: Mr. Gerhard van Bussell Microinfo Ltd. Akateeminen Kirjakauppa Noorderwal 38, Attn: Mr. Roy Selwyn Attn: Mr. Kari Litmanen 7241 BL Lochem Newman Lare, P.O. Box 3 Keskuskatu 1, SF-00100 NORWAY Alton, Hampshire GU34 2PG Helsinki 10 Johan Crundt Tanum AS. England FRANCE Attn: Ms. Randi Mikkelborg UNITED STATES World Bank Publications P.O. Box 1177 Sentrum The World Bank Book Store 66, avenue d'Ikna Oslo 1 600 19th Street, NW. 75116 Paris PANAMA Washington, D.C. 20433 GERMANY, Federal Republic of Ediciones Libreria Cultural Panamena (Postal address: P.O. Box 37525 UNO-Verlag Attn: Mr. Luis Fernandez Fraguela R. Washington. D.C. 20013, U.S.A.) Attn: Mr. Joachim Krause Av. 7, Esana 16 Baker and Taylor Company Stimrockstrasse 23 Panama Zone 1 501 South Gladiola Avenue D-5300 Bonn 1 PHILIPPINES Momence, Illinois, 60954 HONG KONG, MACAU National Book Store 380 Edison Way Asia 2000 Ltd. Attn: Mrs. Socorro C. Ramos Reno, Nevada, 89564 Attn: Ms. Gretchen Wearing Smith M alA 50 Kirby Avenue 6 Fl., 146 Prince Edward Road Somerville, New Jersey, 08876 Kowloon PORTUGAL Commerce, Georgia 30599 INDIA Livraria Portugal Attn: Mr. Antonio Alves Martins Bernan Associates UBS Publishers' Distributors Ltd. 9730-E George Palmer Highway Attn: Mr. D.P. Veer 120 a m Mayad 70764 5 Ansari Road, Post Box 7015 1200 Lae Northam, Inc. New Delhi 110002 (Branch offices in Bombay, Bangalore, 1001 Fries Mill Road Kanpur, Calcutta, and Madras) )arir Book Store INDONESIA Attn: Mr. Akram A[-Agil Sidne Kramer Books Pt. Indira Limited P.O. Box 319 1722 H Street, NW. Attn: Mr. Bambang Wahyudi Riyadh Washington, D.C. 20006 JI, Dr. Sam Ratulangi No. 37 SINGAPORE, TAIWAN, BURMA United Nations Bookshop Jakarta Pusat Information Publications Private, Ltd. United Nations Plaza IRELAND Attn: Ms. Janet David New York, N.Y. 10017 TDC Publishers 02.06 Ist Floor, Pei-Fu Industrial VENEZUELA Attn: Mr. James Booth Building 12 North Frederick Street 24 New Industnal Road Att.er.an Ee Dublin 1 igpr tn M.Ja eia Dubln 1 ingaoreAvda Francisco de Miranda, no. 52 ITALY SPAIN Edificio Galipan, Aptdo. 60.337 Licosa Commissionaria Sansoni SPA Mundi-Prensa Libros, SA. Caracas 145-A  The World Bank Headquarters European Office Tokyo Office 1818 H Street, N.W. 66, avenue d'1na Kokusai Building Washington, D.C. 20433, U.S.A. 75116 Paris, France 1-1 Marunouchi 3-chome Telephone: (202) 477-1234 Telephone: (1) 723-54.21 Chiyoda-ku, Tokyo 100, Japan Telex: WUI 64145 WORLDBANK Telex: 842-620628 Telephone: (03) 214-5001 RCA 248423 WORLDBK Telex: 781-26838 Cable Address: INTBAFRAD WASH INGTONDC ISSN 02i Fa-2115n/ISBN 0-8213-0522-0 Telphne () 73-4.1 hiydaku Tky 100.Jpa