Priority areas for the development of domestic policies regarding the allocation of budgetary funds are the essential components of economic development. Relevant strategies aimed at controlling costs, the growth of public debt, and other aspects are designed to regulate cash flows and prevent potential financial crises. In developed countries, one of the areas of intervention is income inequality, and in order to overcome the existing challenges, responsible agencies need to prioritise correctly to prevent the shortage of resources for third-party payments. As a result, maintaining the system of budget consolidation packages as compared to redistribution policies is a more rational strategy, despite the dissatisfaction of individual stakeholders. The participation of such agencies as the International Monetary Fund (IMF) and the Organisation for Economic Cooperation and Development (OECD) is the mandatory part of such projects. Fiscal restrictions are an indispensable part of a cash control program, and the practices of many states prove that such a principle has economic justification and is an important method to minimise risks.
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Role of Budget Consolidation Packages
The desire to balance the levels of income leads to the fact that budget consolidation is one of the key measures aimed at achieving the preservation of the treasury and its rational use. According to the information provided by the International Monetary Fund (2015, p. 5), “in advanced countries, per capita growth is estimated at about ¾ percentage points higher following fiscal reforms”. As a result, checks and balances provide governments with an opportunity to assess those areas that deserve early intervention and control financial flows, including tax payments, export earnings, and other sources of income. As Armingeon, Guthmann and Weisstanner (2016) remark, some financiers believe that more redistribution policies should be maintained to achieve positive results in the short term and ensure aggregate demand in the domestic market. However, the budget allocation system does not imply spontaneous and rash decisions for the sake of short-term gain. Therefore, the practice of budget consolidation is a more acceptable option in the circumstances, in particular, the uneven incomes of the population.
The increase in the level of public debt should not be allowed to prevent this from causing a financial crisis. At the same time, this parameter is based on the assessment of different criteria, for instance, the growth rate of the economy, the level of interest rates, strategies regarding taxation policies, and other aspects. According to the International Monetary Fund (2015), structural deficiencies in industrialised countries tend to coexist along with large long-term commitments associated with population ageing. As a result, current policies are unsustainable in the long run and require interventions aimed at combating budget deficits.
Cost Reduction vs. Income Increase
Measures to support the budget can be implemented more efficiently by reducing costs. This practice that includes lowering wages primarily in the public rather than the private sector is more productive for creating conditions for positive consolidation outcomes than actions to maintain income levels. In other words, when drawing up a plan for the implementation of fiscal consolidation, it is more appropriate to focus on possible cost reductions and pay less attention to the policy of obtaining as large incomes as possible. The results of such interventions may differ in the short and long term. In the first case, the principle of taxation can be taken into account in order to strengthen the economy. To achieve long-term goals, minimising costs is a more productive measure.
In order to achieve effective consolidation policy results, the governments of those countries that are members of the OECD seek to reduce funding for resource-intensive projects. According to Godar, Paetz and Truger (2015), those states that are members of the union have to allocate many budget funds for social security and protection programs. Such payments as unemployment benefits, pensions, and other areas incur considerable expenses. Also, healthcare and education systems as budget spheres require substantial investments in order for them to provide services that meet modern standards. Economic issues related, for instance, to the transport sector, communications, and other industries also need significant investments. When assessing the importance of fiscal consolidation, reforms based on this practice may be concentrated in those areas where spending cuts are real in the long run (Armingeon, Guthmann & Weisstanner 2016). Such a step may provide an opportunity to improve the sustainability of the economy, thereby preventing a crisis and further financial challenges.
Challenges of Implementing Fiscal Consolidation
The package of fiscal consolidation measures, which implies cost optimisation and increasing their efficiency, may allow optimising the economy. However, such a plan is sometimes criticised by expert institutions. According to Furceri, Loungani and Zdzienicka (2018, p. 179), “fiscal consolidation typically increases inequality” and can “affect the response of monetary policy to shocks as well as its impact on economic activity”. As alternative measures, the authors consider building the budget on a countercyclical method that involves stimulating economic development at the moment but not in the long term (Furceri, Loungani & Zdzienicka 2018). Consequently, budget consolidation is considered an intervention principle that may be relevant after the growth of development indicators resumes. However, a restrictive budget may be the foundation for achieving other valuable indicators, for instance, a stable exchange rate, business achievements, and other significant aspects of the economy. As a result, a consolidation plan may have more advantages than disadvantages, despite specific difficulties.
The examples of international practice prove that steps are taken in relation to the budget consolidation policy. Ban (2015, p. 176) cites data from the IMF and notes that of 144 analysed economies, the majority (58%) support the policy of change in accordance with cost reduction. This experience shows that, despite temporary difficulties and the need to adapt to constraining principles, governments recognise the merits of fiscal policy. In addition to the aforementioned ideas, Afonso and Jalles (2014) argue that social security costs are a negative factor for those OECD countries that have already reached the level of fiscal stability that is needed. Therefore, appropriate practices of control and checks may allow for economic development and contribute to stabilising the budget.
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In general, to overcome the challenges of implementing relevant policies, it is crucial to ensure necessary conditions and reorganise the current economic system in accordance with the conventions of the implementation policy. Agnello et al. (2017, p. 486) note that “a sound macro-fiscal environment is key for the success of fiscal consolidations”. Consequently, stakeholders, in particular, national governments and responsible agencies should ensure that favourable conditions are created for implementing such practices and minimising risks. Based on the experience of the OECD countries, work in this regard requires efforts, but these measures are productive in the face of budget deficits.
Minimising financial risks and crisis prevention in countries with developed economies is largely based on the creation of appropriate control systems, and budget consolidation packages are the mechanisms that may help. Given the data obtained from the IMF and the OECD, many states support such policies to reduce costs in order to increase sustainability and strengthen internal development indicators. The adoption of such programs can provide growth in the long term and contribute to the emergence of opportunities for the proper distribution of financial flows, which is one of the priorities.
Afonso, A & Jalles, JT 2014, ‘Fiscal composition and long-term growth’, Applied Economics, vol. 46, no. 3, pp. 349-358.
Agnello, L, Castro, V, Jalles, JT & Sousa, RM 2017, ‘Income inequality, fiscal stimuli and political (in)stability’, International Tax and Public Finance, vol. 24, no. 3, pp. 484-511.
Armingeon, K, Guthmann, K & Weisstanner, D 2016, ‘Choosing the path of austerity: how parties and policy coalitions influence welfare state retrenchment in periods of fiscal consolidation’, West European Politics, vol. 39, no. 4, pp. 628-647.
Ban, C 2015, ‘Austerity versus stimulus? Understanding fiscal policy change at the International Monetary Fund since the great recession’, Governance, vol. 28, no. 2, pp. 167-183.
Furceri, D, Loungani, P & Zdzienicka, A 2018, ‘The effects of monetary policy shocks on inequality’, Journal of International Money and Finance, vol. 85, pp. 168-186.
Godar, S, Paetz, C & Truger, A 2015, ‘The scope for progressive tax reform in the OECD countries’, Revue de l’OFCE, vol. 5, no. 141, pp. 79-117.
International Monetary Fund 2015, Fiscal policy and long-term growth.