Covid-19 has had a major impact on public finances for every country and all Ministries of Finance are having difficult decisions to make regarding their economies and levels of public debt.
You are to provide a briefing paper for a new junior Minister in the Department of Finance who is appearing at a televised public meeting to answer questions on the National Budget (This could be a programme such as Question time in the UK – see examples on BBC i-player).
Word limit: 1250 words
You are to choose one controversial policy and discuss its impact on both the sustainability of the deficit and the inter-temporal implications.
*Policy chosen: UK Reduced spending on aid
You are to:
1) Brief the minister on the fiscal concepts:
a. Define what is the inter temporal budget constraint (5%)
b. Define what is a sustainable deficit including how to calculate the level of sustainable deficit (10%)
(g-r)D/GDP; where: g = the GDP growth rate, r = interest rate, D = Debt, and GDP = the gross domestic product.
You should look for the figures for g, r, D and GDP in the IMF Article IV or any other official source
2) Brief the minister on your country’s current position in terms of debt and deficit using the IMF article IV surveillance report. – (5%)
3) Brief the minister on the trends over the past 5 years and identify, with appropriate calculations, relating to sustainability (NB you will only have enough information to calculate sustainability of the deficit – you will have a much broader discussion of debt default risk).(10%).
4) Briefly describe a controversial policy change in either an area of spending or tax/revenue that has been announced (or suggested) in response the impact of Covid-19 on the public finances. (This must be a specific policy action and not an economic aim) (20%) – (UK Reduced spending on aid is the policy change to discuss)
5) Brief the minister on:
a. The impact of the policy on the inter-temporal sustainability (15%) b. The impact of the policy on the sustainability of the deficit (15%)
6) Brief the minister on the counter arguments expected from the panel and the audience. (20%)
The assignment requires an understanding of a number of concepts relating to policy based Public Financial. It is the understanding of these concepts and their relationships and the technical application of them that will achieve the highest marks.
You need to carry out a number of broad tasks:
- Explain the theories of:
the inter-temporal budget constraint
- Explain how the policies chosen address those issues
- Advise on the key arguments the minister should get across to the public in very short key phrases – remember this is a hostile environment with members of the public and opposition politicians.
- Advise on the counter arguments that can be expected from other panel members and the audience– remember this is a hostile environment with members of the public and opposition politicians.