Fiscal Consolidation in Central Europe in Preparation for Accession to the European Union

This paper focuses on adjustments in fiscal policy in five CEC’s whose accession seems to be politically most feasible, and who have expressed the strongest desire to join the Union. They include: Poland, the Czech Republic, Slovakia, Hungary, and Slovenia. Fiscal consolidation in these countries is very critical in the process of preparations for accession to the EU. These countries will have to undergo major reforms of tax laws and they have to further develop efficient institutions of government revenue collection. The governments will have to significantly alter their major expenditure positions as well. These CEC’s are all implementing the program of transformation from central planning and state ownership into deregulated, competitive economic structures with private ownership. The ultimate goal of this transformation is minimization of state ownership, state financing and state regulatory interference with business to reasonable levels comparable to modern economies of industrial nations. In essence, this transformation shall be based on a sizable contraction of the state sector to ensure compatibility with the fiscal and regulatory system of the EU nations and to narrow the efficiency gap between the West and the East. Consequently, the task of their fiscal convergence shall be very ambitious. Because the ongoing economic transformation is so closely tied to the contraction of the government intervention with business in CEC’s, it is proposed that at the end of the pre-accession period the candidate countries of Central Europe shall not exceed a 3 per cent budget deficit-to-GDP ratio, right at the level consistent with the Maastricht convergence criteria for inclusion in the European Monetary System. Moreover, even a tighter criterion of no more than 2 per cent shall be recommended for CEC’s since a 3 per cent annul deficit in relation to GDP is still quite significant. However, a tighter deviation from the Maastricht convergence criteria will be politically unjust, it may send a discriminatory message to the candidate countries. The fiscal convergence criterion required in preparations for accession to the EU shall be constitutionally guaranteed in CEC’s and simultaneously announced to the public as a criterion of a "balanced budget" national economic strategy. At the same time, a 60 per cent maximum allowed ratio of public debt-to-GDP shall be applied as a supplementary fiscal convergence measure