Discussion Paper No. 1535, by Willem Buiter, reviews some of the central fiscal problems confronting transition economies. Buiter looks at six countries in Central and Eastern Europe and six in the former Soviet Union, all of which have been subject to IMF programmes during 1990–5. The purpose of the paper is to assist the design and implementation of future Fund programmes, focusing on medium- and longer-term fiscal issues, such as government solvency and longer-run sustainability. Given their narrow tax bases and limited capacities for raising tax revenues, the 12 countries all find it difficult to finance their spending programmes while simultaneously controlling inflation. It is often the case, moreover, that the general government financial deficit bears no relationship to the state of the government’s underlying financial position. The author argues, therefore, that a longer-term perspective on the evolution of government revenues and spending commitments is needed.

Two distinct sets of problems are diagnosed: First, countries that have only recently initiated their transition, and have not yet succeeded in achieving lasting macroeconomic stabilization, face declining tax revenues towards levels similar to those of underdeveloped countries. Second, countries that are already advanced in their transition, conversely, face high levels of general government spending. In either case, governments need to re-think the way that the fiscal sector can be financed in the long run. To impose the discipline required, the IMF might have to resort to the threat of withdrawing loan disbursements.

Aspects of Fiscal Performance in some Transition Economies under Fund-supported Programmes
Willem H Buiter