Regaining Fiscal Credibility and Improving Public Sector Efficiency

Despite substantial structural reductions in government spending relative to GDP in recent years, the government debt ratio has reached high levels and expected ageing-related spending increases remain significant. While steps have been taken to lower the government deficit from 2007 onwards, including an increase in the standard VAT rate, further measures to ensure that government finances are on a sustainable basis should include further consolidation through better prioritisation of government spending. A stronger commitment to consolidation at all levels of government is necessary, inter alia by ending the bailing-out of states in financial difficulties. Reform of fiscal federal relations should include disentangling legislative responsibilities and reducing co-funding across levels of government, as well as widening the scope for sub-national governments to raise their own tax revenue.