Budgetary Subsidies in Centrally Planned Economies in Transition

IMF Working Papers, January 1, 1991

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The paper analyzes budgetary subsidy policy issues that arise when centrally planned economies move toward a market economy.
Successful subsidy reduction must be embedded into an overall economic reform program.
During program execution, former implicit subsidies are likely to become budgetized.
Enterprise restructuring and the introduction of social safety net provisions impose additional pressure on the budget and necessitate careful policy design.
Comprehensive budgetary reform is required to prevent budgetary slippages during the transition process.

Embed subsidy reduction within a broader, coherent economic reform program to ensure sustainability.
Anticipate and plan for the budgetization of former implicit subsidies as price liberalization and market reforms progress.
Design enterprise restructuring programs with explicit attention to their fiscal impact to avoid uncontrolled budgetary pressures.
When introducing or expanding social safety net provisions during transition, calibrate program design to limit adverse fiscal consequences.
Implement comprehensive budgetary reform measures to strengthen public financial management (PFM) and prevent budgetary slippages during transition.

Budget planning and preparation
Expenditure and public financial management (PFM)
Government subsidies and their transformation during transition
Housing and consumer goods pricing implications
Inflation and price liberalization effects
National accounts and trade prices
Enterprise reform, enterprise restructuring, and implications for the enterprise sector
Transition from a socialized enterprise model to market mechanisms