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Working papers from the Economics Department of the OECD that cover the full range of the Department’s work including the economic situation, policy analysis and projections; fiscal policy, public expenditure and taxation; and structural issues including ageing, growth and productivity, migration, environment, human capital, housing, trade and investment, labour markets, regulatory reform, competition, health, and other issues.
The views expressed in these papers are those of the author(s) and do not necessarily reflect those of the OECD or of the governments of its member countries.
Europe's New Fiscal Rules
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- Sebastian Barnes1, David Davidsson2, Łukasz Rawdanowicz1
- Author Affiliations
- 1: OECD, France
- 2: Ministry of Finance, Iceland
- 21 juin 2012
- Bibliographic information
Europe is putting in place a new system of fiscal rules following the euro area sovereign debt crisis and decades of rising government to debt-to-GDP ratios. These include the so-called "six pack" to upgrade the Stability and Growth Pact to a new Treaty incorporating the "fiscal compact". Much of the discussion about the new rules has been procedural or theoretical. This paper shows what the rules will mean in practice under a realistic mediumterm scenario developed by the OECD. In the short term, fiscal consolidation will largely be driven by the current wave of Excessive Deficit Procedures. Only once these commitments are fulfilled will the new system of rules come into action. Although the rules are complex, the central pillar of the new fiscal rules will be the requirement to balance budgets in structural terms. These imply a tight fiscal stance over the coming years for many European countries by comparison with the performance achieved in past decades: almost all countries will have to be as disciplined as the few countries that managed to make meaningful progress in tackling high debt levels in the past. A further tightening of budgetary Medium-Term Objectives is likely in 2012, which will in many cases make the required fiscal stance even tighter. Over the very long term, the rules imply very low levels of debt. The requirements can thus not be considered to be a permanent approach. The methodology to calculate the structural balance has a number of weaknesses and discretion will be needed in implementing the rules.
- Classification JEL:
- E61: Macroeconomics and Monetary Economics / Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook / Policy Objectives; Policy Designs and Consistency; Policy Coordination
- E62: Macroeconomics and Monetary Economics / Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook / Fiscal Policy
- H6: Public Economics / National Budget, Deficit, and Debt
- H8: Public Economics / Miscellaneous Issues