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Improving the SGP Through a Proper Accounting of Public Investment

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  • Blanchard, Olivier J
  • Giavazzi, Francesco

Abstract

The Stability and Growth Pact (SGP) contains a serious error: the way governments are expected to account for public investment. Correcting this error and applying, as article 104.3 of the EU Treaty allows, the current rules of the Pact to a measure of the budget where the treatment of investment expenditures is done properly would, over time, drive the debt-GDP ratio to the ratio of public capital to GDP. Excluding net public investment from the definition of the budget that is relevant for the Pact would also help in the short run, by inducing countries to shift the composition of domestic demand, rather than to reduce its level.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 4220.

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Date of creation: Feb 2004
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Handle: RePEc:cpr:ceprdp:4220

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Keywords: EMU; Stability Pact;

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  1. James Poterba, 1992. "Capital Budgets, Borrowing Rules, and State Capital Spending," NBER Working Papers 4235, National Bureau of Economic Research, Inc.
  2. James M. Poterba & J├╝rgen von Hagen, 1999. "Fiscal Institutions and Fiscal Performance," NBER Books, National Bureau of Economic Research, Inc, number pote99-1, October.
  3. Buti, Marco & Eijffinger, Sylvester C W & Franco, Daniele, 2003. "Revisiting the Stability and Growth Pact: Grand Design or Internal Adjustment?," CEPR Discussion Papers 3692, C.E.P.R. Discussion Papers.
  4. Willem H. Buiter & Clemens Grafe, 2004. "Patching up the Pact," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 12(1), pages 67-102, 03.
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