In this paper we evaluate internationally agreed limits on public sector debt and deficits, such as those agreed by the EC countries in the Treaty of Maastricht as preconditions for membership in a monetary union. These fiscal convergence criteria require that general government budget deficits should not exceed 3% of GDP and that the gross debt of the general government should not be above 60% of GDP. The Maastricht requirements, especially the debt criterion, are much more stringent than those required to ensure public sector solvency. Their implementation would require an excessive degree of fiscal retrenchment which would adversely affect the level of economic activity. The deficit guideline does not appear to be sensible, since the numerical criterion refers to the nominal interest payments-inclusive financial deficit, with no corrections for inflation and real output growth, no cyclical adjustment and no appropriate allowance for future revenue-producing public sector investment. The verbal qualifications are too vague to neutralize the potential for serious damage attached to the numerical guidelines. We discuss the various `externality' arguments in favour of binding fiscal rules and find them wanting, both theoretically and empirically. An argument in favour of external enforcement of binding fiscal rules might be made in the presence of `excessive deficits' due to political distortions. We conclude that the fiscal convergence criteria should be disregarded or applied quite loosely in order to avoid the risk of serious fiscal overkill.
Download Info
To download:
If you experience problems downloading a file, check if you have the
proper application to
view it first. Information about this may be contained
in the File-Format links below. In case of further problems read
the IDEAS help
page. Note that these files are not on the IDEAS
site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Publisher Info
Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number
750.
Find related papers by JEL classification: E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions H62 - Public Economics - - National Budget, Deficit, and Debt - - - Deficit; Surplus H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management
Cited by: (explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.) This item has more than 25 citations. To prevent cluttering this page, these citations are listed on a separate page.