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A Simple Proposal for a Debt Related Fiscal Rule

Author

Listed:
  • Francesco Saraceno

    (Observatoire français des conjonctures économiques (OFCE))

  • Paola Veroni

    (Observatoire français des conjonctures économiques)

Abstract

The main rationale for fiscal policy rules is the concern for long-term sustainability of public finances, that in a monetary union may affect the other members. Among many other criticisms, the Stability and Growth Pact (SGP) has been seen as contradictory or incomplete because it focuses on deficit rather than debt, the main indicator of public finances’ soundness. Furthermore, the few references to debt that were present in the treaties and related regulations are essentially ignored in actual practices. Some of the reform proposals that came out lately have addressed the issue and tried to embed a debt criterion in the Pact. We review these proposals and put forward our own proposed modification: the deficit ratio countries should target is weighted by their relative debt. With respect to the other proposals taking into account debt, our own has the advantages of simplicity, symmetry, and low arbitrariness. To make it politically acceptable to high debt countries, nevertheless, could require to set the targets, at least initially, at level higher than the Maastricht criteria.

Suggested Citation

  • Francesco Saraceno & Paola Veroni, 2004. "A Simple Proposal for a Debt Related Fiscal Rule," Sciences Po publications info:hdl:2441/2524, Sciences Po.
    • Handle: RePEc:spo:wpmain:info:hdl:2441/2524
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    References listed on IDEAS

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    1. Buti, Marco, 2003. "Revisiting the stability and growth pact: grand design or internal adjustment?," Sede de la CEPAL en Santiago (Estudios e Investigaciones) 34908, Naciones Unidas Comisión Económica para América Latina y el Caribe (CEPAL).
    2. Marco Buti & Sylvester Eijffinger & Daniele Franco, 2003. "Revisiting the Stability and Growth Pact: grand design or internal adjustment?," European Economy - Economic Papers 2008 - 2015 180, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.
    3. Mr. George Kopits & Mr. Steven A. Symansky, 1998. "Fiscal Policy Rules," IMF Occasional Papers 1998/011, International Monetary Fund.
    4. Blanchard, Olivier & Giavazzi, Francesco, 2004. "Improving the SGP Through a Proper Accounting of Public Investment," CEPR Discussion Papers 4220, C.E.P.R. Discussion Papers.
    5. Corsetti, Giancarlo & Devereux, Michael P. & Guiso, Luigi & Hassler, John & Saint-Paul, Gilles & Sinn, Hans-Werner & Sturm, Jan-Egbert & Vives, Xavier, 2010. "The European economy," Munich Reprints in Economics 20104, University of Munich, Department of Economics.
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