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Sustainability of Public Finances

Author

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  • Perotti, Roberto
  • Strauch, Rolf
  • von Hagen, Jürgen

Abstract

A central tenet of the Maastricht Treaty is that a successful European Monetary Union requires sustainable public finances of its member states. Yet there is no clear definition of sustainability. The economist’s common use of the term builds on the concept of an intertemporal budget constraint over an infinite time horizon, which is of little practical use. In this study, we develop a concept of sustainability focusing on the controllability of public finances. In so doing, we adopt the approach of the Maastricht Treaty, to assume sustainability as long as a country does not violate the double standards of the deficit (3%) and the debt (60% of GDP) criterion. When the benign assumption does not hold, we distinguish between the symptoms of non-sustainability of public finances, which can be determined in a relatively straightforward way, and the underlying institutional causes, which are more difficult to identify. Correcting the symptoms requires a disaggregate view of the government budget. Successful consolidation requires the fiscal policy problem to be addressed ‘at the source’, i.e. the adjustment of those items of the government budget that produced the build-up of a non-sustainable deficit in the first place. Lasting consolidation also requires a correction of the institutional weaknesses that are the ultimate causes of a non-sustainable deficit. After reviewing the theoretical and empirical arguments for a disaggregate and institutions-oriented approach to correcting non-sustainable deficits, we propose a practical procedure to assess the sustainability of a country’s public finances.

Suggested Citation

  • Perotti, Roberto & Strauch, Rolf & von Hagen, Jürgen, 1997. "Sustainability of Public Finances," CEPR Discussion Papers 1781, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:1781
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    Citations

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    Cited by:

    1. Juergen von Hagen, 2010. "The Sustainability of Public Finanaces and Fiscal Policy Coordination in the EMU," CASE Network Studies and Analyses 412, CASE-Center for Social and Economic Research.
    2. Amador, Joao L. M., 2000. "Fiscal Policy and Budget Deficit Stability in a Continuous Time Stochastic Economy," FEUNL Working Paper Series wp384, Universidade Nova de Lisboa, Faculdade de Economia.
    3. Szapáry, György & Orbán, Gábor, 2004. "A stabilitási és növekedési paktum az új tagállamok szemszögéből
      [The Stabilization and Growth Pact in the light of the new EU member-states]
      ," Közgazdasági Szemle (Economic Review - monthly of the Hungarian Academy of Sciences), Közgazdasági Szemle Alapítvány (Economic Review Foundation), vol. 0(9), pages 810-831.
    4. Miguel Braun & Luciano di Gresia, 2003. "Hacia un sistema de seguro social eficaz en América Latina: la importancia de una política fiscal anticíclica," Research Department Publications 4334, Inter-American Development Bank, Research Department.
    5. Thierry Warin, 2005. "Stability and Growth Pact: An Index to Trigger an Early Warning Earlier?," Middlebury College Working Paper Series 0502, Middlebury College, Department of Economics.
    6. Michael Artis & Massimiliano Marcellino, "undated". "Fiscal Solvency and Fiscal Forecasting in Europe," Working Papers 142, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
    7. Orban, Gabor & Szapary, Gyorgy, 2004. "The Stability and Growth Pact from the perspective of the new member states," Journal of Policy Modeling, Elsevier, vol. 26(7), pages 839-864, October.
    8. Zsolt Darvas & György Szapáry, 2008. "Euro Area Enlargement and Euro Adoption Strategies," European Economy - Economic Papers 2008 - 2015 304, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.
    9. Roy Bahl & Eunice Heredia-Ortiz & Jorge Martinez-Vazquez & Mark Rider, 2005. "India: Fiscal Condition of the States, International Experience,and Options for Reform: Volume 1 (2005)," International Center for Public Policy Working Paper Series, at AYSPS, GSU paper05141, International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University.
    10. Amador, Joao L. M., 1999. "Optimal Budget Deficit Rules," FEUNL Working Paper Series wp385, Universidade Nova de Lisboa, Faculdade de Economia.
    11. van Aarle, Bas & Garretsen, Harry, 2003. "Keynesian, non-Keynesian or no effects of fiscal policy changes? The EMU case," Journal of Macroeconomics, Elsevier, vol. 25(2), pages 213-240, June.
    12. Miguel Braun & Luciano di Gresia, 2003. "Towards Effective Social Insurance in Latin America: The Importance of Countercyclical Fiscal Policy," Research Department Publications 4333, Inter-American Development Bank, Research Department.
    13. Marín, José M., 2002. "Sustainability of public finances and automatic stabilisation under a rule of budgetary discipline," Working Paper Series 0193, European Central Bank.
    14. Roy Bahl & Eunice Heredia-Ortiz & Jorge Martinez-Vazquez & Mark Rider, 2005. "India: Fiscal Condition of the States, International Experience,and Options for Reform: Volume 2 (2005)," International Center for Public Policy Working Paper Series, at AYSPS, GSU paper05142, International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University.
    15. Charles Wyplosz, 2002. "Fiscal Policy: Institutions vs. Rules," IHEID Working Papers 03-2002, Economics Section, The Graduate Institute of International Studies.
    16. Catriona Purfield, 2003. "Fiscal Adjustment in Transition : Evidence from the 1990s," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 39(1), pages 43-62, January.
    17. Hallet, Martin, 1999. "The Impact of EMU on cohesion - further research needed?," ERSA conference papers ersa99pa087, European Regional Science Association.
    18. Catriona Purfield, 2003. "Fiscal Adjustment in Transition : Evidence from the 1990s," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 39(1), pages 43-62, January.
    19. Thierry Warin, 2005. "A Note on International Fiscal Policy Practices," Middlebury College Working Paper Series 0520, Middlebury College, Department of Economics.

    More about this item

    Keywords

    European Monetary Union; Public Debt; Public Finance; Sustainability;

    JEL classification:

    • H60 - Public Economics - - National Budget, Deficit, and Debt - - - General
    • H61 - Public Economics - - National Budget, Deficit, and Debt - - - Budget; Budget Systems
    • H87 - Public Economics - - Miscellaneous Issues - - - International Fiscal Issues; International Public Goods

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