FUNDAMENTOS TEÓRICOS
1.2.5. El sistema fascial y el control postural
In the years running up to the launch of the euro, the debate in both academic and policy-making circles cen- tred on how to ensure budgetary discipline while pre- serving budgetary flexibility (2). It emphasised the need to
achieve and sustain sound budgetary positions when eco- nomic conditions are favourable so that Member States regain the effective use of fiscal policy for stabilisation purposes in periods of cyclical slowdown. Given the 3 % of GDP upper ceiling on budget deficits, the necessary room for manoeuvre had to be created in order to let auto- matic stabilisers play freely. Further fiscal consolidation below the 3 % of GDP threshold was also required to bring public debt below the 60 % of GDP reference value. While the need for further consolidation was largely recognised, the question of what constituted a budgetary target of ‘close to balance or in surplus’ according to the SGP came to the fore. Graph 10 summarises the various factors which are to be taken into account when Member States set their medium-term target. From the standpoint of the Treaty, the medium-term target should encompass sufficient room for manoeuvre to safeguard the 3 % of
GDP threshold and allow for a fast reduction in the stock of public debt towards the 60 % of GDP reference value. These two requirements are discussed in turn.
Safeguarding the 3 % of GDP deficit threshold
In order not to exceed the 3 % of GDP deficit threshold, the medium-term target should encompass a sufficient margin for cyclical fluctuations and unforeseen revenue shortfalls or excess expenditures, including the variabil- ity of the interest burden due to interest rate shocks. Of these elements, building a sufficient room for ma- noeuvre to accommodate cyclical developments was gen- erally recognised at the outset of EMU as an essential first step towards attaining close to balance positions. The so-called ‘minimal benchmarks’ computed by the Commission attempt to isolate the influence of the busi-
ness cycle on the budget position (3). Overall, they show
that most Member States should aim at a minimum to a cyclically-adjusted deficit target of 0 to 1% of GDP; given their higher cyclical stability, the three largest economies of the euro area (Germany, France, Italy) could aim at a slightly higher cyclically-adjusted deficit of 1 to 1.5 % of GDP, while Sweden and Finland would have to aim for a structural surplus as their budgets are more sensitive to the cycle and their economies have shown a high degree of volatility in the past. These minimal benchmarks were used in the assessment of the initial set of stability and convergence programmes in 1999 and subsequent updates. Given the fact that most Member States now have achieved or overshot their minimal benchmark, setting more ambitious targets in line with the letter and the spirit of the SGP appears desirable.
For countries with low to medium sensitivity of their bud- get to cyclical fluctuations (Belgium, Germany, Greece, Spain, France, Ireland, Italy, Austria, Portugal and the UK), a medium-term budgetary target of balanced budgets in cyclically-adjusted terms appears required. As Finland, the Netherlands, Luxembourg, Denmark and Sweden have a higher cyclical sensitivity of the budget balance or have experienced higher cyclical volatility, a small sur- plus of the order of 1 % of GDP in cyclically-adjusted terms would seem adequate to safeguard the deficit
(3) The minimal benchmarks were calculated on the basis of budgetary
elasticities prevailing in mid-1990s and past cyclical behaviour. For a detailed presentation, see European Commission (1999). (1) Article 5, Council Regulation (EC) No 1466/97.
threshold (1). In light of measurement uncertainties, a
margin of 0.5 % of GDP below target could be allowed for when assessing compliance with the ‘close to balance or in surplus’ rule.
Such targets would allow countries to let automatic sta- bilisers operate freely in the event of economic shocks even leading to a negative output gap of 4 percentage points of trend GDP. Moreover, they also encompass a margin for unforeseen budgetary developments (estimated to be of the order of 0.5 to 1 % of GDP, see European Commission, 2000a).
Allowing for a fast reduction in the stock of public debt
The question is raised as to whether high-debt countries (Italy, Belgium and Greece) should set more ambitious medium-term budget targets than a position of structural balance identified above, i.e. whether they should aim
for a structural surplus in order to bring about a rapid reduction of high-debt ratios towards the 60 % of GDP reference value (Article 104 of the Treaty).
There are two possible interpretations of this clause: set- ting a budget balance which (a) ensures a rapid reduction in the stock of debt under normal circumstances, or (b) allows for a continuous reduction in the debt even in severe economic downturns.
The analysis in Box 4 shows that a balanced-budget rule in cyclically-adjusted terms would satisfy both condi- tions. It would ensure a rapid reduction in public debt: under normal circumstances, the pace of reduction in the debt would be higher than that achieved by high-debt countries in the past five years and the debt would be reduced below 60 % of GDP in about 12 years. A position of structural balance would prevent the debt ratio from increasing even in severe cyclical downturns (implying a low rate of growth of nominal GDP) or episodes of pro- longed below-potential economic activity (implying high negative output gaps). These results suggests that it is unnecessary to require high-debt countries to set budget targets which go beyond positions of structural balance. That being said, it is especially important that the high- debt countries rigorously adhere to this target at all times.
(1) While this approach is based on a full working of automatic sta-
bilisers, in the case of the Netherlands it must be recognised that institutional arrangements put in place by the current government have increased the degree of budgetary control at the expense of the full working of the automatic stabilisers.
P a r t I I
E v o l v i n g b u d g e t a r y s u r v e i l l a n c e a n d i n s t i t u t i o n s
Graph 10:Factors to be considered when setting medium-term targets
Cyclical component
Minimal benchmark
Unforeseen budgetary variability including interest
payments variability
Close to balance or in surplus
Fast reduction of public debt below 60 %
Appropriate medium-term
target
Additional room for manoeuvre (discretionary
policy, tax reforms, etc.)
Long-term issues (Ageing, etc.)
The ambition of the updated stability and convergence programmes
Graph 11 presents the forecast for the cyclically-adjusted budget balance (CAB) for 2001 and the projections for 2004 outlined in the latest updates of stability and con- vergence programmes, also in cyclically-adjusted terms. The targets of a balanced budget (including a tolerance margin of 0.5 % of GDP) and a surplus of 1 % of GDP are indicated in the graph. While a number of countries still have some way to go before reaching close to balance positions, the 2004 medium-term targets are fully in line
with the SGP objectives (1). Therefore, SGP requirements
would not imply a tightening of Member States’ current budgetary plans set out in the programmes.
As illustrated in Graph 10, budgetary ambition does not necessarily stop once the SGP target of ‘close to balance or in surplus’ has been reached. Accordingly, several Member States already go a step further in their updated stability and convergence programmes, and set more
ambitious budgetary targets, for example as means to prepare for the budgetary impact of ageing populations (see Graph 11). For instance, a more aggressive strategy of debt reduction could be desirable to pre-empt at least partly the budgetary implications of the demographic shock especially in countries with PAYG pension sys- tems (incidentally, the three high-debt countries have pen-
sion systems essentially financed on a PAYG basis) (2).
An additional room for manoeuvre may also prove useful for discretionary fiscal actions which, in exceptional cir- cumstances, might be needed to supplement the auto- matic stabilisers (see Part III). For instance, in spite of its lower budget sensitivity, a structural surplus could be rel- evant for Ireland as it may be relatively more susceptible to asymmetric shocks in EMU given that the economic cycle (and consequently monetary conditions) appears to be de-synchronised from the euro-area average. While Ireland’s current buoyant growth has contributed to very high surpluses, a reversal of the cyclical pattern may lead to substantial budgetary swings.
(1) On the specific case of the UK, see the discussion in Part I and the
country section in Part V.
(2) See Part IV, Chapter 2.
– 3 – 2 – 1 0 1 2 3 4 5 S FIN L (2) NL DK UK P A I IRL F E EL D B 2001 2004
Close to balance or in surplus
Graph 11:‘Close to balance’ requirement, budgetary positions in 2001 and medium-term budgetary targets set in the last updates of the stability and convergence programmes (1)
(1) Budgetary positions for 2001 and targets for 2004 are presented in cyclically-adjusted terms.
(2) 2003 target.
Sources: 2001: Commission forecast, spring 2001.
P a r t I I
E v o l v i n g b u d g e t a r y s u r v e i l l a n c e a n d i n s t i t u t i o n s
Article 104 of the Treaty states that public debt ratios larger than 60 % of GDP should be ‘sufficiently diminishing and approaching the reference value at a satisfactory pace’. Clearly, Italy, Belgium and Greece who still have a debt ratio of around 100 % of GDP will have to fulfil this goal. This Treaty requirement can be interpreted in two non- mutually exclusive fashions: (A) the medium-term target has to bring about a rapid reduction in the stock of debt; and (B) the reduction of the debt has to continue also in ‘bad’ periods.
Does a balanced budget over the cycle satisfy (A) and (B)? The speed of reduction towards the 60 % reference value,
m, can be written as follows:
(1) m= b
60 % – b
where bis the stock of debt as a share of GDP and ‘.’ indi- cates the change with respect to time.
Given that, from the standpoint of safeguarding the 3 % deficit ceiling, a balanced budget would be generally advis- able, a specific rule for high-debt countries would be to strengthen the budget balance target, d, by a proportion (b) of the excess of the debt over the 60 % ceiling:
(2) d= b (b– 60 %)
Under b= 0, the high–debt country would keep a balanced budget, as most of the other euro-area members. Hence, it would not be required to make additional budgetary efforts compared to the other countries (1). Under b> 0, the coun-
try would aim for a structural surplus. A reasonable value for bcould be between 1 % and 3 %. Hence, if bis set at 3 %, a country with a debt of 100 % of GDP should set an initial target of 1.2% surplus [3 %*(100 % – 60 %)]. The surplus will shrink over time as the debt is reduced and
d will return to zero when b = 60 %. By replacing (1) and (2) in the familiar debt accumulation identity:
(3) b= – d– (y + p) b
where y + pis nominal GDP growth, we obtain:
(4) m= b+(y + p)b
b– 60 %
Table 13 presents the value of the budget balance, the speed of debt reduction and the number of years necessary to bring the debt below 60 % of GDP for various combina- tions of band b, under the assumption of annual growth of nominal GDP of 4.5 % (2).
Two results emerge from the table. First, the speed of reduction under a balanced budget rule appears relatively high: as a point of reference, it is quite higher than the average speed of debt reduction in the period 1997–2001 in Italy and Greece (where it was 6 % per year) and similar to that of Belgium (10.5 %). Second, the difference in speed in moving from a balanced budget to a small surplus is limited and hardly affects the number of years to attain the 60 % level. For instance, if Italy, Belgium and Greece (with their current debt ratios at around 100 % of GDP), would keep a balanced budget (i.e. b= 0) over the period, they would need 12 years to reduce the debt ratio to 60 % of GDP, while they would need 10 years if bwould be set Box 4:A special rule for high-debt countries?
Table 13
Re-absorbing the stock of public debt
b 0 % 1.5 % 3 %
b m d m d m d
100 % 10 % 0 11.5 % 0.6 13 % 1.2 90 % 12 % 0 13.5 % 0.5 15 % 0.9 80 % 16 % 0 17.5 % 0.3 19 % 0.6
(1) Note, however, that for a given level of the cyclically-adjust-
ed budget balance, high-debt countries will have to maintain higher primary surpluses.
(2) This is based on the assumptions of real GDP growth of 2.5 %
and an inflation rate of 2%. Clearly, countries with higher trend GDP growth will enjoy a higher speed of debt reduction.
at 3 %. The latter result is due to the fact that, for high-debt countries, the contribution of nominal GDP growth to the reduction of the stock of debt is largely dominant over the size of the budgetary surpluses, especially if the latter are small.
In order to check whether maintaining a balanced budget in structural terms satisfies condition (B), one can write the expression of the debt change in ‘bad’ times, under the condition that the structural balance is kept in equilibrium and automatic stabilisers are let to operate freely: (5) b= – (y+ pˆ) b – aG
Where (y+ pˆ)and Gare ‘representative’ values of nomi- nal GDP growth and output gap in ‘bad’ times and ais the sensitivity of the budget balance to the cycle. Table 14 reports the percentage points change in the debt ratio under
various combinations of (y+ pˆ)and G, where ais assumed to be equal to 0.5 and bequal to 100 % of GDP.
As Table 14 shows, only in the case of a very harsh reces- sion and stagnating economic activity (in the table, a nom- inal GDP growth of 1 % coupled with a negative output gap of 3 percentage points), the debt may temporarily increase. Although a higher sensitivity of the budget balance to the cycle (a) and lower debt levels (b) would imply a stronger impact of recessions and a less favourable contribution of nominal growth to debt reduction, these results are reas- suring as they show that for the three high-debt countries of the EU a structurally-balanced budget entails a continuous decrease of the debt ratio in most cyclical circumstances. Overall, these results show that a balanced budget for high- debt countries appears sufficient to ensure that the debt-to- GDP ratio approaches the reference value at a satisfactory pace, as required by the Treaty.
Table 14
Decreasing public debt in ‘bad’ times
y + p 3 % 2 % 1 %
G
– 1 % – 2.5 – 1.5 – 0.5 – 2 % – 2.0 – 1.0 – 0.0 – 3 % – 1.5 – 0.5 + 0.5