Fiscal Rules: the Stability and Growth Pact in the European Monetary Union

Content Provider	Semantic Scholar
Author	Moro, Domenico
Copyright Year	2010
Abstract	THE SLOWDOWN IN GROWTH IN 2008 AND ITS possible implications for the level of unemployment created worries and doubts about the fi scal rules set in the Treaty of Maastricht and in the Stability and Growth Pact (SGP). It has been argued that these rules may represent an excessively binding constraint for appropriate countercyclical action, and that the attempts to reach rapidly a budget position “close to balance or in surplus” may worsen the slowdown in growth. The SGP has recommended that Member States of the European Union should set the medium-term budgetary targets which should be close-to-balance or in surplus. Governments will thus normally fund capital expenditure out of current revenue. This has two main consequences: (1) tax fi nancing of investment may create a disincentive to spend on public capital, and (2) the switch from defi cit to tax fi nancing of investment affects the distribution of welfare across generations as it entails a double burden for current generations. In this work we will try to discuss if the rules set up for the European Monetary Union (EMU) can permanently reduce the public sector contribution to capital accumulation. We will discuss a model where we will show how the introduction of a defi cit ceiling, like the one imposed by SGP, can imply a reduction in public investment in a 2-period model. From this model we will show that under strict budgetary rules we are likely to observe a reduction in public investment. This reduction is bigger if the government can freely decide how to allocate the defi cit resources in terms of consumption or public investment. We conclude discussing the possibility and the conditions under which it is possible to cover the gap in public investment reduction via an increase in private investment. We will also discuss the role of the “Private Finance Initiative.” This U.K. scheme means that the government in the short term does not face whole cost of a long-term Capital investment, but instead faces the cost over a period of time (whilst it leases facilities from the private sector). FISCAL RULES: THE STABILITY AND GROWTH PACT IN THE EUROPEAN MONETARY UNION
File Format	PDF HTM / HTML
Alternate Webpage(s)	https://ntanet.org/wp-content/uploads/proceedings/2008/029-moro-fiscal-rules-the-2008-nta-proceedings.pdf
Language	English
Access Restriction	Open
Content Type	Text
Resource Type	Article