Fiscal policy/Addendum: Difference between revisions
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==Deficit-limiting rules== | ==Deficit-limiting rules== | ||
The maintenance of investor confidence is a matter of mutual concern among governments because crises that can lead to [[sovereign default]]s can be contagious, in much the same way that bank [[Run (banking)|runs]] can generate banking panics. That consideration has prompted currency unions such as the European Monetary Union to set up deficit-limiting rules and monitoring systems. | The maintenance of investor confidence is a matter of mutual concern among governments because crises that can lead to [[sovereign default]]s can be contagious, in much the same way that bank [[Run (banking)|runs]] can generate banking panics. That consideration has prompted currency unions such as the European Monetary Union to set up deficit-limiting rules and monitoring systems. | ||
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===The EU's Stability and Growth Pact=== | ===The EU's Stability and Growth Pact=== | ||
The Stability and Growth Pact<ref>[http://ec.europa.eu/economy_finance/sg_pact_fiscal_policy/index_en.htm?cs_mid=570 ''Stability and Growth Pact'', European Commission 2009]</ref> that was introduced as part of the Maastricht Treaty in 1992, set arbitrary limits upon member countries' budget deficits and levels of national debt at 3 per cent and 60 per cent of gdp respectively. Following multiple breaches of those limits, the pact has since been renegotiated to introduce the flexibility necessary to take account of changing economic conditions. Revisions introduced in 2005 relaxed the pact's enforcement procedures by introducing "medium-term budgetary objectives" that are differentiated across countries and can be revised when a major structural reform is implemented; and by providing for abrogation of the procedures during periods of low or negative economic growth <ref>[http://ec.europa.eu/economy_finance/emu10/emu10report_en.pdf "Fiscal Governance". para 10.2 of ''EMU@10 Successes and Challenges After 10 Years of Economic and Monetary Union'', European Commission, 2008]</ref>. | The Stability and Growth Pact<ref>[http://ec.europa.eu/economy_finance/sg_pact_fiscal_policy/index_en.htm?cs_mid=570 ''Stability and Growth Pact'', European Commission 2009]</ref> that was introduced as part of the Maastricht Treaty in 1992, set arbitrary limits upon member countries' budget deficits and levels of national debt at 3 per cent and 60 per cent of gdp respectively. Following multiple breaches of those limits, the pact has since been renegotiated to introduce the flexibility necessary to take account of changing economic conditions. Revisions introduced in 2005 relaxed the pact's enforcement procedures by introducing "medium-term budgetary objectives" that are differentiated across countries and can be revised when a major structural reform is implemented; and by providing for abrogation of the procedures during periods of low or negative economic growth <ref>[http://ec.europa.eu/economy_finance/emu10/emu10report_en.pdf "Fiscal Governance". para 10.2 of ''EMU@10 Successes and Challenges After 10 Years of Economic and Monetary Union'', European Commission, 2008]</ref>. | ||
===The UK's Code for Fiscal Stability=== | ===The UK's Code for Fiscal Stability=== | ||
Revision as of 15:18, 14 February 2010
Deficit-limiting rules
The maintenance of investor confidence is a matter of mutual concern among governments because crises that can lead to sovereign defaults can be contagious, in much the same way that bank runs can generate banking panics. That consideration has prompted currency unions such as the European Monetary Union to set up deficit-limiting rules and monitoring systems.
The EU's Stability and Growth Pact
The Stability and Growth Pact[1] that was introduced as part of the Maastricht Treaty in 1992, set arbitrary limits upon member countries' budget deficits and levels of national debt at 3 per cent and 60 per cent of gdp respectively. Following multiple breaches of those limits, the pact has since been renegotiated to introduce the flexibility necessary to take account of changing economic conditions. Revisions introduced in 2005 relaxed the pact's enforcement procedures by introducing "medium-term budgetary objectives" that are differentiated across countries and can be revised when a major structural reform is implemented; and by providing for abrogation of the procedures during periods of low or negative economic growth [2].
The UK's Code for Fiscal Stability
In November 1997 the British government announced[3] its adoption of two rules of fiscal conduct:
- - a "golden rule":that over the economic cycle, the government would only borrow to invest and not for public consumption, and
- - a "sustainable investment rule": that over the economic cycle, the government would ensure the level of public debt as a proportion of national income is held at a stable and prudent level (subsequently interpreted as 40 per cent of gdp);
and an analysis [4] published by the Treasury in 2008 concluded that:
- - the average surplus on the current budget over the previous economic cycle was positive, thus meeting the golden rule; and,
- - public sector net debt remained below the 40 per cent of GDP limit of the sustainable investment rule over the cycle.
But in November 2008 the government announced [5] the replacement of those rules by a "temporary operating rule" under which it would set policies to improve the cyclically adjusted current budget each year, once the economy emerges from the downturn, so that it would reach balance with debt falling as a proportion of GDP once the global shocks had worked their way through the economy in full.
- ↑ Stability and Growth Pact, European Commission 2009
- ↑ "Fiscal Governance". para 10.2 of EMU@10 Successes and Challenges After 10 Years of Economic and Monetary Union, European Commission, 2008
- ↑ A Code for Fiscal Stability, H M Treasury November 1997
- ↑ Meeting the Fiscal Rules Over the Past Cycle, (1997-98 to 2006-07) - Chapter 2 of End of Year Fiscal Report HM Treasury, November 2008
- ↑ Pre-budget Report, HM Treasury November 2008