You are here: Home Knowledge Base Economy Fiscal Consolidation through Fiscal Rules? Solutions Define a long-term target for the debt-to-GDP ratio and an upper limit for the annual budget deficit to GDP ratio, depending on the business cycle, the country’s existing debt-to-GDP ratio ...
Symposium 2012

Solution for Fiscal Consolidation through Fiscal Rules?

The Challenge

Large and growing ratios of public debt to GDP in many countries are demanding vigorous efforts to achieve fiscal consolidation. Many observers believe that a fiscal rule should be the central element ...

Large and growing ratios of public debt to GDP in many countries are demanding vigorous efforts to achieve fiscal consolidation. Many observers believe that a fiscal rule should be the central element of a successful strategy: they argue that a rule would restrict discretionary actions by governments, thereby strengthening the credibility of consolidation. But there are substantial differences of opinion on the precise specification of the rule.

Define a long-term target for the debt-to-GDP ratio and an upper limit for the annual budget deficit to GDP ratio, depending on the business cycle, the country’s existing debt-to-GDP ratio and its future growth prospects.

This consolidation rule focuses on the overall debt to GDP ratio and the annual budget deficit. Similar to the Maastricht Treaty, it suggests a limit on the overall debt to GDP ratio and defines an upper limit for the annual budget deficit to GDP ratio, determined in part by this stage of the business cycle in which the country finds itself.

An important extension would be to allow for country-specific limits, which fit with the future growth perspectives and the already accumulated debt of each country. Such a flexible rule would probably gain more acceptance among legislators, because it would take account of the economic performance of each country.

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    Solution
    Symposium 2012

    Fiscal rules should be given constitutional status.

    Fiscal rules should be given constitutional status.

    Fiscal rules should be given constitutional status.

    Polity