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Vast Agreement on Fiscal Rules – Spending Growth should be Limited

October 17th, 2012

Fiscal rules are important to achieve fiscal consolidation because they are self-disciplinary and induce a cost of breaking them. That was the main agreement between the panelists of the session “Fiscal Consolidation through Fiscal Rules?” at this year’s Global Economic Symposium (GES) in Rio de Janeiro. Additionally it was stated that those rules should have a constitutional rank and that governments should be monitored on a regular basis.

More specific one solution was supported by the majority of the panelists. This proposal includes putting a limit on government spending growth. Only in case of an emergency economic situation the rule can be suspended with a supermajority of 60 percent in parliament.

One option for such a rule proposed in this context would be the ‘inflation minus one rule’: Each year’s growth in government spending would be limited to the last three years’ inflation rate, according to the GDP deflator (annualized), minus one percentage point. There shouldn't be any exceptions to this rule – not defence, not entitlements, not favorite projects. With this rule GDP growth would almost always exceed budget growth and thus the spending-to-GDP ratio would come down. This rule disciplines governments without holding them back if they like to consolidate more aggressively.

Additionally, the panelists agreed on two more limits: the deficit-to-GDP ratio and an upper limit for the overall debt-to-GDP ratio. Those limits should be country-specific and should take into account the future economic growth prospects of each individual country.

The third agreement stresses the importance of having a safeguard to strengthen the enforcement of a fiscal rule but there was not yet consensus about what this safeguard should look like.


“The Global Economic Symposium (GES) 2012 is being jointly organized by the Kiel Institute for the World Economy (IfW) and the Bertelsmann Stiftung, in cooperation with the German National Library of Economics – Leibniz Information Centre for Economics (ZBW) and in collaboration with the Fundação Getulio Vargas (FGV).

Further information can be found at www.global-economic-symposium.org and at the official GES-blog at blog.global-economic-symposium.org.

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