Rainy Day Funds: Can They Make a Difference in Europe?
22 Pages Posted: 18 Oct 2007
Date Written: September 2007
Rainy Day Funds (RDFs) have an important role in the USA. They allow States - which usually have rules requiring a balanced budget for current revenue and spending - to limit pro-cyclical fiscal policies. This paper examines the possible role of RDFs in the European fiscal framework. The analysis suggests that RDFs would not fundamentally alter the incentive problems at the root of the difficulties in the implementation of the Stability and Growth Pact. Moreover, RDFs are not an option for countries with high deficits. However, for low-deficit countries, RDFs can lessen the rigidity of the 3 per cent threshold in bad times. RDFs could be introduced on a voluntary basis at the national level and could contribute to make the rules more country-specific. The introduction of RDFs would require a change in the definition of the "Maastricht deficit": deposits and withdrawals should be considered respectively as budget expense and revenue. In this way, the balances held in RDFs could be spent in bad times without an increase in the deficit. To ensure that RDFs are not used opportunistically, deposits should only be made out of budget surpluses and circumstances allowing withdrawals should be specified ex ante.
Keywords: rainy day funds, fiscal rules, EMU
JEL Classification: H30, H61, H62
Suggested Citation: Suggested Citation