Safety Margins in EU Budgetary Surveillance: An Assessment
26 Pages Posted: 14 Feb 2012
Date Written: March 29, 2007
This paper deals with alternative approaches for deriving adequate budgetary safety margins. We highlight some critical features of the existing EU Commission’s methodology and propose an alternative method for assessing the minimal benchmark, i.e. the value of the deficit-to-GDP ratio that ensures compliance with the required safety margins. A number of empirical arguments lend support to this measurement approach, although our estimates of minimal benchmarks do not diverge extensively from those derived through the current methodology. We also provide estimates of safety margins by using a complementary approach based on stochastic simulations of a macroeconomic model. The findings are qualitatively very similar to those obtained with the other method. Moreover, we lend empirical support to the view that a fiscal structure with lower budget sensitivity to cyclical fluctuations is conducive to less ambitious safety margins.
Keywords: budgetary safety margin, minimal benchmark, cyclically-adjusted balance
JEL Classification: E62, H62
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