Implementing the Stability and Growth Pact: Enforcement and Procedural Flexibility

57 Pages Posted: 28 Apr 2005

See all articles by Roel M. W. J. Beetsma

Roel M. W. J. Beetsma

University of Amsterdam - Research Institute in Economics & Econometrics (RESAM); European Commission; Centre for Economic Policy Research (CEPR); CESifo (Center for Economic Studies and Ifo Institute); Tinbergen Institute; Netspar

Xavier Debrun

International Monetary Fund (IMF) - Research Department

Multiple version iconThere are 3 versions of this paper

Date Written: January 2005

Abstract

The paper proposes a theoretical analysis illustrating some key policy trade-offs involved in the implementation of a rules-based fiscal framework reminiscent of the Stability and Growth Pact (SGP). The analysis offers some insights on the current debate about the SGP. Specifically, greater procedural flexibility in the implementation of existing rules may improve welfare, thus increasing the Pact's political acceptability. Here, procedural flexibility designates the enforcer's room to apply well-informed judgment on the basis of underlying policies and to set a consolidation path that does not discourage high-quality policy measures. Yet budgetary opaqueness may hinder the qualitative assessment of fiscal policy, possibly destroying the case for flexibility. Also, improved budget monitoring and greater transparency increase the benefits from greater procedural flexibility. Overall, we establish that a fiscal pact based on a simple deficit rule with conditional procedural flexibility can simultaneously contain excessive deficits, lower unproductive spending and increase high-quality outlays.

Keywords: Fiscal rules, Stability and Growth Pact, procedural flexibility, deficits, structural reforms

JEL Classification: E62, H6

Suggested Citation

Beetsma, Roel M. W. J. and Debrun, Xavier, Implementing the Stability and Growth Pact: Enforcement and Procedural Flexibility (January 2005). Available at SSRN: https://ssrn.com/abstract=647945 or http://dx.doi.org/10.2139/ssrn.647945

Roel M. W. J. Beetsma (Contact Author)

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