The Fiscal Stability Treaty

Seamus Coffey

Referendum

“The rules … shall take effect in the national law … through provisions of binding force and permanent character, preferably constitutional, or otherwise guaranteed to be fully respected and adhered to throughout the national budgetary processes.”

• Do we want to put fiscal rules in the Constitution?

• Do we want to put these fiscal rules in the Constitution?

Fiscal Rules in the Treaty

• Maastricht Criteria:

– 3% of GDP annual deficit limit

– 60% of GDP general government debt limit

(or is sufficiently declining towards )

• Balanced Budget Rule:

– 0.5% of GDP annual structural deficit limit

Proposed DoF Rules (March 2011)

Public Finances Correction Rule (“Stormy weather” rule):

Would govern pace of budgetary correction, to ensure that the EU Treaty limits for the public deficit (3% of GDP) and debt levels (towards 60% of GDP) are respected. This would require that the primary budget balance be improved by a defined minimum amount (of between 0.75% and 1.5% of GDP) each year.

Prudent Budget Rule (“Bad weather” rule) :

Would assist in maintaining budgets at a balanced position over the medium‐term, as required under the SGP. Similar to the Correction Rule, would specify a minimum improvement in the primary budget balance of 0.5% of GDP until the medium‐term budgetary objective has been reached. Minimum annual improvement would be expressed in cyclically‐adjusted terms.

Sustainable Expenditure Growth Rule (“Good weather” rule):

Would apply in ‘good economic times’ and limit gross current expenditure growth to the underlying rate of growth in the economy. Higher rates of expenditure growth would need to be financed through additional taxation, thereby forging a direct and immediate link between spending choices and revenue raising.

The Structural Balance

The structural budget balance refers to the general government cyclically adjusted balance adjusted for once-off elements beyond the economic cycle.

The cyclically adjusted balance is the fiscal balance adjusted for the effects of the economic cycle.

SB = B – CB – OOM

CB = a.OG

Output Gap

A  measure of the difference between the actual output of an economy and the potential output it could achieve when it is most efficient, or at full capacity. 

-.1

-.05

0

.05

.1

Gro

wth

Ra

te

1971 1975 1979 1983 1987 1991 1995 1999 2003 2007 2011 Source: CSO

Growth in Irish Real GDP 1971 to 2010

Economic Growth

-.1

-.05

0

.05

.1

Gro

wth

Ra

te

1971 1975 1979 1983 1987 1991 1995 1999 2003 2007 2011 Source: CSO

Growth in Irish Real GDP 1971 to 2010

Economic Growth

-.1

-.05

0

.05

.1

Gro

wth

Ra

te

1971 1975 1979 1983 1987 1991 1995 1999 2003 2007 2011 Source: CSO

Growth in Irish Real GDP 1971 to 2010

Economic Growth

-.1

-.05

0

.05

.1

Gro

wth

Ra

te

1971 1975 1979 1983 1987 1991 1995 1999 2003 2007 2011 Source: CSO

Growth in Irish Real GDP 1971 to 2010

Economic Growth

-6

-3

0

3

6

9

12

Gro

wth

Ra

te

1994 1997 2000 2003 2006 2009 2012

OECD

IMF

EC

Source: CSO

Deviations of actual GDP from potential GDP as a per cent of potential GDP

Output Gaps

-15

-10

-5

0

5

Pe

rcen

t

2002 2003 2004 2005 2006 2007 2008 Source: IMF, World Economic Outlook

Structural Budget Balance, % GDP

Structural Balances

IMF 2007

IMF 2011

-15

-10

-5

0

5

Pe

rcen

t

2002 2003 2004 2005 2006 2007 2008 Source: IMF, World Economic Outlook

Structural Budget Balance, % GDP

Structural Balances

IMF 2007

IMF 2011

Is the rule pro-cyclical?

The Debt Brake Rule

“When the ratio of a Contracting Party's general government debt to gross domestic product exceeds the 60 % reference value that Contracting Party shall reduce it at an average rate of one twentieth per year as a benchmark, “

Additional New Measures

• Expenditure Growth Rule

• Macroeconomic Imbalance Scorecard

Costs and Benefits

POINTING OUT that the granting of financial assistance in the framework of new programmes under the European Stability Mechanism will be conditional, as of 1 March 2013, on the ratification of this Treaty by the Contracting Party concerned,

Fiscal Stability Treaty

Costs and Benefits

We are determined to continue to provide support to countries under programmes until they have regained market access, provided they successfully implement those programmes. We welcome Ireland and Portugal's resolve to strictly implement their programmes and reiterate our strong commitment to the success of these programmes.

July 21st 2011, EU Leaders Summit Statement