Fiscal Policy Flashcards by Aoife Langdon

Foundation for EMU

Maastricht 1992

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What did Maastricht stipulate

Member states should regard economic policies as common concern

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4 convergence criteria of maastricht

Price stability
Exchange rate fluctuations
Maintain Acceptable interest rates
Sustainability of financial policies

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What should financial policies be

Govt deficit not higher than 3% GDP
Debt less than 60% of GDP

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What was stability and growth pact 1997

Discipline
Provision to set medium term elective of budgets close to balance or surplus

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What were tools of stability and growth pact

Multi lateral surveillance
Early warning systems to prevent deficits exceeding 3%
EDP Procedure

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What was the rationale for pact

Common currency removed instruments to manage economy such as devaluation and interest rates
Inappropriate borrowing and spending leads to inflation and interest rate pressure

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Pre 2008 name some things that occurred

Pact worked well
Deficit breached Greece Portugal Italy France Germany
2003 commission took case to ECJ
2004 10 new members

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Reforms in 2005

Structural balance
Differential MTO depending on debt
Minimum adj to mto if not at balance

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Fiscal errors

Not enough done in good times
Spain Ireland tax receipts treated as structural
No urgency in running down debt

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Governance issues

Early warning advised 4 times rejected by ecofin 3
EDP avoided in France and Germany
One dimensional policing
Qualitative surveillance poor

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2008 crisis

By 2010 average eurozone debt was 6%
22 of 27 members in EDP
Explosion of govt debt
2010 Greek crisis caused bond crisis
Ireland - EDP 2009, recover plan 2010, adopted by Troika late 2010
Exited EDP 2016

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Post 2008 response

2010 common budgetary timetable
Stability program update budget outline every April
Country specific recommendations in summer
Window for dialogue

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2011 six pack

Exp benchmark public spending linked to GDP
If at MTO can grow at GDP growth rate
If not can grow below

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What are MTO and expenditure benchmark subject to

Fines and warnings

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What were the changes to council voting mechanism

Reverse QMV
More automatic adoption of commission recommendations

Fiscal compact 2012

MTO provision incorporated into national law

Fiscal responsibility act

2012

Provision of fiscal budgetary act

Budgetary rule general budget balance led/surplus
Structural budget balance at medium term objective deficit 0.5 per cent of GDP
Or in compliance with adjustment path towards objective

Debt rule of fiscal compact 2012

Reduce debt/GDP by 1/20th difference per annum

Two pack 2013

Surveillance of members in buyout
National budgets passed before mid October
Commission can request new budget if unhappy
Leeway to finalise budget and legislation by December
Budgets to be framed on macro economic assumptions
Independent body to measure compliance with fiscal rules

Current state of play

Criticism of rules growing
Complex
Pro cyclical
Dampens capital spend
No buffers in good times

Feb 2020

Review of fiscal framework launched

March 2020

Rules suspended until end of 2021
EU sought to avoid austerity

Summer 2021

Government announced new spending rule of 5%

Revisions to EU framework

More simplification More country specific More national ownership Corrective arm unchanged New binding medium term fiscal structural plans Commission conducts debt sustainability analysis and suggests reference fiscal adjustment based on net primary spend

Scale of adjustment dependent on

Deficit and debt levels Mini reductions for elevated debt Bring deficit to safety margin below 3 per cent

When can you adjust

Can’t backload adjustment Only change with new government Not subject to correction procedure for now

Critical assessment pros

Enabled currency union Did not determine spending decisions Prevent not correct attempt Imposed constraint

Critical assessment cons

One size fits all? One dimension approach to monitoring and compliance before 2008 Deficit focus ignited behaviour in time of growth Hypothetical nature if structural balance measure nit suited to Ireland Does it ensure long term sustainability of public finances

Preventative arm of stability and growth pact

Prevent deficits seeing light of day Present budget to stability program update to European Commission then to ecofin who’d issue early warning deficit not at 3%

Corrective arm of stability growth pact

Excessive deficit procedure Sanctions and fines if deficit not at 3%

2009 to 2015

Ireland in EDP 11% so given longer to correct it as was highest in Europe

What caused minor wobble 2001 to 2003

Foot and mouth 9/11 and dot com bubble burst

Headline vs structural balance

Clean up one off items such as windfall corporation tax Makes adjustment for economic cycle spend of 94 vs revenue of 96 How’s growth behaving in economy and what’s projected growth - potential rate of growth

Potential rate of growth

How much can we grow without fuelling inflation

What is MTO

Structural balance

Expansionary fiscal contraction

Government adopts pro cyclical approach Export led recovery other agents counterbalanced it so did not prolong it

What is countercyclical fiscal policy

Government dies opposite in relation to rest of economy uses by raising taxes and cutting spending