Fiscal sustainability and policy implications for the euro area" by

Abstract In this paper we examine the sustainability of euro area public finances against the backdrop of population ageing. We critically assess the widely used projections of the Working Group on Ageing Populations (AWG) of the EU's Economic Policy Committee and argue that ageing costs may be higher than projected in the AWG reference scenario. Taking into account adjusted headline estimates for ageing costs, largely based upon the sensitivity analysis carried out by the AWG, we consider alternative indicators to quantify sustainability gaps for euro area countries. With respect to the policy implications, we assess the appropriateness of different budgetary strategies to restore fiscal sustainability taking into account intergenerational equity. Our stylised analysis based upon the lifetime contribution to the government's primary balance of different generations suggests that an important degree of pre-funding of the ageing costs is necessary to avoid shifting the burden of adjustment in a disproportionate way to future generations. For many euro area countries this implies that the medium-term targets defined in the context of the revised stability and growth pact would ideally need to be revised upwards to significant surpluses

Germany after Qualification for EMU: A Disaggregated Approach to the Analysis of Structural Public Finance Developments

This paper analyses the structural developments underlying the evolution of public finances in Germany after qualification for EMU. For this purpose, we extend a disaggregated approach to cyclical adjustment in a way that allows us inter alia to distinguish the impact of discretionary fiscal policy measures from other structural influences. Furthermore, we assess the relevance of the severe forecasting error with respect to macroeconomic developments after 2000 for deficit developments. Our analysis shows that positive transitory influences covered a structural deterioration between 1997 and 2000, while in the last two years negative transitory influences offset a slight improvement in the structural deficit ratio. A significant part of the structural worsening between 1997 and 2003 is not directly linked to recent fiscal policy decisions. Overall, the deterioration was mainly due to weak revenue side developments, while the expenditure side did contribute slightly to consolidation. Zusammenfassung In diesem Aufsatz wird die strukturelle Entwicklung der öffentlichen Finanzen in Deutschland nach der Qualifikation zur Währungsunion analysiert. Um die verschiedenen Einflüsse auf die Entwicklung der öffentlichen Finanzen zu unterscheiden und einzuordnen, wird eine erweiterte Version eines disaggregierten Ansatzes zur Konjunkturbereinigung von Haushaltssalden verwandt. Wir untersuchen außerdem die Bedeutung der erheblichen Fehleinschätzungen bezüglich der gesamtwirtschaftlichen Entwicklung in den vergangenen Jahren für die Defizitentwicklung. Die Analyse zeigt, dass die strukturelle Verschlechterung des Finanzierungssaldos in den Jahren 1997 bis 2000 zunächst von positiven, aber vorübergehenden Einflüssen überdeckt worden ist. In den letzten beiden Jahren hat sich die strukturelle Lage leicht verbessert. Allerdings standen dieser Entwicklung negative temporäre Faktoren entgegen. Über den gesamten Zeitraum 1997 bis 2003 erhöhte sich die strukturelle Defizitquote, was jedoch zu einem bedeutenden Teil nicht direkt durch finanzpolitische Entscheidungen aus diesem Zeitraum bedingt war. Insgesamt war die Erhöhung hauptsächlich auf die schwache Entwicklung der Einnahmenseite zurückzuführen, während die Ausgabenseite eher entlastend wirkte

Reforming Cyclical Adjustment in the Debt Brake: Respond to Revised Assessments with a Delay

Abstract In this article, we point out requirements for potential output estimates used for cyclical adjustment in the German debt brake. Further, we propose supplementing the cyclical component in the debt break with an error term — regardless of the specific potential output estimation approach. The error term provides fiscal policy more time to adjust to potential output revisions and tax revenue forecast errors. Simulations based on past data show that the error term reduces erratic budgetary adjustments and strengthens automatic stabilisers