Rainy day funds: can they make a difference in Europe

Rainy Day Funds (RDFs) have an important role in the USA. They allow States – which usually have rules requiring a balanced budget for current revenue and spending – to limit procyclical fiscal policies. This paper examines the possible role of RDFs in the European fiscal framework. The analysis suggests that RDFs would not fundamentally alter the incentive problems at the root of the difficulties in the implementation of the Stability and Growth Pact. Moreover, RDFs are not an option for countries with high deficits. However, for low-deficit countries, RDFs can lessen the rigidity of the 3 per cent threshold in bad times. RDFs could be introduced on a voluntary basis at the national level and could contribute to make the rules more country-specific. The introduction of RDFs would require a change in the definition of the “Maastricht deficit”: deposits and withdrawals should be considered respectively as budget expense and revenue. In this way, the balances held in RDFs could be spent in bad times without an increase in the deficit. To ensure that RDFs are not used opportunistically, deposits should only be made out of budget surpluses and circumstances allowing withdrawals should be specified ex ante.rainy day funds, fiscal rules, EMU

Cyclical asymmetry in fiscal variables

In a stylised framework of fiscal policy determination that considers both structural targets and cyclical factors, we find significant cyclical asymmetry in the behaviour of fiscal variables in a sample of fourteen EU countries from 1970 to 2004, with budgetary balances (both overall and primary) deteriorating in contractions but not improving correspondingly in expansions. Analysis of budget components reveals that the asymmetry is due to expenditure, in particular transfers in cash. We find no evidence that the fiscal rules introduced in 1992 with the Treaty of Maastricht affected the cyclical behaviour of the variables examined. Numerical simulations show that cyclical asymmetry inflated average deficit levels, contributing significantly to the accumulation of debt.fiscal stabilisation, government expenditure, government debt, fiscal rules

The Reliability of EMU FIscal Indicators: Risks and Safeguards

The reliability of EMUÂ’s fiscal indicators has been questioned by recent episodes of large upward deficit revisions. This paper discusses the causes of such revisions in order to identify ways to improve monitoring. The computation of EMUÂ’s deficit indicator involves the assessment of accrued revenue and expenditure and the identification of transactions in financial assets. Both can open margins for opportunistic accounting. However, crosschecks between deficit and changes in gross nominal debt (the other fiscal indicator used in EMU) can reduce the scope for window dressing. Simple comparison of deficit and changes in debt can readily spotlight large inconsistencies in fiscal data. Nevertheless, consistency checks must go deeper than simple comparison, since different items in the reconciliation account between deficit and change in debt can offset each other. Econometric evidence suggests that such offset may indeed have been used to reduce the visibility of deficit-specific window dressing. Attention to the quality of statistics has increased in recent years, also in the context of the reform of the Stability and Growth Pact. In this context, the paper argues that detailed analysis of the reconciliation account between deficit and change in debt is crucial to the effectiveness of monitoring.EMU, fiscal rules, fiscal indicators, stock-flow adjustment

Pension Expenditure Projections, Pension Liabilities and European Union Fiscal Rules

In the current debate on the European Union (EU) fiscal rules there is a widespread consensus on the need to place more focus on government debt and long-term fiscal sustainability in the surveillance of budgetary positions. More specifically, pension developments should be taken into account in assessing fiscal sustainability. The way to make this operational has not yet been defined. The paper examines the pension expenditure projections available in EU countries and their use in the assessment of fiscal sustainability. While acknowledging the progress in the availability and quality of projections, the paper notes that their comparability is still unsatisfactory. Any mechanical use of existing pension expenditure projections should therefore be avoided. The paper also examines the different definitions of pension liabilities and their potential role in the EU fiscal framework. It argues that pension liabilities may bring a clearer understanding of the impact of fiscal policies, may provide a measure of the cost of terminating pay-as-you-go pension schemes and may be useful for the measurement of deficits computed on accrual basis. However, the level of pension liabilities does not provide indications concerning the sustainability of pension schemes and their effects on public budgets. Pension liabilities should not be added to conventional debt. The paper argues that both pension expenditure projections and estimates of pension liabilities can complement the deficit and debt indicators currently used in the EU fiscal rules. The paper concludes by pointing to the need of improving some technical and organisational aspects concerning age-related expenditure projections, such as the independence of forecasters, the transparency of projections and the homogeneity of methods.

Fiscal rules for subnational governments in the EMU context

Includes bibliograph

Report on trends in the Italian productive system

In the last decade the Italian economy has underperformed compared both with the previous decades and with the main European countries. It is widely acknowledged that this evolution reflects unresolved structural problems, which have become more urgent in view of the major changes in the world economy (the new technological paradigm, globalization, European economic integration). The goal of the Report is to make a critical survey of all the empirical analyses on the Italian economy and to derive policy suggestions. The evolution of Italy’s productive system is examined from a long-run perspective, highlighting weaknesses and possible signs of recovery and elaborating on the systemic features that may have negatively affected growth performance directly or indirectly through the above exogenous shocks. The focus, mostly but not exclusively microeconomic, emphasizes the considerable heterogeneity of firms, a crucial element for identifying the factors that affect economic growth.growth, productivity, market structure, firm heterogeneity

The Reliability of EMU Fiscal Indicators: Risks and Safeguards

The reliability of EMU’s fiscal indicators has been questioned by recent episodes of large upward deficit revisions. This paper discusses the causes of such revisions in order to identify ways to improve monitoring. The computation of EMU’s deficit indicator involves the assessment of accrued revenue and expenditure and the identification of transactions in financial assets. Both can open margins for opportunistic accounting. However, crosschecks between deficit and changes in gross nominal debt (the other fiscal indicator used in EMU) can reduce the scope for fiscal gimmickry. Simple comparison of deficit and changes in debt can readily spotlight large inconsistencies in fiscal data. Nevertheless, consistency checks must go deeper than simple comparison, since different items in the reconciliation account between deficit and change in debt can offset each other. Econometric evidence suggests that such offset may indeed have been used to reduce the visibility of deficit-specific fiscal gimmickry. Attention to the quality of statistics has increased in recent years, also in the context of the reform of the Stability and Growth Pact. In this context, the paper argues that detailed analysis of the reconciliation account between deficit and change in debt is crucial to the effectiveness of monitoring

Cyclical asymmetry in fiscal variables in the EU

Fiscal stabilisation, Government expenditure, Government debt, Fiscal rules, E62, H6,

Heterogeneity in human capital and economic growth

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