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Public investment, the Stability Pact and the ‘golden rule’

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  • Fabrizio Balassone
  • Daniele Franco

Abstract

The fiscal rules set in the Treaty of Maastricht and in the Stability and Growth Pact have sometimes been criticised as an excessively binding constraint for appropriate counter-cyclical action. The risk that the rules may permanently reduce the public sector’s contribution to capital accumulation has also been pointed out. In this framework, the adoption of a ‘golden rule’ has been suggested. Starting from the recent debate, this paper tackles two questions: (a) the implications of the Pact for public investment and (b) the pros and cons of introducing a golden rule in EMU’s fiscal framework, given the objectives of low public debts and adequate margins for a stabilising budgetary policy. The analysis suggests that the rules set in the Treaty and in the Pact may negatively influence public investment spending. However, the golden rule, although intuitively appealing, does not seem to be an appropriate solution to the problem.

Suggested Citation

  • Fabrizio Balassone & Daniele Franco, 2000. "Public investment, the Stability Pact and the ‘golden rule’," Fiscal Studies, Institute for Fiscal Studies, vol. 21(2), pages 207-229, June.
    • Handle: RePEc:ifs:fistud:v:21:y:2000:i:2:p:207-229
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    More about this item

    JEL classification:

    • H54 - Public Economics - - National Government Expenditures and Related Policies - - - Infrastructures
    • H6 - Public Economics - - National Budget, Deficit, and Debt
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination

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