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A Challenge for the G20: Globally Stipulated Debt Brakes and Transnational Independent Fiscal Supervisory Councils

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Listed:
  • Dolls, Mathias

    (Ifo Institute for Economic Research)

  • Peichl, Andreas

    (Ludwig-Maximilians-Universität München)

  • Zimmermann, Klaus F.

    (University of Bonn)

Abstract

Debt-to-GDP ratios have grown to unprecedented levels in many industrialized economies. This requires disciplined consolidation efforts which are, however, supposed to come now at the wrong time with the economic recovery being fragile. The countries forming the G20 need to make sure the long-term sustainability of public finances. Not least, this is indispensable in order to avoid a further spreading of the sovereign debt crisis. Against this background, we call for a global debt brake following the Swiss or German example which should be agreed upon in Cannes in early November 2011. The agreement on the debt brake should be binding – in contrast to previous expressions made at the G20-level to reduce government debt, as, for example, the Seoul Action Plan is lacking any binding character. Therefore, the debt brakes should be fixed in national constitutions and monitored by independent transnational fiscal councils. The fiscal councils could be located at the European Stability Mechanism (ESM) and the International Monetary Fund (IMF) and should conduct a regular evaluation of national budget plans in order to ensure that they meet the requirements stipulated by the debt brake. Through this global monitoring process, an early warning system could be developed with the aim to avoid sovereign debt crises and the resulting contagion risks among highly indebted countries in the future. In an economic and political environment which is characterized by large uncertainties concerning economic prospects and the fear of a potential spreading of the sovereign debt crisis, a global debt brake in combination with an independent transnational supervisory council would send a credible signal that a reduction of sovereign debt to sustainable levels is not further delayed into the future. Moreover, a well-designed debt brake ensures that the general government budget is balanced over the business cycle. Consequently, it is a more efficient instrument than the former Stability and Growth Pact for the Eurozone which in fact stipulated a ceiling for the budget deficit, but whose requirements regarding budget surpluses in good times were insufficient. This asymmetry is eliminated by those debt brakes which are in force in Switzerland and Germany. The new fiscal policy framework thus leaves enough room for discretionary fiscal policy and the workings of automatic stabilizers in an economic downturn.

Suggested Citation

  • Dolls, Mathias & Peichl, Andreas & Zimmermann, Klaus F., 2011. "A Challenge for the G20: Globally Stipulated Debt Brakes and Transnational Independent Fiscal Supervisory Councils," IZA Policy Papers 33, Institute of Labor Economics (IZA).
    • Handle: RePEc:iza:izapps:pp33
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    References listed on IDEAS

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    More about this item

    Keywords

    debt brake; fiscal council; G20;
    All these keywords.

    JEL classification:

    • H1 - Public Economics - - Structure and Scope of Government
    • H3 - Public Economics - - Fiscal Policies and Behavior of Economic Agents
    • H6 - Public Economics - - National Budget, Deficit, and Debt

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