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Consolidation under the Europe’s New Fiscal Rules: Analyzing the Implied Minimum Fiscal Effort

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  • Kuusi, Tero

Abstract

The new EU fiscal framework builds on several overlapping target measures and convergence rules. Thus, it is not clear how strict goals the framework sets for public finances. In this paper we build a simulation framework that solves the minimum fiscal effort under different assumptions on the initial state of the economy and the expected economic conditions during the consolidation. We then use the model to analyze several fiscal consolidations. We find that Germany, France, Spain and Italy are currently in compliance with our measure of minimum fiscal effort, but Spain is at risk of falling behind the required pace of consolidation in the near future. As a historical reference we revisit the Finnish Great Depression of the early 1990s. We find that the consolidation was in compliance with the fiscal rules, but during the first years of the consolidation the difficulty of detecting the phase of the business cycle could have considerably increased the restrictiveness of the rules. Finally, we address the looming sustainability gap in the Finnish public finances that reflects the cost of aging population. Under no policy change the required correction is found to become substantial by 2030.

Suggested Citation

  • Kuusi, Tero, 2014. "Consolidation under the Europe’s New Fiscal Rules: Analyzing the Implied Minimum Fiscal Effort," ETLA Working Papers 23, The Research Institute of the Finnish Economy.
    • Handle: RePEc:rif:wpaper:23
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    Cited by:

    1. Kuusi, Tero, 2018. "Does the structural budget balance guide fiscal policy pro-cyclically? Evidence from the Finnish Great Depression of the 1990s," MPRA Paper 84829, University Library of Munich, Germany.

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    More about this item

    JEL classification:

    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H6 - Public Economics - - National Budget, Deficit, and Debt

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