Microsoft Word - 00_Title_draft.doc

under deficit rules. Spending rules make the availability of resources more predictable, notably

with respect to annually appropriated funding for those core functions of government.

• Funding for public investment can be protected under a spending rule, by requiring additional
  fiscal restraint through mandatory spending or taxes, or by setting a separate appropriations limit
  for investment.


• In contrast to the unpredictable fiscal constraints imposed by deficit rules, the more predictable
  fiscal behaviour encouraged by spending rules can lead to easier co-ordination with monetary
  policy, and to greater confidence and steadier behaviour within the private sector.

Based on this analysis, and in the judgment of the current authors, policy analysts should consider this
alternative approach to fiscal policy making carefully.

Table 1. Alternative fiscal rules

Deficit rule Cyclically adjusted

deficit rule

Spending rule

Fiscal responsibility:

Expansion Encourages larger deficit Encourages larger deficit Requires that surplus be

saved

Recession May require a smaller deficit May require a smaller

deficit

Allows deficit to grow

Macroeconomic stabilisation:

Expansion Pro-cyclical Pro-cyclical, but less so

than unadjusted deficit

rule

Counter-cyclical, through

automatic stabilisers

Recession Pro-cyclical Pro-cyclical, but less so

than unadjusted deficit

rule

Counter-cyclical, through

automatic stabilisers

Administrability Verification more difficult Verification more

difficult

Verification easier

Credibility Status more contentious Status more contentious Status more transparent

Public investment Can be protected Can be protected Can be protected,

possibly better than under

deficit rules

Core government functions Volatile funding Volatile funding Predictable funding

Monetary policy Co-operation difficult Co-operation difficult Co-operation easier

References

Annett, A. (2006), “Enforcement and the Stability and Growth Pact: How Fiscal Policy Did and Did Not
Change under Europe’s Fiscal Framework”, International Monetary Fund Working Paper,
No. 06/116, IMF, Washington DC.

Annett, A. and A. Jaeger (2004), “Europe’s Quest for Fiscal Discipline”, Finance and Development,
June, IMF/World Bank, Washington DC.

Atkins, R. and R. Minder (2005), “Brussels threatens action over Italy’s ‘worrying’ deficit: Economic
Affairs Commissioner Joaquin Alumnia has set himself on a collision course with Rome after
predicting breach of EU fiscal rules”, Financial Times, 5 April, London.

Begg, I. and W. Schelkle (2004), “The Pact is Dead: Long Live the Pact”, National Institute Economic
Review, No. 189, Sage Publications, Thousand Oaks, California, United States.

Bergsten, C. (2004), “The Euro and the Dollar: Toward a ‘Finance G-2’?”, paper prepared for the
conference on “The Euro at Five: Ready for a Global Role?”, 26 February, Washington DC.