rebalance incentives of policy-makers and impose constraints on the conduct of fiscal policy, via the
introduction of adequate fiscal rules and institutions. This section first provides empirical evidence for
the existence of a deficit bias in most of developed economies (considerations related to the conduct of
pro-cyclical policies are addressed in Part 4 of this report). Next, the main explanations for the existence
of such a bias mentioned in the literature are reviewed. Finally, proposals for limiting or eliminating the
deficit bias are examined.
2.2. The deficit bias in perspective
When looking at fiscal developments in a long-term perspective, it appears that episodes of protracted
departure from budgetary balance have been rather uncommon in the history. Up to the first oil price
shock, budgetary deficits were almost exclusively related to war episodes and were typically corrected
promptly (see European Commission, 2004). The picture changed from the 70s onwards, when sustained
deficits not related to exceptional public finance needs as during war periods were recorded in the most
advanced economies.
The propensity to finance public spending with debt has become an increasing source of concern in
Europe. As illustrated in Figure 1 below, in the last thirty years the general government gross debt-to-
GDP ratio has been increasing rapidly in the EU. In countries like Germany and France, for example,
debt ratios – not debt levels – more than tripled over the last three decades. Even if most EU
governments started to shift gear during the 1990s with the agreement on the Maastricht Treaty and the
run-up to EMU, deficit and debt levels remain high in a number of EU countries.^3
Figure 1 - Developments in the debt ratio in the main industrialised regions since 1970253545556575197019721974197619781980198219841986198819901992199419961998200020022004General government gross debt as % of GDP020406080100120140160180General government gross debt as % of GDP (Japan)EU US JP (rhs)N.B.: Data for EU are the weighted average by all the old 15 Member States, data for BE are available since
1971, for DK since 1971, for NL since 1975 and for PT since 1973
Source: Commission services.In the absence of policy measures, government deficits and debt will further increase in the medium and
long term. In most of EU countries, governments made in the past long-term welfare expenditure
commitments which, against the background of demographic changes, i.e. low birth rates and longer life
expectancy resulting in population ageing, may lead to unsustainable government finances. The recent
long-run projections of the Commission show that, under unchanged policies, the debt ratio could follow
(^3) For instance, in 2005, the debt-to-GDP ratio reached 107.5 percent of GDP in Greece, 106.4 percent in Italy, 93.3
percent in Belgium, 67.7 percent in Germany and 66.8 percent in France.