Fiscal policy and sustainability Marco BUTI Director-General European Commission, DG Economic and Financial Affairs
Post-Growth 2018 Conference Brussels, 19 September 2018
2
Musgrave +: what economic role for governments? Fiscal sustainability Allocation
-/+
Redistribution
+/-
+/-
Stabilisation
Unsustainability concerns sharpen the trade-offs
3
Fiscal prudence allows for stabilisation GDP in recessions depends on public debt levels
Source; Jordà, Schularick, and Taylor, 2013. “Sovereigns vs Banks: Crises, Causes, and Consequences.” FRB San Francisco WP 2013-37
• •
High government debt is a drag on growth and recovery High debt countries more subject to tensions in financial markets
4
Automatic stabilisation coefficient of income
Stabilisation and redistribution tend to go hand in hand Correlation is positive although weak
f(x) = R² = 0
45
40
35
30
25
20
15
10
15
20
25
30
35
Government redistribution
Source: 2017 Public Finance Report , European Commission
5
Change in public investment on tot gov exp, 2016-2010
Fiscal prudence helps protect public investment Debt level and share of govt. investment on total govt. spending, EA post 2010
Public debt as % of GDP, 2009
6
The "golden rule" does not work in practice • It creates an illusion: public investment is not self-financed • It generates calls for exempting other expenditures, the enforcement of the SGP
thereby weakening
• Gross vs net investment • It incentivises creative accounting BUT EU fiscal rules acknowledge the specificity of public investment: Investment clause in the SGP Proposal for a European Investment Stabilisation Function