EDS: Debt reduction depending on the growth rate of the economy

Get real time updates directly on you device, subscribe now.

By Tasos Dasopoulos

The revised study of the Hellenic Fiscal Council predicts the growth rate of the economy as a key factor determining the annual debt reduction as a central change for the stability pact

In the study, signed by Professor George Ioannidis and Professor Panagiota Koliousi, the key points are to cross the tough fiscal line that sees debt reduction by 1/20 to approach 60% in 20 years, at “fiscal path”. The “fiscal path” is defined as the fiscal space delimited between the maximum and the minimum percentage that can reduce the debt of a heavily indebted country, depending on the growth rate of its economy.

The upper limit corresponds to a stricter fiscal policy, that is, to a policy that achieves a faster de-escalation of the GDP / GDP ratio. For the sake of simplification, we identify the upper limit with the fiscal line produced by the existing fiscal framework (annual reduction of excess debt (> 60%) by 1/20). The lower limit corresponds to a less strict fiscal policy and is formed – based on the existing fiscal framework – by changing the intensity of the fiscal adjustment rate.

Thus, in periods of stagnation or weak growth the GDP / GDP ratio remains stable, in periods of low growth it decreases relatively slowly and in periods of strong growth it decreases faster.

The two thresholds (upper and lower) delimit the fiscal path through which the Member State can move.

Financing investments from additional fiscal space

If the debt reduction is determined by the growth rate of the economy, the resulting additional budget space can only be used to finance investments that are compatible with the Union’s strategic objectives. These investments include:

-National participation in programs co-financed by the Structural Funds and Cohesion Policy.

– The costs for reversing climate change and / or dealing with its consequences, the costs for the digital transition, and the investment costs for strengthening the Health and Social Protection system, provided that they are organized in the form of an Operational Program.

-Other investment expenditure, which is directly linked to the Union’s strategic objectives (eg R&D expenditure), as reflected in the relevant European Strategies.

Central budgetary capacity

It is also proposed to develop a central fiscal capacity (CFC) which will complement the proposal. Central budgetary capacity is a strong incentive for “discipline”, as its use presupposes compliance by Member States with fiscal rules. It also plays a key role in tackling negative external demand, bridging the “demand gap” caused by possible overly restrictive policies in other Member States, increasing fiscal space through joint borrowing.

It is also proposed to institutionalize the targeting of fiscal rules. It is emphasized that debt sustainability is a necessary, not sufficient, condition for achieving the Union’s economic and social goals. The new financial framework must be linked to the wider economic, social and development goals of the Union. Based on the above, it is necessary to institutionalize – through explicit reference – four basic principles: fiscal sustainability, economic growth, green and digital transition, social and economic convergence.

The advantages of this proposal are that all possible fiscal trajectories within the fiscal path cause a de-escalation of the GDP / GDP ratio. However, the intensity of fiscal adjustment is determined by the rate of change in GDP and is supported by a consultation process with the European Commission. The content and scope of the consultation is determined in advance by the eligibility of expenditure and the width of the financial path. Also, no special exceptions are required for public investment, but strong institutional disincentives are created to prevent their reduction.


Source From: Capital

Get real time updates directly on you device, subscribe now.

Leave A Reply

Your email address will not be published.