The Pact for Stability and Growth establishes an incentive scheme which will firmly restrict the leeway for sustained excessive deficit spending. If hypothetically applied to historical data the pact would have resulted in severe direct costs from deposit payments and fines for many EU members; only few countries would have been able to claim extraordinary business cycle conditions. Especially countries with a high elasticity of public budget items on the regional output gap will be affected by indirect costs from implementing fixed rules on deficit spending. For Germany, Denmark, Finland, Sweden, and Austria hypothetical deposit payments are large relative to fines, implying that excessive deficit positions would be corrected rather quickly. It is important to note that there might be a rationale to punishing excessive structural deficits due to possible negative external effects and because public choice theory suggests higher incentives to run excessive deficits within the European Monetary Union. But a punishment of cyclical deficits arising from the reaction of automatic stabilizers or of fiscal policy cushioning negative asymmetric shocks is clearly inconsistent with the target of minimizing output fluctuations. A new measure of the cyclical deficit ratio in Austria's public budgets based on Structural Time Series Models provides evidence for a moderate response of public deficits to business cycle variations. Compared to previous national and international estimates we find higher elasticities confirming the flexibility of Austria's fiscal policy already apparent in the cross country comparison. A Monte Carlo simulation of cyclical deficit ratios shows that a structural budget deficit of up to 1.25 percent of GDP is compatible with a minimal risk for Austria of paying a deposit. Under these circumstances indirect costs from reduced cyclical responsiveness can be practically ruled out. Starting from today's situation, further consolidation efforts will be necessary to bring down the structural budget deficit towards this value. The more so, since the years until 2010 will be favorable in terms of small demographic pressures on the Austrian public pension system. Since further fiscal consolidation is needed throughout Europe, transitional costs from simultaneous fiscal retrenchment are likely.
Die Kosten des Paktes für Stabilität und Wachstum; The Costs of the Pact on Stability and Growth
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