Sustainability of public finances

Sustainability of public finances:
A basic tenet in the move towards European Monetary Union (EMU) is that monetary stability requires the 'sustainability' of public finances. The Maastricht Treaty gives a dichotomous interpretation of sustainability through the convergence criteria. However, the Treaty gives no clear guidance for evaluating the public finances of a country violating the criteria, i.e. for judging whether or not it has taken adequate measures of adjustment, and whether or not it is moving in the right direction. These questions are also left open by the more recent 'Stability and Growth Pact'.

Developing a practical approach to assessing the sustainability of a country's public finances is the purpose of this study. It emphasises the distinction between symptoms of non-sustainability, which can be determined in a straightforward way, and underlying institutional causes, the spreading of non-decisions and excessive fragmentation of budget decisions. Successful correction of non-sustainable public finances requires a disaggregate view of the government budget and tackling the fiscal policy problem 'at the source', i.e. adjusting those items of the government budget that produced the build-up of a non-sustainable deficit in the first place. Lasting consolidation also requires remedies to the underlying institutional weaknesses. Before outlining a practical procedure, the study also reviews the theoretical and empirical arguments for such a disaggregate and institutions-oriented approach.

Perotti, Roberto (et al.)
Sustainability of public finances
Centre for Economic Policy Research, 1998
ISBN: 1-898128-35-9
Price: £10.00

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