How could the Stability and Growth Pact be simplified?

23-04-2018

Past reforms of the Stability and Growth Pact (SGP) have improved its economic rationale, but this progress has come at the expense of simplicity, transparency and, possibly, enforceability. This study surveys and evaluates reform models that could reduce complexity without compromising the SGP’s indispensable flexibility. From a holistic perspective, the greatest potential for simplification will result from a shift of discretionary power to an independent fiscal institution. Independence is a substitute for complexity. With a narrower focus on the potential streamlining of the SGP and a reduction of excess complexity, first, the preventive and corrective arms could be integrated into one procedure. Second, this integrated procedure should be centred on a net expenditure rule that is combined with a debt feedback mechanism and a memory for expenditure overruns. Third, further fiscal indicators that are currently treated as parallel targets (headline deficit rule and structural balance) could be downgraded to non-binding reference values. And fourth, the planned transposition of the Fiscal Compact into European law should follow SGP reforms in order to promote consistency between European and national fiscal rules.

Past reforms of the Stability and Growth Pact (SGP) have improved its economic rationale, but this progress has come at the expense of simplicity, transparency and, possibly, enforceability. This study surveys and evaluates reform models that could reduce complexity without compromising the SGP’s indispensable flexibility. From a holistic perspective, the greatest potential for simplification will result from a shift of discretionary power to an independent fiscal institution. Independence is a substitute for complexity. With a narrower focus on the potential streamlining of the SGP and a reduction of excess complexity, first, the preventive and corrective arms could be integrated into one procedure. Second, this integrated procedure should be centred on a net expenditure rule that is combined with a debt feedback mechanism and a memory for expenditure overruns. Third, further fiscal indicators that are currently treated as parallel targets (headline deficit rule and structural balance) could be downgraded to non-binding reference values. And fourth, the planned transposition of the Fiscal Compact into European law should follow SGP reforms in order to promote consistency between European and national fiscal rules.