Archive for the ‘Fiscal Policy’ Category

Should Aggregate Expenditure Ceilings be Comprehensive?

Monday, May 9th, 2016

Aggregate expenditure ceilings are today a feature of budgeting in many OECD countries. An article of mine just published in the OECD Journal on Budgeting addresses a key design issue of the coverage of aggregate expenditure ceilings – should they cover the totality of government expenditure, or is it legitimate to exclude certain categories of expenditure? (more…)

Does Central Banking Lending to Government Count as Debt?

Monday, May 2nd, 2016

In the two previous blog pieces, we looked at the argument put forward by “monetary populists” that the central bank (CB) should finance fiscal stimulus by making direct grants to government. In this piece, we look at an alternative proposition put forward by other monetary populists, who argue that even when the CB lends money to government (rather than granting it), it is in effect providing debt-free funding. Their argument is that government borrowings from the CB you do not count as debt, and it is only when government borrows from the private sector that it incurs true debt. (more…)

Debt-Free Fiscal Stimulus (continued)?

Wednesday, April 27th, 2016

The proposition that the central bank (CB) should grant the government the funds with which to finance fiscal stimulus is, as discussed in the last blog piece, one which has been frequently advanced in recent times. The proponents of such “debt free fiscal stimulus” view it as a more effective and equitable version of the failed quantitative easing (QE) policies pursued to date.

Proponents of debt free fiscal stimulus believe that the fiscal constraints upon government can be eased if CB grants replace borrowing is the means of funding fiscal stimulus. The problem is that this is not true. (more…)

Debt-Free Fiscal Stimulus?

Monday, April 18th, 2016

What if it were feasible to use the central bank (CB) to fund stimulus spending without recourse to debt? What if the CB were to simply give government the money to pay for the fiscal stimulus – that is, a grant rather than a loan?  If this were the case, shouldn’t the CB be fully exploited to finance the fiscal stimulus which the world so desperately needs today? Shouldn’t the CB be systematically tapped to fund infrastructure and other socially useful expenditure?

The belief that the CB should serve as a source of debt-free funding for government is one of the oldest themes of the ‘monetary populism’, which sees it as a legitimate use of the sovereign right to create money. Not surprisingly, this notion of debt-free funding has resurfaced strongly in the post-GFC years, as an easy response to the fiscal difficulties faced by governments. (more…)

Reconciling Fiscal Stimulus with Fiscal Responsibility?

Monday, April 11th, 2016

There is today in many countries a crying need for fiscal stimulus. At the same time, the need for fiscal consolidation is equally compelling in the medium and longer term. How can these two imperatives be reconciled? How can fiscal stimulus be managed so that it does not become an excuse for a renewed bout of the type of fiscal irresponsibility which has led so many OECD countries into difficulties? This is a key issue facing both fiscal policy formulation and public financial management today. It is a multi-faceted issue which does not have simple answers. But let’s start at the start by considering the macroeconomic policy context. (more…)

Balanced Budget Rule Finalized: Basic Problem Remains

Tuesday, January 31st, 2012

Now that the content of the European-wide balanced budget treaty has been finalized, how does it stack up? In my last blog, I noted out that any permanent balanced budget rule is inappropriate because, in the long-term, it implies zero public debt. This is inconsistent with the proposition that moderate levels of public debt have a legitimate role to play, particularly in the financing of infrastructure. In the final version of the treaty, we now have a provision which relaxes marginally the budget balance requirements for countries which have debt levels significantly below 60 percent. Does this then solve the problem? (more…)

European Balanced Budget Rule

Monday, January 16th, 2012

EU fiscal rules have never been fully coherent. The adoption of constitutional rules requiring European governments to run permanent structural balanced budgets – pursuant to the treaty currently being negotiated in Brussels – will, however, make them totally incoherent and contradictory. (more…)

Sweden to Introduce Budget Surplus Rule

Monday, May 10th, 2010

Following a major fiscal policy review, Sweden has recently announced that it will legislate a fiscal rule in respect to the budget balance. This represents a significant development in a much-admired fiscal policy framework which was introduced more than a decade ago, during a period of major fiscal consolidation. (more…)

Top-Down Budgeting and Fiscal Exit Strategies: Getting Spending Priorities Right

Wednesday, April 28th, 2010

As countries move to restore their public finances in the wake of the financial crisis, firm control of aggregate expenditure has become more important than ever before. Part of this is ensuring that, after an aggregate expenditure ceiling is set, it is respected throughout the budget preparation process. This is what top-down budgeting seeks to achieve. In practice, however, it is not easy. The central difficulty is how to divide the aggregate expenditure ceiling into ministry ceilings. This is an issue that I will discuss in this and a series of subsequent blog pieces. (more…)

Fixed vs. Indicative Medium-Term Ceilings: The Fiscal Policy Dimension

Thursday, April 22nd, 2010

I have previously criticized the assumption made by some that medium-term (MT) budgeting necessarily requires that ministries be given fixed MT ceilings – that is, ceilings which represent commitments from government on the level of funding each ministry will receive in the next, say, three years. A system of indicative ceilings is, I have argued, preferable in many countries. There is an important point to add to this debate: namely, that there can sometimes be serious tension between fixed medium-term ministry expenditure ceilings and the aggregate fiscal policy or fiscal rules which guide budget policy. (more…)