This study presents a compact model that allows a stylised, yet dynamic reasoning on the main macrofiscal aggregates that are relevant for setting budgetary paths compatible with the structural budget balance requirements of the preventive arm of the Stability and Growth Pact. Some lessons on the conduct of fiscal policy in a reference framework in structural terms can be learned from the simulations provided for illustrative purposes. These simulations show in particular that – under certain conditions relating to the degree to which the budgetary adjustments have a permanent effect on the economic activity and thus on potential GDP – when the feedback effects of adjustments on the underlying macroeconomic environment are left out of consideration, this can be detrimental to the credibility of the considered structural paths.
This study presents a method for decomposing the annual variation of the debt ratio among the cyclical, structural and one-off components, thus making it possible to identify the structural conditions for a positive or negative snowball effect. The study shows that the cyclical component may be significant and, depending on the year, partially hide the structural component of the endogenous debt development. The method differs from the European Commission method for estimating a cyclically-adjusted debt. Compared with it, our method estimates a cyclical component that is better correlated with the level and variation of the output gap. Finally, the study discusses the advisability and feasibility of taking into account equilibrium inflation and interest rate in the approach.
The state reform was elaborated at a moment when large fiscal consolidation measures were required to restore the long-term sustainability of Belgian public finances. The 2011 institutional agreement provided that the federated entities contribute, through the reform, to the fiscal consolidation. That contribution can be justified by the fact that the reform, by reducing the budgetary size of the federal level, decreases the federal level’s room for manoeuvre and its capacity to resolve on its own the sustainability issue. The magnitude of the contribution necessary to prevent the sustainability challenge from deteriorating is assessed and compared to the redistribution of the public deficit as organized by the reform. The assessment is made in a constant policy scenario and for different assumptions about the reform's life span. This study shows that the transfer of fiscal burden to the federated entities is, a priori, sufficient not to aggravate the sustainability problem considering the reduced size of the federal level’s budget. The federated entities have gained scale and powers but will have to contribute substantially to the efforts to restore fiscal sustainability.