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Benchmarks and Targets Under the SGP: Evaluating Safe Deficit Targets Using NiGEM

Published online by Cambridge University Press:  26 March 2020

Ray Barrell  and
Ian Hurst
Ray Barrell*
Affiliation:
National Institute of Economic and Social Research
Ian Hurst*
Affiliation:
National Institute of Economic and Social Research
*
e-mails: rbarrell@niesr.ac.uk, aihurst@niesr.ac.uk
e-mails: rbarrell@niesr.ac.uk, aihurst@niesr.ac.uk
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Abstract

Fiscal pacts and automatic stabilisers are widely discussed in the policy debate. Pacts put bounds on borrowing, and the bounds have to be evaluated. We use our model, NiGEM, to set safe targets for European deficits. Although there are many issues to consider, we conclude that cyclically adjusted target deficits of 1 per cent of GDP would ensure that governments seldom had to borrow more than 3 per cent of GDP, especially if they stood ready to raise taxes when the deficit deteriorated either for reasons separate from cyclical developments or because supply shocks had occurred. Offsetting the automatic stabilisers when supply shocks occur is shown to help stabilise output volatility.

Type
Articles
Information
National Institute Economic Review , Volume 185 , July 2003 , pp. 54 - 63
Copyright
Copyright © 2003 National Institute of Economic and Social Research

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Footnotes

∗

The authors would like to thank Stephen Hall, Rebecca Riley, Martin Weale, Olga Pomerantz and Jan int Veld and participants in a Treasury Seminar for their comments. This paper is the result of work commissioned by the UK Treasury as background to the Treasurys continuing work on UK and EU fiscal policy frameworks.

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