Fiscal sustainability , or public finance sustainability , is the ability of a government to sustain its current spending, tax and other policies in the long run without threatening government solvency or defaulting on some of its liabilities or promised expenditures. There is no consensus among economists on a precise operational definition for fiscal sustainability, rather different studies use their own, often similar, definitions. However, the European Commission defines public finance sustainability as: the ability of a government to sustain its current spending, tax and other policies in the long run without threatening the government's solvency or without defaulting on some of the government's liabilities or promised expenditures. Many countries and research institutes have published reports which assess the sustainability of fiscal policies based on long-run projections of country's public finances (see for example, and ). These assessments attempt to determine whether an adjustment to current fiscal policies that is required to reconcile projected revenues with projected expenditures. The size of the required adjustment is given with measures such as the Fiscal gap . In empirical works, weak and strong fiscal sustainability are distinguished. Differences are related to both econometric techniques used for examination and variables involved.
49-693: The Euro-Plus Pact (or Euro+ Pact , also initially called the Competitiveness Pact or later the Pact for the Euro ) was adopted in March 2011 under EU's Open Method of Coordination , as an intergovernmental agreement between all member states of the European Union (except Croatia, Czech Republic, Hungary, Sweden and UK), in which concrete commitments were made to be working continuously within
98-473: A 40 percent increase in world population and 7.8 years increase in the median age over the next 40 years. Fiscal sustainability is considerably impacted by this phenomenon but this can be triggered multiple ways. For example, shocks such as war and mass migration can dramatically alter the demographic composition of a society. In the industrialized world this trend is driven by simultaneous decreasing fertility and increasing longevity. One economic indicator that
147-683: A common base for corporate tax and adopting debt brakes. In the following sections the motivation for and criticism of each objective is summarized. Wage indexation is the process of adjusting wages to compensate for inflation, which reduces the value of money over time. Abolishing indexation would allow for real wages to decrease increasing the competitiveness of countries as it becomes less expensive to employ people. Understandably this policy objective has been called into question by some governments such as Belgium as it reduces people's purchasing power. In countries with "pay as you go" pension systems, as most European countries have, raising pension ages has
196-401: A de facto definition or criterion for fiscal sustainability. Also, it has been shown that under plausible assumptions the inter-temporal budget constraint is in fact not the correct criterion for sustainability. There are many different indicators of fiscal sustainability. The indicators measure the fiscal adjustment required to bring public finances back to sustainable track. Specifics of
245-679: A negative growth rate. For EU member states in 2016, the expected government debt to GDP ratio is above the 60%. This is expected to change with the strong support of financial independent institutions assuming they respect the SGP rules. Additionally, reforms that address the root causes of risks to fiscal responsibility take into account the costs of aging and their components. Independent fiscal institutions which act responsibly are key for maintaining fiscal responsibility but often these institutions are created or further developed in response to crises instead of proactively preventing it. For example, during
294-595: A new commonly agreed political general framework for the implementation of structural reforms intended to improve competitiveness, employment, financial stability and the fiscal strength of each country. The plan was advocated by the French and German governments as one of many needed political responses to strengthen the EMU in areas which the European sovereign-debt crisis had revealed as being too poorly constructed. The pact
343-562: A permanent one-time change to projected path of primary balance to GDP ratios. Thus, if ITGAP = 5%, primary balance must be greater than projected by 5% of GDP for each future year. This could be achieved by permanently raising taxes or cutting expenditures 5% of GDP. For derivations and more information, see for example, or. There are numerous challenges and threats to the sustainability of public finance which can range from institutional challenges ranging from creating independent fiscal institutions, fiscal responsibility laws, fiscal rules and
392-476: A regular "structured dialogue". Tax policy coordination is expected to help strengthen the sharing of best practices and fight against tax fraud and evasion . Direct taxation remains a national competence for each Euro Plus Pact member to decide upon individually. The European Commission had presented a proposal to introduce a Common Consolidated Corporate Tax Base (CCCTB) with appliance for all EU member states already back in March 2011, which if agreed could be
441-436: A revenue neutral way to ensure consistency among national tax systems, while respecting national tax strategies - as it refrain to set a common tax rate. The Euro Plus Pact explicit mentioned, that its featured "structured dialogue" for "tax policy coordination", should also be used for the purpose to try and reach a future CCCTB agreement. The CCCTB proposal had still not reached any final agreement as of June 2015, which prompted
490-430: A very profound impact on government revenue as people who continue working will also pay taxes instead of requiring them. This too is a controversial proposal as can be seen in the 2010 French pension reform strikes . Creating a "common base" is perceived by some as a first step in a process of unifying tax rates and as such has been opposed by countries such as Ireland, which have low corporate tax rates. The opinion of
539-495: A whole. One example of this is the financial sector in EU non Eurozone member states which benefit from trading currencies and would lose a large part of their income should their country join the eurozone. Creating independent fiscal institutions keeps these instruments out of the reach of political actors that would seek to use them for their personal benefit. The potential for states to reform their fiscal policy to ensure sustainability
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#1732779827735588-490: Is necessary to transfer sovereignty. Open Method of Coordination Too Many Requests If you report this error to the Wikimedia System Administrators, please include the details below. Request from 172.68.168.226 via cp1108 cp1108, Varnish XID 220042806 Upstream caches: cp1108 int Error: 429, Too Many Requests at Thu, 28 Nov 2024 07:43:47 GMT Fiscal sustainability There
637-489: Is no consensus among economists about the correct criterion/definition to be used for fiscal sustainability. The most commonly used criterion is the government's inter-temporal budget constraint or inter-temporal equilibrium condition: where B t {\displaystyle B_{t}} is the stock of public debt, r {\displaystyle r} is the interest rate of public debt and P B t {\displaystyle {PB}_{t}}
686-573: Is reflected across current expenditure levels and projected changes to spending, states are uses a number of measures to combat this trend. The two main categories of reform in the area of pensions are altering the age eligibility for pension benefits or altering the coverage of the benefits and adjusting the size of the benefits. Altering the age eligibility for pensions can be done through legislation through increasing statutory retirement ages or it can be achieved through nudging whereby incentives are given to individuals that postpone retirement. Adjusting
735-425: Is the debt-to-GDP ratio , r {\displaystyle r} is the interest rate of government debt, g {\displaystyle g} is the growth rate of the economy and p b t {\displaystyle pb_{t}} is the primary balance to GDP ratio. The infinite horizon tax gap gives the adjustment required to satisfy the inter-temporal budget constraint in terms of
784-451: Is the primary balance (negative of primary deficit or government revenues minus government expenditures excluding interest expenditure). The government's inter-temporal budget constraint states that the initial debt level should be equal to the present value of future surpluses. That is, the government debt must be backed by expected future cash flows. Many economists have voiced grave concerns over using inter-temporal budget constraint as
833-409: Is typically oriented around institutional independence and covering the cost of aging over a longer time horizon. As public pension spending is the most affected by the demographic shift of aging at the EU level accounts for 11% of GDP it is critical to develop reforms that anticipate this trend. Although there is a large variation between the composition of the welfare state between member states which
882-408: Is used to illustrate the share of economically inactive people in society is the old age dependency ratio . The dependency ratio is an age to population ratio of those not typically in the labor force with individuals between 0-14 and 65+ comprising the dependent part individuals between 15 and 64 measured as the productive part. This ratio is significant for determining the pressure on exerted on
931-555: The European Commission is that having a common rules for calculating of the base amount over which the different national tax rates are applied is beneficial for the enterprises since it will reduce the administrative burden and costs of maintaining compliance with 27 different rule sets for corporate bookkeeping. The word "debt brake" comes from the German "Schuldenbremse", an amendment to the constitution legally limiting
980-464: The Stability and Growth Pact into national legislation." When implementing a balanced budget amendment , Member States are free to choose the type of legislation instrument (i.e. constitutional law or framework law), as long as it impose a "sufficiently strong binding" condition and a "durable nature". The law-enforced rule, needs to be fully compliant with the Stability and Growth Pact rules, but
1029-659: The EMU , this recommendation was adopted with a target for its transposition to take place at the latest in June 2017. The Euro-Plus Pact came with four broad strategic objectives along with more specific strategies for addressing these objectives. The four objectives are: An additional fifth issue is: Although for tax policy coordination, there is no requirement to achieve certain improvements or implement specific measures, as member states only more vaguely: "commit to engage in structured discussions on tax policy issues, notably to ensure
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#17327798277351078-452: The EU in July 2013. The pact did not set up any structures or agreement for an independent monitoring of reform progress among its participating members. However, as a third party independent initiative aimed to keep institutional investors informed, the annual Euro Plus Monitor report conducts a comparative competitiveness ranking for all eurozone states and selected EU member states, as per
1127-576: The European Commission) upon its analysis of the latest set of submitted National Reform Programmes, declared the pact was in a dormant state (not being actively used or referred to by the majority of participating states), and recommended it should be revived by moving it from its current intergovernmental state to become an integrated part of the European Semester in the EU framework law. In the latest approved plan for reforming
1176-708: The President of the European Systemic Risk Board , the countries will be regularly informed on their present state of macro-financial stability, and will be expected to put into place "national legislation" to resolve potential problems. In addition, all participating Member States commit to adopt a fully community acquis compliant national legislation for banking resolution. The Euro Plus Pact does not entail any specific commitments on tax policy initiatives, other than to briefly outline that member states commit to engage in discussions about it through
1225-507: The areas found in critical need of improvement. It also featured a commitment to transpose and operationalize one of the Stability and Growth Pact fiscal rules directly into national legislation – to make it more effectively working, and a commitment to perform regular "structured dialogue" for enhanced tax policy coordination in EU. In May 2015, the European Political Strategy Centre (in-house think tank of
1274-482: The commission to announce they will now submit a relaunched less ambitious CCCTB proposal in 2016 - leaving out the more difficult "consolidation part" for later agreement - so that the core CCTB can be adopted more rapidly in the short-term. In November 2011, the Finance ministers of all 23 participating states agreed on the content and format of the regular "structured dialogue" on tax policy coordination. The dialogue
1323-627: The competitiveness. Each country will be responsible for the selection of its own specific policy actions to improve employment, but should mainly pick and choose between the following reform types: This objective will be assessed on basis of the sustainability gap indicators (S0 for the short-term, S1 for the medium-term and S2 for the long-term), which the Commission already publish every third year in their fiscal sustainability report (as part of their work to calculate appropriate minimum Medium-Term budgetary Objectives for each EU member state). If
1372-611: The composite S0 indicator is above 0.43, it signals existence of too high risk for fiscal stress in the short-term, which call on implementation of immediate counter measures. If the fiscal gap indicators S1 and/or S2 indicators are positive, it means debt levels are forecast to become unsustainable in the medium-term and/or long-term under a no-policy-change assumption, because of increasing public expenditures caused by demographic factors. If such S1 or S2 sustainability issues arise, they are to be addressed through implementation of fiscal consolidation leading to sufficient annual improvements for
1421-596: The exact formulation of the rule is up for each country to decide, as it could either be a "debt brake rule, or a rule related to the primary balance or an expenditure benchmark rule." Additionally, in case sub-national levels of the general government have autonomy to issue debt or other liabilities, the rule should ensure enforcement of fiscal discipline both at the national and sub-national levels. The Financial stability will be measured quantitatively for each country with respect to its " level of private debt for banks, households and non-financial firms. " With assistance from
1470-438: The exchange of best practices, the avoidance of harmful practices, and consideration of proposals to fight against fraud and tax evasion." The four key objectives listed above are intended to be addressed with individualized measures by all member countries of the pact, unless a Member State can "show that action is not needed" in a specific area. While the pact comes with specific strategies, these are not compulsory. Specifically
1519-469: The four common key objectives, shall after having been agreed, then be noted as an explicit part of their "National Reform Program" and/or "Stability/Convergence Program" reports, being published annually in March/April. Finally, in addition to this: "Member States also commit to consult their partners on each major economic reform having potential spill-over effects before its adoption". This area of
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1568-427: The great recession new fiscal rules were introduced to counteract debt accumulation. The question can be raised whether these economies are sustainable in the short run due to economic shocks and in the long run due to endemic problems in the structure of the system. The major challenges of the public finance sustainability consist of creating independent fiscal institutions, fiscal responsibility laws, fiscal rules and
1617-419: The impact of tax changes on growth). It was agreed, to set up a regular monitoring and reporting to the highest political level (European Council meetings) by the end of each future Council presidencies , on the following issues: "progress within the structured dialogue, concrete results in the field of tax coordination, avenues explored and specific issues on which agreement could be reached". Status reports for
1666-468: The indicator depend on the operational definition of fiscal sustainability and the underlying economic modelling framework employed in a study. Some of the most commonly used indicators are so-called tax gaps. For example, the infinite horizon tax gap, or S2 sustainability indicator in European Commission phraseology is defined as: where b t {\displaystyle b_{t}}
1715-624: The joint analysis and opinion of Berenberg Bank and the Lisbon Council . According to the Euro Plus Monitor report 2011, many eurozone member countries were found to be rapidly reforming to increase the competitiveness of their economies as of November 2011. The report also found that "Many of those countries most in need to adjust [...] are now making the greatest progress towards restoring their fiscal balance and external competitiveness". Greece, Ireland, Malta and Spain are among
1764-422: The management of fiscal risks to changing dynamics in the demographic structure of societies. Although these factors are significant, the core indicator of outstanding government debt in proportion to GDP is the go to metric for analyzing the health of a country's public finance sector. If a country does suffer from a high proportion of outstanding government debt then it is very vulnerable to interest shocks and
1813-506: The management of fiscal risks. A few key factors for creating stability through institutions which have been leveraged by EU member states are the following activities which the majority of fiscal councils have enacted: The trend of demographic aging presents a major challenge to the industrialized world and an increasing number of developing countries. Recent projections developed by the UN Population Division estimate
1862-455: The pact states: "The choice of the specific policy actions necessary to achieve the common objectives remains the responsibility of each country, but particular attention will be paid to the set of possible measures mentioned below. " Each member state commits at an annual frequency to "agree at the highest level on a set of concrete [policy] actions to be achieved within 12 months". The actions and initiatives taken by each member state across
1911-470: The pact, is the same as several European countries had to address in the 1980s by abolishing Wage Indexation . The need for competitiveness improvements will be evaluated for each country upon analysis of its national Unit Labour Cost (ULC), a quantitative measure of wage costs per unit produced or serviced, and is to be addressed by measures that will reduce the cost of labour and/or measures that will increase productivity. Each country will be responsible for
1960-458: The productive population by the dependent population. Although longevity is an arguably positive outcome, when paired with a decline in fertility it can create higher financial stress on working people. Key aspects that influence the age-dependency ratio: Political actors often get in the way of financial stability due to competing interests between stakeholders that have a lot to gain through not implementing changes that would benefit society as
2009-602: The proposal for economic measures and cooperation was adopted by the European Council and included as participants without any caveats the Eurozone member states as well as Bulgaria , Denmark , Latvia , Lithuania , Poland and Romania . The EU members which did not participate are Czech Republic , Hungary , Sweden and the United Kingdom , all for different reasons. Croatia subsequently acceded to
Euro Plus Pact - Misplaced Pages Continue
2058-581: The selection of its own specific policy actions to improve competitiveness, but should mainly pick and choose between the following reform types: This objective will be evaluated on basis of measured figures for the long-term unemployment rate, youth unemployment rate and labour participation rates. Beside of full employment being an objective by itself, a flexible all-inclusive labour market with security arrangements removing barriers for employees to conduct an increased amount of job shifts throughout their working career, also positively spill-over into improving
2107-573: The size of sovereign debt countries are allowed to run. These have been implemented in Switzerland in 2003 and in Germany in 2010. Debt brakes can vary in strictness and details of the intended implementation are not yet clear, but the motivation for this rule is to create a legally binding policy instead of the current budget guidelines on deficits which have been not been implemented by member countries. The plan has been criticised for impinging on
2156-435: The sovereignty of countries, due to its authority to set policy in areas that were previously under national sovereignty. The reforms that the pact contain have also been criticised as being too harsh, or conversely called into question for not being strict enough in its requirements to implement reforms. On the other hand, some leaders agree that in order to avoid dangerous nationalisms and have fiscal and economic governance, it
2205-416: The structural budget balance and/or by increasing the sustainability of pensions, health care and social benefits systems through the following expenditure saving reforms: To further safeguard fiscal sustainability, one of the most stringent conditions of the pact is given with respect to also implementing national fiscal rules: "Participating Member States commit to translating EU fiscal rules as set out in
2254-644: The structured dialogue on tax policy coordination, were subsequently published in: June 2012, November 2012, June 2013, December 2013, June 2014, December 2014, and June 2015. These regular specific reports which focus on Euro Plus related taxation dialogues, supplement those being simultaneously published by the ECOFIN council - which produce status on all relevant tax dialogues conducted between all EU member states. The ECOFIN tax dialogue reports were also published in June 2012, November 2012, June 2013, December 2013, June 2014, December 2014, and June 2015. On 25 March 2011
2303-458: The top five reformers among 17 countries included in the report. The monitor report was also published in 2012, 2013, and 2014. The original plan was announced by Germany and France in February 2011 and called for six policy changes to be set as well as for a monitoring system to be implemented to ensure progress. The four objectives are: abolishing wage indexation, raising pension ages, creating
2352-504: Was constructed as an attempt to incentivize increased implementation of structural reforms by each participating EU member state, to improve their performance within the four focus areas of the pact, through: (1) A regular bottom-up inter-governmental political dialogue (learning best practices from each other) and (2) A commitment for each state to include reform measures (freely chosen from a broad list of potential policy action responses) in their annual National Reform Programme for those of
2401-466: Was decided to focus on: Avoidance of harmful practices, fight against fraud and tax evasion, exchange of best practices, prospects for International Coordination, and other potential issues (including taxation challenges related to digital economy, stronger alignment of national tax systems in specific areas like the recently proposed CCCTB, financial transaction tax , environmental and energy taxation, sustainability of tax systems, and empirical analysis of
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