Simulation of a fiscal public expenditure rule dependent on the level of public debts

Bruno Ducoudre (1) , Mathieu Plane (1) , Xavier Ragot (1, 2) , Raul Sampognaro (1) , Xavier Timbeau (1)

1 OFCE - Observatoire français des conjonctures économiques (Sciences Po)
2 ECON - Département d'économie (Sciences Po)

In this first part, starting from the fiscal rule contained in the report “Reconciling risk sharing with market discipline: A constructive approach to euro area reform” published in January 2018 by 14 French and German economists at the Centre for Economic Policy Research, we have simulated for France between 1997 and 2017 the fiscal policy that would have resulted from the proposed rule as well as the public finances trajectory. The report by the 14 economists indeed offers a public expenditure rule with a public debt target. The basic principle is simple: nominal public expenditures should not grow, in the long run, faster than the nominal GDP (which is the sum of the potential real GDP and expected inflation) and they should grow slower for countries that need to reduce their debt, roughly speaking countries with a debt higher than 60% of the GDP. The speed of debt reduction would depend on its distance to 60% (the further away, the faster the speed of adjustment). Public expenditures are net of interest payments, of unemployment spending (except when these are due to discretionary changes) and corrected by discretionary revenue measures (changes in tax rates and tax bases).

Keywords: Fiscal policy; Market discipline

Keywords: Public expenditures

Domains: Humanities and Social Sciences; Economics and Finance

Bruno Ducoudre, Mathieu Plane, Xavier Ragot, Raul Sampognaro, Xavier Timbeau. Simulation of a fiscal public expenditure rule dependent on the level of public debts. 2018, pp.1 - 25. ⟨hal-03443476⟩