Many participants in the Treaty debate dislike the idea of legislation that relies on the concept of a structural budget balance. Certainly, there are measurement challenges with this concept and estimates of the structural balance will be frequently revised (which is one reason why the Treaty includes a correction mechanism when cumulative deviations from forecasts grow too large). Still, I have yet to see an explanation as to what is a preferred alternative, given that a target for the overall budget balance is intrinsically procyclical (during a recession, a given target is more difficult to achieve).
So, conditional on desiring a target for some measure of the fiscal balance, a target for the structural balance is preferable to a target for the overall balance.
This leaves the challenge of robust measurement of the structural balance (see also my piece here). In the spirit of the “excessive imbalances” procedure stitched into the six-pack regulations, a nuanced approach is required that looks at a wide array of variables (GDP, credit growth, house prices, current account, competitiveness indicators) in order to assess the underlying structural macroeconomic position of an economy. While the European Commission estimates will be an important benchmark, the special features of the Irish economy mean that local capacity to analyse and forecast structural positions will be important.
3 replies on “Structural Budget Balance”
“what is a preferred alternative”
I cannot understand why they have gone after structural deficit instead of Balance of Payments.
The old Bretton Woods System (which the Euro is in part trying to recreate at a local level) only worked because of strict balance of payments monitoring. That is what the Eurozone countries need. Fiscal surpluses just won’t do the trick.
“While the European Commission estimates will be an important benchmark, the special features of the Irish economy mean that local capacity to analyse and forecast structural positions will be important.”
A useful first step would be to bring Irish macroeconomic modelling out of the seraglio at Whitaker Square, and put it where we can all root around its innards. The ESRI seems to have a near-monopoly on thorough structural modelling of the economy. That’s not healthy. Good macroeconomic modelling is central to economic policy development and criticism, and without access to it most Irish economic commentators are working half in the dark when they speak or write about the crisis.
It’s time either to open up HERMES (and ESRI’s efforts at general equilibrium modelling) to public scrutiny, or to create some serious competitors that do the full monty in its place. If the ESRI doesn’t want to expose its “crown jewels”, perhaps Chuck Feeney would put up some funds to the universities to bring competition in thought to another critically important policy area.
Timing and options, I would suggeszt.
Imagine you had a recently popped almost global credit bubble and the prospect of years or even decades of private sector deleveraging.
Imagine investors scrambling for government bonds so much so that some countries could effectively issue enormous quantities of bonds.
Imagine there was a genuine risk that if they didn’t, then within 5 years a real global deflationary spiral could set it.
Now think about the value of the option of that potential bond issuance for the EZ and global economy.
Now try to come up with the least appropriate time you can think of to introduce a structural deficit rule.