The document discusses the key fiscal rules and targets contained in the proposed Fiscal Stability Treaty, including: - Limiting annual deficits to 3% of GDP and requiring debt levels not exceed 60% of GDP (Maastricht criteria) - Requiring structural deficits be reduced by between 0.75-1.5% of GDP annually if above limits (Public Finances Correction Rule) - Limiting expenditure growth to potential GDP growth in strong economic times (Sustainable Expenditure Growth Rule) - Additional measures like macroeconomic imbalance scorecard and linking access to ESM funds on ratifying the treaty.

1. The Fiscal Stability Treaty
Seamus Coffey

2. Referendum
“The rules … shall take effect in the national law … through
provisions of binding force and permanent character,
preferably constitutional, or otherwise guaranteed to be fully
respected and adhered to throughout the national budgetary
processes.”
• Do we want to put fiscal rules in the Constitution?
• Do we want to put these fiscal rules in the Constitution?

3. Fiscal Rules in the Treaty
• Maastricht Criteria:
– 3% of GDP annual deficit limit
– 60% of GDP general government debt limit
(or is sufficiently declining towards )
• Balanced Budget Rule:
– 0.5% of GDP annual structural deficit limit

6. Proposed DoF Rules (March 2011)
Public Finances Correction Rule (“Stormy weather” rule):
Would govern pace of budgetary correction, to ensure that the EU Treaty limits
for the public deficit (3% of GDP) and debt levels (towards 60% of GDP) are
respected. This would require that the primary budget balance be improved by
a defined minimum amount (of between 0.75% and 1.5% of GDP) each year.
Prudent Budget Rule (“Bad weather” rule) :
Would assist in maintaining budgets at a balanced position over the
medium‐term, as required under the SGP. Similar to the Correction Rule,
would specify a minimum improvement in the primary budget balance of 0.5%
of GDP until the medium‐term budgetary objective has been reached.
Minimum annual improvement would be expressed in cyclically‐adjusted
terms.
Sustainable Expenditure Growth Rule (“Good weather” rule):
Would apply in ‘good economic times’ and limit gross current expenditure
growth to the underlying rate of growth in the economy. Higher rates of
expenditure growth would need to be financed through additional taxation,
thereby forging a direct and immediate link between spending choices and
revenue raising.

7. The Structural Balance
The structural budget balance refers to the general government
cyclically adjusted balance adjusted for once-off elements
beyond the economic cycle.
The cyclically adjusted balance is the fiscal balance adjusted for
the effects of the economic cycle.
SB = B – CB – OOM
CB = a.OG

8. Output Gap
A measure of the difference between the actual output of an
economy and the potential output it could achieve when it is
most efficient, or at full capacity.

9. -.1
-.05
0
.05
.1
1971 1975 1979 1983 1987 1991 1995 1999 2003 2007 2011
Source: CSO
Growth in Irish Real GDP 1971 to 2010
Economic Growth

10. -.1
-.05
0
.05
.1
1971 1975 1979 1983 1987 1991 1995 1999 2003 2007 2011
Source: CSO
Growth in Irish Real GDP 1971 to 2010
Economic Growth

11. -.1
-.05
0
.05
.1
1971 1975 1979 1983 1987 1991 1995 1999 2003 2007 2011
Source: CSO
Growth in Irish Real GDP 1971 to 2010
Economic Growth

12. -.1
-.05
0
.05
.1
1971 1975 1979 1983 1987 1991 1995 1999 2003 2007 2011
Source: CSO
Growth in Irish Real GDP 1971 to 2010
Economic Growth

13. -6
-3
0
3
6
9
12
1994 1997 2000 2003 2006 2009 2012
OECD
IMF
EC
Source: CSO
Deviations of actual GDP from potential GDP as a per cent of potential GDP
Output Gaps

16. -15
-10
-5
0
5
2002 2003 2004 2005 2006 2007 2008
Source: IMF, World Economic Outlook
Structural Budget Balance, % GDP
Structural Balances
IMF 2007
IMF 2011

17. -15
-10
-5
0
5
2002 2003 2004 2005 2006 2007 2008
Source: IMF, World Economic Outlook
Structural Budget Balance, % GDP
Structural Balances
IMF 2007
IMF 2011

18. Is the rule pro-cyclical?

19. The Debt Brake Rule
“When the ratio of a Contracting Party's general government
debt to gross domestic product exceeds the 60 % reference
value that Contracting Party shall reduce it at an average rate
of one twentieth per year as a benchmark, “

23. Additional New Measures
• Expenditure Growth Rule
• Macroeconomic Imbalance Scorecard

26. Costs and Benefits
POINTING OUT that the granting of financial assistance in the
framework of new programmes under the European Stability
Mechanism will be conditional, as of 1 March 2013, on the
ratification of this Treaty by the Contracting Party concerned,
Fiscal Stability Treaty

27. Costs and Benefits
We are determined to continue to provide support to countries
under programmes until they have regained market access,
provided they successfully implement those programmes. We
welcome Ireland and Portugal's resolve to strictly implement
their programmes and reiterate our strong commitment to the
success of these programmes.
July 21st 2011, EU Leaders Summit Statement