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Setting Medium-Term Fiscal Targets in the EMU(*)

Author: MICHAEL J. ARTIS AND MARCO BUTI
Published in PFM, Vol. 1 No. 1

Under the Stability and Growth Pact, countries are committed to
achieve medium-term budget positions of “close to balance or in surplus”.
The rationale for this commitment is that such budgetary positions would
allow for the full working of the built-in stabilisers without triggering the
sanctions procedures of the Pact. The paper sets out to explore what
factors affect the level of the budgetary target and suggests how the safety
margin for cyclical fluctuations and unforeseen budgetary variability may
be allowed for. All in all, on the basis of past fiscal behaviour, broadly
balanced budgets in the medium term appear to be adequate for most EU
countries in safeguarding the 3% of GDP deficit ceiling. Of course, as the
cyclical behaviour of the euro-area economy adapts to the new EMU
environment, the medium-term targets will need to be addressed again.

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