Automatic Stabilisers and Budget Rules

Abstract

An important issue in relation to fiscal policy is to strike a balance between “stabilisation” and “sustainability”. The aim of this paper is to discuss what we consider to be the consensus view on fiscal policy design which seems to have emerged in recent years. This view has two pillars. First, automatic stabilisers should be allowed to work since they are rule based, whereas discretionary policies should only be allowed in exceptional cases. The motivation for this “escape clause only” is that if a more flexible use of discretion is allowed for in the conduct of fiscal policy, it could easily lead to a deficit bias. Second, the structural balance should, “on average” over the business cycle, be in balance or surplus. For example, the Stability and Growth Pact stresses the need to ensure “a medium-term budgetary position of close to balance or in surplus”, and in Sweden the fiscal policy framework has been formulated with a requirement of ensuring a given budget surplus (currently 2 % of GDP) on average over the business cycle. Ideally, this type of policy design would guarantee not only that fiscal policy can be used for stabilisation purposes but also that fiscal sustainability problems can be avoided.