Benchmarks and Targets Under the SGP: Evaluating Safe Deficit Targets Using NiGEM

Ray Barrell and Ian Hurst

National Institute Economic Review, 2003, vol. 185, 54-63

Abstract: Fiscal pacts and automatic stabilisers are widely discussed in the policy debate. Pacts put bounds on borrowing, and the bounds have to be evaluated. We use our model, NiGEM, to set safe targets for European deficits. Although there are many issues to consider, we conclude that cyclically adjusted target deficits of 1 per cent of GDP would ensure that governments seldom had to borrow more than 3 per cent of GDP, especially if they stood ready to raise taxes when the deficit deteriorated either for reasons separate from cyclical developments or because supply shocks had occurred. Offsetting the automatic stabilisers when supply shocks occur is shown to help stabilise output volatility.

Date: 2003
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