Short-Term Monitoring of Fiscal Policy Discipline

Under the Maastricht Treaty and the Stability and Growth Pact (SGP) European Union (EU) Member States commit themselves to avoid deficits over 3% of GDP and to pursue in the medium-term budgetary positions close-to-balance or in surplus. The SGP provides also regulation for the surveillance of budgetary positions. An analysis of associated tools is the focus of this paper. In particular, it addresses two open issues in the empirical literature, which are crucial for monitoring fiscal policy discipline in the EU. First, the estimation of the structural component of the balance ratio. Second, the computation, when only annual fiscal data is available, of quarterly budget balance ratios. An econometric model addressing both issues is presented and estimated. Additionally, this framework allows us to answer questions such as: What is the safety margin that will prevent a particular country from reaching with certain probability a budget deficit that breaches the 3%?