Study on quality of public finances in support of growth in the Mediterranean partner countries of the EU

Until the early 1990s, the discussions on fiscal policy primarily largely centered on the functions of economic stabilization, income redistribution and resource allocation. Longterm growth was not usually viewed as an end by itself, and fiscal policy was often not sufficiently tailored to the different circumstances and priorities of countries at different stages of development. It was only in the early 1990s that the growth implications of fiscal policy moved to the center of the debate. In the earlier literature, fiscal policy and the discussion of its impact on growth focused on broad aggregates, levels and trends. It is only relatively recently that more disaggregated fiscal parameters are being discussed in the context of growth. While the role of the fiscal policy as a linchpin of a sound macro position and a sustainable debt strategy has hardly been disputed, the discussion has gradually focused on the conditions under which the budgetary policy, and more specifically its expenditure, revenue and financing design, would be supportive of growth. These issues have already been thoroughly debated within the EU in the context of the Lisbon Strategy for Growth and Jobs and the Strategy and Growth Pact (SGP) and hold clear lessons for the Mediterranean (MED) partner countries. The Euro-Mediterranean ECOFIN Ministerial Meetings held since June 2005 have stressed the importance of the reform of public finance management as part of a broader process of economic and institutional change aimed at fostering higher growth and employment. The link between fiscal policy and growth has been studied in academia, but has recently also been the subject of thorough analyses by the European Commission, the World Bank and the International Monetary Fund. These studies have set the stage for the analysis undertaken in this study. The study explores empirically the nature of the growth-fiscal link in the MED partner countries, drawing on the lessons of these and other recent studies. It investigates to what extent the lessons drawn from these earlier studies apply to the Partner countries the Mediterranean region.