Automatic Stabilisers and Budget Rules

Torben M. Andersen, Svend E. Hougaard Jensen

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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.
Original languageEnglish
Title of host publicationQuantitative Economic Policy : Essays in Honour of Andrew Hughes Hallett
EditorsReinhard Neck, Christian Richter, Peter Mooslechner
Number of pages12
Place of PublicationHeidelberg
Publication date2007
ISBN (Print)9783540746836, 9783642094132, 3540746838
ISBN (Electronic)9783540746843
Publication statusPublished - 2007
SeriesAdvances in Computational Economics


  • Business cycle
  • Fiscal policy
  • Consensus View
  • Fiscal rule
  • Fiscal sustainability

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