Fiscal policy/Addendum

Public Expenditure 2005

Percentage of GDP

	Social expenditure	Health expenditure	Education expenditure	Military expenditure	Central government total
France	29.2	8.9	5.7	2.0	53.4
Germany	26.7	8.2	4.6	1.5	46.9
Italy	23.0	6.8	4.5	1.8	48.7
Japan	18.6	6.7	3.5	0.8	38.4
United Kingdom	21.3	8.9	5.6	2.4	44.3
United States	15.9	6.0	5.3	4.1	36.6

(Sources OECD Factbook 2009 [1], OECD Outlook No 85 [2])and CIA world factbook [3] (for education spending) [4] (for military spending)

Public Debt

( % of GDP )

	Japan	Italy	France	Germany	United States	United Kingdom	Average (1)
2007	195	107	65	65	62	44	79
2009 estimate	217	117	77	80	89	69	101
2010 estimate	226	123	84	87	100	82	110
2014 estimate	239	132	95	91	112	100	120

⁽¹⁾ average of advanced G20 countries

(Source: The State of Public Finances: A Cross-Country Fiscal Monitor, IMF Staff Position Note SPN/09/, 21July 30 2009, [5])

Deficit-limiting rules

The maintenance of investor confidence is a matter of mutual concern among governments because crises that can lead to sovereign defaults can be contagious, in much the same way that bank runs can generate banking panics. That consideration has prompted currency unions such as the European Monetary Union to set up deficit-limiting rules and monitoring systems.

The UK's Code for Fiscal Stability

In November 1997 the British government announced its adoption of two rules of fiscal conduct:

- a "golden rule":that over the economic cycle, the government would only borrow to invest and not for public consumption, and

- a "sustainable investment rule": that over the economic cycle, the government would ensure the level of public debt as a proportion of national income is held at a stable and prudent level (subsequently interpreted as 40 per cent of gdp);

and an analysis published by the Treasury in 2008 concluded that:

- the average surplus on the current budget over the previous economic cycle was positive, thus meeting the golden rule; and,

- public sector net debt remained below the 40 per cent of GDP limit of the sustainable investment rule over the cycle.

But in November 2008 the government announced the replacement of those rules by a "temporary operating rule" under which it would set policies to improve the cyclically adjusted current budget each year, once the economy emerges from the downturn, so that it would reach balance with debt falling as a proportion of GDP once the global shocks had worked their way through the economy in full.

The EU's Stability and Growth Pact

The Stability and Growth Pact that was introduced as part of the Maastricht Treaty in 1992, set arbitrary limits upon member countries' budget deficits and levels of national debt at 3 per cent and 60 per cent of gdp respectively. Following multiple breaches of those limits, the pact has since been renegotiated to introduce the flexibility necessary to take account of changing economic conditions. Revisions introduced in 2005 relaxed the pact's enforcement procedures by introducing "medium-term budgetary objectives" that are differentiated across countries and can be revised when a major structural reform is implemented; and by providing for abrogation of the procedures during periods of low or negative economic growth .