fiscal policy in the macroeconomic policy mix: france ... · 2) fiscal policy in the macroeconomic...

Fiscal policy in the macroeconomic policy mix: France, Germany, the UK and Sweden compared

Franco-German Conference, Berlin, 19 – 20 June, 2008

Eckhard Hein and Achim Truger

1) Introduction/structure

Short summary of the presentation:

We look at the role of fiscal policy in real stabilisation, in particular after the 2000/01 recession until 2005 in France, Germany, Sweden and the UK

We find that• Fiscal policy was important in stabilising (or destabilising) three of

the selected four economies.

• German fiscal policy proved to be severly destabilising and reinforced the already destabilising tendencies resulting from wage and monetary policy.

• French fiscal policy – as well as wage and (the effects of) monetary policy – did better than its German counterpart. Until 2005 French economic policy coped better with the problems resulting from the restrictive ‘Maastricht regime’ in the Euro area. However, it may well be that France will be hit hard by underlying tendencies of restriction and disequilibrium in the Euro area

1) Introduction/Structure

1) Introduction/Structure

2) Fiscal policy in the macroeconomic policy mix – a critique of the NCM and an alternative Post Keynesian assignment

3) Macroeconomic performance in France, Germany, Sweden and the UK, 1996 – 2005

4) The macroeconomic framework: Monetary and wage policies,international competitiveness

5) Assessing the impact of fiscal policies 1996 to 2005

6) What ever happened to German fiscal policy?

7) Conclusions


NCM assignment

Wage bargaining/labour market/social benefit system:NAIRU

Monetary policy:Actual unemployment in the short run, inflation in the long run

Fiscal policy:Support monetary policy in achieving price stability, balance the budget

Policy credo:“Prevent unemployment in the short run by means of appropriate monetary policies and reduce the NAIRU by means of ‘structural reforms’ in the labour market.”

PK alternative assignment

Monetary policy:Take short run asymmetries and long run real effects into account

Fiscal policy:Real stabilisation in the short and the long run

Wage policies:Nominal stabilisation (internal and external), stabilise functional income distribution

Policy credo: “Aggregate demand matters in the short and in the long runand has to be stabilised by co-ordinated macroeconomic policies”



Case study of 4 European economies:

France and Germany: Major EMU countries: macroeconomic policy-mix is dominated by the “Maastricht Regime” (Convergence criteria of Maastricht Treaty, ECB, Stability and Growth Pact)

UK and Sweden: Non-EMU countries, but completely different models of capitalism: Anglo-Saxon liberal capitalism vs. Northern Welfare State. Devaluation of currency during turbulences in the early 1990s.

Period 1996-2005: full trade cycle, divided into two 5-years periods (1996-2000; 2001-2005), turbulences of early 1990s are excluded for clearer picture of the macroeconomic policy regime


Figure 1: GDP growth in %, 1996-2007,Germany, France, UK, Sweden and EU-15

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Germany France UK Sweden EU_15

Source: EU-commission


Table 1: Macroeconomic Performance in the EU-15, Euro area, Germany, France, the UK and Sweden, 2001-2005

Germany France UK SchwedenReal GDP, annual growth rate, percent 0.6 1.6 2.5 2.6Growth contribution of domestic demand

including stocks, percentage points -0.4 2.0 2.9 1.5Growth contribution of private consumption,

percentage points 0.2 1.3 1.9 1.0Growth contribution of public consumption,

percentage points 0.1 0.4 0.6 0.2Growth contribution of gross fixed capital

formation, percentage points -0.4 0.4 0.5 0.4Growth contribution of balance of goods

and services, percentage points 0.9 -0.4 -0.5 1.0Employment growth, percent -0.1 0.6 0.9 0.3Unemployment rate, percent 9.1 8.9 4.9 5.8Inflation rate (HCPI), percent 1.6 2.0 1.5 1.8

Source: European commission (2008), authors' calculations

Table 2: Monetary, wage and exchange rate policies, 2001-2005 Germany France UK Sweden

Monetary PolicyShort-term real interest rate, percent 1.2 0.8 3.0 1.4Long-term real interest rate, percent 2.6 2.3 3.3 2.8Short-term real interest rate minus real

GDP growth, percentage points 0.7 -0.8 0.5 -1.2Long-term real interest rate minus

real GDP growth, percentage points 2.0 0.6 0.9 0.3Wage PolicyNominal compensation per employee,

annual growth, percent 1.7 2.9 4.4 3.5Nominal unit labour costs, annual growth,

percent 0.4 2.0 2.8 1.2Labour income share, percent 65.0 66.2 73.1 69.7Change in labour income share to

previous year, percentage points -0.6 0.1 -0.1 -0.1Exchange Rate PolicyChange in NEER

(relative to 35 industrial countries), % 2.0 1.9 -0.1 0.1Change in REER

(relative to 35 industrial countries), % 0.2 1.8 0.9 -0.7real exports of goods & services, % of GDP 38.6 28.7 28.3 47.7real imports of goods & services, % of GDP 34.9 28.7 32.1 38.9sources: European commission (2008), authors' calculations

4) The macroeconomic framework: Monetary and wage policies, international competitiveness

Germany:- Restrictive effects of ECB monetary policy reaction- Very restrictive wage policy

positive for export surplus (mercantilism), but bad for domestic demand through high real interest rates and falling labour income share in a wage-led economy, and bad for Euro area as a whole (deflationary impact)

France:- Adequate effects of ECB monetary policy reaction- Stability oriented wage policies (unit labour cost growth in line with inflation target and labour income share roughly stable)

Problems with current account (nominal appreciation of the euro, German real devaluation)

Sweden:- Adequate effects of monetary policy reaction (but not actively until 2003)- rather restrictive wage policies undercutting inflation target,

mercantilist stabilisation via the current account

UK:- Expansive effects of monetary policy reaction, but on too high a level of the interest rate- Too expansive wage policies, not in line with inflation target

international competitiveness is undermined, problems with current account


Assessing the impact of fiscal policy is very difficult:• Using budget deficits is almost certainly misleading as the

deficits are endogenous• Using ‘cyclically adjusted’ deficits is theoretically dubious as it

implicitly assumes the existence of a stable NAIRU and potential GDP etc. Empirically it depends very much on the statistical method used and the assumptions about potential growth, and ‘potential growth’ is endogenous as well.

• We nevertheless used such measures in our earlier work, but always with a ‘bad conscience’

therefore we tried to stay as close to the ‘raw data’ as possibleHowever, if you want to stick to the idea of a reference level for neutral fiscal policy, then you still have to assume some trend for nominal GDP growth.

5) Assessing the impact of fiscal policies


Budget Balance in % of GDP, 1996-2007, Germany, France, the UK and Sweden and EU-15

-5.0-4.0-3.0-2.0-1.00.01.02.03.04.05.0

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Germany France UK Sweden EU-15



Budget balance, cyclically adjusted budget balance and output gap 1996-2005 in % of (pot.) GDP

France

-5.0

-4.0

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

budget balance cycl. adj. budget balance output gap




Germany

-5.0

-4.0

-3.0

-2.0

-1.0

0.0

1.0

2.0

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

budget balance cycl. adj. budget balance output gap




France

-5.0

-4.0

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

budget balance cycl. adj. budget balanceoutput gap structural balance const trendoutput gap constant trend




Germany

-5.0

-4.0

-3.0

-2.0

-1.0

0.0

1.0

2.0

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007



Assessing the qualitative impact of fiscal policy:Fiscal policy is defined as neutral, if • non-cyclical government expenditure (government

consumption, investment and subsidies) follows real trend GDP (MA of preceding 6 years) + inflation target (2%)

• cyclical government expenditure (social benefits) fluctuates but follows trend on average, i.e. if actual GDP growth equals trend growth.

• Revenue follows actual GDP.


Table 3: Nominal GDP, government expenditure revenue in Germany, France, the UK and Sweden, average growth rates in %

1996-2000 2001-2005

Germany France UK Sweden Germany France UK Sweden

Reference value for neu-trality (6 year MA of real GDP + 2% inflation target) 3.9 3.6 4.5 3.8 3.6 4.5 5.0 5.1

nominal GDP 2.2 3.8 5.8 4.5 1.7 3.6 5.2 4.0

total expenditure 1.9 2.7 3.5 1.2 1.4 4.4 7.7 3.8

governmentconsumption 1.6 3.1 5.0 4.0 1.5 4.4 8.3 4.3

public investment -1.7 3.3 -3.8 -1.9 -3.6 5.1 0.8 5.5

subsidies -1.8 2.4 0.0 -11.8 -4.8 3.0 12.8 4.2

total non-cyclicalexpenditure 1.0 3.1 4.1 2.1 0.7 4.4 7.8 4.4

social benefits 3.2 2.9 2.2 1.0 2.6 4.3 5.6 4.0

total revenue 2.8 4.3 7.2 5.0 0.4 3.8 5.3 3.2source: European Commission (2008), authors‘ calculations

Assessing the quantitative impact of fiscal policy:Fiscal policy is defined as neutral, if • non-cyclical government expenditure (government

consumption, investment and subsidies) follows real trend GDP (MA of preceding 6 years) + inflation target (2%).

• cyclical government expenditure (social benefits) follows the trend on average, i.e. if actual GDP growth equals trend growth. Otherwise automatic stabilisers with a GDP elasticity of 1 are assumed

• Revenue follows actual GDP. For deviations a GDP elasticity of 1 is assumed.

With these assumptions a fiscal stance can be identified. The stance on the revenue side is multiplied by 0.5 because tax multipliers are usually estimated to be much smaller than expenditure multipliers



Figure 3b: Disaggregated raw estimate of the fiscal stance in % of GDP, 1996-2007, France

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

Averag

e 199

6-200

0

Averag

e 200

1-200

5

non cyclical expenditure cyclical expenditure cyclical revenue (50%) total fiscal stance

Source: EU-commission; authors' calculations


Figure 3a: Disaggregated raw estimate of the fiscal stance in % of GDP, 1996-2007, Germany

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

Averag

e 199

6-200

0

Averag

e 200

1-200

5




1999 2000 2001 2002 2003 2004 2005 tax cuts (in % of GDP)

+3,0(+0,2)

–1,3(–0,1)

–23,2(–1,1)

–25,3(–1,2)

–22,9(–1,1)

–38,0(–1,7)

–44,6(–2,0)

Child benfits –3,0 –4,9 –4,9 –8,0 –8,0 –8,0 –8,0

Total revenue loss (in % of GDP)

0,0(–0,0)

–6,2(–0,3)

–28,1(–1,4)

–33,3(–1,6)

–30,9(–1,5)

–46,0(–2,1)

–52,6(–2,4)

Budget balance in % of GDP -1.5 -1.2 -2.8 -3.7 -4.0 -3.8 -3.4

Revenue effects of German ‘Tax Reform 2000‘ (income and profit taxation and family taxation) in bn Euro

Nominal growth rates of government expenditure categories, revenue and GDP in %, 1996-2007, Germany

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

actual GDP total revenue total expenditure



Total government revenue and expenditure (% of GDP), 1996-2007, Germany

40.0

45.0

50.0

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

expenditure revenue



In contrast to the assumptions of NCM fiscal policy played a veryimportant part in the explanation of the differing growth performance

• Germany: Sharply pro-cyclically restrictive fiscal policy might havebeen the dominant factor behind weak growth performance.

• France: More neutral fiscal policy, but still slightly pro-cyclicallyrestrictive on average.

• UK: Aggressively counter-cyclical fiscal policy was crucialand probably the dominant factor behind good growth performance

• Sweden: fiscal policy was slightly more restrictive than in France on average. A strong counter-cyclical effort in 2002 was followed bystrong restriction. The comparatively good growth performance of theSwedish economy can hardly be explained by fiscal policy.

7) Conclusions

Fiscal policy has played a major, but not an exclusive role in the differing performances whole policy-mix matters

• Germany: Restrictive stance of monetary and wage policies is amplified by restrictive fiscal policy very restrictive domestic mix, only partly compensated by export surpluses ‘dysfunctional mercantilism’

• France: Adequate monetary and wage policies plus mildly restrictive fiscal policies mildly restrictive domestic policy-mix, current account problems due to external circumstances (euro exchange rate and German mercantilism ‘innocent victim’

• UK: Non-restrictive monetary policies, very expansive wage and fiscal policies expansive domestic mix causing competitiveness and current account problems ‘unbalanced expansion’

• Sweden: Expansive monetary policy, restrictive fiscal and mildly restrictive wage policies mildly restrictive domestic mix, stabilisation via the current account ‘functional mercantilism’

7) Conclusions

7) Conclusions

Perspectives and policy implications:

France’s better performance relative to Germany: Maastricht regime no problem??

1. France’s performance has been worse than UK and Sweden

2. SGP also forced France into restrictive fiscal policies (03 -05)

3. Maastricht regime has been conducive to major imbalances in the Euro area (Germany’s mercantilism) which impose growing pressure on France and other member countries

Maastricht regime has to be revised along PK-lines (ECB MP strategy, wage bargaining coordination, fiscal policy coordination)

THE END

Short term real interest rate minus real GDP growth rate in %, 1996-2007, EU-15, Germany, France, UK,

Sweden

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

EU-15 Germany France UK Sweden



Long term real interest rate minus real GDP growth rate in %, 1996-2007, EU-15, Germany, France, UK,

Sweden

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007




Long term real interest rate in %, 1996-2007, EU-15, Germany, France, UK, Sweden

1.01.52.02.53.03.54.04.55.05.56.0

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007






United Kingdom

-5.0

-4.0

-3.0

-2.0

-1.0

0.0

1.0

2.0

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007





Sweden

-4.0

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007




Figure 3c: Disaggregated raw estimate of the fiscal stance in % of GDP, 1996-2007, UK

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

Averag

e 199

6-200

0

Averag

e 200

1-200

5




Figure 3d: Disaggregated raw estimate of the fiscal stance in % of GDP, 1996-2007, Sweden

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

Averag

e 199

6-200

0

Averag

e 200

1-200

5



4. Assessing the impact of fiscal policies

Total government expenditure (% of GDP ) 1996-2007, Germany, France, UK, Sweden

35.0

40.0

45.0

50.0

55.0

60.0

65.0

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Germany France UK Sweden


5. The stance of monetary and wage policies

Figure 3: Nominal unit labour costs growth in %, 1996-2005 in Germany, France, UK, Sweden

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005



5. The stance of monetary and wage policies

Figure 4: Labour income share (% of GDP at factorcosts) 1996-2005, Germany, France, UK, Sweden

62

67

72

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005




1996-2000 2001-2005Germany France UK Sweden Germany France UK Sweden

Reference value for neutrality(MA 6 of nominal GDP + 2% inflation target) 3.9 3.6 4.5 3.7 3.5 4.8 5.0 5.0

nominal GDP 2.2 3.8 5.2 4.4 1.7 3.5 5.2 3.8

total expenditure1) 1.9 2.7 3.3 1.1 1.3 4.4 7.6 3.6

government consumption 1.6 3.2 5.0 3.9 1.4 4.3 8.2 4.4

social benefits 3.2 2.9 2.6 1.0 2.6 4.3 6.2 4.0

pubic investment -1.7 3.3 -4.5 -1.7 -3.9 5.1 -1.0 4.9

subsidies -1.8 2.4 -2.7 -11.8 -5.1 3.0 8.5 4.2

gross interest payments 0.2 -0.1 0.4 -4.5 -0.9 2.0 0.3 -9.6

total revenue 2.8 4.3 6.9 5.2 0.4 3.8 5.1 2.9

levels in %total expenditure in % of GDP1) 48.3 53.0 40.9 61.0 47.6 53.0 42.7 57.3

total revenenue in % of GDP 46.1 50.4 40.3 61.2 44.1 49.8 40.7 57.6

government consumptionin % of GDP 19.3 23.4 18.7 27.1 19.0 23.5 20.7 27.4

total social benefits, % of GDP 29.7 32.1 24.9 37.2 30.3 33.6 25.9 36.9

public investment, % of GDP 1.9 3.0 1.4 3.2 1.5 3.1 1.4 3.1

public employment, % of total employment 12.0 23.4 18.2 32.6 10.9 22.6 18.6 31.2

growth of public employment,% -1.7 0.2 -0.1 -0.9 -1.0 0.7 2.2 0.5

change in public employment, % of total employment -0.2 0.1 0.0 -0.3 -0.1 0.2 0.4 0.1

Abbildung 3: Leitzinssätze in Deutschland, Großbritannien und Schweden, 1996-2006, %

Quellen: Bank of England, Deutsche Bundesbank, Europäische Zentralbank, Schw edische Reichsbank

0

12

34

56

78

9A

pr 9

6A

ug 9

6D

ez 9

6A

pr 9

7A

ug 9

7D

ez 9

7A

p r 9

8A

ug 9

8D

ez 9

8A

p r 9

9A

ug 9

9D

ez 9

9A

p r 0

0A

ug 0

0D

ez 0

0A

pr 0

1A

ug 0

1D

ez 0

1A

p r 0

2A

ug 0

2D

ez 0

2A

p r 0

3A

ug 0

3D

ez 0

3A

pr 0

4A

ug 0

4D

ez 0

4A

p r 0

5A

ug 0

5D

ez 0

5A

pr 0

6A

ug 0

6

Pro

zent

Deutschland (Jan 1996 - Dez 1998: Bundesbank, ab Jan 1999: EZB)Schweden (Schwedische Reichsbank)Großbritannien (Bank of England)

3. Makroökonomische Politik im Vergleich: Geldpolitik


Figure 4: Nominal growth rates of government expenditure categories, revenue and GDP trend in %,

1996-2007, Germany

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

GDP trend actual GDP government consumption

social benefits total revenue total expenditure



Figure 5: Nominal growth rates of government expenditure categories, revenue and GDP trend in %,

1996-2007, France

1.0

2.0

3.0

4.0

5.0

6.0

7.0

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007





Figure 6: Nominal growth rates of government expenditure categories, revenue and GDP trends in %, 1996-2007, UK

-1.0

1.0

3.0

5.0

7.0

9.0

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007





1996-2000 2001-2005


Reference value for neu-trality (6 year MA of real GDP + 2% inflation target) 3.9 3.6 4.5 3.8 3.6 4.5 5.0 5.1

nominal GDP 2.2 3.8 5.8 4.5 1.7 3.6 5.2 4.0

total expenditure 1.9 2.7 3.5 1.2 1.4 4.4 7.7 3.8

governmentconsumption 1.6 3.1 5.0 4.0 1.5 4.4 8.3 4.3

public investment -1.7 3.3 -3.8 -1.9 -3.6 5.1 0.7 5.5

subsidies -1.8 2.4 0.0 -11.8 -4.8 3.0 12.8 4.2

total non-cyclicalexpenditure 1.0 3.1 4.1 2.1 0.7 4.4 7.8 4.4

social benefits 3.2 2.9 2.2 1.0 2.6 4.3 5.6 4.0

total revenue 2.8 4.3 7.2 5.0 0.4 3.8 5.3 3.2source: European Commission (2008), authors‘ calculations


Figure 7: Nominal growth rates of government expenditure categories, revenue and GDP trend in %, 1996-2007, Sweden

-2.0-1.00.01.02.03.04.05.06.07.08.0

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

GDP trend actual GDPgovernment consumption social benefitstotal revenue total expenditure


Table 3: Nominal GDP, government expenditure revenue in Germany, France, the UK and Sweden, average levels in % of GDP

1996-2000 2001-2005


Total expenditure 48.3 53.1 40.7 59.4 47.6 52.9 42.7 56.3

Total revenue 46.1 50.4 39.9 59.6 44.1 49.8 40.4 56.3

Government consumption 19.3 23.4 18.7 26.8 19.0 23.5 20.6 26.9

Total social benefits 29.7 32.2 24.9 36.7 30.3 32.6 25.7 36.5

Public investment 1.9 3.0 1.3 3.1 1.6 3.1 1.4 3.0

Public employment(% of total empl.) 12.0 23.4 18.2 32.6 10.9 22.6 18.6 31.2

Public employment(growth in %) -1.7 0.2 -0.1 -0.9 -1.0 0.7 2.2 0.5

Change in publ. Employment(in % of tot. employm.) -0.2 0.1 0.0 -0.3 -0.1 0.2 0.4 0.1

source: European Commission (2008), OECD (2006); authors‘ calculations

fiscal policy in the macroeconomic policy mix: france ... · 2) fiscal policy in the macroeconomic...

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