Erik Nielsen, 29 October 2021

European policymakers are considering whether to reinstate the existing fiscal rules with only the most necessary adjustments, or to put in place a better framework. This column proposes reform anchored in the most important economic criteria for public sector debt sustainability. First, ‘standards’ for a healthy budget composition that should include an agreed minimum ratio of investment relative to GDP and the principle that countries with public debt in excess of a certain level of GDP will reduce that ratio during ‘good years’. Second, a higher-frequency ‘rule’ to flag potential trends which might compromise future public debt sustainability, in the form of a cap on projected interest payments as a share of fiscal revenue.

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