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Fiscal Treaty: Debt Correction Mechansim

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  • 27-04-2012 3:52pm
    #1
    noodler
    Registered Users Posts: 26,219 ✭✭✭✭


    Can anyone give me a numerical example of this? Perhaps using Irish data?
    Head 4: Debt rule

    Head 4 provides that when the ratio of general government debt to GDP is above 60%, the
    ratio will be reduced in accordance with the relevant EU regulation under the Stability and
    Growth Pact. It has been drafted in this form to ensure full consistency between this
    proposed legislation and the EU legislative requirement, which is that the difference between
    the existing debt to GDP ratio and the 60% threshold must be reduced by one twentieth each year.


    So Ireland's GGD was approx 109% GDP in 2011.

    So it was 49 PPs over 60%.

    Now I know the rule won't kick in for Ireland for years but humour me:

    So how does the 1/20th reduction work each year after that?

    EDIT:

    If Ireland's current debt is 109% GDP (174.4bn)....................then it is 49PPs (or 78.4bn) above the 60% rule...ok?

    Now, the rule then entail a 5% reduction in the gap in this year.....the gap is 78.4bn so I assume 0.05 X 78.4bn = 3.92bn adjustment (for a moment lets ignore inflation and economic growth.


    The next year....Debt is now 170.48bn (174.4bn - 3.92bn) or 106% GDP (again assuming GDP at 160bn which is remaining constant).

    We are now 46PPs (or 73.6bn) which is then above the 60% GDP ceiling and so another 5% reduction is required...of 0.05 X 73.6bn = 3.68bn and so on etc etc

    Is this the correct way of looking at it? Obviously the burden of adjustment would be made far, far smaller with growth in nominal GDP. None of the literature I have read so far mentions a numerical example but the point is that the adjustment is always in steady decline.


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