In 2016, only four countries – namely, Germany, Luxembourg, Cyprus, and Estonia – have fiscal space for additional discretionary measures according to the Stability and Growth Pact rules. What then is the way forward? It has been emphasized on many occasions that for countries without fiscal space, fiscal policy can still support demand by altering the composition of the budget.
In particular, they point out that consideration should be given to cutting distortionary taxes and unproductive expenditure and increasing investments that improve total factor productivity over the medium term. Investment and structural reforms that increase the growth potential of the economy create fiscal space by raising future government revenues.