Both of these factors create new incentives for fiscal policy to focus more on short-term job creation schemes and less on long-term fiscal soundness. And the new member states are not much different in this respect. They have experienced a decade of incredible structural change, and yet more is ahead. Furthermore the new member states have great infrastructure needs and, coupled with high unemployment, there will be continued pressure for fiscal expansion, even in a cyclical upturn. So from this perspective, too, the hope that the recovery alone will “fix” the European deficit problem might be too optimistic. In addition, structural fiscal deficits in many of the euro area member states might be larger than present calculations show since there is a large risk that potential growth is lower than commonly assumed. Estimates of potential growth for the old Europe have successively been lowered as labour productivity growth has fallen gradually during the last two decades from around 2% to about 1% per year. However, the figures for the second quarter of this year were the highest we have seen for some time. The IMF’s latest potential growth estimate for the euro area is about 1.8%. Nevertheless, inflation has been remarkably stable, just above 2% in recent years despite poor growth and presumed large negative output gaps. If potential growth is lower, the need for fiscal consolidation is even higher than present consolidation programmes show. Let me summarize the problem.
It is a pity that government accounts, which affect everyone in a society in a compulsory way, are less transparent, less well audited and less understood than the accounts of companies listed on the stock exchange, which only affect few people. Sweden has pre-decided ceilings on government expenditure three years ahead and a target of a 2 per cent surplus for the public sector over the business cycle, a figure that includes pension savings and that, given an ageing population, is in fact akin to targeting a balanced budget over the cycle. This target is present in the debate of every budget. The National Institute of Economic Research comments on the target and helps the public to understand it. This keeps the government accountable not only in the normal political sense but also in relation to the targets agreed upon. The political debate is in a sense being taught to keep the long term in view. The public then knows from the national debate that fiscal discipline is good for the country and, if “accountants” in Brussels or other nations criticise your budget policies, there is a greater chance of the criticism being interpreted as a help towards fiscal soundness. The Swedish trade unions, for example, are among the most vocal defenders of our budget target. The expenditure ceilings have been respected but to some extent with the help of creative accounting. In addition, the last couple of years no decisions have been taken on the ceilings for all three years, as was intended.