Zdeněk Tůma: The role of rules in public finance Introductory remarks by Mr Zdeněk Tůma, Governor of the Czech National Bank, at the International Institute for Public Finance, Prague, 25 August 2003. *  *  *  Ladies and gentlemen, dear colleagues, It is a great pleasure and honour for me to join the previous distinguished speakers with some introductory remarks to this high level conference. As a central banker, I would not pretend to be an expert in specific details of public finance. Therefore, I have chosen a general topic that is common to both central banking and fiscal policy. That topic is the application of rules in stabilisation policies Over the last twenty years, the philosophy of stabilisation policies has evolved substantially. The rules-versus-discretion debate has led to a preference for a rule-based approach to policy making. This has been supported by the negative historical experience with discretionary policies, as well as by a realisation that successful public policies in first place have to be credible and transparent, so as to direct private expectations in a desirable way. In terms of the actual institutional design, monetary policy has played a leading role, the shift to greater central bank independence with a clear anti-inflationary mandate marking this trend. Nonetheless, three serious questions have emerged as a result. First, whether independence and reliance on strict policy rules has too high costs in terms of macroeconomic instability. Second, how to co-ordinate monetary policy with governmental actions to make a consistent policy mix.
The teething problems with the Stability and Growth Pact have been an example of these challenges. One of the key motivations of the Pact was an effort to avoid free riding by national governments in a multinational currency area. In other words, the desire to achieve a proper policy mix was present at the birth of this rule. In spite of that, the Pact is now criticised for being too rigid, not allowing for a proper policy response in times of distress, and thus ultimately leading to poor real economic performance. This naturally undermines its credibility and supports calls for various “escape clauses”, to use the inflation-targeting terminology. The Pact is thus fighting the same battle that the conservative central banker was some time ago. It should evolve towards a “constrained discretion” system that will fulfil its major goals - sustainability, credibility and co-ordination of stabilisation policies - yet at the same time be sufficiently flexible to allow for proper responses in adverse periods. It has yet to convince policy-makers and the public that it can deliver the lunch without them having to pay too high a price for it in terms of cyclical stabilisation. So far, the Pact has seemed to be losing the battle. This is somewhat unfair, as the adverse period came before most EU countries had achieved the target of balanced structural budgets, which reduced their manoeuvring space considerably. In a sense, the Pact is thus paying a price for being too lax in the previous period, i.e.