Against the background of the European Commission’s reform plans of the Stability and Growth Pact, this paper uses NiGEM to simulate the macroeconomic implications of re-applying the fiscal rules in 2024. Next to returning to the unreformed rules, the most prominent options include an expenditure rule. Our results indicate that re-applying the unreformed rules leads to severe cuts in public spending. An expenditure rule would, however, not necessarily alleviate the fiscal adjustment burden. Instead, our simulations show that great care must be taken to specify the expenditure rule, such that fiscal consolidation is achieved in a growth-friendly way.

Colonial Virginia's legislature introduced an inside paper money into its domestic economy that was, at that time, primarily a barter economy without any government or bank-issued inside paper monies in circulation. I decompose Virginia's paper money into its expected real-asset present value, risk discount and transaction premium. The value of Virginia's paper money was determined primarily by its real-asset present value. The transaction premium was small. Positive risk discounts occurred in years when monetary troubles were suspected, namely worries that the government would not redeem the paper money as promised. Counterfeiting, however, was not one of these worries. The legislature had the tools and used them effectively to mitigate the effects of counterfeiting on the value of its paper money. Colonial Virginia's paper money was not a fiat currency, but a barter asset, with just enough transaction premium to make it the preferred medium of exchange for local transactions. It functioned like a zero-coupon bond and traded below face value due to time-discounting, not depreciation.

Qing China represents a counterfactual to the early modern European history of fiscal expansion in the wake of warfare. In response to the staggering costs of suppressing the White Lotus Rebellion (1796–1804), the Jiaqing Emperor sought to solve the empire's fiscal problems by tightening bureaucratic control over an overstretched system of treasury finance. However, Jiaqing's policy of austerity and retrenchment was not simply an expedient in times of fiscal strain, but deeply rooted in ideological struggles over taxation that began in the eighteenth century. It was an expression of hardline fiscal conservatism, which held fixed revenue quotas sacrosanct and which I call quota-ism. This policy had dire consequences for the ability of the Qing regime to respond to external shocks and to fulfill its sovereign tasks – war, river conservancy and famine relief. It contributed to the bankruptcy of Qing government finance by the time of the Opium War.

In this article, I evaluate the challenges related to the European Commission's output gap method of calculating the structural budgetary position, and assess its bottom-up alternatives in the EU's fiscal framework using the Finnish data for the years 1984–2014. The results reinforce the impression of the limited capacity of the output gap method to predict cyclical changes in real time and suggest that using the output gap method to steer fiscal policy tends to lead to a procyclical policy (stimulus in upturns and austerity in downturns). The bottom-up assessment methods that are based on discretionary fiscal policy measures appear to work better, and using them to steer fiscal policy could make the policy more effective.

We explore how the contract values of the various stakeholders of a typical US state civil servants pension fund are affected under the continuation of current policies and under alternative policies, such as changes in contribution, indexation and investment allocation policies. We find that all participant cohorts derive a substantial net benefit from the current pension contract, while all tax-paying cohorts make substantial contributions. The shift in value from tax payers to participants can be reduced substantially by having the latter make larger contributions or making indexation less generous. Under our baseline calibration, and continuation of existing policies, the chances are high that the fund's assets get depleted in the coming decades.

I reconstitute the spending obligations and revenue sources of colonial New Jersey's provincial government for the years 1704 through 1775 from primary sources using forensic accounting techniques. I identify and analyze the methods for raising revenue to meet normal peacetime and emergency wartime expenses. I calculate the provincial tax burdens imposed on New Jersey's citizens. I identify how Britain interfered with New Jersey's fiscal structure. I estimate what the revenues and tax burdens would have been without this interference. New Jersey paid for war expenses by issuing bills of credit, spreading the tax burden of redeeming these bills into the future. New Jersey paid its yearly administrative costs with current property taxes and with current interest earnings from loaning paper money. In the absence of British interference and wars, New Jersey could have driven tax burdens to zero by using interest earnings to pay for all its provincial administrative costs.

Scotland's economic performance and fiscal make-up are key elements in the debate leading up to the forthcoming referendum on independence. However, in terms of understanding Scotland's economic performance, the situation is complicated by the high degree of overseas ownership, especially with regards to North Sea activity, and the importance of a natural commodity, oil. This makes the use of traditional measures of economic performance, like GDP or GDP per capita, less relevant than for most countries and suggests a greater need to use both constant price and cash GNI, neither of which are currently available. In terms of its fiscal balance, Scotland's independence would require taxes derived from its offshore (North Sea) activity to be sufficient to offset the extra monies (in per head terms) currently transferred from the rest of the UK (via the Barnett formula system) in order to pay for the current level of public services. Based on current projections, such North Sea related tax revenues would amount to less than the likely Barnett transfer, leading to a net loss in funding at the time of independence. Under such circumstances the question of whether or not Scotland could afford to initiate the building up of an ‘Oil Fund’, is largely a redundant one. However, uncertainties over both future oil and gas revenues and over the continuation of the existing Barnett system make it difficult to predict with any great certainty whether Scotland would see a longer-term net fiscal gain or loss post-independence. Apparent inconsistencies between official GNI and Scottish revenue figures also means that the existing fiscal balance position remains open to question.

This paper considers which currency option would be best for an independent Scotland. We examine three currency options: being part of a sterling currency zone, adopting the euro, or having an independent currency. No currency option is the best when considered against all criteria. Therefore, making the decision requires deciding which criteria are most important. Recent events around the world, particularly in Europe, show that it is essential to consider how an independent Scotland would seek to adjust to adverse economic circumstances. In economists' terms, it is important to think through the ‘off-equilibrium’ adjustment paths of each of the currency options. The amount of public debt, and so the capacity for a fiscal response, is a critical determinant of these paths and therefore of the optimal currency choice. Since commitment to a currency union by an independent country can only be conditional, an independent Scotland might find it optimal to abandon the currency union in the future if the financial stability advantages to having its own currency begin to outweigh any disadvantages due to trade and transactions costs.

Three years after the implementation of the Adjustment Programme for Greece, public debt remains at unsustainable levels. Despite recent improvements in meeting deficit targets and the fact that the risk of exit from the Euro Area has subsided, growth is still missing and unemployment has surpassed 25 per cent, causing major social tensions. The paper argues that a critical parameter of such failure was that the Programme grossly underestimated the adverse effects that fiscal correction might have on growth. Fiscal multipliers are found to be significant in the Euro Area so that fiscal cuts had strong and permanent Keynesian effects, rather than a transitive and minor downturn as initially assumed. In light of this, the paper argues that policies should now concentrate on enhancing growth and by relaxing fiscal targets allow the multipliers to raise activity as the only route to safeguard the exit from recession and ensure sustainability of debt.

This paper explains how the collapse of growth after 2008, in combination with soaring public and external deficits, led to the escalation of Greek debt, while the government's delay in responding to the crisis increased the cost of borrowing and necessitated the bail-out agreement with the IMF and the European Union. One year later, Greece is struggling to harness fiscal deficits amidst a deep recession and rising social tension. Debt sustainability has not yet been ensured and another tranche of loans has been negotiated under new terms and conditions, including higher taxes and extensive privatisations of public companies and property. The paper discusses the main failures of the bail-out agreement and why the lack of growth so far has undermined efforts at stabilisation. As an alternative, the paper suggests that with a modest return to growth, combined with fast-track privatisations, the prospects of debt sustainability improve substantially. In light of the recent debate on the European Stability Mechanism, the paper suggests that the bail-out facility should avoid the debt seniority condition, so that Greece could return to normal market borrowing after 2013 without raising new fears of ‘haircuts’ on private sector obligations.

We calculate the present value of state pension liabilities under existing policies and separately under policy changes that would affect pension payouts. If promised payments are viewed as default free, then it is appropriate to use discount rates given by the Treasury yield curve. If plans are frozen at June 2009 levels, then the present value of liabilities would be $4.4 trillion. Under the typical actuarial method of recognizing future service and wage increases, this figure rises to $5.2 trillion. Compared to $1.8 trillion in pension fund assets, the baseline level of unfunded liabilities is therefore around $3 trillion. A 1 percentage point reduction in cost-of-living adjustments (COLAs) would lower total liabilities by 9–11%; implementing actuarially fair early retirement would reduce them by 2–5%; and increasing the retirement age by 1 year would reduce them by 2–4%. Dramatic policy changes, such as the elimination of COLAs or the implementation of Social Security retirement age parameters, would leave liabilities around $1.5 trillion more than plan assets. This suggests that taxpayers will bear the lion's share of the costs associated with the legacy liabilities of state DB pension plans.

Solid budgetary discipline is an essential condition for the success of Economic and Monetary Union (EMU). The “Excessive Deficit Procedure” and the “Stability and Growth Pact” allow some flexibility for the conduct of budgetary policies during severe economic slowdowns. The paper examines whether European Union Member States will have to change their budgetary policies carried out during and after severe recessions, once these procedures become fully operational in the third stage of EMU. The results of this analysis suggest that, when starting from a budgetary position of close-to balance or in surplus, the risk of breaching the 3% reference value is relatively low during one-year recessions but increases in case of deep or protracted recessions. The early years of EMU, when some countries might still have a deficit of about 2% of GDP, are likely to prove highly problematic in the event of a severe recession.