European fiscal stability is preserved under the Maastricht Treaty through the EDP of the Growth and Stability (the Pact). The objective of the EDP is to prevent excessive government deficits. The Pact establishes strict limitations to government deficit and debt of EU Member States and provides a comparative framework for overseeing Member States' public finances. Member States are expected to maintain both an annual budget deficit of less than 3% of GDP and a public debt less than 60% of GDP. The EDP provides a procedure for imposing sanctions on Member States exceeding these parameters.
To assess fiscal stability, the risks borne by the government activities (aggregating all government units) are taken into account. As noted above, the general rule is that a government should report in the National Accounts those assets for which it bears most of the risk. PPPs are relevant to the extent that they fall within the remit of this rule.
It is important to note that the Eurostat treatment of PPPs is not based on a cost-benefit assessment of the value for money consequences of PPPs. The Eurostat treatment of PPPs seeks merely to provide consistent debt and deficit figures that are comparable across all Member States. The objective is to analyse the financial stability of an economy with the determining factor being the risk to which a government is, in principle, exposed as a result of a particular project.
The impact of PPP projects on debt and deficit is measured against the limits provided by the Pact. This means that EDP rules and budget constraints may prevent governments from going ahead with an economically worthwhile PPP simply because of its debt and deficit consequences. This would apply even where the nongovernment partner is prepared to bear a significant (but not the majority) part of project risks.
The same constraints may induce governments to seek to tailor PPP structures simply to achieve statistical treatment outside of the debt and deficit provisions. This may be pursued by trading off higher project costs for increased risk transfer to the non-government partner, independently of the real value for money of the PPP structure adopted.
The Eurostat treatment may also have an impact on the room for manoeuvre that governments would have in providing support measures (e.g. direct lending, guarantees, favourable contractual terms) in times of market distress, such as the present financial crisis. This important issue is explored further in this paper.
Classification as government assets has consequences for: • Deficit - the initial expenditure is recorded as government fixed capital formation; • Debt - the financial account would record new government borrowing. |