The gains from early intervention in Europe: Fiscal surveillance and fiscal planning using cash data *

The use of real-time cash data allows us to make accurate intra-annual forecasts of an economy’s fiscal position, and to issue early warning signals for the need to correct fiscal imbalances. This paper shows how those signals should be used to design the necessary fiscal corrections, and discusses the gains that can be achieved by such interventions. Examples from Germany and Italy show that large corrections are often necessary early on to make the later adjustments acceptable in size and to keep debt ratios from escalating. There is a credibility issue here; we find the differences between front-loaded and back-loaded adjustment schemes are likely to be vital for the time consistency and hence credibility of fiscal policymaking. We also show that, without early interventions, the later deficit reductions typically double in size – meaning governments become subject to the excessive deficit procedure and significant improvement tests more often. Thus the budget savings from early intervention and the use of cash data are significant. In our examples they are similar in size to the operating budget of the department of housing and urban development in Germany. Similar results apply in other Eurozone countries.


Introduction
The past few years, especially since the expanded debt and fiscal deficits that followed the 2007-09 financial crisis and recession, have given rise to an emerging literature on the credibility of fiscal policies and the anchoring of (fiscal) expectations. 1It matters a great deal that expectations of future policy should be anchored; that is, fiscal decisions and their financing need to be predictable, easily understood and credible in the sense of being both plausible and likely to be sustained into the future.But it is equally important that the necessary corrections be undertaken to return fiscal policies to their intended path following a shock or slippage.Only then can we regain the full effectiveness of fiscal policy that Leeper and others associate with appropriately anchored expectations. 2e goal of this paper is to use early the warning signals generated by cash data on the state of government finances.To do this we extend the results of Perez  (2007), Pedgregal and Perez (2008), and Onorante et al. (2008), who show how intra-annual data can be used to derive accurate forecasts for end-of-year fiscal outcomes.These forecast can then be used to issue "early warning" signals about the corrections that need to be made in order to bring public finances (both deficits and debt) back on their intended track -as may be required by the stability and growth pact (SGP) from time to time.We show that such early warning signals can be highly valuable because they allow us to start an adjustment process earlier and spread the effort over a longer time period.That makes the size of each adjustment a smaller and less contentious issue; and therefore less likely to create opposition in government or its electorate.Second, we also examine whether budget corrections are better frontloaded or back-loaded -we find that different adjustment mechanisms have different size and timing profiles.These are all relevant questions from a policy perspective.It is important that the plans submitted or announced are actually time-consistent, so that governments stick to their published targets after an unplanned departure from the officially agreed stability programme (SP). 3 highlight this point because, as Figure 1 shows in the case of Germany and Italy, there seems to be considerable evidence that the time consistency in SP plans has been violated on a regular basis.The figure highlights how sequential multi-period SP plans are set at each point in time (bottom left of each line), and that there was a deterioration of the starting position in the following year in most cases.Some analysis of how these situations can be avoided is therefore necessary.

Figure 1. Announced deficit plans for Germany and Italy
Intra-annual and cash data: It has long been emphasized in the fiscal forecasting literature, that data on government deficits are only available with a long time lag. 4 At the time when the data becomes available, the deficit has already realized and no policy measures can be implemented to avoid drifting away from the intended target values.However Pérez (2007), Pedregal and Pérez (2008), and Onorante et  al. (2008), have shown that intra-annual data can be used to derive an accurate picture of the likely year-end fiscal outcomes with much shorter time lags.We extend their results by introducing cash data into that process.We then go one step further and ask how much a government can actually gain by using early warning signals from this procedure and taking immediate action to correct a fiscal slippage.This question has received rather little attention in discussions on the prudential surveillance of fiscal policy.The reasons are two-fold.On the one hand, the question requires setting an objective function for the government in order to relate departures from a proposed plan to the adjustment costs inherent in making a correction.We discuss that issue in this paper and review some alternative measures.On the other hand, this question raises the problem of time consistency in fiscal policy.We highlight the potential for time inconsistency, and discuss the trade-off between adjustment costs and time inconsistency.At that stage it becomes necessary to draw out the connection between deficit and debt surveillance within the SGP rules.Both SGP components need to be monitored if we are to fulfil the purpose behind the SGP -and create fiscal policies that are sound in the long run.
We have set our analysis within the framework of the existing SGP system because that is still the standard framework for monitoring and control of fiscal policies in the Euro-zone.However, while early intervention may have -at bestonly mitigated the outbreak of the fiscal crises in 2009-10, our distinction between additive and slope correction schemes (ie between the frontloading and backloading of deficit corrections) has now been pushed to centre stage given that preventing further debt escalations has necessarily become the prime focus of attention.Back-loading, as we shall show, allows debt ratios to rise slowly but surely during the consolidation period and have had to be ruled out for that reason.It seems likely that these results will lead to debt target rules being formally included within the SGP process (European Commission 2011), but the implementation remains to be seen.These developments all serve to highlight the importance of including both early interven-tions and cash data monitoring in any realistic fiscal surveillance programme. 5 would be nice to evaluate these questions in the context of the choice of fiscal austerity vs. growth debate which has become a feature of the European debt crisis, to check that the gains from early interventions, or frontloading vs. backloading those interventions, are not larger than their costs in a wider welfare sense (we do check for political acceptability and market credibility).Clearly the economic environment and timing of interventions matter, as do the fiscal multipliers and impacts on GDP growth of different implementations or choices of fiscal consolidation measures.Indeed, this involves a major debate debate with opposing positions taken by DeLong and Summers favouring not too drastic corrections in order to avoid double dip recessions and killing off greenshoots, and Neumann  (2012) arguing for recovery through austerity and reduced fiscal imbalances; with Corsetti (2012) and Alessandrini et al (2012) emphasising the more subtle tradeoffs between growth, market credibility, and competitiveness and financial sector imbalances that lie between these two positions.However, important as those issues are, they are not directly at issue here because we are concerned with the most effective and credible way to recover a previously agreed fiscal (SP, MTO) path once the budget deviates from it -not whether that path was optimally chosen in the first place.We presume that path to have been chosen taking full account of the relevant fiscal multipliers, policy preferences, market discipline, and credibility/risk premia.Those choices are a separate issue from the best way to recover the path that incorporates them after a deviation or shock.It is therefore beyond the scope of our present analysis to assess how economic recovery itself should be achieved and if the policy implementation may be hampered in the case of a severe economic crisis.6

Data
The data used in this paper come from three different data series.First, since we are interested in the deficit of the general government, we use the annual series of government deficits according to ESA95 accounting standards.We then augment this series with data collected using the ESA79 standards in order to construct a longer time series.This data comes at annual frequency and provides the official deficit figure when it comes to the assessment of compliance with the SP plans.Second, starting in 1995, there is also a series at quarterly frequency of government deficit data.This also follows ESA95 accounting standards.We use this data as intra-annual information to forecast the end-of-year government deficit.Finally, we use the data series of the public accounts (cash series) that comes at monthly intervals.In addition, we use quarterly nominal GDP data.These data are required to normalize all other variables as ratios of GDP.
Thus the data we use come at three different frequencies.However, we can reduce the frequency of the cash data by aggregating it to quarterly observations if need be.

Timeline of events
Our goal is to study the gains that can be obtained from early intervention in fiscal policy by governments.To do that, we have to specify the sequence of events of the government's action.In period t-1, before the current budget year starts, the government submits a SP plan to the European Commission.Then at the start of quarter Q3 of year t, the first year covered by the SP plan, a deficit forecast for the entire year is made. 7If the forecast predicts a slippage of the government deficit below the SP target, the government can consider putting early intervention measures into place immediately in order to avoid a deficit realization that is too far away from their SP target.Independent of whether early intervention measures have been implemented or not, the government also has to adjust its plan for the three remaining years of the plan to satisfy the debt targets of the initial SP plan by the end of the plan period.We illustrate the timing of these events in figure 2: Δ is the deficit-to-GDP ratio in period t.
The time line set out in figure 2 is conceptually straightforward, but perhaps difficult to implement.It puts a lot of faith in the effectiveness of fiscal activism, and in the "costless" production and pursuit of SP plans.Many governments may find that hard going in practice, and that mid-year is a bit late to adjust current (and future) budget plans which may have been in preparation for some time.Nevertheless, using real time data, Beetsma and Guiliodori (2008) show there is considerable evidence that governments do in fact adjust their budgets mid-year.We may therefore assume that the time line in figure 2 is feasible, if uncomfortable, at least for governments that are sufficiently determined to correct any budgetary failures before they run out of control.That is not to say that all governments do make fiscal corrections in good time.Recent experience in the Euro-zone shows very clearly that, while some do, many do not.
In an extension to figure 2's timeline, we also discuss the case where no changes to the original plan are made and calculate the deviations in the debt ratio that then appear at the end of the SP plan.

Correction plans
When there has been a one-time deviation in fiscal policy such that the deficit exceeds the SP plan, there are at least two ways to correct the deficit and meet the debt target at the end of the SP.One method we label the constant slope plan, and the other an additive constant plan. 8The additive constant plan takes the original plan and adds a constant correction to all deficits planned under the original SP agreement.This constant d therefore describes a level shift.This plan will have large adjustments between Q3 of period t, when the corrections start if there are early interventions (or from the end of period t if not), and period t+1 when the corrections can continue at the rate originally planned.Either way, these adjustments will be enough to eliminate the extra debt caused by the deficit slippage.We sketch this correction process in Figure 3.

Figure 3. Constant additive adjustments
There a two correction plans: one with early interventions (dashed line), and one without early interventions (dotted line).We also plot the original SP/MTO plan (solid line).These corrections are based on the original SP plan plus an additive constant chosen to meet the same debt target at the end of the plan.
The constant slope plan, by contrast, does not have this front-loading property.
Instead, it creates a constant change in the deficit each year.The burden of adjustment in this plan is therefore spread more equally over the remaining periods of the plan.This time, the constant d describes a constant change in the deficit from year to year, whereas d in the additive case described a constant shift in the deficit compared to the original SP plan.We sketch this correction plan in figure 4: Note that the SP path is identical in both cases, so that we can easily compare the correction paths (see figure 5).We see that the constant slope plan has much smaller corrections in the deficit in the periods t to t+1.The larger corrections are postponed to later periods where, compared to the additive case, the adjustments relative to the original SP plan are plainly larger.They are back-loaded therefore.9 In that sense these two correction schemes are polar opposites in terms of where the adjustments fall.The frontloaded, additive constant case represents a rapid correction ("cold shower") strategy and risks stirring up political opposition.

Figure 4. Constant slope adjustments
There a two correction plans: one with early interventions (dashed line) and one without early interventions (dotted line).We also plot the original SP/MTO plan (solid line).All plans have a constant slope and meet the same debt target at the end of plan.
By contrast, the back-loaded, constant slope version is easier to implement.But it risks allowing the policymakers to backslide and will therefore lack credibility if the markets doubt that it will be carried through to the end.The potential for time inconsistency here underlines the importance of Leeper's literature on anchoring expectations (ensuring the credibility of fiscal corrections), especially if this route is taken.On the other hand, the usual fear that once a forecasting relationship is in use the underlying behaviour upon which it is based will change (a form of the Lucas critique), may be less severe here than in the monetary policy arena.Monetary rules often breakdown because market behaviour changes.But people have little freedom to change the taxes they owe even if deficits are forecast to change, and governments likewise have little chance to change their spending rules since most are "contractual".In that case, private sector responses to a forecast budget deviation from plan are likely to be limited in the short term.Only in extreme cases, where the long term sustainability of the debt target is threatened, would we expect to see a breakdown of our forecasting and correction rules.That could be a possibility in the second constant slope correction plan; but not in the first, additive adjustments plan -which may be a good reason to favour the latter.

Example 1: The case of Germany in 2002
To give concrete examples of the differences between the two correction schemes we have just described, we first consider the case of German fiscal policy in 2002.
The German government submitted the following plan (see Recall figure 1 where we plotted this plan together with the plans that followed this one.As can be seen immediately, this plan had to be revised in the following year because the realised deficit did not coincide with the planned deficit of -2.0% of GDP.Hence, early interventions would indeed have had the potential to avoid further fiscal slippages.
For this plan, we take the deficit numbers and the nominal growth rates as given.
The debt level in 2001 is taken to be 60 % of GDP.We update the debt ratio according to the following rule: where t D ˆ denotes the debt ratio at the end of period t, t Δ is the deficit in period t, and N t g is the nominal growth rate of GDP between periods t and t-1. 10 The deficit figure, , ˆt  contains interest payments on the accumulated stock of debt: For the purposes of illustration, we abstract from changes in the interest rates over time in this paper.It is however straightforward to extract the interest payments component and analyse it separately from the primary deficit.
Using the model proposed in Onorante et al. (2008), we forecast the outcomes for Germany based on June/July 2002 information. 12We expect a deficit for 2002 of 3.88%. 13We can then derive the actual debt ratio of the German government using the realization for 2002 assuming that this is a one-time deviation from the SP plan (see table 2).This case is constructed to resemble a situation in which no intraannual interventions are made, and the full deficit is realized at the end of 2002.If the German government were simply to return to the original SP plan after 2002, the deficit corrections would be rather large (2.65% and 1% in 2003 and 2004 respectively), and there would be a permanent rise in the debt burden of 1.5% for ever -increasing the interest payments by 0.075% of GDP every year -all from one deficit slippage of 1.65% of GDP in 2002.Corrections of this size are unlikely to be undertaken.
Next we consider a situation in which early intervention measures are taken after the deficit forecasts are made.We make an arbitrary assumption that these intervention measures are effective to the extent that, at the end of the year, the deficit becomes a convex combination (with equal weights) of the SP target and the realization for that year; thus the deficit for 2002 in the case of early intervention This step is used to provide a start to our calculations for the additive and constant slope corrections with early interventions.We replace it with a less arbitrary, but rather more difficult to implement assumption for the early interventions in section 6.3.By contrast, where there are no early interventions, we start with the realised deficit at the end of period t.
For simplicity we abstract from any legal complications in changing the budget.The procedures will vary by country.Typically tax changes must be legislated.But spending rules, especially as regards the timing and speed of that spending, mostly do not once the spending allocations have been made.Thus, for the size of corrections reported here, the changes could be introduced at will.

The additive correction approach
For the correction of a one time deficit slippage, we look first at the approach with a level shift for the remaining years up to the end of the planning horizon, in this case to 2005.The level shift is chosen such that the government can still satisfy its originally announced debt target. 14We want to find deficits

ˆ
It is easy to solve for d using the law of motion for the debt ratio in (2).We get The alternative would be not to take early intervention measures and to let the deficit take its realized value for 2002.In this case, the debt at the end of 2002 would be 62.03%.Based on this, we can again calculate the shift value, d, necessary to reach the 54.55% debt target in 2005.We get d=-0.0051.This implies that the government has to reduce its deficit for the next three years by an additional 0.51% of GDP each year, compared to 0.25% if early intervention measures had been taken.The necessary annual corrections would have doubled in size therefore.
Against this, it must be kept in mind that the government already had to intervene in mid-2002 in the early intervention case.It reduced the deficit by 0.83% of GDP: from 3.65% with no early interventions, to 2.83% of GDP under early interventions (thereby avoiding the need to undergo the SGP's excessive deficit process and the significant improvement test).The difference of 0.83% is spread as net expenditure cuts over the remaining three years if there are no early interventions -matching the 0.25% per year of early interventions, plus the additional interest charges.By contrast, the 0.83% difference in the early interventions case had to be corrected through public spending cuts in 2002. 15That may be a tough call, but it does allow the German government to avoid the SGP's excessive deficit procedure and it is the kind of correction the German government will impose upon itself in its own new balanced budget legislation.

The slope correction approach
The second approach for correcting the one time deficit slippage would be to apply a constant slope adjustment path for the remaining years up to the end of the planning horizon, in this case 2005.The slope has to be chosen such that the government can still satisfy its original debt target.We need to find deficits Given that, it is easy to solve for d based on the law of motion for the debt ratio in (2)

Altering the impact of early intervention
For our numerical example, we assume that, at the point at which the slippage is first detected, it is still possible to achieve a deficit at the end of the year that is a convex combination of the planned and the realized deficit.To overcome possible concerns regarding this particular approach, we provide a flexible sensitivity formula.Instead of assuming equal weights, we tried introducing a weighting parameter  such that  ~denotes the realized deficit in period t without intervention.It is easy to verify that the adjustment rules for d under both rules are linear in  .The derivative with respect to  therefore provides a measure of the flexibility and advantages of this adjustment rule (relative to our bench-mark with equal weights).

Constant slope adjustment
In the case of constant slope adjustments, the derivative is  denotes the difference in  from 0.5, our benchmark.A simple estimate of that change can be obtained by setting nominal growth rates to zero.In this case the formula reduces to ⅔ ( ) which, in the case of Germany, would imply a sensitivity of 1.1 %.If we set  equal to zero, i.e.
a complete correction as soon as the slippage is first detected, we would get a slope coefficient of 1.85 % which is almost exactly equal to the numerical value of 1.83 % used earlier.For the numeric example in this section, we assume that for the remaining six months of the year after the forecast has been made, the government can implement policy measures, e.g. a budget freeze, so that the deficit remains in accordance with the submitted SP plan.In the case of Germany, every month of slippage from the SP plan will increase the slope coefficient by approximately 0.09. 16This shows that there are quantitative effects from altering the impact range of early intervention.But, compared to not intervening, the gains always remain substantial.

Additive constant adjustment
In the case of the additive constant adjustment the derivative becomes If we set nominal growth rates to zero as before, we get ⅓ ( ) reflecting the equal spread of the corrections over the three adjustment periods.For Germany, the sensitivity in our example would be 0.55 %, i.e. we would get an adjustment parameter of 0.53 % if there were a complete correction in the period in which the slippage were first detected, instead of 0.51% as in our calculations.Once again there is sensitivity with respect to the impact range of early interventions; but, as in the case of the constant slope adjustment scheme, the gains of intervening early are always substantial.

Example 2: The case of Italy in 2002
As a second case, we take Italy in 2002.The Italian government had submitted the following plan (see table 6) to the European Commission in November 2001: Again, as figure 1 showed, the plan had to be revised in the year after implementation due to additional fiscal slippage; so early interventions would again have been beneficial.
For this plan, once again we take the deficit numbers and the nominal growth rates as given.The debt level in 2001 is taken to be 107.5 % of GDP, and we update the debt ratio according to the rule given in (2).17 Based on the forecast for Italy made in June/July 2002, we expect a deficit for 2002 of 3.88%. 18We now derive the debt ratio of the Italian government using the realization for 2002 and assume that this is a one-time deviation from the SP plan (see table 7).This is intended to resemble a situation in which there are no intraannual interventions and the full deficit is realized.
Next, we consider the situation where, after the forecast is made, early intervention measures are taken.We make the same assumption as before; that the measures taken are effective to the point that, at the end-of-year, the deficit is the convex combination with equal weights of the SP target and the realization for that year.In that case, the deficit for 2002

The additive correction approach
First, we derive again the correction under the level shift as in the German example above.If we solve for d we get d=0.0038.This means that the Italian government would have to cut the deficit by about 0.4% of GDP for each of the remaining years.This plan can be seen in table 8.In this scenario, with early interventions the government would escape both the SGP's excessive deficit scrutiny and the Commission's significant improvement test.However, the early deficit reductions are severe: 1.24% of GDP in 2002, and 2.14% in 2003, but very small thereafter.The alternative would be not to take early intervention measures and to let the deficit take its course for 2002.In that case the debt at the end of 2002 would be 105.63%.Based on this, we can calculate the level shift, d, that would be necessary to reach the 89.78% debt target in 2005.We get d=-0.0076.This implies that the government would have to double its deficit reductions to 0.76% of GDP, each year for three years, instead of only 0.38% had early intervention measures been taken.However, it must be kept in mind that the government already had to reduce the deficit by a large margin in 2002 in the early interventions scenario.The deficit in 2002 with early interventions is 1.76%, whereas it is 3.01% without such interventions; the difference of 1.25% being spread over the remaining three years.
On the other hand, the deficit reductions of 0.38% for three years in the early interventions case are less than the 1.25% of additional cuts imposed after 2002 when there are no early interventions -but not by much.Those late cuts are used to pay for extra spending in 2002.
Thus, in this plan, the government avoids the savage cuts in the first two years of the early interventions solution by trading cuts of 1.24% in net spending saved in 2002, and 1.38% of GDP saved in 2003, for larger cuts (of 0.76% and 0.56%) in 2004-5.The difference in the cuts required under the two plans being made up by the growth in GDP during the life of the plan.

The slope correction approach
The second approach is the constant slope adjustment path taken to the plan's horizon.The slope is chosen such that the government can still satisfy the original debt target in 2005.We need to find deficits The new plan can be seen in table 9.The back-loading is more obvious here than in the German example; and, with an extra 1% of GDP in budget cuts in 2005, and a correspondingly larger gain in frontloading relief, the temptation for time inconsistent behaviour compared to the early intervention solution in table 7 will be large.This is guaranteed to raise doubts about the credibility of this as a consolidation plan.

Measuring the gains from early intervention directly
It is relatively easy to derive a monetary measure of the gains to be had from early interventions.Here we use the difference in the debt burden at the end of the current SP plan starting with or without early interventions.That takes out any differences in the subsequent fiscal corrections which depend on the type of correction method chosen.

The gains in monetary terms
a) For Germany: we assume that, after the slippage, the government returns to the fiscal contractions in its original SP plan, first having made an early intervention and then without.The difference in outcomes is easily read off from table 3. We see that, for Germany, the gain of early intervention would have been a difference in debt ratios in 2005 of 1.46%.If we take a nominal interest rate of 5%, this would increase the government deficit for all future periods by 0.073% of GDP.For Germany, this would mean additional interest payments every year of about 1.64 billion Euros at 2005 prices.This is equivalent to the entire central government budget for housing, urban development, and regional planning (1.794 billion Euros) being lost forever. 19b) For Italy: we follow the same approach and compare the debt ratio at the end of the SP plan in 2005 in the case where early intervention measures have been taken, to the case where they have not been taken.The difference can be read off from table 8, and we see that for Italy the difference in debt ratios in 2005 would have been 2.20%.Again, assuming a nominal interest rate of 5%, this means a permanent raise in interest payments of 0.11% of GDP.For Italy, this is equivalent to a loss in public spending of 1.57 billion Euros each year for ever.

The gains in terms of budget management
The budgetary execution is easier when large corrections can be avoided.In the case of the additive correction approach, the gains from early intervention can be read off from the adjustment factor d that captures the value of reducing the fiscal 19 This number is taken from http://www.bundesfinanzministerium.de/bundeshaushalt2005/pdf/vorsp/zyubfkt.pdf.contractions in the following years of the SP plan.In the constant slope approach, the change in the fiscal impulse can be derived as the difference of the corrected plan and the original SP plan.
We set out the net fiscal contractions or expansions implied for Germany, relative to the original SP plan, in table 11.These figures show that the two approaches offer different schedules for correcting fiscal slippages.Both allow quite a large amount of extra spending in the first year of the plan.But then they differ.The constant slope plan offers two additional years of extra spending, but then demands a large cut in net spending.The additive constant approach, by contrast, offers small cuts spread evenly over the three correction years.
For Italy, the net fiscal contractions or expansions implied, relative to her original SP plan are set out in Table 12.Qualitatively the results resemble those for Germany.They imply small but equally spread fiscal contractions under the additive approach; and but positive impulse in the first two periods, followed by a small contraction in 2004 and a sharp contraction in the last period under the constant slope approach.

Elsewhere in the Eurozone
Up to now, we have looked only at two countries in two specific time periods.In this section we do the same analysis for the Eurozone countries in all years for which SP plans exist and are publicly available.To get a comprehensive measure, and to avoid an overload of individual country detail, we average the fiscal impulses of the different adjustment plans over all the cases back to 2000 where forecasting deficit slippages demanded early intervention.The results are presented in table 13 for both additive and constant slope approaches.
These results confirm that what we saw above for Germany and Italy in their 2002 plans does in fact hold more generally.The differences between the left and right panels show that there are clear and substantial advantages, in terms of both lower debt levels and permanent interest savings, in every case to instituting early corrections.The changes in the overall run of fiscal policies required to make the necessary budget corrections is almost always smaller -often substantially smaller -with early interventions; most obviously in Germany, Italy, the Netherlands and Belgium.In most cases the changes are halved if early action is taken; with those changes bunched in the final year in the slope adjustment method is used, but evenly spread out if the additive method is used.The average changes in the fiscal impulse relative to the SP plan for the additive constant and the constant slope approaches with and without early interventions.
Similarly, the required changes are almost always much smaller (even in earlier years) if the additive adjustment method is used.In fact the changes are typically 3 to 5 times smaller with additive rather than slope adjustments, most notably in Spain, Germany, Italy and Portugal (possibly Belgium and the Netherlands).It is important to bear in mind that, although these results are qualitatively the same as those for the actual budget corrections discussed in sections 6 and 7, the figures in table 13 show the changes in overall fiscal policy which those budget corrections cause when superimposed on the SP/MTO plans.And those are the changes in policy which the public sees and judges the policymakers by.The additional interest payments when no corrections are made, using the additive constant approach.The term r D gives the government spending, expressed as a share of GDP that would need to be devoted to extra interest payments if no adjustments at all were taken.In this case, debt targets are not met and higher interest payments would be necessary for ever.The additional interest payments when no corrections are made, using the constant slope approach.
The term r∆D gives the government spending, expressed as a share of GDP, that would need to be devoted to extra interest payments if no adjustments at all were taken.Debt targets are not met and higher interest payments would be necessary for ever.
Looking at the figures in tables 14 and 15, we can see that the interest payment consequences of not making early corrections are indeed small (justifying our having left them out of consideration until this point) -just a fraction of a percent in each case, even in Italy and the Netherlands.Moreover the extra interest payments are not different between the two correction methods.Again it was reasonable to ignore them.However, they build up over time and last for a long time since the corrections are sufficient only to get us back to the planned debt levels.

Conclusions
In this paper we have accomplished two things.Firstly, we have investigated the gains to be made, in terms of monitoring and correcting excessive deficits, by using cash data rather than accruals data to monitor the current fiscal position; and, given that information, by computing the early interventions needed to head off any excess deficits as they emerge; and secondly, we have also examined and compared two different strategies for correcting excess deficits that may have already emerged, such that the debt ratio returns to some pre-specified level at the end of the designated planning period.
Independently of the measure used, our results show that the gains from early intervention are certainly not negligible for governments committed to reducing their debt.What is different between the different plans is the allocation of the corrections over time.Both the constant slope and the additive constant plans require a lot of effort at the moment a fiscal slippage is detected in order to avoid further slippages in the remainder of the year and in subsequent years.This means that an important part of the adjustment has to take place in the first year.After that, the two approaches differ sharply in the timing of the corrections.The additive approach typically requires a second costly adjustment after the early intervention.
One could however argue that this would be a less serious problem if those corrections could be implemented in a package together with the early intervention measures and therefore avoid further discussion in the political process.
The advantage of the constant slope approach is that it spreads the adjustment steps equally across the horizon of the SP plan.That approach may therefore be politically easier to implement.However, it also requires an especially strong and committed government to overcome the (political) temptation to use the surplus that occurs towards the end of the plan for opportunistic spending instead of debt reductions; for example, close to elections or as debt or deficit consolidation fatigue begins to set in among the politicians.
In our discussion of the different adjustment paths available to a fiscally consolidating government, we have emphasised the gains of early intervention.In that context we have stressed the importance of accounting for the interaction between deficit and debt targets, and the danger of time consistency in the

Figure 2 .
Figure 2. Timeline of events

Figure 5 .
Figure 5.The constant slope and constant additive adjustments compared meet the SP debt target of 54.55% in 2005.Since many plans can satisfy this target, we look for a simple plan with a constant additive shift: meet the debt target of 54.55% in 2005.Since there are many plans that can satisfy this target, we look for a simple plan such that: meet the debt target of 89.78% by 2005.If we evaluate d for Italy in 2002, we get d=0.0105 with early interventions.This means the government has to decrease its deficit from year to year, for the next three years, by 1.05% of annual GDP.

Table 3 .
German government deficit plan after a one-time deviation in 2002 Deficit and growth rates are taken from the plan submitted by the government in December 2001, and no corrections are taken with respect to these numbers.The debt follows from our own calculations based on a debt ratio of 60% for 2001.All GDP growth rates are nominal.

Table 4 .
German government deficit plan after a one-time deviation and revision in July 2002 t  ˆdenotes the deficit realized in the first year covered by the SP plan; and D ˆdenotes the target debt ratio at the end of the SP plan.If we evaluate d for Germany in 2002, we get d = 0.0025.Given the policies of 2002, this means the government has to decrease its deficit in each year, for the following three years, by 0.25% of annual GDP.The new plan can be seen in table3.Notice that the deficit corrections going into2003  and 2004 (2.1% and 1% of GDP)are smaller than in table 1, and involve no extra debt or interest payments.

Table 5 .
denotes the initial debt before the SP plan starts, t  ˆdenotes the deficit realized in the first year of the SP plan, and D ˆ denotes the target debt ratio at the end of the plan.If we evaluate d for Germany in 2002, we get d=0.0131.This that the government, under early intervention, has to decrease its deficit in each year, for the following three years, by 1.31% of annual GDP.As a result, the budget contractions are 0.46% and 0.35% of GDP smaller in2003-4, but 1% larger  in 2005.The new plan can be seen in table 4. German government deficit plan after a one-time deviation and revision in July 2002 15Notice however that the total budget cuts with no early interventions are slightly smaller than those with early interventions: 1.53% vs. 1.58%, despite extra interest charges.This is because of the effect of higher GDP growth on the debt/deficit ratios later in the plan.means

Table 7 .
Italian government deficit plan starting in 2002, submitted in November 2001

Table 8 .
Italian government deficit plan after a one-time deviation in 2002

Table 9 .
Italian government deficit plan after a one-time deviation and revision in July 2002

Table 10 .
Italian government deficit plan after a one-time deviation and revision in July 2002 Deficit and growth rates are taken from the plan submitted by the government in November 2001, and no corrections are taken with respect to these numbers.The debt follows from own calculations based on a debt ratio of 107.5% for 2001.If, instead, we consider the case of no early interventions, then the constant slope regime would require d=0.0183 to meet the 2005 debt target.The resulting plan can be found in table 10.This time the budget corrections are substantially larger than those with early interventions.Similarly, the back-loading element is large: the budget would have to be cut by 2.2% more of GDP in 2005 than in the scheme with additive corrections, and by 2.4% more than with both additive corrections and early interventions.The frontloading relief is equally large: 1.24% in 2002 and 1.3% in 2003.It is hard to believe that time inconsistent behaviour would not appear in such a case.As a result this plan is unlikely to have much credibility in the markets.Deficit and growth rates are taken from the plan submitted by the government in November 2001, and no corrections are taken with respect to these numbers.The debt follows from our own calculations based on a debt ratio of 60% for 2001.

Table 12 .
Change in the fiscal impulse of the German in reaction to a additive constant and constant slope revision of the original SP plan to meet the debt target in 2005

Table 13 .
Change in the fiscal impulse of the Italian in reaction to a constant slope and constant slope revision of the original SP plan to meet the debt target in 2005 Change in the fiscal impulse of the Italian in reaction to a constant slope and constant slope revision of the original SP plan to meet the debt target in 2005.

Table 14 .
The average changes in the fiscal impulse relative to the SP plan for the additive constant and the constant slope approaches with and without early interventions

Table 15 .
The additional interest payments when no corrections are made, using the additive constant approach

Table 16 .
The additional interest payments when no corrections are made, using the constant slope approach