Budgetary concepts

When the Maastricht Treaty first imposed fiscal conditions on Europe they were little understood. Elementary and intermediate textbooks in macroeconomics were, in large part, inadequate to consider the issues. Part of the reason for this was because they involved dynamics. Since dynamics were almost completely absent from their analysis, the reader had no foundation on which to discuss the issues sensibly. We have in this book supplied these foundations, and so it is possible, even at an elementary level, to consider the fiscal criteria of the Maastricht Treaty and its implications for Europe. These are important issues and so we shall consider the analysis in detail. In order to do this adequately, however, we do need to consider issues of government deficit financing. But these should be within the grasp of any undergraduate who has done an intermediate course in macroeconomics. As in previous chapters, we shall be concentrating on setting the problems up on a spreadsheet and then experimenting with them. The chapter does, however involve a little more algebraic manipulation than in other chapters. But the benefit derived in understanding the fiscal criteria of the Maastricht Treaty make it more than justified.

Our starting point is the budget deficit, which we shall denote BD. In setting out the dynamics of the budget deficit we need to be clear at all times between stocks and flows. A stock is a variable that is at a point in time.