Sustainability-linked Fiscal Leeway

The public sector plays a decisive role in providing the required investments for a green transformation of our economies. In this context, it is crucial that governments not only have the fiscal leeway to make public green investments but that they actually achieve the desired outcomes. To simultaneously ensure environmental sustainability and debt sustainability, public green investment needs to be both effective and efficient.

This paper describes a way to reconcile the need for effective and efficient green investment with ensuring budgetary control and minimal administrative burden: Sustainability-linked Fiscal Leeway. It makes the granting of additional fiscal leeway dependent on the achievement of green goals. The achievement of the green targets is monitored ex-post. Thus, no ex-ante definition of green investments is needed. Governments do not have to submit comprehensive and binding investment plans, but only formulate targets, e.g., greenhouse gas emission reduction paths. In case of non-compliance, the additional fiscal leeway can be withdrawn. As such, effectiveness of green public investments is guaranteed whilst allowing long-term planning and leaving flexibility to governments, as well as avoiding over-bureaucratisation. Sustainability-linked Fiscal Leeway makes a relevant contribution to shaping a fiscal and budgetary policy that is fit for the challenges of the future and at the same time leaves ample room for its practical implementation.