Fiscal Rules for Subnational Governments

Fiscal rules and budget forecast errors of Italian municipalities

“…Fiscal estrictions can be imposed on local borrowing autonomy to avoid the excessive use of bank loans or other forms of lending, when intergovernmental transfers do not match the financial capacities of local jurisdictions to provide centralized standards of local public goods and services. Sub-central budget rules can be used by the central government to avoid the provision of special ad-hoc transfers to insolvent local jurisdictions and prevent a possible fiscal crisis due to their fiscal profligacy (Prud'homme, 1995;Tanzi, 1996;Ter-Minassian, 2007).…”

“…There is no wide consensus in the literature on the desirability and the effectiveness of sub-central fiscal rules to restrain fiscal profligacy of local governments. Ter-Minassian (2007) claims that sub-central fiscal rules can be used only when market discipline and cooperative arrangements across levels of governments fail to enhance fiscal responsibility at the local level. The disciplinary role of the market is effective only if the commitment by the central government to bail out the sub-national insolvent governments is not credible.…”

Public Sector Finances as Determinants of Private Investment in PPP Projects – Experiences from Select Countries

“…Other critical factors in the study were unstable economic policy and weak financial, technical and managerial capabilities of the concessionaires. Ter-Minassian [20] concluded that cooperative arrangements and moral suasion across different levels of government could be an add-on to market measures to persuade sub-national governments to be fiscally responsible and promote savings in good times and avoid pro-cyclicality. Lee [21] found that the annual spending of some provincial governments in Korea had exceeded budgeted figures by a margin of around 1.5% -2% of total budget.…”

Day After Tomorrow: Designing an Optimal Fiscal Strategy for Libya

“…Fiscal policy rules -a formal constraint on discretionary fiscal policy, typically defined in terms of a numerical target for fiscal performance -have become a popular tool for avoiding procyclicality and enhancing policy credibility, especially in emerging economies: the number of countries adopting national or supranational fiscal rules has increased from only five in 1990 to 81 in 2012. 12 Fiscal policy rules place constraints on discretionary policies through procedural and numerical limits on fiscal aggregates such as the structural budget balance, spending, or indebtedness in proportion to GDP (Ter-Minassian, 2006;Filc and Scartascini, 2007). Although the optimal design and implementation of a rule-based medium-term fiscal framework varies from one country to another, depending on fiscal policy objectives and institutional capabilities, the basic principles are to constrain pressures to overspend, moderate procyclicality, and ensure long-term fiscal sustainability and equitable intergenerational use of the hydrocarbon wealth ).…”