The decline in public investment: ``social dominance’’ or too-rigid fiscal rules?

Abstract

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Do Fiscal Rules Undermine Public Investments? A Review of Empirical Evidence

“…If investment provisions in fiscal rule frameworks cannot limit budget deficits while also stimulating public investments as politically intended, one may look for alternative designs for more flexibility. Jürgens (2022), Ardanaz et al (2021) as well as Delgado-Téllez et al (2022) turned not only to investment-friendly rules in order to categorise flexible fiscal rules but also to escape clauses and cyclical adjustments of target values of fiscal rules. Ardanaz et al (2021) show that all three aspects of flexibility provided similarly positive effects on public investments.…”

“…The studies in Table 1 also use various econometric approaches to account for potential endogeneity of fiscal rule adoption ranging from a Difference-in-Difference (DiD) estimation (e.g., Carrieri & Martínez, 2021, Daniele et al, 2019), a combination of DiD with a Regression Discontinuity Design (RDD) which is labelled as Difference-in-Discontinuities (e.g. Grembi et al, 2016or Alpino et al, 2022, entropy balancing as a form of matching on covariates determining fiscal rule adoption on the country level (Vinturis, 2022), synthetic control methods (Salvi et al, 2020), or they use cross country fixed effects panel regressions to examine relationships between fiscal rules and public investments on the macro-level (Grosse-Steffen et al, 2021, Ardanaz et al, 2021, de Biase & Dougherty, 2022, Delgado-Téllez et al, 2022. Furthermore, available studies use heterogeneous accounting measures of public investments (partly due to the different empirical settings of the studies considered, e.g., local or national levels of observation).…”

“…Vinturis, 2022) or respective changes or growth rates of the latter (e.g. Dahan & Strawczynski, 2013;Delgado-Téllez et al, 2022).…”

Fiscal Rules and Their Influence on Public Sector Efficiency

“…This applies especially to the more developed countries, where public spending is very high relative to GDP, and revenue sources are virtually stagnant in GDP terms. Moreover, this pressure is increasingly difficult to contain because of the social dominance of spending, particularly due to the aging of the population and associated social preferences (Delgado-Téllez et al, 2022).…”