Under threat: Rules-based fiscal policy and how to preserve it

Abstract

Rules-based fiscal policy is under threat. Over the last two decades, it proved frustratingly complicated to strike the right balance between three essential properties of sound fiscal policy rules: simplicity, flexibility, and enforceability. Simplicity has been sacrificed to ensure that more contingent (i.e. flexible) rules remained enforceable. The resulting arrangements have failed to adequately guide fiscal policy, undermining formal compliance, and ultimately, popular and political support for rules. To mitigate the risk that countries abandon rules-based policymaking, we suggest downplaying enforceability-i.e. the role of formal sanctions through enforcement-and enhancing the reputational costs of breaching rules. At the limit, the rule could consist of a simple quantitative benchmark for a key fiscal indicator. To boost reputational effects, independent fiscal councils should focus on debunking the "fiscal alchemy," clearing the public debate from partisan smokescreens, and fostering popular support for sound fiscal policies.

National fiscal rules and fiscal discipline in the European Union

“…First, close to our study, it would be interesting to look at the response of fiscal discipline to the so-called second-generation fiscal rules (see Eyraud et al [2018]), which potentially add flexibility and enforceability to the simplicity feature of the traditional fiscal rules-see the discussions relative to the "fiscal rules trilemma" in e.g. Debrun and Jonung [2019] and Reuter [2019]. Second, beyond national fiscal rules, one could explore the relationship between sub-national fiscal rules and fiscal discipline, from a cross-country perspective.…”

Fiscal Rules Cause Lower Debt: Evidence from Switzerland’s Federal Debt Containment Rule

“…While there is clear technical sanction mechanisms for not meeting the rule’s requirements, the enforcement of this sanction cannot be legally enforced due to a lack of constitutional jurisdiction in Switzerland. To mitigate the risk of abandoning fiscal rule, Debrun and Jonung (2019) suggest downplaying the role of formal sanctions through enforcement and enhancing the reputational costs of breaching rules. In fact, the Swiss rule exhibits a high degree of legitimacy because it was approved in a referendum, which could serve as a strong informal enforcement tool as it was always complied with since its introduction.…”

El gasto público en México y su postura fiscal procíclica (1980-2016)

“…En relación con las reglas fiscales, existe una gran cantidad de estudios aplicados en los que se aporta evidencia respecto de su efectividad para reducir la postura procíclica de la política fiscal, o bien, mantener su carácter contracíclico. Las reglas fiscales son instrumentos usuales para mantener controlado el déficit fiscal y la deuda pública, pero podrían tener efectos contrarios si son mal diseñadas (Bergman y Hutchinson, 2018;Tovar, 2018); su buen funcionamiento dependerá de factores institucionales, administrativos y económicos, de la autonomía de las agencias fiscales encargadas de su operación, de la correcta selección de la regla de política, del nivel de endeudamiento que presente la economía, de la flexibilidad en su diseño, entre otros elementos (Heinrich, 2018;Debrun, 2018;Badinger y Heinrich, 2017;Combes, Minea y Sow, 2017;Zeyneloglu, 2018;Guerguil, Mandon y Tapsoba, 2017). Heinrich (2018) encuentra evidencia de relajamiento en la observancia de las reglas fiscales en países de la Unión Europea durante periodos electorales.…”