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The Role of Fiscal Rules in Determining Fiscal Performance

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  • Suzanne Kennedy
  • Janine Robbins
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    Abstract

    This paper examines the role of legislated fiscal rules in determining fiscal performance. It reviews the rationale for fiscal rules and discusses the advantages and drawbacks associated with them, notably the possibility that rules may impede countercyclical fiscal policy. The paper then analyzes the use of fiscal rules in the United States, the European Economic and Monetary Union, Germany, Japan, New Zealand, Sweden and Canada. Rules at the subnational level in the United States and Canada are also examined. A review of the experiences of several nations during the fiscal consolidation of the mid-1990s indicates that countries both with and without fiscal rules implemented successful fiscal adjustments. From this, we conclude that fiscal rules may be helpful in achieving fiscal success and may even be necessary in certain countries, but they are clearly not necessary in all countries. However, before making any judgements about the value of fiscal rules, it is important to note that fiscal rules at the national level have not yet been seriously tested; the "acid test" of fiscal rules will come with the next recession. A review of empirical studies addressing fiscal rules generally supports these conclusions. Many studies find that fiscal rules can have an impact on fiscal policy outcomes, depending on how they are structured. The results regarding whether fiscal rules impede a government’s ability to engage in countercyclical fiscal policy have been mixed, although recent work suggests that strict rules may exacerbate business cycle fluctuations. Finally, some research suggests that some types of fiscal rules or targets may be more suited to certain levels of government (subnational rather than national) or to certain types of electoral systems (proportional representation rather than pluralist systems). Overall, it would seem that there may be a role for legislated fiscal rules in certain cases, but that legislated rules are by no means necessary for achieving fiscal consolidation in all jurisdictions. Determining the conditions under which fiscal rules are indeed necessary to ensure fiscal discipline remains an area for further research. Ce document étudie le rôle des règles budgétaires prévues par la loi par rapport à la performance financière. Il traite des raisons qui sous-tendent les règles budgétaires et des avantages et inconvénients liés à celles-ci, comme par exemple la possibilité que ces règles puissent aller à l’encontre d’une politique fiscale contracyclique. Le document comprend également une analyse de l’utilisation des règles budgétaires aux États-Unis, au sein de l’Union économique et monétaire européenne, en Allemagne, au Japon, en Nouvelle-Zélande, en Suède et au Canada. De plus, il passe en revue les règles infranationales aux États-Unis et au Canada. Un examen des expériences de plusieurs nations, dans le cadre de l’assainissement de leurs finances publiques au milieu des années 90, révèle que tant les pays dotés de règles budgétaires que les autres ont réussi à apporter des redressements fiscaux efficaces. Cet examen nous a permis de conclure que les règles budgétaires peuvent contribuer à l’assainissement des finances et qu’elles peuvent même être nécessaires dans certains pays mais que, clairement, ces règles ne s’imposent pas dans tous les pays. Toutefois, avant de porter un jugement quelconque au sujet de la valeur des règles budgétaires, il est important de souligner que les règles budgétaires au plan national n’ont pas fait l’objet de mises à essai sérieuses cela aura vraisemblablement lieu lors de la prochaine récession. Un examen des études empiriques sur les règles budgétaires révèle que celles-ci corroborent généralement ces conclusions. Plusieurs études ont démontré que les règles budgétaires peuvent avoir une incidence sur les résultats de la politique fiscale, selon la manière dont elles sont structurées. Les résultats relativement à la question de savoir si les règles budgétaires nuisent à la capacité du gouvernement d’adopter une politique fiscale contracyclique sont partagés. Des travaux menés récemment révèlent cependant que les règles strictes peuvent exacerber les fluctuations du cycle économique. En dernier lieu, certaines études laissent croire que certains types de règles ou cibles budgétaires seraient mieux adaptées à certains paliers de gouvernement (infranational plutôt que national) ou certains types de systèmes électoraux (représentation proportionnelle plutôt que système pluraliste). En général, il semble que les règles budgétaires prévues par la loi aient un rôle à jouer dans certains cas, mais qu’elles ne soient nullement nécessaires pour assainir les finances de toutes les administrations. Il faudra mener d’autres travaux pour déterminer les conditions sous lesquelles les règles budgétaires sont réellement nécesssaires pour assurer une discipline financière.

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    Bibliographic Info

    Paper provided by Department of Finance Canada in its series Working Papers-Department of Finance Canada with number 2001-16.

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    Handle: RePEc:fca:wpfnca:2001-16

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    Cited by:
    1. Ignacio Lozano & Hernán Rincón & Miguel Sarmiento & Jorge Ramos, . "Regla fiscal cuantitativa para consolidar y blindar las finanzas públicas de Colombia," Borradores de Economia 505, Banco de la Republica de Colombia.
    2. Mariano Tommasi & Miguel Braun, 2002. "Fiscal Rules for Subnational Governments. Some Organizing Principles and Latin American Experiences," Working Papers 44, Universidad de San Andres, Departamento de Economia, revised Mar 2002.
    3. Anwar Shah, 2006. "Fiscal decentralization and macroeconomic management," International Tax and Public Finance, Springer, vol. 13(4), pages 437-462, August.
    4. Hauptmeier, Sebastian & Heipertz, Martin & Schuknecht, Ludger, 2006. "Expenditure reform in industrialised countries: a case study approach," Working Paper Series 0634, European Central Bank.
    5. Shah, Anwar, 2005. "Fiscal decentralization and fiscal performance," Policy Research Working Paper Series 3786, The World Bank.
    6. Fermín Cabasés & Pedro Pascual & Jaime Vallés, 2007. "The effectiveness of institutional borrowing restrictions: Empirical evidence from Spanish municipalities," Public Choice, Springer, vol. 131(3), pages 293-313, June.
    7. Rafal Benecki & Jens Hölscher & Mariusz Jarmuzek, 2006. "Fiscal Transparency and Policy Rules in Poland," CASE Network Studies and Analyses 0327, CASE-Center for Social and Economic Research.
    8. Norbert Fiess, 2004. "Chile's Fiscal Rule," Econometric Society 2004 Latin American Meetings 348, Econometric Society.
    9. Balatoni, András & Tóth G., Csaba, 2012. "Az új magyar adósságszabály értékelése
      [Assessment of the new regulations on debt]
      ," Közgazdasági Szemle (Economic Review - monthly of the Hungarian Academy of Sciences), Közgazdasági Szemle Alapítvány (Economic Review Foundation), vol. 0(10), pages 1107-1137.
    10. Fabiana Rocha & Ana Carolina Giuberti, 2006. "Assimetria Cíclica Na Política Fiscal Dos Estados Brasileiros," Anais do XXXIV Encontro Nacional de Economia [Proceedings of the 34th Brazilian Economics Meeting] 52, ANPEC - Associação Nacional dos Centros de Pósgraduação em Economia [Brazilian Association of Graduate Programs in Economics].
    11. Pablo Mendieta Ossio & Hugo Rodriguez Gonzales, 2005. "Interacción de la política fiscal con la política monetaria en el MERCOSUR y países asociados," Revista de Análisis del BCB, Banco Central de Bolivia, vol. 8(1), pages 49-97, December.

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