Do fiscal rules undermine public investments? A review of empirical evidence

Fiscal rules are a frequent policy measure to restrict deficit-taking among incumbent politicians. In times of increased and sustained investment needs to mitigate the consequences of climate change, and to promote the digital and structural transformation, fiscal rules have become subject to criticism for undermining public investments. We review 36 existing empirical studies examining the effect of fiscal rules on public investments. We also discuss whether more public investments typically come at the cost of higher deficits and whether the effect on public investments differs between rigid and more flexible fiscal rules. Overall, we do not find majoritarian evidence for a negative effect of fiscal rules on overall public investments. Among the papers finding a (significant) effect of fiscal rules on public investments, the number of those that estimate a negative relationship, however, surpass the ones finding a positive relationship. Rigid fiscal rules seem to deter public investments as compared to more flexible and investment-friendly rules which, by contrast, rather increase public investments. Existing evidence does not suggest that public investments come at the cost of higher public deficits in a majority of studies (except in case of flexible fiscal rules). The design of fiscal rules appears to be crucial for higher public investments.