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On the Unintended Consequence of Fiscal Rules: Evidence from Fiscal Expenditures

Author

Listed:
  • Rabah Arezki
  • Gregoire Rota-Graziosi
  • Van Dao Le

Abstract

This paper documents the unintended consequence of fiscal rules in the form of tax expenditures using both theory and data. We first introduce a simple fiscal model where the government has time-inconsistent preferences with a present bias toward public spending in line with Halac and Yared (2014). We then empirically validate the main prediction of the model by providing evidence that the adoption of a binding fiscal rule on public spending leads to an increase in tax expenditures, whereas revenue rules, which do not constrain spending, leave them unaffected. Our findings suggest the existence of a robust "innovation channel" in the fiscal domain—paralleling regulatory capital requirements in banking.

Suggested Citation

  • Rabah Arezki & Gregoire Rota-Graziosi & Van Dao Le, 2026. "On the Unintended Consequence of Fiscal Rules: Evidence from Fiscal Expenditures," CESifo Working Paper Series 12741, CESifo.
    • Handle: RePEc:ces:ceswps:_12741
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    Keywords

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    JEL classification:

    • D02 - Microeconomics - - General - - - Institutions: Design, Formation, Operations, and Impact
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
    • H1 - Public Economics - - Structure and Scope of Government
    • P16 - Political Economy and Comparative Economic Systems - - Capitalist Economies - - - Capitalist Institutions; Welfare State

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