On the Role and Effectiveness of Fiscal Rules and Independent Fiscal Councils

Fiscal rules and fiscal councils are often adopted independently: many countries operate under fiscal rules without a fiscal council, while fiscal councils are frequently established only after a fiscal rule is already in place, suggesting that the two institutions may contribute differently to fiscal discipline. This paper starts with a simple theoretical framework to explain these stylized facts, accounting for the fact that governments, or even society at large, may not always be in favour of a fiscal council. The model also predicts that a sufficient strengthening of a budget balance rule, an independent fiscal council, and an increased interaction between rule strength and council strength all help reduce the expected deficit. The ensuing empirical analysis, using the updated 2025 IMF datasets on fiscal rules and fiscal councils, tests these predictions for a large country sample, including 32 advanced economies and 58 emerging market and developing economies spanning from 2000 to 2024. We find indicative evidence that, depending on the sample and the institutional design, both stronger rules and councils are associated with lower primary deficits, reduced projection biases and improved forecast accuracy. We also find some role for the interaction between the strengths of rules and councils, although the pattern varies.