Optimal Supermajority Threshold for Suspending Fiscal Rules

This paper analyzes the optimal supermajority threshold for approving fiscal rule suspensions within a two-period political turnover model. Faced with the potential loss of power, the incumbent party aims to secure preferred expenditures by increasing public debt. To counteract this, an expenditure rule requiring legislative approval for suspension is introduced. The analysis shows that the voting threshold in parliament should exceed a simple majority, making a simple majority rule suboptimal. A stricter supermajority is necessary when fiscal expenditure rules are more flexible, as it allows for more effective responses to economic fluctuations. Moreover, while higher initial debt levels call for stricter expenditure rules, the optimal supermajority threshold remains unaffected by the debt level. Finally, as political polarization among voters intensifies, the optimal threshold decreases, increasingly aligning with the incumbent party’s preferences.