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Symposium 2015

Virtual Library File - Fiscal Rules: Theoretical Issues and Historical Experiences

The Challenge

In the aftermath of the global financial crisis and the Great Recession, many countries are facing substantial deficits and growing debt. As analyzed in the 16th Geneva Report on the World Economy, th ...

In the aftermath of the global financial crisis and the Great Recession, many countries are facing substantial deficits and growing debt. As analyzed in the 16th Geneva Report on the World Economy, the global debt-GDP ratio continues to grow, while growth and inflation remain low, raising concerns about the dangers posed by new crises. This situation spurs the need to consolidate public finances in order to bring down debt-GDP ratios. When setting up specific fiscal consolidation plans in order to achieve this, policymakers can generally choose from a wide range of possible fiscal instruments. The aim of this session is to discuss how consolidation plans should be designed to bring debt-GDP ratios down, while minimizing short-run social and economic costs.

In this paper the author discusses the role of institutions (e.g. fiscal rules) in the context of fiscal (in)discipline. The main conclusion can be summarized as follows:

  1. Rules are unlikely to exist unless they come with supporting institutions.
  2. Fiscal institutions are neither necessary nor sufficient to achieve fiscal discipline, but they help.
  3. Institutions must bind the policymakers without violating the democratic requirement that elected officials have the power to decide on budgets, effective arrangements are those that give institutions the authority to apply legal rules or to act as official watchdogs.