Fiscal Consolidation through Fiscal Rules?
Large and growing ratios of public debt to GDP in many countries are demanding vigorous efforts to achieve fiscal consolidation. Many observers believe that a fiscal rule should be the central element of a successful strategy: they argue that a rule would restrict discretionary actions by governments, thereby strengthening the credibility of consolidation. But there are substantial differences of opinion on the precise specification of the rule.
These disagreements arise from the different requirements of a fiscal rule. To be transparent to the public, the rule should be simple and easy to monitor. To stabilize the economy, the rule should reduce medium-term debt to GDP ratios without aggravating cyclical fluctuations. To be credible, there should be safeguards to ensure that the rule will not be flouted. And to be legitimate, the rule and the safeguards must be in line with constitutional provisions.
To what extent do fiscal rules make a real difference to fiscal policy outcomes? What is the appropriate schedule for the path of fiscal consolidation? Should a fiscal rule focus on the budget ratio or the debt ratio? And how should the business cycle be taken into account?
What are appropriate safeguards against deviations from a fiscal rule? Are ex-ante restrictions on budgetary policy superior to ex-post penalties? And how should fiscal rules be enforced in states with fiscal federalism?