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You are here: Home Knowledge Base Economy Fiscal Consolidation through Fiscal Rules?
Symposium 2012

Fiscal Consolidation through Fiscal Rules?

The Challenge

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?

    Solutions

    Solution
    Symposium 2012

    Define a long-term target for the debt-to-GDP ratio and an upper limit for the annual budget deficit to GDP ratio, depending on the business cycle, the country’s existing debt-to-GDP ratio ...

    Define a long-term target for the debt-to-GDP ratio and an upper limit for the annual budget deficit to GDP ratio, depending on the business cycle, the country’s existing debt-to-GDP ratio and its f ...

    Define a long-term target for the debt-to-GDP ratio and an upper limit for the annual budget deficit to GDP ratio, depending on the business cycle, the country’s existing debt-to-GDP ratio and its future growth prospects.

    Polity
    Solution
    Symposium 2012

    Fiscal rules should be given constitutional status.

    Fiscal rules should be given constitutional status.

    Fiscal rules should be given constitutional status.

    Polity

    Proposals

    Proposal
    Symposium 2012

    Rules to Control Government Spending

    True - rules can be broken, but breaking them imposes costs and having them historically has provided some discipline. As a consequence, a combination of a spending rule with immediate spending cuts t ...

    True - rules can be broken, but breaking them imposes costs and having them historically has provided some discipline. As a consequence, a combination of a spending rule with immediate spending cuts to make more credible the action of the government can be effective ways to enhance the economic security of a country. There are a number of potential rules that can be used. My expertise is the United States so I will focus on the US. The closest we came at the Federal level to a spending rule was the Gramm-Rudman-Hollings Balanced Budget Act of 1985. Current plans by

    Polity
    Proposal
    Symposium 2012

    Fiscal Consolidation through Fiscal Rules?

    Fiscal rules to support fiscal consolidation should consist of a long-term target for the debt/ GDP ratio and an operating target for the budget deficit.  The long-term target could be formulated as ...

    Fiscal rules to support fiscal consolidation should consist of a long-term target for the debt/ GDP ratio and an operating target for the budget deficit.  The long-term target could be formulated as a maximum value for the debt GDP ratio, e.g. 60 per cent as in the Maastricht treaty ( or a lower value to provide an additional safety cushion). Consolidation policy to reach this target should operate via a target for the budget deficit. The reason is that parliaments decide about budgets, and that budget figures are usually easier to communicate to the public than debt ratios. A possible

    Polity

    Background Paper

    Background Paper
    Symposium 2012

    Fiscal Rules: Theoretical Issues and Historical Experiences

    Fiscal indiscipline is a feature of many developed countries. It is generally accepted that the source of the phenomenon lies in the common pool problem, the fact that recipients of public spending ...

    Fiscal indiscipline is a feature of many developed countries. It is generally accepted that the source of the phenomenon lies in the common pool problem, the fact that recipients of public spending to fail to fully internalize the costs  that taxpayers must assume. As a result, democratically elected governments are led to postpone tax collection, or to cut spending. Solving the fiscal iscipline problem requires internalizing this externality. This calls for adequate institutions or for rules, or both. This paper reviews the various types of solutions that have been discussed in the literature and surveys a number of experiments. With the European debt crisis in mind, the paper pays particular attention to the common pool problem that emerges in federal states. The main conclusions are the following. First, rules are unlikely to exist unless they come with supporting institutions. Second, fiscal institutions are neither necessary nor sufficient to achieve fiscal discipline, but they help. Third, because  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.

    Polity, Academia, Business, Civil Society