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Symposium 2012

Solution for 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 ...

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.

Fiscal rules should be given constitutional status.

A core requirement for successful consolidation through fiscal rules is the credible commitment of legislators to follow a specific rule. But especially when an economy is in recession, legislators might be under pressure from various interest groups to suspend fiscal rules and switch to discretionary fiscal policy. The solution to maintaining the self-disciplinary effect of fiscal rules is therefore to introduce a cost of breaking fiscal rules.

If a fiscal rule has constitutional rank, it induces a huge cost in terms of political reputation on the legislators (for example, the government could be taken to the constitutional court). The suspension of fiscal rules should only be possible in times of severe crisis and even then only with a large (60%) majority in parliament, after which the base would return to the presuspension year budget levels.

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    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.

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