Fiscal Rules and Fiscal Performance: World Evidence

This paper presents world evidence on the contribution of fiscal target rules to fiscal performance. The empirical model identifies the potential contribution of different types of fiscal rules (and both de jure and de facto)... [ view full abstract ]

This paper presents world evidence on the contribution of fiscal target rules to fiscal performance. The empirical model identifies the potential contribution of different types of fiscal rules (and both de jure and de facto) to four measures of fiscal performance, controlling for a host of other determinants. The model is tested on annual data for 115 countries spanning 1985-2015. The main findings are the following. Other variables can be as important as rules in affecting performance, including government checks and balances, political stability, financial integration, and low inflation. Other fiscal institutions may reinforce the benefits of fiscal rules in reducing procyclicality, including sovereign wealth funds. Two de jure rules deliver their intended primary objective: expenditure rules reduce procyclicality and budget balance rules improve fiscal balances. However, de jure debt rules do not improve debt sustainability. The positive effect of expenditure rules is reinforced when a fiscal council is in place. De facto rules do not ameliorate procyclicality of government expenditures but reduce procyclicality of fiscal balances when a fiscal council is in place. De facto budget balance rules improve the contribution of budget balance rules to the fiscal stance, especially in conjunction with a fiscal council.