Balanced budget rules and fiscal outcomes: Evidence from historical constitutions

Abstract

This paper studies the reduced-form effects of constitutional-level balanced budget rules (BBRs) on fiscal outcomes. Using historical data for a large set of countries dating back to the nineteenth century and applying a difference-in-difference design we find that the introduction of a constitutional BBR leads to a reduced probability of experiencing a sovereign debt crisis. We estimate that debt-to-GDP ratio decreases by around eleven percentage points on average, most of these consolidation being explained by decreasing expenditures rather than increasing tax revenues. Using the same methodology and sample, we do not find evidence that non-constitutional BBRs included in national legislation affect these variables. Additional estimates gained from applying the synthetic control method on nine selected case study countries in Africa, Europe, and Latin America are consistent with the main findings, but also highlight the importance of country specific circumstances when evaluating the success of BBRs.