Design Choices for Fiscal Policy Rules

Abstract

This article discusses issues regarding budget process rules in the context of the current pattern of rising fiscal deficits. It begins by explaining the premise that budget process rules have multiple objectives, and so must be judged according to multiple criteria. Prominent among those criteria, given the apparent economic sluggishness of the early years of the 1990s and the resulting fiscal deficits, are how any particular set of rules might facilitate economic recovery and growth, but also maintain fiscal responsibility and public credibility. This discussion is pertinent to both the euro area countries and the United States, and the article explores aspects of the European Union Stability and Growth Pact and the United States Gramm-Rudman-Hollings system. The article then proceeds to analyse alternative fiscal control measures according to these and other criteria, such as the ability to maintain sound core operations of government to attain all of its long-standing policy objectives, including the funding of public investment. The article concludes by weighing the alternative rules against these criteria.