Federalism and the stringency of balanced budget rules – A comparative study of Canada, the European Union, and the United States of America

Abstract

ABSTRACTStudies of federalism concerning the impact of (fiscal) decentralization on budgetary stability produced inconclusive results. Ambiguous findings lead to uncertain budgetary expectations, and consequently, the level of stringency of adopted balanced budget rules (BBRs) varies across the spectrum of different federal models. This article clarifies the link between the structure of federalism and the stringency of BBRs. It argues that rather than decentralization alone, it is the combination of decentralization and interdependence between levels of government that explains the varying stringency of BBRs across federal systems. Additionally, the strictness of fiscal prudency rules is estimated through a new, ten-point model. Three cases are selected for empirical testing, and the analysis shows that the European Union’s adoption of a rather stringent BBR is not counterintuitive, but rather expected based on its political structure.