Government efficiency and fiscal rules

Abstract

Fiscal rules have been on the rise worldwide since the 1990s, highlighting the urgent need for sound public finance. Since the turn of the century furthermore, the issue of government efficiency has stimulated public debate and given rise to numerous indicators. Does government efficiency lead to better fiscal discipline? Or on the contrary, do fiscal rules make governments more efficient? This chapter offers some insight into the potential link between fiscal rules and government efficiency by investigating the correlation between the presence, strength, and compliance rate of fiscal rules and a government efficiency index. This exploratory study offers some interesting insights, but the conclusions depend on the indicator used as a proxy for fiscal rule performance, the periods considered, and the types of fiscal rules included in the analysis. The simple presence of fiscal rules seems to have had a positive impact on government efficiency overall between 2003 and 2015 but the effect varies over time. The link between the stringency of fiscal rules and government efficiency seems to be stronger, with stricter fiscal rules being associated with higher government efficiency. Similar results are obtained for fiscal rule compliance, but these vary between time periods: compliance with fiscal rules is weakly correlated with government efficiency before and after the global financial crisis is highly correlated during the crisis. This may reflect the activation of release clauses and the low level of compliance in the crisis, as exemplified by the United Kingdom abandoning the golden rule in 2009.