Expenditure Rules Research Articles

Expenditure Rules: Limiting the Level or the Variation of Public Expenditure?

The main goal of the first-generation expenditure rules was to ensure fiscal discipline: preserving a sound fiscal framework and public debt sustainability. Regarding this goal, analytically as well as empirically, limiting the share of public expenditure in GDP would be more appropriate in case of weak potential economic growth or if the public expenditure-to-GDP ratio is high. On the contrary, limiting the variation of public expenditure would be more appropriate for countries with high potential economic growth or with a weak public expenditure-to-GDP ratio. The second goal of expenditure rules is to contribute to sustaining economic activity. Regarding this goal, limiting the level of public expenditure appears as more favorable than limiting the variation of public expenditure. Indeed, a rule in terms of variation could hamper economic growth, especially for countries with a high public expenditure-to-GDP ratio.

The Impact of Federal Fiscal Rules on Debt: Insights from the European Union Countries

AbstractThis study analyzes the impact of federal fiscal rules on government debt in European Union countries. We describe the growth and institutional reforms of fiscal rules in European Union countries and conduct an empirical analysis to examine their impact on central government debt to draw comparative implications for federal fiscal rules in the United States. Our empirical results suggest that more stringent expenditure rules can reduce central or federal government debt relative to GDP, while other types of fiscal rules are found to be insignificant. We also find that certain design and structural features of fiscal rules are more important than others. Our findings offer timely and pertinent policy implications for the mounting federal budget and debt challenges of the United States.

On the side effects of fiscal policy: Fiscal rules and income inequality

Contributing to an important literature on the side effects of fiscal policy, this paper employs a treatment effect analysis to show that fiscal rules (FR) have significant side effects on income inequality (IQ). Economically meaningful, this favorable causal direct effect is robust to many alternative specifications. Nevertheless, not all FR are alike: balanced budget and debt rules decrease IQ, contrary to expenditure rules that increase it. Finally, the effect of FR on IQ is found to be subject to heterogeneity related to various factors. Given the current upward global IQ trends, our results provide insightful evidence for governments of countries aiming at reducing IQ.

What Type of Fiscal Rule Promotes the Fiscal Soundness?

Empirical studies on the impact of fiscal institutions such as fiscal rule and the establishment of independent fiscal institutions on fiscal performance have often overlooked the endogeneity issues. This study utilizes the system GMM model in dynamic panel analysis to control for the endogeneity inherent in fiscal institutions. This study is distinctive from the previous researches in the following aspects: ① It indices the levels of fiscal rules and independent fiscal institutions, ② Furthermore, it includes an interaction term between the level of fiscal rule and the level of independent fiscal institutions, ③ It analyzes the type of fiscal rules that affects fiscal soundness effectively. The study finds the followings: First, the level of fiscal rules has a positive (+) impact on the fiscal balance. Second, among fiscal rule types, the level of expenditure rule has a positive (+) impact on the fiscal balance. Third, the interaction term between the level of expenditure rule and the level of independent fiscal institutions has a positive (+) impact on the fiscal balance. The implications of this study are as follows: Countries with strict fiscal rules tend to reduce fiscal deficits, and among various fiscal rule types, expenditure rule has a significant impact on fiscal soundness improvement. Moreover, it was confirmed that countries with well-established expenditure rule experience an increased impact on fiscal soundness when activating independent fiscal institutions.

Fiscal rules to the test: The impact of the Spanish expenditure rule

Despite the large spread of fiscal rules around the world, there is still not enough evidence of their effectiveness in ensuring fiscal sustainability. Furthermore, there is little evidence of the impact of expenditure rules in countries’ fiscal performance. This paper evaluates the effectiveness of the Spanish expenditure rule that has been in force since 2012 in controlling the growth of public expenditure. We use a synthetic control methodology to analyze the impact of the rule on the evolution of current and primary expenditure within Spanish public administrations (2001–2018), avoiding the potential endogeneity problems of traditional econometric approaches. Overall, we find that the expenditure rule has largely improved budget sustainability by limiting both current and primary expenditure. These results are robust to different levels of government.

Regras para o controle da despesa com pessoal no direito brasileiro

This text addresses the main payroll expenditure rules within the scope of Brazilian public management. Over the recent past years, due to the worsening of the Brazilian fiscal crisis, this topic has been the subject of changes promoted by constitutional amendments and by complementary laws approved by the Brazilian National Congress. At the same time, several rules of the Fiscal Responsibility Law had their constitutionality challenged before the Brazilian Federal Supreme Court, whose final decision on the merits took place in 2020. In this context, the objective of the work is to systematize the normative and jurisprudential outlook on this relevant aspect of Brazilian public management. The rules currently in force and their effects on the accountability of public managers, expense agents and beneficiaries are exposed. In the first part of the work, the constitutional rules on the subject are exposed, including changes made by recent amendments. In the second part, the rules of the Fiscal Responsibility Law are discussed. Limits for payroll expenditures are presented, including legislative changes that have taken place in recent years, to strengthen the mechanisms of control, monitoring, and accountability, in case of violation of established rules.

Stabilizing, neutral or destabilizing? The impact of fiscal rules on the GDP volatility in the EU countries

The goal of the present article is to estimate the impact of numerical fiscal rules on the volatility of GDP growth in the European Union countries in 1995–2019 to answer the question about their counter--cyclical and stabilizing properties. The obtained results show that the introduction and the wider use of fiscal rules in the EU countries reduced economic fluctuations – an increase in the Fiscal Rules Index of one standard deviation was associated with a decrease in the volatility of the GDP growth rate of approximately 20%. When analysing different types of fiscal rules existing in the EU countries, the biggest reduction in GDP volatility was obtained for countries where debt rules were in force. In the case of “operational” rules, the budget balance rules have a stronger impact on limiting GDP growth fluctuations, while the impact of expenditure rules in this matter turned out to be insignificant.

Government debt forecast errors and the net expenditure rule in EU countries: Undue optimism at a cost

Against a backdrop of debt ratio targets being central to recent proposed changes to the EU fiscal rules, we examine errors in official forecasts of the General Government debt ratios and their determinants in 26 member states from 2012 to 2019 when the “six pack” rules applied. We find debt ratio outturns exceeding projected values with forecast errors increasing over a four-year horizon. Larger errors arise where the initial debt ratio exceeds the Maastricht Treaty threshold of 60 per cent. In modelling the forecast errors of the debt ratio, we find that most of the variation is explained by forecast errors in the output growth rate and in the structural budget balance, as well as previous errors in projecting the debt ratio. During the sample period, member states who had not met their medium-term objective of a balanced structural budget were expected to adhere to a net expenditure rule. For countries subject to this requirement, we find undue optimism arising in forecasting the deficit ratio, a determinant of the debt ratio. The implications of these findings for EU policymakers and, in particular, forecasters are considered.

Оновлення системи фіскальних правил в Європейському Союзі та перспективні напрями їх реформування в Україні

Introduction. In 2022 and 2023 fiscal rules in Ukraine were suspended by amendments to the Budget Code, although after the end of war the negotiation process with the EU on its enlargement will put the issue of resumption of the fiscal rules in Ukraine and their alignment with the EU norms on the economic reforms’ agenda in Ukraine. Problem Statement. Restoration of the system of fiscal rules in Ukraine and its new substantive filling on the way of Ukraine’s preparation for the EU accession taking into account the experience of implementation of the supra-national fiscal rules in the EU and challenges for the reforms of the budgetary framework in the EU member states. Purpose – drawing lessons of functioning of the numerical fiscal rules in the EU, reviewing the components of transformation of the budgetary framework and mechanisms of the fiscal policy surveillance from the side of the EU supra-national bodies and eventually, on their basis, specifying the core directions of reforming fiscal rules in Ukraine for their approximation to the EU standards. Methods. General scientific and special methods are applied: analysis and synthesis, description and comparison, historical method, method of theoretical generalization and abstract-logical method. Results. The article highlights the essence of fiscal rules as important constituents of modern fiscal institutions, shows the quantitative indicators of extension of the fiscal rules across the world and their common combinations. It reveals the main trends in modification of the fiscal rules and validation of the escape clauses in the course of corona-crisis. The author summarizes the mechanisms of budget deficit regulation, containment of public expenditure growth and limiting public debt level in the EU member states with a focus on the provisions of the Stability and Growth Pact and of the EU Regulations, which specify the tools of application of the Pact and Treaty on the Functioning of the European Union. The author synthetizes the key dimensions of current transformation of the EU fiscal rules with an emphasize on the instruments of fiscal policy surveillance in the EU member states and targeting fiscal policy at achieving green and digital transition by their economies with simultaneous debt sustainability goal. Policy proposals are devised for upgrading the system of fiscal rules in Ukraine and their validation after finishing the war. Conclusions. Incorporation of debt limit and budget balance ceiling across the sector of general government into the budgetary legislation of Ukraine, as well as of net primary expenditure rule aimed at restoration of the debt sustainability, as well as mechanisms of implementation of the fiscal rules and independent monitoring of the fiscal rules observance in line with the EU standards (over the medium run) would contribute to securing macro-financial stability in Ukraine and accelerate the economic and political integration of Ukraine with the EU.

THE MACROECONOMIC EFFECTS OF RE-APPLYING THE EU FISCAL RULES: RETURNING TO THE STATUS QUO ANTE OR MOVING TO EXPENDITURE RULES?

AbstractAgainst the background of the European Commission’s reform plans of the Stability and Growth Pact, this paper uses NiGEM to simulate the macroeconomic implications of re-applying the fiscal rules in 2024. Next to returning to the unreformed rules, the most prominent options include an expenditure rule. Our results indicate that re-applying the unreformed rules leads to severe cuts in public spending. An expenditure rule would, however, not necessarily alleviate the fiscal adjustment burden. Instead, our simulations show that great care must be taken to specify the expenditure rule, such that fiscal consolidation is achieved in a growth-friendly way.

Public Finance in Poland in a COVID Fog: A Look Through the Lens of Fiscal Transparency and Accountability

Abstract Goal – The aim of the article is to identify dysfunctional phenomena (implementation of specific mechanisms/solutions and actions taken), generating increased opacity and limit the responsibility/accountability of public finance in Poland, exacerbated by the COVID-19 crisis. Methods – descriptive analysis, comparative analysis and financial analysis methods were used. Results – fiscal transparency and accountability in Poland is limited by: the marginalisation of the role of the state budget, the loosening of the stabilising expenditure rule, the creation of financial mechanisms based on special funds fed by repayable financing sources for the implementation of state tasks, inter alia, in the fight against the effects of the COVID-19 crisis, the use of national and EU methodologies for calculating the deficit and debt of the public sector in order to conceal part of them, the lack of a consolidated financial statement of the public finance sector.

재정준칙과 정부 부패

A fiscal rule is a long-lasting constraint on fiscal policy through numerical limits on budgetary aggregates. Several empirical studies have shown that countries with fiscal rules tend to have better fiscal outcomes. This paper estimates the causal effect of fiscal rules on government corruption in a panel of 36 OECD countries over the period 1994-2015. This paper finds that Expenditure Rules, Debt Rules correlate with lower government corruption. However, Budget Balance Rules with higher government corruption. This paper contributes to the empirical literature on the effectiveness of fiscal rules by developing a new instrumental variables strategy. Above all, an independent financial institutions have a positive effect on the adoption of fiscal rules. This study suggest that independent financial institutions can enhance the adoption of fiscal rules and government transparency.

Proposals for the reform of EU fiscal rules

The aim of this paper is to contribute to the ongoing debate regarding the reform of the EU fiscal framework, with a special focus on fiscal sustainability for Greece. Our key policy proposals for the EU fiscal rules draw on lessons from past experience, the conclusions of relevant studies and the fiscal sustainability risks faced by Greece and other high-debt countries in the euro area. To this end, we use the European Fiscal Board’s Compliance Tracker Dataset to assess compliance with the existing SGP framework. Moreover, we employ the Bank of Greece’s Debt Sustainability Analysis (DSA) model to identify possible fiscal sustainability risks for Greece over the medium- to long-term horizon, taking into account alternative economic policy scenarios (including a debt rule scenario). Our main findings indicate that the revised fiscal framework should focus on the need to enhance sustainability of public debt as a key priority, by setting a debt anchor as a medium-term fiscal objective, with a single operational expenditure rule that promotes countercyclicality of fiscal policy. The current benchmark levels could be maintained and complemented with the appropriate flexibility in the rate of debt reduction to address cross-country heterogeneity and avoid self-defeating effects of fiscal policy. In the case of Greece, despite the favourable characteristics of public debt, fiscal policy in the short and medium term should focus on accelerating debt reduction. The exposure of Greece’s public debt dynamics to market and interest rate risks will gradually increase, as official sector debt is replaced by market financing, thereby changing the structure of public debt and highlighting the need to create fiscal buffers in order to increase its resilience to future adverse macroeconomic shocks.

The logics of sovereign credit ratings in developed and developing countries

This article analyzes empirically the different determinants of Standard & Poor’s, Moody’s and Fitch ratings in developed and developing countries. It finds that the determinants of the ratings follow different patterns in both groups of countries. Whereas credit rating agencies regard openness to trade as negative for developed countries, they do not for developing countries. Whereas gross debt stock and the age structure of the society are significant predictors for credit ratings in developing countries, developed countries profit from a low unemployment rate, a long tenure of the chief executive and strong fiscal rules, more specifically from strong balanced-budget and expenditure rules.

An empirical study of public debt sustainability based on fiscal fatigue and fiscal space in CEMAC countries

AbstractThis paper seeks first to test whether there is evidence of fiscal fatigue in the Central Africa Economic and Monetary Community (CEMAC) countries. On the contrary, we want to investigate the impact of fiscal rules on fiscal space to see if the implementation of fiscal rules enhances fiscal space in the region. The findings show evidence of fiscal fatigue for the Republic of Congo, Equatorial Guinea, and Gabon while Cameroon, the Central African Republic, and Chad exhibit no fiscal fatigue behavior. For our second objective, while analyzing the determinants of fiscal space we found that the two fiscal rules (the balanced budget rule and debt rule) implemented in CEMAC Zone do not improve fiscal space. Therefore, there is a need for the fiscal policy stance to supervise the conduct of fiscal rules in the CEMAC region as fiscal rules themselves do not enhance the available fiscal space. Besides, we suggest CEMAC's fiscal policy authorities to integrate the expenditure rule in their fiscal policy framework to mitigate the government expenditure bias.

Was There A Government Expenditures Rule in Disguise During 2014-19? Some Evidence for India

An expenditure rule takes the form of a limit on real spending by the Government. It is a prerequisite to ensure stability of the economy. Such rules, generally, impose restriction on the budget deficits, if stipulated as a law even in disguise. The purpose is to ensure macro-economic stability by rendering negative externalities, if any, of pursuing an independent fiscal policy from that of a previous government. Such rules are in place, officially, in several advanced and emerging economies (Cordes et al, 2015). In this short study, the authors deploy an easily understandable model and set it against data for India, over the period 1992-93 to 2018-19 split up into three subperiods. These three sub periods roughly approximate the periods when a different political party was in government in New Delhi. The government at the beginning of the third period claims to have observed an expenditure rule in guise, with a view to keeping the ‘deficit’ at 3.5 percent or less. The empirical evidence, however, seems to be slightly in disagreement with the claim.

Do governments stick to their announced fiscal rules? A study of Latin American and the Caribbean countries

This paper introduces a dataset that gathers information on whether and how Latin America and the Caribbean (LAC) have complied with or deviated from implemented fiscal rules. It provides annual data on fiscal rules for 14 LAC countries from 2000 to 2020, and it considers the design features of the rules and information about numerical compliance. It provides descriptive statistics reflecting the panorama of the fiscal rules implemented in LAC countries. Additionally, it calculates compliance rates across countries, years, and rules. On average, this study finds that compliance with rules aiming to constrain debt ratios and structural balances is the highest, while compliance with fiscal balance and expenditure rules is the lowest. Furthermore, the data collection process revealed that LAC countries still have room for discretion even when they subject their fiscal policy to rules. To address this problem, the paper proposes an adjusted compliance index that considers different elements that add degrees of discretion to the rule. The study finds that the numerical compliance rates of each country are likely to be over-estimated once discretionary actions are accounted for.

The Role of Fiscal Expenditure Rules in Maintaining the Financial Stability of the State

Abstract One of the main challenges which legal science faces nowadays is the creation of legal mechanisms guaranteeing sound public finance. The aim of this article is to assess the role of national fiscal rules in maintaining financial stability. Firstly, to fulfil this aim, the role of fiscal rules and their efficiency was analysed. Next, based on the commonly used tool assessing the quality of national fiscal rules – the Fiscal Rule Index – the quality of expenditure rules in the EU countries was analysed in order to evaluate the Polish stabilising expenditure rule and the escape clause of its application. Therefore, the following research question is to be answered: whether in the face of an unstable financial situation of the state connected with an increasing deficit, deviation from the stabilising expenditure rule should be considered as being right. Research methods based on non-reactive research, i.e., analysis of professional literature, legal acts, and statistical data published by the European Commission, were used in this article. Due to this analysis, it was indicated that expenditure rules are regarded as one of the most effective tools to manage public funds, and therefore any derogations from the application of these rules should be evaluated negatively.

Economic Exogenous Shocks, Residents’ Welfare and Optimal Fiscal Expenditure Rules

How to use fiscal expenditure rules to deal with exogenous shocks, most of the existing studies start from the perspective of stabilizing economic fluctuations, pay insufficient attention to residents’ welfare, and mostly investigate the single fiscal expenditure rule of total amount, ignoring the cooperation between different types of fiscal expenditure. Based on the new Keynesian model (NK-DSGE), assuming that the economic operation is subject to three kinds of exogenous shocks of different nature, this paper analyzes and evaluates the optimal fiscal expenditure rules and their combination from the perspectives of stabilizing consumption fluctuations and ensuring residents’ welfare.Specifically, this study divides public expenditure into government consumption expenditure, government investment expenditure and transfer payment expenditure, and evaluates the welfare guarantee effect of the above expenditure under the smoothing rule, the output-oriented reverse adjustment rule, the debt-oriented reverse adjustment rule and the simultaneous output-oriented and debt-oriented reverse adjustment rule respectively.The specific conclusion is that: From the perspective of restraining consumption fluctuation, when production or investment is positively impacted, the smooth rule is the best choice; when labor preference is negatively impacted, the debt-oriented rule is the best choice. From the perspective of maximizing residents’ welfare, and based on the comprehensive evaluation of long-term welfare effect and short-term welfare effect, under the positive impact of technology on production, the optimal rule is that the smoothing rule is adopted for all three types of expenditure; under the negative impact of labor preference, the optimal rule is that consumption expenditure adopts output-oriented reverse adjustment, and investment expenditure and transfer payment expenditure adopt both output-oriented and debt-oriented reverse adjustment; under the positive impact of investment efficiency, the optimal rule is that consumption expenditure adopts output-oriented reverse adjustment, investment expenditure adopts both output-oriented and debt-oriented reverse adjustment, and transfer payment adopts debt-oriented reverse adjustment.Finally, this paper verifies that when consumption expenditure is biased towards the field of people’s livelihood and increases the substitution elasticity of public consumption and private consumption, the welfare level of residents can be significantly improved. In the post epidemic era, the uncertainty of world economic development has greatly increased. This study shows that, compared with the single fiscal expenditure rule of total amount, different types of fiscal expenditure are given different response rules according to the specific nature of exogenous shocks, so as to increase the flexibility and accuracy of policies, better deal with the uncertainty in the future, and ensure residents’ welfare to the greatest extent.

Twin deficits revisited: A role for fiscal institutions?

We revisit the twin-deficits relationship for a sample of 65 countries with fiscal rules over the period 1985–2015, using a panel data estimation methods. Our analysis accounts for the role of various types of fiscal rules and institutions: expenditure rules, revenue rules, budget balance rules, debt rules, fiscal councils, and supporting procedures. We find that the twin-deficits hypothesis is confirmed. The impact of the budget balance on the current account balance is increased when fiscal rules are considered, except with revenue rules and debt rules. Well-designed fiscal rules, fiscal councils and features that reinforce compliance with rules improve the current account balance. Our findings highlight the role of fiscal factors in explaining sustained global current account imbalances. They also contribute to the ongoing discussion about the improvement of macroeconomic and budgetary surveillance in the European context.