Fiscal Rules Research Articles

Fiscal solvency and fiscal limitations under economic crisis and recovery: An empirical approach of Ukraine

The challenges of crisis phenomena can lead to a radical transformation in the stance of public finance and affect the opportunities for economic development. Since the instruments of fiscal adjustment directly determine the solvency and stability of public finances, in these conditions they require special attention. The purpose of the paper is to investigate and assess the correspondence between fiscal solvency, fiscal limitations, and socioeconomic development of Ukraine in a crisis and recovery policy based on compliance with fiscal rules. Empirical studies have not revealed a strong direct correspondence between fiscal solvency, debt security, and socioeconomic development. But at the same time, the implementation or approaching the implementation of fiscal rules has a positive effect on the level of socio-economic development only in conditions of macroeconomic stability, therefore, in a crisis, it is very important not to tighten fiscal rules too early. However, data from the post-crisis policy of Ukraine (2011, 2015, 2021) indicate that incentive measures were prematurely curtailed.

Assessing the sustainability of fiscal policy in Morocco: Insights into economic stability

This study explores the sustainability of fiscal policy in Morocco, a country with limited natural resources, by examining the factors that contribute to its long-term effectiveness. To assess fiscal policy sustainability, we used a quantitative approach, drawing on historical data and relevant macroeconomic indicators. Our analysis focused on the relationship between fiscal policy and economic growth, which is a crucial factor affecting public finance sustainability, among other key macroeconomic indicators. We utilized a combination of two models, cointegration strategy and Bohn's adapted specification method, to investigate the long-run properties of the intertemporal budget constraint. Our findings suggest that fiscal policy in Morocco may not be sustainable and effective in the long-term, indicating potential risks and threats to the country's economic stability. Unsustainable fiscal policies can lead to a lack of confidence in public finance, currency depreciation, and inflationary pressures. Therefore, it is essential to take action to address the sustainability of Morocco's fiscal policy to counteract potential crisis shocks on the economy. The research suggests policymakers the need to implement effective fiscal policy that can address the challenges facing Morocco's economy. The fiscal rules will confronting the economic structural problems; however, it will promoting fiscal transparency and long-term economic growth.

Fiscal rules and the cyclicality of fiscal policy in the East African community

ABSTRACT We examine the cyclicality of government expenditure and the impact of fiscal rules in a panel of five East African Community (EAC) countries using annual data for the period 1980–2019. The analysis is based on pooled ordinary least squares and panel autoregressive distributed lag regressions. We find that government consumption is acyclical while investment is procyclical. In addition, we find suggestive evidence that fiscal policy became less procyclical following the adoption of fiscal rules consistent with the EAC macroeconomic convergence criteria. These results highlight the importance of strengthening the scope and implementation of existing fiscal rules to facilitate the complete transition to countercyclical fiscal policy stance.

Rethinking fiscal rules

The Covid 19 pandemic has caused both a decrease in tax revenues and an increase in public spending, forcing governments to increase fiscal deficits to unprecedented levels. Given these circumstances, it is foreseeable that fiscal rules will play a predominant role in the design of many countries’ recovery policies. We develop a general equilibrium, overlapping generations model for a small, open economy in order to study the impact of several fiscal rules upon welfare, public expenditures and growth. We calibrate the model to the Peruvian economy. In this economy, fiscal rules have been widely used and, unlike in other Latin American countries, they have been relatively successful. We find that fiscal rules will generate better results in terms of output if, in addition to maintaining control over the fiscal result, they also preserve public investment. We also find that the performance of economies that implement structural rules tends to be better than the performance of economies that implement rules based on realized budget balance.

Public debt and income inequality in an endogenous growth model with elastic labor supply

In this study, we examine the relationships among long-run public debt policy, economic growth, and income inequality by extending a representative consumer theory of distribution and using an endogenous growth model with a sustainable fiscal rule, elastic labor supply, and initial endowment of heterogeneous wealth. We show that fiscal policy with strict (loose) budgetary discipline decreases (increases) the economic growth rate in the short run. In contrast, it increases (decreases) the economic growth rate in the long run. Then, we show that fiscal policy with strict (loose) budgetary discipline decreases (increases) income inequality in both the short and long run. First, we show that a balanced growth path is a locally stable saddle point. Then, we consider the relationships among public debt, the economic growth rate, and income inequality. In this model, the average leisure and the public-debt-to-private-capital ratio determine the rate of return and wage rate, affecting both the economic growth rate and income distribution across agents. We conclude that there is a negative relation between the economic growth rate and the measure of income inequality in the long run by conducting numerical simulations using US data. The policy implication of this paper is that the government has a public debt policy that achieves both faster economic growth and the improvement of income inequality.

Do Subnational Fiscal Rules Reduce Public Investment? The Case of Fiscal Responsibility Laws in India

This article examines whether the adoption of deficit targets by subnational governments in India influenced the composition of public spending. Using dynamic panel estimations, this study finds that the adoption of fiscal responsibility laws (FRLs) by Indian states is correlated with improvements in their budget balances, but the same period also witnessed significant cuts in development spending. Furthermore, the states have reduced their capital expenditure and social sector spending after adopting FRLs, while the increases in tax and nontax revenues are insignificant. The subnational governments in developing countries that are adopting numerical deficit and debt targets should explore mechanisms to minimize the distortionary impacts of fiscal targets on the composition of subnational spending since reduced expenditure on development and capital projects may be counterproductive for fiscal sustainability in the long run as these expenditures tend to have significant positive externalities.

Public Finance, Fiscal Rules and Public–Private Partnerships: Lessons for Post-COVID-19 Investment Plans

We explore the distribution of public–private partnerships (PPPs) among the European Union countries, with a special focus on fiscal rules and budgetary constraints while controlling for empirically identified drivers. While offering the opportunity to increase innovation and efficiency in the public sector infrastructure, PPPs allow governments to relax their budget and borrowing constraints. We find that the state of public finances influences the government’s choice of PPPs and makes them more appealing for reasons other than efficiency. Stringent numerical rules on the budget balance also foster government’s opportunism in the choice of PPPs. On the other hand, high levels of public debt increase the country risk, and discourage private investors from PPP contracts. The results highlight the importance of restoring PPP investment choices based on efficiency criteria and adapt fiscal rules to shield public investment while stabilizing private expectations by means of credible trajectories of debt reduction. The findings contribute to the debate on the role of fiscal rules in fiscal policy and of PPPs in infrastructure financing.

Response of fiscal efforts to oil price dynamics

This study investigates the response of Nigeria's government balance to oil price dynamics. The Linear and Non-Linear Autoregressive Distributed Lag models are employed for analysis. The findings of the study reveal that while the long run response of government balance to oil price dynamics is symmetric, the short run response is asymmetric. In the long run, an increase in oil price improves the government's fiscal position, signifying an increase in fiscal effort. Interestingly, while positive oil price shocks lead to a short run worsening of the government's fiscal position, indicating poor fiscal efforts, negative oil price shocks influence an improvement of government fiscal efforts. Further, although the operationalisation of fiscal rules worsens the government's fiscal position in the short run, it has a beneficial long run effect. These findings have far-reaching policy implications.

Fiscal rules: the imitation game

ABSTRACTDe jure fiscal rules have known a rapidly increasing popularity worldwide. This paper aims at analysing their spatial diffusion in 108 countries over the period 2001–2015 using a pooled version of the Bayesian SAR probit model. Using two different types of weighting (geographic proximity and bilateral trade) and desegregating the results for specific rules, I find a significant and positive spatial lag in line with the imitation (strategic complementarity) hypothesis. Rational imitation, deriving from a race to fiscal credibility, is preferred over the blind imitation hypothesis as the mimetic behaviour is revealed only in countries facing weaker fiscal reputation.

Sub-sovereign Fiscal Rules in Poland in Comparison with Measures Adopted in the US, China, and Selected EU Countries

Measures to increase debt sustainability and related creditworthiness play an important role in sovereign fiscal policy. The establishing of fiscal rules delimits fiscal policy through specific limits for particular budget aggregates. Fiscal rules in Poland were analyzed against measures applied in European Union countries, with emphasis on changes due to COVID-19. Also differences in fiscal rules at the regional and local level in the United States, China, and Poland are described. Conclusions from the research lead to the identification of a relationship between the restrictiveness of the rules and possibilities to maintain budget balance and prevent excessive indebtedness. Important conclusions may be also drawn from different reactions for crisis in the fiscal rules area – from relaxing the rules to wide use of special fund or financial vehicles – which were crucial states reply to fiscal burdens.

Fiscal DSGE model for Latvia

ABSTRACT We develop a fiscal dynamic stochastic general equilibrium (DSGE) model for policy simulation and scenario analysis purposes tailored to Latvia, a small open economy in a monetary union. The fiscal sector elements comprise public investment, public consumption, government transfers that are asymmetrically directed to both optimizing and restricted (hand-to-mouth) households, cyclical unemployment benefits, foreign ownership of public debt, import content in public consumption and investment, and fiscal rules for each fiscal instrument. The model features a search-and-matching labour market friction with pro-cyclical labour costs, a financial accelerator mechanism, and import content in final goods. We estimate the model using Latvian data, study the new channels in the model, and provide a comprehensive analysis on the macroeconomic effects of the fiscal elements. Our results indicate that Latvian fiscal policy was pro-cyclical during the boom-bust period of 2004–2010 and that foreign ownership of public debt breaks Ricardian equivalence and raises fiscal multipliers.

Fiscal Rules versus the Financial Conditionof EU Local Government Units

The financial crisis and significant deterioration of public finances have led to the strengthening of instruments aimed at ensuring the financial stability of the state, including fiscal rules. The article1 focuses on the fiscal rules binding the local self-government units (LGUs) of the European Union. An attempt was made to answer the question of how the design of fiscal rules in LGUs has changed, especially in crisis situations, and what was the effectiveness of these regulations. The results of statistical analyses covering the period 2001-2020 are shown. As the aggregated values with such a large variety of local financial systems are difficult to compare, the article presents the results of two case studies (Portugal and Poland), where no significant correlations were found between the number or strength of fiscal rules and the budget deficit indicators. Summarising the analysis of the financial situation of the Polish and Portuguese municipalities, it can be stated that the financial health of LGUs varies greatly depending on the size of the municipality, which makes it difficult to formulate general conclusions regarding the links between the fiscal rules and the financial condition of LGUs.

Фіскальні правила в забезпеченні боргової безпеки України

The aim of the article is to deepen and develop the scientific foundations of disclosure of the essence and significance of fiscal rules in the budget process, the features of their practical application in the countries of the world in the context of strengthening the debt security of Ukraine. The article systematizes fiscal rules by kinds, provides an essential characterization, identifies the disadvantages and advantages of their practical application in order to manage the debt security of the State. The popularity and frequency of application of various kinds of fiscal rules in the budget process of 106 countries of the world for the period from 1990 to 2021 are determined, some visual graphs are built. The distribution of fiscal rules by kinds in the context of economic groups of the countries of the world is carried out, an assessment of their effectiveness in the implementation of counter-cyclical fiscal policy is provided. The practice of using fiscal rules in the budget process of Ukraine is disclosed, the reasons for violation of their marginal indicators during military aggression are determined. The need to use a combination of different kinds of fiscal rules in order to achieve positive effects on debt security and level the cyclical nature of fiscal policy is emphasized. Proposals for improving the process of public debt management in the context of ensuring the optimal level of debt security of Ukraine are substantiated. Prospect for further research in this direction is to prove the need to restore the system of fiscal rules after the end of the war and bring it to the requirements of the European Union, taking into account the European integration vector of Ukraine’s development.

Fiscal rules as institutional tools for public debt management in the European Union Member States

Abstract This paper aims to assess the impact of the second-generation numerical fiscal rules on the effectiveness of public debt management in the Member States of the European Union. The research was conducted using dynamic panel models on a sample of 27 EU Member States over the period 2008–2021. The effectiveness of public debt management was determined by the level of public debt servicing costs, considering not only the impact of the quality of numerical fiscal rules on interest payments, but also other factors influenced by these rules, such as the quality of fiscal policy, the solvency of public finances and the quality of institutional governance. The motivation for this topic was to evaluate the effectiveness of the second-generation numerical fiscal rules following the changes made to their design in the context of the reconstruction of the EU fiscal surveillance system after the global economic and financial crisis of 2008–2010. The research has found that strong numerical fiscal rules improve the effectiveness of public debt management. In addition, stable fiscal policy and higher solvency of public finances, as well as political stability and the absence of violence, are conducive to lower public debt servicing costs. This paper enriches the literature by extending it with a new approach to fiscal rules, highlighting their multifaceted impact on the quality of public debt management.

Održivost fiskalnog okvira i privredni rast u Srbiji

In the last three years, Serbia led a very expansionary fiscal policy, with a fiscal deficit higher than the average of the countries of Central and Eastern Europe (CEE) 1 and the Western Balkans 2 . This led to a significant rise in public debt in absolute terms, while public debt-to-GDP ratio increased only slightly, due to the currency structure of debt, the unchanged exchange rate of the dinar against the Euro, and high inflation. At the end of 2022, Serbia was the European median in terms of public debt, although the debt was above the average of comparable CEE countries. Despite the moderate level of debt, public interest expenditures and the effective interest rate on Serbia's public debt are relatively high in European terms, which is a consequence of the fact that financial markets in less developed countries see the limit of sustainability of public finances at a lower level of indebtedness than in developed countries. Tightening of monetary policy in the world will trigger the further increase of government spending on interest, which may crowd-out more productive public expenditures or narrow the room for tax cuts, which is why it is especially important to keep the public debt at a lower level in the coming period. At the end of 2022, Serbia implemented a fundamental reform of fiscal rules. The advantage of the new fiscal rules is reflected in a lower deficit target and a more detailed elaboration of the government's response mechanisms to violations of the rules. Raising the public debt ceiling to the upper limit of the prohibitive zone, the elimination of countercyclical elements in the deficit rule and the absence of clear escape clauses for periods of crisis may pose a limitation. The new fiscal rules could contribute to the sustainability of Serbia's fiscal policy, provided that their consistent and continuous application is ensured.

Italy and Fiscal Rules: Past Performance and Future Prospects

Italy and Fiscal Rules: Past Performance and Future Prospects

Stabilność fiskalna w warunkach kryzysu gospodarczego a konstytucyjne reguły fiskalne – ujęcie prawnofinansowe

The aim of the article is to analyse selected theoretical and practical aspects of fiscal sustainability and the conditions of economic crisis, in the constitutional and financial context. The legal regulations on the stabilisation of state finances and the constitutional fiscal rules are presented. The values of fiscal indicators in the EU countries in the years 2019–2022 have been compared. The research shows that, despite the increasing legal regulations and progressive constitutionalisation of fiscal rules, intensive intervention measures taken to counteract the economic effects of the COVID-19 pandemic have led to fiscal destabilisation.

Compliance with Golden Rules of Fiscal Policy in Construction Companies

The present-day situation is associated with less optimistic economic development. At the turn of 2019/2020, the world was struck by a coronavirus pandemic that affected both the economy of the entire country represented mainly by industries and the social level of the population. More than ever, corporate management adhered to the established business rules which include certain fiscal policy rules. These fiscal rules are theoretically referred to as the Golden Rules of Fiscal Policy [1] [2] [3]. These Golden Rules of Fiscal Policy include 4 rules related to assets, sources of asset coverage, their longevity and the investment growth rate. The Golden Rules of Fiscal Policy apply in general to any business subject. However, this paper focuses solely on the construction industry. The aim of the paper is to find out, on a sample of construction companies operating in the Czech Republic, whether they comply with the Golden Rules of Fiscal Policy within their operation and compare these values to the national average. The sample of construction companies was chosen on the basis of carrying out the same activities, the same size in terms of the number of employees, amount of turnover and amount of assets, and operating in the same region of the Czech Republic. The national average of values under the Golden Rules of Fiscal Policy was determined from the statistical data published by the Ministry of Industry and Trade of the Czech Republic (MIT) on its website [4]. Methods of both vertical and horizontal analyses, which represent the basic methods of financial analysis, were used to determine the values of individual Golden Rules of Fiscal Policy for construction companies.

Capital Controls Are Needless Under Fiscal Rules

Capital Controls Are Needless Under Fiscal Rules

Fiscal Rules in the European Union: Less is More

Fiscal Rules in the European Union: Less is More