National Fiscal Rules Research Articles

Institutional and Economic Determinants of Regional Public Debt in Spain

We analyze from an empirical point of view the evolution and determinants of Spanish regional public debt. Spain offers an interesting case study because of its high level of fiscal decentralization, implemented gradually during the past four decades, the parallel entry into force of a number of national fiscal rules in that period, and the heterogeneity of its regions, both in terms of economic fundamentals and some institutional features. Our main findings are the following: i) regional governments’ fiscal policies reacted to public debt increases, on average, over the sample of study; ii) fiscal rules played a limited role in controlling debt surges, being only marginally effective in some instances, like high debt situations; iii) a higher degree of regional fiscal co-responsibility tends to be linked to more subdued debt dynamics; iv) market-disciple indicators have encouraged some discipline at the regional level, and v) regional non-standard (commercial) debt surges present explanatory power on the standard measure of public debt.

The politics of fiscal rules within the European Union: a dynamic analysis of fiscal rules stringency

ABSTRACTOver the last 25 years, fiscal rules (FRs) have been proliferating in Europe bringing in-depth change to the architecture of fiscal institutions. This paper investigates different theories explaining the changes in national fiscal rules stringency (FRS) using a panel of 28 European countries from 1990 to 2013. The authors found evidence that fiscal stress prevents fiscal reform in the short term, and leads to stronger fiscal rules in the long term. This pattern corresponds to the ‘war of attrition’ argument formulated by Alesina and Drazen [(1989) ‘Why are stabilizations delayed?’, The American Economic Review 81(5): 1170–88]. The authors found evidence that countries eager to join the EU showed their commitment to Maastricht targets by incorporating FRs into national laws. Countries facing financial difficulties after the 2009 sovereign debt crisis were coerced into adopting more stringent FRs to obtain fiscal support from the EU. Both cases support the idea that coercive diplomacy might explain the strength of national fiscal rules in the EU.

Promoting sustainable public finances in the European Union: The role of fiscal rules and government efficiency

New indices of fiscal rule strength are constructed and, using a dynamic panel econometric model for 27 EU countries over the period 1990–2012, we assess whether national fiscal rules alone help to promote sustainable public finances in the EU or whether they must be supported by good governance in order to be effective. We find that fiscal rules are effective in reducing structural primary deficits at all levels of government efficiency. However, the effect is smaller as government efficiency increases, indicating that fiscal rules and government efficiency are institutional substitutes in terms of promoting fiscal sustainability. We also find that balanced budget rules are the most effective form of fiscal rules. Multiple fiscal rules are found to enhance fiscal solvency. Other institutional features that enhance the effectiveness of fiscal rules are transparency of policies and commitment to implementation of fiscal programs. Supranational rules, however, do not affect the effectiveness of national fiscal rules in reducing the deficit bias. Our results are robust to alternative estimation methods and endogeneity assumptions.

Spanish Public Finances Through the Financial Crisis

Spain’s public finances have been under significant stress during the crisis, despite pre-crisis fiscal surpluses and low levels of public debt. The impact of the crisis and an initial phase of counter-cyclical activism exacerbated the existing (structural) fiscal vulnerabilities. To correct the fiscal imbalances, a significant number of bold policy actions were taken, affecting taxation, public spending, national fiscal rules and the structure of the public sector. In this paper we discuss the evolution of public finances in Spain during the financial crisis, framing crisis-related fiscal policy measures within medium-term economic trends and focusing on policy responses to the financial crisis. We also touch upon the main policy challenges ahead.

Spanish Public Finances through the Financial Crisis

AbstractSpain's public finances have been under significant stress during the financial crisis, despite pre‐crisis fiscal surpluses and low levels of public debt. The impact of the crisis and an initial phase of countercyclical activism exacerbated the existing (structural) fiscal vulnerabilities. To correct the fiscal imbalances, a significant number of bold policy actions were taken, affecting taxation, public spending, national fiscal rules and the structure of the public sector. In this paper, we discuss the evolution of the public finances in Spain through the financial crisis, framing crisis‐related fiscal policy measures within medium‐term economic trends and focusing on policy responses to the crisis. We also touch upon the main policy challenges ahead.

Strengthening the post-crisis fiscal rules – the case of Spain, Slovakia and Sweden

The purpose of this article is to identify changes in the development of national fiscal rules in response to the crisis, in terms of the new economic governance in the EU. In-depth analysis was carried out on the example of the three countries that have the highest Fiscal Rule Strength Index, i.e. Spain, Slovakia and Sweden. The conclusions of the study were the basis for the formulation of recommendations for Poland. The research focuses on the new rules as well as the rules modified between 2007 and 2012. The key elements of creating fiscal rules and criteria used for their evaluation were recognized. The research shows that the strength of fiscal rules is determined by their legitimacy, the type of institutions monitoring them, the adjustment mechanism and sanctions, as well as the scope of the public sector, which the rule was imposed on. Short duration of most of the rules limits the ability to evaluate their effectiveness. However, the analysis of changes in the finance sector and local government in terms of new institutional arrangements allowed to conclude that the strong fiscal rules index is not a guarantee of maintaining public finance discipline, and the example of this was the varied fiscal position of the countries surveyed.

The impact of national fiscal rules on the stabilisation function of fiscal policy

We study the relationship between discretionary fiscal policy and macroeconomic stability in 21 OECD countries over the 1985–2012 period. The novelties of our contribution lie in the use of annual panel data, whereas most of the existing evidence is cross-sectional, and more importantly in the thorough investigation of how fiscal rules affect the policy-macroeconomic stability relationship. We find that the aggressive use of discretionary fiscal policy, particularly of government consumption items, leads to higher volatility of output and, to a lesser extent, inflation. However, when strict fiscal rules are introduced, discretionary policy becomes output-stabilising rather than destabilising. This result can be more easily achieved by rules on balanced budgets, rather than on expenditures, revenues, or debt. On the other hand, fiscal rules are unable to affect the inflation-destabilising nature of discretionary policy, if any, probably because of the higher importance of central banks in that respect.

Are (Fiscal) Rules Made to Be Broken? The Law and Economics Analysis of the Numerical Fiscal Constraints

By constraining political incentives and discretion, the numerical fiscal rules are among the main institutional (legal) instruments to ensure fiscal discipline. As stated in this paper, in order to be effective, the numerical fiscal rules need to inflict sufficiently high costs for their violation, which would outweigh the political benefits of excessive deficits. The paper attempts to answer two questions with regard to fiscal rules. First, it inquiries whether there is a difference in effectiveness between the numerical fiscal rules imposed by the international treaties and those enacted domestically. Second, it examines the effectiveness of the selected qualitative features of the national numerical fiscal rules. The results included in this paper show that while the national fiscal rules are associated with improved budget balance, this link is weaker for the supranational rules. Also, according to the results, the formal enforcement mechanism turned out to be the most important institutional element in guaranteeing the rules’ effectiveness.

Fiscal Rules and Government Size in the European Union

This paper studies the impact of national fiscal rules on government size as measured by the ratio of government expenditures to gross domestic product. We develop a model of the budgetary process and show that a common pool problem may arise which can be mitigated through fiscal rules. We test the model’s predictions using a novel time-series cross-section dataset of 27 European Union members for the period between 1990 and 2011. Corroborating the model, we find that fiscal rules have a negative impact on government size. Contrasting the model, their impact becomes smaller as the number of ministers increases.

Cyclical Adjustment in Fiscal Rules: Some Evidence on Real-Time Bias for EU-15 Countries

Most EU member states adopt national fiscal rules that refer to cyclically adjusted borrowing limits. Yet, trend increases in public debt caused by the cyclical components are only prevented if the real-time output gaps used to calculate cyclical components balance over time. We analyze real-time output gaps for EU-15 countries estimated by the EU (2002---2012), the IMF (2000---2012), and the OECD (1989---2012) and find a strong negative bias. Simulations suggest that this bias may well translate into considerable debt-ratio hikes. Our findings imply that fiscal rules should incorporate ex post checks of the unbiasedness of cyclical components and a corresponding correction mechanism.

National fiscal consolidation and the challenge to Australian federalism

AbstractFollowing failure of the stimulatory policies post the 2008 financial crisis and the resulting instability of the Euro, national fiscal consolidation with real sanctions for non-compliance has become a key focus of most governments as they address escalating budget deficits and rapidly rising public debt. The problem is that agreement by central governments to adopt national fiscal rules, whether self-imposed or imposed by some supranational institution, leaves unaddressed how such rules and sanctions should be adopted by (or imposed on) sub-central and local governments. To date, the primary focus has been on whether the encouragement given over recent decades to fiscal decentralisation has worsened public debt levels and made national fiscal consolidation by central governments more difficult. This article argues that what is missing from this discussion is attention to the intergovernmental institutional arrangements and how they and their reform are potentially crucial to both national fiscal consolidation and ensuring retention of the benefits of fiscal decentralisation.

Fiscal Policy Over the Election Cycle in Low-Income Countries

Focusing on Low-Income Countries, we investigate the behavior of fiscal variables during and after elections. The results indicate that during election years, government consumption significantly increases and leads to higher fiscal deficits. During the two years following elections, the fiscal adjustment takes the form of increased revenue mobilization in trade taxes and cuts to government investment, with no significant cuts in government consumption. Using a new dataset on national fiscal rules and IMF programs, we find that both the presence of fiscal rules and IMF programs help dampen the magnitude of the political budget cycle in LICs. We conclude that elections not only imply a macroeconomic cost when they take place but also trigger a painful fiscal adjustment in which public investment is largely sacrificed.

Fiscal Policy over the Election Cycle in Low-Income Countries

Focusing on Low-Income Countries, we investigate the behavior of fiscal variables during and after elections. The results indicate that during election years, government consumption significantly increases and leads to higher fiscal deficits. During the two years following elections, the fiscal adjustment takes the form of increased revenue mobilization in trade taxes and cuts to government investment, with no significant cuts in government consumption. Using a new dataset on national fiscal rules and IMF programs, we find that both the presence of fiscal rules and IMF programs help dampen the magnitude of the political budget cycle in LICs. We conclude that elections not only imply a macroeconomic cost when they take place but also trigger a painful fiscal adjustment in which public investment is largely sacrificed.

Discretionary Fiscal Policy in the EMU Context: An Empirical Approach (1981-2010) & the Recent Reform in European Governance

1. Introduction The debt crisis in the Eurozone (EZ) is one of the most crucial challenges in modern economic history. The decline of public finances of many member states constitutes an explosive mixture that threatens the existence of the Eurozone itself and has significant impacts for the global economy. As the leadership of EU is still searching for solutions and actions which will counteract the problem and restore the stability, the analysis of the causes which led to the systemic crisis, the examination of the institutional framework of European governance and the evaluation of the measures and policies adopted, are considered as matters of great importance which require extensive analysis and critical approach. The current paper attempts to approach these aspects from the perspective of fiscal policy, examining them from both a theoretical and empirical background. Membership in the Eurozone implies that apart from the delegation of monetary policy to the conservative European Central Bank (ECB), there are obligations and restrictions on fiscal policy for the member states. Even though the latter remains a political tool into the hands of national authorities, they must comply with the rules set at EU level in order the stability to be achieved. The implementation of sound and disciplined fiscal policies and the coordination of them in central level are key elements for ensuring the financial stability in the eurosystem. As the project of European integration was not associated with a fiscal union, the member states have maintained the independence of their national fiscal policies. However, their autonomy is limited significantly by the existence of the euro zone's supranational fiscal rule. The Stability and Growth Pact (SGP) offers guidance and coordinates the implementation of fiscal policy through the obligation of member states to respect the rules and the procedures that the Pact predicts. The target of the SGP is to perform effectively a dual function: to ensure the sustainability of public finances prompting the governments to run sound policies and to provide the necessary flexibility so as the national authorities to be able to deal with the negative fluctuations of the business cycle. This paper consists of two parts. In the first section, we are trying to acknowledge the particular structure of fiscal policy in EMU context. We examine empirically how the restrictions of Maastricht criteria and the SGP have impaired the capacity of national authorities to run countercyclical discretionary fiscal policies and whether the stabilization function of fiscal policy is associated with less procyclical discretionary policies. The division of the EZ countries into two subgroups (north--south) will provide us useful conclusions about the different effects the constraints have had on rich north and poor south. Lastly, we will evaluate whether the national fiscal rules can counteract political indiscipline and their efficiency on budget outcomes. In the second section, we will approach the recent reform of the European governance, providing details of the reform package and discussing its appropriateness and its potential effectiveness on the restore of the European financial stability. 2. Discretionary Fiscal Policy in the EMU: An Empirical Approach The main objective of the empirical analysis is to examine to what extent the constraints of both Maastricht criteria and SGP have affected the way national authorities conduct their discretionary fiscal policy. Provided that the monetary policy of all countries in the Eurozone is managed by the ECB, the fiscal policy undertakes the responsibility to operate as a stabilizing tool of the business cycle and to counteract the negative asymmetric shocks. Consequently, it is the foremost tool in the quiver of governments to deal with their country-specific fluctuations. For this reason, we would expect that the process of European integration should be linked to the adoption by the member-states of more countercyclical discretionary fiscal policies. …

FROM BUDGETARY FORECASTS TO EX POST FISCAL DATA: EXPLORING THE EVOLUTION OF FISCAL FORECAST ERRORS IN THE EUROPEAN UNION

This paper splits the ex post error in the budget balance, defined as the final budget figure minus the planned figure, into implementation and revision errors, and investigates the determinants of these errors. The implementation error is the difference between the nowcast, published toward the end of the year of budget implementation, and the planned budget, while the revision error is the difference between the final figure and the nowcast. The split takes account of differences in reporting incentives at the different budgeting stages. The predictive content of fiscal plans is important, because it determines the reliability of the budget, while that of the nowcasts is important also because these figures are an input for the next budget and may contain important signals about the fiscal stance. Implementation and revision errors may arise for political and strategic reasons. Our results suggest that an improvement in the quality of institutions, whether measured by the tightness of national fiscal rules, the medium‐term budgetary framework or budgetary transparency, increases the quality of budgetary reporting at both the planning and the nowcast stage. This supports the recently adopted requirements on national fiscal frameworks. It also strengthens the case for a close monitoring by the European Commission of national budgeting. (JEL E6, H6)

The recent reform of European governance: A critical review

This paper investigates whether the recent EU governance reform is a step in the right direction and discusses its ability to restore European financial stability. The authors argue that the reform appears incapable of dealing with the factors responsible for the sovereign debt crisis, and they stress the need for financial sector reforms and sound fiscal policies. To that end, the adoption of national fiscal rules seems capable of dealing with the profligacy of governments and tackling the problem of deficit bias. Regarding the introduction of the new Excessive Imbalance Procedure, this article argues that EU authorities should adopt a symmetric approach instead of the one currently being pursued.

From First-Release to Ex-Post Fiscal Data: Exploring the Sources of Revision Errors in the EU

This paper explores the determinants of deviations of ex-post budget outcomes from first-release outcomes published towards the end of the year of budget implementation. The predictive content of the first-release outcomes is important, because these figures are an input for the next budget and the fiscal surveillance process. Deviations of ex-post from first-release fiscal figures may arise for political and strategic reasons. In particular, Ministries of Finance control the production of first-release figures, and may have an incentive to be over-optimistic at this stage. Our results suggest that an improvement in the quality of institutions, whether measured by the tightness of national fiscal rules, the medium-term budgetary framework or budgetary transparency, reduces the degree of optimism at the first-release stage, thereby making first-release figures more informative about the eventual outcomes. This supports the European Commission proposals for minimum standards for national fiscal frameworks and amendments by the European Parliament for improving national ownership. It also strengthens the case for a close monitoring by the Commission of the first-release production of fiscal figures.

Tied to the mast? National fiscal rules in the European Union

Numerical fiscal rules implemented at the national level in member countries of the European Union offer useful information on possible reasons for the growing reliance on such rules, and on their implication for fiscal policy. Our analysis of a survey-based dataset suggests that both the introduction of the EU fiscal framework and country-specific fiscal governance features played a role in triggering introduction of numerical fiscal rules, and that the impact of rules is statistically significant, robust, and quantitatively important. Outcomes and rules may be jointly determined by unobserved political factors, but the evidence suggests that causality runs from rules to fiscal behaviour, and that rules specifically designed to prevent conflicts with the stabilization function of fiscal policy are indeed associated with less pro-cyclical policies. — Xavier Debrun, Laurent Moulin, Alessandro Turrini, Joaquim Ayuso-i-Casals and Manmohan S. Kumar

National and State Fiscal Rules in Australia: An Outline and Critical Analysis

Robinson notes that since the late 1980s deficits and public debt have been the major preoccupation of Australian fiscal policy. There was a widespread public perception that a number of States, and subsequently the national government, were experiencing debt crises. As a reaction, in the 1990s, most federal governments adopted explicit fiscal rules requiring balanced cash budgets. Governments aimed at reducing debt and usually targeted structural cash surpluses. At a later stage, some governments introduced accrual accounting which distinguishes between consumption and investment. Robinson argues that the golden rule can best be expressed as a rule requiring the accrual operating balance (i.e. the gap between revenues and consumption including capital amortisation) to average zero over the business cycle. He notes that this result may represent the best practicable approximation of the intergenerational equity principle: each time period should pay for itself. The net worth of the public sector would remain constant. While some States adopted the golden rule, the federal government went for a zero “fiscal balance” (i.e., the operating balance minus net non-financial investment) over the cycle. Net financial worth would remain constant in nominal terms. This approach is tighter than that required for fiscal sustainability.

Postwar Fiscal Rules in the Netherlands: What Can We Learn for EMU?

This paper reviews the consecutive fiscal rules in operation in the Netherlands since 1945. The rules are assessed mainly from a life cycle perspective. It is shown that fiscal rules (in the Netherlands) exhibit a life cycle with the length of the cycle predominantly influenced by political factors (changes in government and 'rule erosion') and the economic environment (low trend growth or recessions). However, with the establishment of the Stability and Growth Pact, member countries have willingly given up a degree of freedom regarding the design of national fiscal rules. It is argued that the preferred function of national fiscal rules under EMU is the stabilization function i.e. in the sense that automatic stabilizers should be allowed to operate in full.