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

Abstract

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.

To what extent do fiscal spending rules affect budget composition?

“…They suggest that subnational fi scal rules are effective in unitary countries, specifi cally in limiting defi cits and large debts, while there is no clear evidence in federal countries, due to the larger legal fi scal autonomy. The fact that subnational fi scal rules reduce public defi cits is also found by Burret and Feld (2018) in the case of Swiss cantons, while Bergman, Hutchison and Jensen (2016) show that fi scal rules foster sound public fi nances in a panel of EU countries. Grisorio and Prota (2015) study Italian regional administrations over the period 1996-2008 and show that an increase in fi scal decentralization affects public expenditure composition, specifi cally through a reduction in the share of capital to total expenditure.…”

“…Consumption was penalized, because the rule imposed a cut of 6.5% on current spending, while investment could increase by 8.1%. 7 Before, the main target rule was based on the fi scal gap, 8 while from 2007 the main constraint was on a target balance calculated on both a cash and an accrual basis. 9 The number of municipalities subject to the pact has changed since the introduction of the DSP: during the fi rst two years, all municipalities were subject to the DSP, while since 2001 those with fewer than 5,000 inhabitants have been exempt.…”

Multiannual financial forecast and fiscal sustainability of local and regional government. The evidence form selected polish cities

“…Do pomiaru poziomu zrównoważenia wykorzystuje się koncepcję międzyokresowego ograniczenia budżetowego (Hamilton, Flavin, 1986), tzw. syntetyczne wskaźniki zrównoważenia finansów (Buiter, 1985;Blanchard, Chouraqui, Hagemann, Sartor, 1990) oraz formalne testy statystyczne (Burnside, 2005;Chen, 2016;Westerlunda, Prohl, 2010;Bergman, Hutchison, Jensen, 2016), w tym pomiar kointegracji między zmiennymi charakteryzującymi finanse danej jednostki (dochody, wydatki, poziom deficytu itp. ).…”

Fiscal and Other Rules in EU Economic Governance: Helpful, Largely Irrelevant or Unenforceable?

“…He attributes this failure to the fact that the rule focused on the deficit, which is only partly under the control of the authorities because it is subject to the effects of unpredictable economic developments. Bergman et al (2016) find that fiscal rules do result in improved primary balances, but only if there is a strong governance framework at the national level. They also note that because the Fiscal Compact reinforces balanced budget rules and obliges countries to enhance independent scrutiny of fiscal policy, it is likely to reduce deficit bias in the EU.…”