Fiscal rule is a long-term quantitative restriction imposed on any budgetary aggregate (revenues, expenditures or deficit), or on government’s balance (mostly debt).
A countercyclical economic policy targets stimulating domestic demand during cyclical downturns and restraining it at booming times.
Fiscal rules have acquired a mainstream status in economic policy, with over 90 nations adhering to this practice1. Theoretically, these rules help achieving socially important goals, such as:
1. Ensuring balance between short-term and long-term goals of the government. Limiting the influence of the electoral cycle and the industry lobby on deficit, debt and expenditures patterns.
2. Providing for sustainable budget expenditures relative to potentially volatile revenues and, as a result, ensuring their acyclicity, or countercyclicality, thus contributing to macroeconomic stability.
3. Maintaining creditworthiness of the state by capping debt or sustaining budget reserves, thus reducing the probability of debt crises.
Developing and commodity exporting countries tend to strive after the first two targets, while the third one is usually less relevant in an environment of relatively high inflation and ballooning economic growth. Therefore, fiscal rules in such countries are often aimed at limiting the budget deficit without formally setting a debt ceiling. A relative smoothness of expenditures is achieved through pegging them to the structural deficit, which is acyclic by definition (see Figure 1).
Raw-material exporters are primarily trying to decouple expenditures from volatile commodity-based revenues. Some countries take additional steps in order to mitigate the impact of fluctuations in non oil & gas revenues (Colombia, Chile).
Whether the rule attains its objectives or not, depends on both correct wording and practical implementation2. The effect in the end appears to positively correlate with such factors as:
a) Sustainability in various macroeconomic conditions (or clear stipulation of circumstances allowing for deviations from or exceptions to the rule).
b) Coverage of most of budget system levels.
c) Clear and easily understandable wording, coupled with possibility of an independent implementation assessment, reference to factual data (as opposed to poorly predictable or questionable indicators), and absence of grounds for manipulation.
d) Existence of a formalized system ensuring compliance with the rule (penalties for non-abidance, personal and shared responsibility).
1 IMF Fiscal Rules Dataset 2016.
2 See, for instance, “Fiscal Rules in Response to the Crisis—Toward the “Next-Generation” Rules. A New Dataset // IMF Working Paper No. 12/187” by A. Schaechter, T. Kinda, N. Budina and A. Weber, 2012.
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