The Implication of Fiscal Principles and Rules on Promoting Sustainable Public Finances in the EU Countries

Abstract

The purpose of this study was to analyze fiscal behavior in the European Union countries, to highlight the implications of institutional constraints on healthy fiscal attitudes, and to test the relationship between government decisions, fiscal responsibility instruments, and the sustainability of public finances during the period 2000–2014. By using panel data analysis, we tested the responsiveness of primary balance to government indebtedness, as well as to some determinants of fiscal responsibility, such as the degree of public spending or fiscal rules effectiveness, and we included two different perspectives regarding fiscal rules status. First, we computed a fiscal responsibility index, which measures the applicability of or compliance with the fiscal rules, referring to legal dimensions and administrative and institutional capacity. Second, we established a fiscal responsibility convergence index, which measures the status of the EU Member States regarding the approach of numerical rules. The empirical findings indicate that fiscal authorities do not act to the existing stock of public debt and highlights a negative response of budget balances to the stock of outstanding debt. Fiscal position improves when the index of fiscal responsibility is involved and countries become more sustainable when they are related to the entire level of fiscal governance, with respect to legal framework, institutional and administrative capacity, but at the debt ratio threshold of over 90%, the effect of the overall fiscal rule comes out as less relevant for the improvement of the primary balance.