Fiscal Policy of Advanced Economies: Playing by the Rules?

Abstract

The article examines the reasons for the adoption of fiscal rules in advanced economies, their main types, evolution and results of application. In the practice of fiscal policy over the past decades, there has been a steady trend towards budget deficits. There are two main reasons that explain this widespread deficit bias phenomenon: the tendency to push out the financial discipline burden to future governments or even to future generations and the interplay of political processes and interest group activities (common pool effect). Chronic budget deficits and growing public debts have prompted many countries to adopt certain national and supranational (in the EU) fiscal rules – long-lasting constraints on fiscal policy through numerical limits on main budgetary aggregates: budget balance, debt, expenditure or revenue. Fiscal rules can promote financial discipline and reduce the deficit bias in several ways. This influence on fiscal behavior arises from their capacity to “tie the hands” of policymakers and to be a useful signaling tool, helping to reduce the asymmetry of information between policymakers and voters. But the compliance track record with fiscal rules is relatively poor. They have failed to provide sufficient fiscal discipline: the deficit bias persists and the debt-to-GDP ratio in most advanced economies continues to grow. The adopted budget rules are periodically suspended, they are subject to revision, sometimes formally implemented by applying the creative accounting, policymakers use them as a tool of political bargaining. Ultimately, fiscal discipline does not depend on the existence of rules, but on the willingness of politicians to comply with this discipline.