Search

In many countries, the past few decades have been characterized by large budget deficits and excessive public debt levels, also outside of the financial crisis and the COVID-19 outbreak. However, sound fiscal policy is important for a healthy and stable economy. Fiscal discipline is therefore needed so that governments have room to stimulate the economy when it is struggling without jeopardizing the sustainability of public finances. In this thesis, I examine if fiscal rules can be of help. These rules impose constraints on fiscal policy, such as a limit for the budget deficit or a ceiling for public debt. The results show that fiscal rules are indeed desirable tools to reduce fiscal imbalances. Countries that adopt well-designed fiscal rules have lower budget deficits and are less likely to implement policies that destabilize the economy. Moreover, fiscal rules trigger important adjustments that stimulate governments to consolidate unsustainable fiscal policies. Therefore, strengthening fiscal rules helps countries in paving the way for sound fiscal policies. Strengthening fiscal rules is nonetheless unlikely to be sufficient to ensure fiscal soundness. The results show that government decision-making is strongly influenced by the consequences of inadequate policies. Besides fiscal rules, other factors also play an important role. The impact of fiscal rules therefore also depends on other factors. Most notably, transparency in fiscal policy appears to be important for the effect of fiscal rules. This thesis shows that by facilitating the supervision of fiscal policies, fiscal rules are more likely to lead to the desired outcomes.

Two main goals of the Stability and Growth Pact (SGP) are fiscal sustainability and fiscal policies’ contribution to economic stabilization. However, from the very beginning, several Member States of the European Economic Monetary Union (EMU) failed to stay within the SGP’s reference values, all too often leading to large fiscal imbalances, procyclical fiscal policies, and public debt overhangs. The SGP has therefore been revised several times to improve the enforceability and flexibility of the fiscal rules. In practice, however, these amendments made the European fiscal framework overly complex and incoherent, leaving national governments with too little incentive to pursue a prudent fiscal stance. To (better) promote fiscal sustainability in the EMU, the current weaknesses of the SGP need to be addressed. Several options have been suggested, mainly to decentralize the responsibility for fiscal discipline back to the national level or to reform the current framework. Notably, the latter option seems more likely to be implemented. Most proposals suggest a prominent role for an expenditure rule, augmented with a debt anchor. These proposals make perfect sense, but a discussion on the effectiveness and reform of the SGP shows that they will not remedy all current shortcomings of the fiscal rules.