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Under Threat: Rules-Based Fiscal Policy and How to Preserve It

Debrun, Xavier and Jonung, Lars LU (2018) In Working Papers
Abstract
Rules-based fiscal policy is under threat. Over the last two decades, it proved frustratingly complicated to strike the right balance between three essential properties of sound fiscal policy rules: simplicity, flexibility, and enforceability. Simplicity has been sacrificed to ensure that more contingent (i.e. flexible) rules remained enforceable. The resulting arrangements have failed to adequately guide fiscal policy, undermining formal compliance, and ultimately, popular and political support for rules. To mitigate the risk that countries abandon rules-based policymaking, we suggest downplaying enforceability—i.e. the role of formal sanctions through enforcement—and enhancing the reputational costs of breaching rules. At the limit, the... (More)
Rules-based fiscal policy is under threat. Over the last two decades, it proved frustratingly complicated to strike the right balance between three essential properties of sound fiscal policy rules: simplicity, flexibility, and enforceability. Simplicity has been sacrificed to ensure that more contingent (i.e. flexible) rules remained enforceable. The resulting arrangements have failed to adequately guide fiscal policy, undermining formal compliance, and ultimately, popular and political support for rules. To mitigate the risk that countries abandon rules-based policymaking, we suggest downplaying enforceability—i.e. the role of formal sanctions through enforcement—and enhancing the reputational costs of breaching rules. At the limit, the rule could consist of a simple quantitative benchmark for a key fiscal indicator. To boost reputational effects, independent fiscal councils should focus on debunking the "fiscal alchemy", clearing the public debate from partisan smokescreens, and fostering popular support for sound fiscal policies. (Less)
Please use this url to cite or link to this publication:
author
and
organization
publishing date
type
Working paper/Preprint
publication status
published
subject
keywords
fiscal policy rules, Euro area, fiscal policy, independent fiscal councils, E62, F42, F61
in
Working Papers
issue
2018:29
pages
35 pages
language
English
LU publication?
yes
id
7d54a621-14c8-46c5-a02e-d34a47897a68
alternative location
https://swopec.hhs.se/lunewp/abs/lunewp2018_029.htm
date added to LUP
2018-11-05 16:15:56
date last changed
2019-02-05 04:00:50
@misc{7d54a621-14c8-46c5-a02e-d34a47897a68,
  abstract     = {Rules-based fiscal policy is under threat. Over the last two decades, it proved frustratingly complicated to strike the right balance between three essential properties of sound fiscal policy rules: simplicity, flexibility, and enforceability. Simplicity has been sacrificed to ensure that more contingent (i.e. flexible) rules remained enforceable. The resulting arrangements have failed to adequately guide fiscal policy, undermining formal compliance, and ultimately, popular and political support for rules. To mitigate the risk that countries abandon rules-based policymaking, we suggest downplaying enforceability—i.e. the role of formal sanctions through enforcement—and enhancing the reputational costs of breaching rules. At the limit, the rule could consist of a simple quantitative benchmark for a key fiscal indicator. To boost reputational effects, independent fiscal councils should focus on debunking the "fiscal alchemy", clearing the public debate from partisan smokescreens, and fostering popular support for sound fiscal policies.},
  author       = {Debrun, Xavier and Jonung, Lars},
  language     = {eng},
  note         = {Working Paper},
  number       = {2018:29},
  series       = {Working Papers},
  title        = {Under Threat: Rules-Based Fiscal Policy and How to Preserve It},
  url          = {https://swopec.hhs.se/lunewp/abs/lunewp2018_029.htm},
  year         = {2018},
}