Advanced

Under threat : Rules-based fiscal policy and how to preserve it

Debrun, Xavier and Jonung, Lars LU (2019) In European Journal of Political Economy 57. p.142-157
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,... (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
organization
publishing date
type
Contribution to journal
publication status
published
subject
keywords
Euro area, Fiscal policy, Fiscal policy rules, Independent fiscal councils
in
European Journal of Political Economy
volume
57
pages
142 - 157
publisher
Tranfer Verlag, Regensburg, FRG
external identifiers
  • scopus:85053663598
ISSN
0176-2680
DOI
10.1016/j.ejpoleco.2018.09.001
language
English
LU publication?
yes
id
da479c86-bce5-4d03-ab6e-f90f835b4456
date added to LUP
2018-10-23 09:23:57
date last changed
2019-09-17 04:41:42
@article{da479c86-bce5-4d03-ab6e-f90f835b4456,
  abstract     = {<p>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.</p>},
  author       = {Debrun, Xavier and Jonung, Lars},
  issn         = {0176-2680},
  keyword      = {Euro area,Fiscal policy,Fiscal policy rules,Independent fiscal councils},
  language     = {eng},
  pages        = {142--157},
  publisher    = {Tranfer Verlag, Regensburg, FRG},
  series       = {European Journal of Political Economy},
  title        = {Under threat : Rules-based fiscal policy and how to preserve it},
  url          = {http://dx.doi.org/10.1016/j.ejpoleco.2018.09.001},
  volume       = {57},
  year         = {2019},
}