While the primary objective of fiscal rules is to enhance budgetary discipline, they can also foster policy coordination between different levels of government and reduce uncertainty about future fiscal policy developments. Depending on their design, they can also enhance macroeconomic stabilisation over the business cycle. However, fiscal rules can only yield these benefits if they are well designed and endowed with appropriate institutions for monitoring and if enforcement mechanisms are in place, or if they are supported by strong political commitment.
What are numerical fiscal rules?
Fiscal rules are permanent constraints on fiscal policy, typically defined in terms of a summary indicator of fiscal performance.
According to the relevant literature, a fiscal rule is well designed when it is binding, thereby acting as an effective constraint on policy making. In most cases, the bindingness of a rule relates to the stringency of the legal basis. Additional desirable features of fiscal rules include the existence of monitoring bodies - such as independent fiscal institutions - and correction mechanisms in case of deviations from the rule targets. Finally, an important property is the resilience to shocks through some form of flexibility, usually embedded in the rule design, such as escape clauses.
European Commission, “Do national fiscal rules support numerical compliance with EU fiscal rules?” Part IV in Report on Public Finances in EMU 2021, European Commission, European Economy Institutional Paper 181, July 2022.
Mohl, P., Mourre, G., Langedijk, S., Hoogeland, M., Does Media Visibility Make EU Fiscal Rules More Effective?, European Commission, European Economy Discussion Paper 155, December 2021.
Bova, E., Belu Manescu, C., National Expenditure Rules in the EU: An Analysis of Effectiveness and Compliance, European Commission, European Economy Discussion Paper 124, April 2020.
European Commission, “Has ownership of the EU’s fiscal rules been strengthened by national fiscal frameworks?”, Chapter IV.4 in Report on Public Finances in EMU 2018, European Commission, European Economy Institutional Paper 095, January 2019.