Fiscal rules in EU Member States

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.