Association for Public Policy Analysis & Management

There has been a significant increase in the number of countries that have adopted some form of fiscal rules. In 1990, there were only five countries (Germany, Indonesia, Japan, Luxembourg and United States) that had some form of fiscal rules at the national level; however in 2013, according to an IMF estimate, 87 countries had some national or supranational fiscal rule in operation. Fiscal Rules refer to a broad array of legislations and institutional arrangements that impose fiscal restrictions through numerical limits on government budgets at subnational, national and supranational level. Fiscal rules constrain the ability of the political actors to intervene in the fiscal policy, and thus may plausibly influence the democratic orientation of public expenditures. Although, the fiscal rules are adopted considering that all available fiscal instruments can be optimally utilized to achieve the goals, in practice given the incremental nature of other instruments and political economy considerations, it is plausible that social expenditure cuts are mostly used to meet short-term goals.

Previous research on the impact of fiscal rules has primarily focused on their effect on fiscal performance, but very limited attention has been paid to the social implications of such constraints. Some of the recent work that has examined the impact of fiscal rules has found a significant effect of fiscal rules on public expenditures. Dahan & Strawczyski (2013) examined the impact of fiscal rules on the composition of social expenditures and found an adverse effect of fiscal rules on the social transfers to government consumption ratio in OECD countries. On the other hand, Cordes et.al. (2015) suggest that the introduction of expenditure rules may contribute to a reduction in public investment in emerging economies but not in advanced economies. The evidence on the effects of such rules remains mixed, but an increasing number of countries are adopting a rules based fiscal policy framework.

In this context, this paper examines the effect of fiscal rule adoption on the changes in public expenditures using a panel of developed and developing countries. The key data sources include the Government Finance Statistics and Fiscal Rules Dataset compiled by IMF along with other country-level economic, political, and institutional information. I focus on combinations of four types of fiscal rules (expenditure rules, revenue rules, budget balance rules and debt rules) and their effects on the composition of public expenditures (particularly, health, education and social protection expenditures). I use fixed-effects panel estimates to examine this relationship while controlling for a range of political and economic factors. The preliminary results suggest that though fiscal rules have a significant effect on the public expenditures there is a considerable variation in the effect for different combination of rules. The effects also differ significantly by institutional and economic characteristics of the countries.

Cordes, T., Kinda, T., Muthoora, P., & Weber, A. (2015). Expenditure Rules: Effective Tools for Sound Fiscal Policy. http://www.imf.org/external/pubs/ft/wp/2015/wp1529.pdf

Dahan, M., & Strawczyski, M. (2013). Fiscal Rules and the Composition of Government Expenditures in OECD countries. Journal of Policy Analysis and Management, 32(3).