Fiscal Rules and Social Welfare Provision: Evidence from a Panel of Countries
*Names in bold indicate Presenter
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).