The Evolution of the Federal Budget and Fiscal Rules

Abstract:     
Peach discusses the role of the fiscal rules introduced in the United States at the federal level from the mid-80s. He notes that the first generation of rules, which focused on numerical targets for the deficit, did not prove very effective. The second generation was more successful: it established ceilings on some expenditure items and modified budgetary procedures. In particular, changes in the tax code and in expenditure enacted in a session of the Congress were expected to be deficit neutral over a certain number of years. Peach argues that rules, although not always adhered to, substantially affected the policy debate in the United States. Rules were particularly effective when they were supported by the political will to avoid large deficits and debts. He notes that also simple rules can be instrumental in improving the fiscal balance. In particular, the requirement to formally raise the debt ceiling introduced in the US in 1917 contributed to the enactment of legislation aimed at avoiding debt expansion. He concludes that rules are particularly effective when the majority of voters are convinced that compliance with them is in their interest.

Number of Pages in PDF File: 20

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