Fiscal Rules: Useful Policy Framework or Unnecessary Ornament?

Abstract

Kopits draws a parallel between rule-based monetary and fiscal policies and points to their common denominator: the attempt to confer credibility on policy action by removing discretionary intervention. He outlines the evolution of fiscal rules and notes that the last generation of rules, those introduced in the 1990s, emphasises very much the need for transparency standards. Kopits notes that fiscal rules are sometimes characterised as a fig leaf and that they are criticised for reducing budgetary flexibility and inviting abuse. Kopits finds support for a rules-based fiscal policy framework in political economy arguments. For example, rules can restrain rational policymakers who are facing an electorate which underestimates the future implications of current policies. He considers different approaches at the national and subnational levels and draws some conclusions about the desirable features of rules. He concludes that rules are mostly useful in countries where a reputation of fiscal prudence is lacking and that their effectiveness is enhanced if they rely on a comprehensive framework applied in a consistent and transparent manner at all levels of government.