The Design of National Fiscal Frameworks and Their Budgetary Impact

This study analyses the link between well-designed fiscal frameworks and sustainable fiscal policies. We look at different features of national numerical fiscal rules in combination with fiscal councils and medium-term budgeting frameworks. Therefore we construct our own time-varying dataset for national fiscal frameworks for the period 1990-2012 covering all 27 EU Member States and estimate a dynamic panel on aggregate and disaggregated fiscal policy measures. We contribute to the existing literature on fiscal frameworks by (i) using a larger dynamic dataset (with around twice as many observations as comparable studies); (ii) using dummy variables instead of composite indices to quantify the budgetary impact; (iii) looking at disaggregated data to uncover hidden effects; and (iv) extending the analysis with fiscal councils and medium-term budgeting (which are expected to help to overcome the time inconsistency and transparency problem of numerical fiscal rules).

Our main findings are the following: the introduction of numerical fiscal rules lowers public expenditures as well as revenues (but the latter to a smaller extent, so that indeed the primary balance is improved). This budgetary improvement can be further strengthened when numerical fiscal rules are enacted in law or constitution and supported by independent fiscal councils and an effective medium-term budgeting framework. On a disaggregated level we find that numerical fiscal rules have a strong impact on social benefits, compensation of employees, general public services and defence expenditures.