## _wp12187

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---

### I. Key objectives and scope
- Strengthening fiscal frameworks, particularly numerical fiscal rules, emerged as a key response to the fiscal legacy of the crisis.
- Review covers trends since the mid-1980s until end-March 2012 on:
  - Types and number of rules, their combinations, and main characteristics (legal basis, enforcement, coverage, escape clauses, provisions for cyclical adjustments).
  - Supporting features such as independent monitoring bodies and fiscal responsibility laws.
- Dataset and country coverage:
  - Country-by-country descriptions and a dataset provided for national rules (covering at least the central government) and supranational rules.
  - Dataset covers rules in effect by end-March 2012 or with a specific transition regime at that time; rules adopted but not yet implemented are described but excluded from charts and tables.
  - The database covers 81 countries; five countries no longer had a fiscal rule in effect at end-March 2012: Argentina, Canada, Iceland, India, and Russia.
  - National fiscal rules were in effect in 45 economies by end-March 2012.

### II. Definition and types of fiscal rules
- Definition:
  - A fiscal rule imposes a long-lasting constraint on fiscal policy through numerical limits on budgetary aggregates; boundaries are set that cannot be frequently changed and a numerical target limits a particular budgetary aggregate.
- Four main rule types (based on constrained aggregate):
  - Debt rules:
    - Set explicit limit/target for public debt in percent of GDP.
    - Pros: Direct link to debt sustainability; easy to communicate and monitor.
    - Cons: No clear short-term operational guidance; affected by developments outside government control; may be pro-cyclical.
  - Budget balance rules (BBR):
    - Constrain deficit/balance (overall, structural, cyclically adjusted, or “over the cycle”).
    - Pros: Operational guidance; close link to debt sustainability.
    - Cons: Headline balance affected by shocks; structural measures require output gap estimation.
  - Expenditure rules (ER):
    - Limit total, primary, or current spending (absolute terms, growth rates, or percent of GDP).
    - Pros: Clear operational guidance; allows stabilization; steers size of government.
    - Cons: Not directly linked to debt sustainability; may incentivize shifts to excluded categories.
    - Note: expenditure ceilings counted as rules only if binding for a minimum of three years.
  - Revenue rules (RR):
    - Set ceilings or floors on revenues; useful to prevent excessive use of windfall revenue.
    - Cons: Not directly linked to debt sustainability; potentially pro-cyclical.

### III. Design features and supporting institutions
- Legal basis and coverage:
  - Majority of national expenditure, balance, and debt rules embedded in statutory norms; a minority enshrined in constitutions.
  - Supranational balance and debt rules mostly cover general government aggregates; national rules often cover central government only.
- Aggregate exclusions:
  - About 20 percent of countries with fiscal rules by end-March 2012 exclude certain revenue and/or expenditure items; capital expenditure is most frequently excluded (golden rule).
  - Examples of exclusions preserved in source text include interest payments exclusion in Finland (ER), France (ER), Spain (ER), Sweden (ER); capital expenditure exclusions in Brazil (ER, DR), Ecuador (ER), Hong Kong SAR (BBR), Japan (BBR).
- Escape clauses:
  - Formal escape clauses exist in Brazil, Colombia, Germany, Mauritius, Mexico, Jamaica, Panama, Peru, Romania, Slovakia, Spain, and Switzerland; triggers include economic recession, natural disasters, banking system bailout, among others.
- Automatic correction mechanisms:
  - Built into very few rules but enhance enforceability (examples: Germany and Switzerland “debt brakes”; Poland and Slovakia staged triggers; United States sequesters scheduled from January 2013).
  - Under the Fiscal Compact, signatory EU members must include automatic correction mechanisms in national structural budget balance rules.
- Supporting procedures and institutions:
  - Reliable data, technical forecasting capacity, comprehensive budget reporting, internal/external audit, timely fiscal data release.
  - Top-down budgeting and Medium-Term Budget Frameworks (MTBFs).
  - Fiscal Responsibility Laws (FRLs) and Independent Fiscal Councils increasingly used (examples: Sweden’s Fiscal Policy Council; newly established councils in Ireland, Portugal, Romania, Serbia, United Kingdom).

### IV. Supranational rules and the EU Fiscal Compact
- EU numerical targets under the Fiscal Compact:
  - Structural deficit limit: 0.5 percent of GDP (1 percent of GDP for countries with debt levels below 60 percent and low sustainability risks).
  - New debt rule: continuous reduction of public-debt-to-GDP ratio toward the 60 percent of GDP threshold, with an annual pace of debt reduction of no less than 1/20th of the distance between the observed level and the target, starting three years after a country has left the current excessive deficit procedure (EDP).
  - Expenditure benchmark: annual growth of primary expenditure (excluding unemployment benefits and subtracting revenue discretionary increases) should not exceed long-term nominal GDP growth; applies only when a country is not in EDP (overall deficit less than 3 percent of GDP).
- Enforcement and process:
  - Transition periods to new deficit limits will be agreed with the European Commission.
  - The European Court of Justice will verify transposition of structural balanced budget rules into national legislation but will not verify compliance.
  - Broader criteria and more automatic process to open an EDP: ECOFIN (qualified majority) can place countries in EDP when they don’t comply with the debt rule; a reverse qualified majority would allow the Commission’s suggestion to trigger EDP unless blocked by a qualified Council majority.
  - Enforcement tools for the expenditure benchmark are limited.
- Prevalence and combinations:
  - By end-March 2012, of the 47 members of monetary unions and the EU, only 19 were also guided by national fiscal rules.
  - About two thirds of the 76 countries with fiscal rules in 2012 operate under national rules or a combination of national and supranational fiscal rules; one third governed only by supranational rules.
  - Most countries have more than one fiscal rule; average number of national fiscal rules increased from 1.5 to 1.7 during 1997 to end-March 2012.

### V. Historical spread and crisis response
- Historical spread:
  - In 1990, five countries had fiscal rules covering at least central government: Germany, Indonesia, Japan, Luxembourg, United States.
  - By end-March 2012, national and/or supranational fiscal rules surged to 76 countries.
  - Advanced economies led adoption; emerging economies increased adoption about a decade later; few low-income countries used them.
- Crisis-related adjustments and “next-generation” rules:
  - Many countries temporarily suspended or loosened rules during the crisis where escape clauses were absent.
  - Examples of crisis-period adjustments (selected exact measures preserved):
    - Bulgaria: expenditure rule discontinued in 2010–2011 after breach in 2009; reintroduced in 2012; deficit limit adjusted to 2 percent of GDP from 2012.
    - Chile: structural budget balance ceiling widened from a surplus of 1 percent of GDP (2001–07) to a surplus of 0.5 percent in 2008 and zero in 2009; transition path to converge to 1 percent of GDP structural deficit by 2014.
    - Israel: Deficit Reduction Law ceilings relaxed in July 2009 to allow deficits of 6 and 5.5 percent of GDP for 2009 and 2010; transition path to 2014 (1 percent of GDP deficit).
    - United Kingdom: temporary operating rule from Nov. 2008–Dec. 2009 to improve cyclically adjusted current budget each year post-downturn.
  - “Next-generation” features:
    - Combine sustainability with flexibility (cyclically adjusted targets; accounting for commodity price deviations).
    - Incorporate automatic correction for past deviations (examples: Serbia; Germany and Switzerland “debt brakes”).
    - Combine expenditure rules with debt or balance rules for operational guidance and anchoring.

### VI. Fiscal rules dataset and indices: construction and methodology
- Dataset:
  - Covers all IMF members for which national and supranational fiscal rules were identified during 1985 to end-March 2012.
  - Comprises about 70 variables on fiscal rules: number/type of rules, legal basis, coverage, escape clauses, enforcement, supporting procedures, and descriptive elements.
- Scoring and variable construction (Box 2 scoring preserved):
  - Legal basis (national rules only): 1 political commitment; 2 coalition agreement; 3 statutory; 4 constitutional.
  - Coverage: 1 central government; 2 general government or wider public sector.
  - Enforcement: formal enforcement procedure (Yes: 1, No: 0); monitoring mechanism outside government (Yes: 1, No: 0).
  - Supporting procedures/institutions (national rules only): multi-year expenditure ceilings (Yes: 1, No: 0); fiscal responsibility law (Yes: 1, No: 0); independent body setting budget assumptions (Yes: 1, No: 0); independent body monitoring budget implementation (Yes: 1, No: 0).
  - Flexibility (baseline overall index does not include): clearly-defined escape clauses (Yes: 1, No: 0); fiscal balances defined in cyclically adjusted terms (Yes: 1, No: 0).
- Fiscal Rules Index construction:
  - Sub-indices for each type of rule and each key characteristic; each sub-index is a simple sum of its five or six indicator terms.
  - Indicators range between zero and one, except coverage and legal basis rescaled to run between zero and one.
  - Sub-indices standardized to run between zero and five; combined and overall index standardized to range from zero to five.
  - Baseline overall index does not include the “flexibility” characteristic.
  - Rationale: multiple rules and complementary characteristics increase bindingness and effectiveness.

### VII. Robustness checks and alternative aggregations
- Random weights robustness (Appendix 4):
  - Random weights technique uses 1,000 randomly-generated weight sets; mean value asymptotically equivalent to equal-weight indicator.
  - Main finding: overall fiscal rules index robust to alternative weighting; altering weights does not lead to sizeable changes.
- Decreasing marginal gain weighting and PCA:
  - Hierarchy assumed: debt rule; budget balance rule; expenditure rule; revenue rule.
  - Weights: 1 to most binding rule; ½ to second; ¼ to third; ⅛ to fourth (with variants for countries with fewer rules).
  - Indices generated with principal component analysis (PCA) capture at least 80 percent of original variance.
  - Different aggregation methods produce highly correlated indices (example correlations preserved in source: Standardized sum vs Standardized sum (decreasing marginal gain) correlation 0.96* (0.97*); Standardized sum vs PCA correlation 0.97* (0.97*)).

### VIII. Key empirical indications and conclusions
- Preliminary empirical indications:
  - Fiscal rules with more encompassing design features are associated with better fiscal performance.
  - Simple correlations (Appendix 5) show national fiscal rules index correlated with lower change in 10-year average debt/GDP ratio:
    - National Fiscal Rules Index regression: y = -7.7x + 13.1; [t = -2.66]***; R-squared = 0.10 (data from 1985–2011 for 79 countries).
    - National and Supranational Fiscal Rules Index regression: y = -3.1x + 4.8; [t = -1.19]; R-squared = 0.02.
  - Caveats: empirical results subject to omitted variable bias and reverse causality; indices reflect de jure setup only and do not measure compliance.
- Main conclusions:
  - Use and spread of fiscal rules widened, with three “waves” of adoption: early/mid-1990s; early 2000s; response to the recent crisis.
  - Most countries now have several rules, often combining sustainability with flexibility (cyclically adjusted balance).
  - “Next-generation” fiscal rules are more complex, presenting design, monitoring, and communication challenges.
  - Design convergence observed, but differences persist; many rules now have at minimum a statutory basis.
  - Automatic correction mechanisms and sanctions remain limited; Fiscal Compact requires automatic correction mechanisms in structural balance rules.
  - Top-quartile countries in the overall fiscal rules index have at least two numerical rules and supporting features (monitoring outside government; coverage of general government).

### IX. Selected appendices highlights
- Appendix 1 — Escape clauses: country examples (selected triggers preserved):
  - Brazil (since 2000): Real GDP growth below 1 percent over four quarters, and natural disaster but can only be invoked with Congressional approval.
  - Germany (since 2010): Natural disasters or unusual emergency situation outside government control with major impact; absolute majority of parliament needed; parliament must approve an amortization plan with a specified timeframe.
  - Panama (since 2008): If real GDP grows by less than 1 percent, non-financial public sector deficit ceiling can be relaxed to 3 percent of GDP in the first year, followed by gradual transition to original ceiling (1 percent of GDP) within 3 years.
  - WAEMU (since 2000): Temporary and pronounced shortfall of real GDP (at least 3 percentage points below the average of the previous 3 years) and budget revenue (at least 10 percentage points below the average of the previous 3 years average).
- Appendix 2 — New fiscal rules adopted since 2010 (selected exact entries):
  - Austria: Amendment passed on December 7, 2011, stipulating that, from 2017 onward, the structural deficit at the federal level (including social insurance) shall not exceed 0.35 percent of GDP.
  - Japan: Fiscal Management Strategy (including a pay-as-you-go rule) adopted in 2010 (by cabinet decision); Medium-Term Fiscal Framework, including a limit on expenditure, also introduced.
  - United States: Statutory pay-as-you-go rules for revenue and mandatory spending reinstated in February 2010 but subject to important exemptions; August 2011 Congress enacted discretionary spending caps saving about $900 billion over the next decade; automatic spending cuts (sequesters) scheduled from January 2013 to produce savings of US$1.2 trillion over a decade.
- Appendix 3 — Country coverage examples:
  - Advanced Economies list includes: Australia; Austria; Belgium; Canada; Cyprus; Czech Republic; Denmark; Estonia; Finland; France; Germany; Greece; Hong Kong SAR; Iceland; Ireland; Israel; Italy; Japan; Luxembourg; Netherlands; New Zealand; Norway; Portugal; Russia; Slovak Republic; Slovenia; Spain; Sweden; Switzerland; United Kingdom; United States.
  - Emerging Economies list includes: Brazil; Chile; Colombia; Mexico; Poland; Romania; Serbia; among others.
  - Low-income Countries list includes: Armenia; Benin1/; Burkina Faso1/; Cameroon1/; Cape Verde; Central African Republic1/; Chad1/; Congo1/; Cote d'Ivoire1/; Equatorial Guinea1/; Dominica1/; Gabon1/; Grenada1/; Guinea Bissau1/; Kenya; Kosovo; Mali1/; Niger1/; Nigeria; Senegal1/; Togo1/; St. Kitts and Nevis1/; St. Lucia1/; St. Vincent and the Grenadines1/.
- Appendix 4 — Random weights robustness:
  - Random weights technique with 1,000 draws confirms robustness of overall fiscal rules index; Appendix Figure 1 illustrates distribution (boxplot) for a selected sample of euro area countries.
- Appendix 5 — Preliminary statistical evidence:
  - Literature summary: tighter and more encompassing fiscal rules correlated with stronger cyclically adjusted primary balances in EU countries; budget balance and debt rules contributed more to outcomes than expenditure and revenue rules.
  - Empirical caveats reiterated: omitted variables and reverse causality possible.
- Appendix 6 — Fiscal Responsibility Laws (selected entries preserved):
  - Brazil: Fiscal Responsibility Law (2000) — Yes ER; DR PS Yes Yes.
  - Chile: FRL (2006) — Yes BBR CG No No.
  - Peru: Fiscal Responsibility and Transparency Law (2003) — Yes BBR; ER NFPS Yes Yes.
  - United Kingdom: Budget Responsibility and National Audit Act (2011) Code for Fiscal Stability (1998) — Yes BBR; DR PS No No.

*Source: _wp12187 - Introduction and Chapter V–VI excerpts and appendices as provided.*

### Introduction ...........................................................................................................

### _wp12187 - Introduction ...........................................................................................................

### I. Introduction
- Strengthening fiscal frameworks, in particular numerical fiscal rules, has emerged as a key response to the fiscal legacy of the crisis.
- In the euro area and in most other European Union (EU) member states this applies to institutional reforms at the national and supranational level, as agreed in the “Fiscal Compact” and the “six pack.”
- Many countries outside the EU have started or are considering reforms to existing fiscal rules and introduction of new ones to provide a medium-term anchor, support credible long-term adjustment efforts, and ensure fiscal sustainability.
- The paper takes stock of the use of numerical fiscal rules around the world, focusing on systematic compilation and comparison of fiscal rules and their design elements, including developments during the crisis.
- The review covers trends since the mid-1980 until early 2012 on types and number of rules, their combinations, and main characteristics (legal basis, enforcement, coverage, escape clauses, provisions for cyclical adjustments).
- The paper also inventories supporting features such as independent monitoring bodies and fiscal responsibility laws.
- Country-by-country descriptions and a dataset are provided for national rules (covering at least the central government) and supranational rules.
- The paper does not assess implementation or the role of rules in fiscal performance.
- Fiscal rules indices are constructed to summarize rules’ main elements, building on Kumar and others (2009) and focusing on features that support enforcement; indices reflect formal institutional setup and do not explicitly account for degree of compliance.

### II. Definition, Objectives, and Types of Fiscal Rules
- Definition:
  - A fiscal rule imposes a long-lasting constraint on fiscal policy through numerical limits on budgetary aggregates.
  - Boundaries are set that cannot be frequently changed and operational guidance is provided by specifying a numerical target that limits a particular budgetary aggregate.
- Objectives:
  - Correct distorted incentives and contain pressures to overspend, especially in good times, to ensure fiscal responsibility and debt sustainability.
  - Two main explanations for deficit bias: governments’ shortsightedness and the “common pool problem.”
  - In currency unions, supranational rules aim to internalize regional costs of fiscal indiscipline and improve monetary-fiscal coordination.
  - Concerns about fiscal rules include: too little room to adjust to shocks, distraction from spending priorities, and incentives for creative accounting.
  - Fiscal rules can also serve objectives of economic stabilization (when they allow adjustment for economic activity), containing the size of government, and supporting intergenerational equity.
  - “Next-generation” fiscal rules are designed to strike a better balance between sustainability and flexibility by accounting for economic shocks and being complemented by other institutional arrangements (such as independent fiscal councils); their effectiveness will depend on country-specific institutional capacity.
- What is included in the paper / dataset:
  - Expenditure ceilings are considered fiscal rules if targets can be revised only on a low-frequency basis and are binding for a minimum of three years; medium-term budgetary frameworks or expenditure ceilings that can be changed annually are not considered rules.
  - Only rules that set numerical targets on aggregates capturing a large share of public finances—deficit, debt, expenditure or revenue—and at a minimum cover the central government level are included. Rules limited to subnational governments or fiscal sub-aggregates are excluded.
  - The paper includes de jure arrangements and does not analyze adherence in practice.
  - Unless indicated otherwise, indicators cover rules that took effect by end-March 2012 or for which a specific transition regime was in place at that time. Rules adopted but not yet implemented are described in the dataset but not included in charts and tables.
- Types of fiscal rules (four main types based on constrained budgetary aggregate):
  - Debt rules:
    - Set an explicit limit or target for public debt in percent of GDP.
    - Pros: Direct link to debt sustainability; easy to communicate and monitor.
    - Cons: No clear short-term operational guidance; no economic stabilization feature; can be met via temporary measures; debt affected by developments outside government control; may be pro-cyclical; when debt is well below ceiling, rule may not bind.
  - Budget balance rules:
    - Constrain the variable primarily influencing the debt ratio.
    - Can be specified as overall balance, structural or cyclically adjusted balance, and balance “over the cycle.”
    - Pros: Clear operational guidance; close link to debt sustainability; easy to monitor.
    - Cons: Headline balance can be affected by developments outside government control (e.g., major downturn); overall balance lacks stabilization features unless cyclically adjusted.
    - Structural or cyclically adjusted balances account for shocks but require output gap estimation and are harder to communicate and monitor; “balance over the cycle” may delay remedial measures to end of cycle.
    - Excluding interest payments weakens link to debt sustainability; “golden rule” (net of capital expenditure) is less linked to debt.
    - “Pay-as-you-go” rules are typically procedural and not counted as numerical fiscal rules in this paper.
  - Expenditure rules:
    - Set limits on total, primary, or current spending (absolute terms, growth rates, or percent of GDP).
    - Pros: Clear operational guidance; allows for economic stabilization; steers size of government; relatively easy to communicate and monitor.
    - Cons: Not directly linked to debt sustainability since revenue side not constrained; may lead to unwanted spending composition changes if shifts occur to categories not covered by the rule.
  - Revenue rules:
    - Steer the size of government and can improve revenue policy and administration; can prevent pro-cyclical spending when constraining use of windfall revenue.
    - Cons: Not directly linked to debt sustainability since expenditure side not constrained; no economic stabilization feature (can be pro-cyclical).
- Table 1 in the source summarizes pros and cons of each rule type (referenced as IMF staff assessment).

### III. Scope, Dataset, and Coverage Principles
- Temporal scope: Trends reviewed from the mid-1980 until early 2012.
- Inclusion criteria reiterated:
  - Minimum coverage: central government.
  - Binding duration: expenditure ceilings qualify if binding for minimum of three years.
  - Dataset covers rules in effect by end-March 2012 or with a transition regime in place at that time.
- The paper focuses on national rules and supranational rules; subnational rules and narrowly targeted sub-aggregate rules are excluded.

### IV. Construction of Fiscal Rules Indices and Limitations
- Indices summarize rules’ main elements and build on the desirability of rule features discussed in Kumar and others (2009), particularly those supporting enforcement.
- Indices aim to make fiscal rules comparable across countries and country groups.
- Caveat: Indices and dataset do not explicitly account for degree of compliance; they reflect formal institutional setup only.
- The paper notes causality issues in empirical evidence on fiscal rules' success (Debrun and others, 2008) and indicates that future work is needed to assess compliance and performance links.

### V. Structure of the Paper (Chapters)
- Chapter II: Defines fiscal rules and compares objectives.
- Chapter III: Reviews trends in types of rules used during the past two decades.
- Chapter IV: Analyzes key features of rules.
- Chapter V: Presents how rules were adjusted and new rules adopted in response to the crisis and how “next-generation” rules differ.
- Chapter VI: Describes the fiscal rules dataset and builds fiscal rules indices.
- Chapter VII: Concludes.

*Source: _wp12187 - Introduction (content up to and including Section II as provided).*

### Chapter V makes reference to the recent introduction of pay-as-you-go rules in Japan and the United States.

### _wp12187 - Chapter V makes reference to the recent introduction of pay-as-you-go rules in Japan and the United States.

### Expenditure rules: design, benefits, and limitations
- Typically set an expenditure ceiling over a time horizon ranging often between three to five years.
- Not linked directly to the debt sustainability objective since they do not constrain the revenue side.
- Can provide an operational tool to trigger the required fiscal consolidation consistent with sustainability when accompanied by debt or budget balance rules.
- Useful to constrain spending during temporary absorption booms when windfall revenue receipts are temporarily high and headline deficit limits are easy to comply with.
- Do not restrict the economic stabilization function of fiscal policy in times of adverse shocks because they do not require adjustments to cyclical or discretionary reductions in tax revenues.
- Greater counter-cyclicality can be achieved by excluding cyclical-sensitive expenditure items, such as unemployment support, however at the expense of creating a bigger distance to the sustainability target.
- Not consistent with discretionary fiscal stimulus.
- Expenditure ceilings directly define the amount of public resources used by the government, and are in general relatively easy to communicate and monitor.
- Monitoring challenges include creative accounting (for example by shifting toward more tax expenditure), which calls for a broad coverage under the rule.

### Revenue rules: purposes and shortcomings
- Set ceilings or floors on revenues and are aimed at boosting revenue collection and/or preventing an excessive tax burden.
- Most revenue rules are not directly linked to the control of public debt, as they do not constrain spending.
- Revenues may have a large cyclical component, fluctuating widely with the business cycle, making ceilings or floors challenging to implement.
- Exceptions: rules that restrict the use of “windfall” revenue for additional spending.
- Revenue rules alone could result in procyclical fiscal policy, as floors do not generally account for the operation of automatic stabilizers on the revenue side in a downturn, and ceilings do not account for upturns.
- Like expenditure rules, revenue rules can directly target the government size.

### Combining rules: addressing trade-offs
- Many countries combine two or more fiscal rules to address trade-offs among sustainability, economic stabilization, and the size of government objectives.
- Examples of combinations:
  - A debt rule combined with an expenditure rule provides a link to debt sustainability while assisting with short- to medium-term operational decisions, allowing for some counter-cyclicality and explicitly targeting the size of government.
  - A debt rule combined with a cyclically adjusted budget balance rule can achieve similar objectives.

### Historical spread and usage of fiscal rules (1990–2012)
- In 1990, only five countries had fiscal rules in place that covered at least the central government level: Germany, Indonesia, Japan, Luxembourg, and the United States.
- In Japan and Germany, fiscal rules have a long tradition dating back to as early as 1947 and 1969, respectively, though adherence to the rule was weak for most years.
- Over the next two decades, the number of countries with national and/or supranational fiscal rules surged to 76 by end-March 2012.
- The database covers 81 countries, of which five countries no longer had a fiscal rule in effect at end-March 2012: Argentina, Canada, Iceland, India, and Russia.
- National fiscal rules were in effect in 45 economies by end-March 2012.
- Advanced economies were the frontrunners in adopting rules; about a decade later rules were adopted in a number of emerging economies; few low-income countries used them.

### Supranational fiscal rules and major regional frameworks
- Supranational fiscal rules were introduced in currency unions and the EU, covering 47 members, to constrain individual countries from running fiscal policies inconsistent with a monetary union.
- European Union (EU) member state rules include:
  - The 3 percent of GDP deficit ceiling and the 60 percent of GDP debt ceiling included in the Maastricht Treaty in 1992 and the Stability and Growth Pact (SGP) in 1997.
  - The SGP also includes a provision that countries should pursue country-specific medium-term objectives (MTOs), defined in structural budget balance terms.
  - With the “six pack reform” from November 2011, a new debt reduction rule and expenditure growth benchmarks have been introduced.
- Eastern Caribbean Currency Union (ECCU) members aim to reduce public debt-to-GDP ratios to 60 percent by 2020.
  - ECCU members earlier had an overall deficit target of 3 percent of GDP for which compliance was weak; this overall deficit target was dropped in 2006 and the level of the primary balance consistent with the debt target in 2020 has been used to guide fiscal policy.
- West African Economic and Monetary Union (WAEMU) first-order fiscal convergence criteria from 2000 include:
  - A balanced budget (excluding foreign-financed capital expenditures).
  - A public debt-to-GDP ratio no higher than 70 percent.
  - Compliance, particularly of the budget balance, has been weak.
- Central African Economic and Monetary Community (CEMAC) rules:
  - A debt rule and a balanced budget in place.
  - In 2008 the specification changed from a balanced “basic fiscal balance” to a balanced “basic structural fiscal balance”—replacing actual oil revenue with its three-year moving average.
  - A rule was added that the non-oil basic fiscal balance in percent of non-oil GDP should at least be in balance.

### EU governance reforms: “six pack” and Fiscal Compact
- The “six pack” of five new EU regulations and one EU directive took effect in December 2011; countries are expected to adopt the newest provisions by 2014.
- On March 2, 2012, 25 members of the European Council signed an intergovernmental treaty, the Fiscal Compact (Treaty on Stability, Coordination and Governance in the Economic and Monetary Union).
  - The Fiscal Compact introduces several new elements for fiscal rules at the national level and reinforces the framework of fiscal governance included in the SGP.
  - A main novelty is the requirement to adopt in legislation national rules that limit annual structural deficits.

*Source: _wp12187 - Chapter V makes reference to the recent introduction of pay-as-you-go rules in Japan and the United States.*

### 0.5 percent of GDP (1 percent of GDP for countries with debt levels below 60 percent and low

### _wp12187 - 0.5 percent of GDP (1 percent of GDP for countries with debt levels below 60 percent and low

### Supranational rules and the Fiscal Compact
- Fiscal Compact numerical targets:
  - Structural deficit limit: 0.5 percent of GDP (1 percent of GDP for countries with debt levels below 60 percent and low sustainability risks).
  - New debt rule: continuous reduction of public-debt-to-GDP ratio toward the 60 percent of GDP threshold, with an annual pace of debt reduction of no less than 1/20th of the distance between the observed level and the target, starting three years after a country has left the current excessive deficit procedure (EDP).
  - Expenditure benchmark: annual growth of primary expenditure (excluding unemployment benefits and subtracting revenue discretionary increases) should not exceed long-term nominal GDP growth; applies only when a country is not in EDP (overall deficit less than 3 percent of GDP).
- Enforcement and process:
  - Transition periods to new deficit limits will be agreed with the European Commission.
  - The European Court of Justice will verify transposition of structural balanced budget rules into national legislation but will not verify compliance.
  - Broader criteria and more automatic process to open an EDP: ECOFIN (qualified majority) can place countries in EDP when they don’t comply with the debt rule; a reverse qualified majority would allow the Commission’s suggestion to trigger EDP unless blocked by a qualified Council majority.
  - Enforcement tools for the expenditure benchmark are limited.

### Prevalence and combinations of national and supranational rules
- By end-March 2012:
  - Of the 47 members of monetary unions and the EU, only 19 were also guided by national fiscal rules.
  - Overall, about two thirds of the 76 countries with fiscal rules in 2012 operate under national rules or a combination of national and supranational fiscal rules; one third is governed only by supranational rules.
- Trends and combinations:
  - Most countries have more than one fiscal rule; the average number of national fiscal rules increased from 1.5 to 1.7 during 1997 to end-March 2012.
  - About 40 percent of the “newcomers” (those adopting national fiscal rules since 2000) adopted a combination of national rules immediately.
  - The most frequently used rules constrain debt and the budget balance, often in combination; expenditure rules are prevalent mostly in advanced economies; revenue rules are less common.

### Key characteristics of fiscal rules
- Legislative basis:
  - Bulk of national expenditure, balance, and debt rules embedded in statutory norms; fewer revenue rules implemented via political commitments or coalition agreements.
  - A minority of rules are enshrined in constitutions (examples listed in source).
  - Higher-level legislation tends to confer durability but effectiveness also depends on enforcement mechanisms and accountability procedures.
- Coverage:
  - Supranational balance and debt rules mostly cover general government aggregates; less than half of national rules do.
  - National expenditure and budget balance rules often cover only central government.
- Aggregate exclusions:
  - About 20 percent of countries with fiscal rules by end-March 2012 exclude certain revenue and/or expenditure items; capital expenditure is most frequently excluded (golden rule).
  - Examples of exclusions:
    - Interest payments excluded in Finland (ER), France (ER), Spain (ER), Sweden (ER).
    - Cyclically-sensitive expenditure excluded in Denmark (ER), Finland (ER), Switzerland (BBR).
    - Capital expenditure exclusions: Brazil (ER, DR), Ecuador (ER), Hong Kong SAR (BBR), Japan (BBR); supranational: WAEMU and CEMAC (BBR, DR, foreign financed capital spending excluded).
- Escape clauses:
  - Formal escape clauses exist in Brazil, Colombia, Germany, Mauritius, Mexico, Jamaica, Panama, Peru, Romania, Slovakia, Spain, and Switzerland; triggers include economic recession, natural disasters, banking system bailout, among others.
  - EU SGP (2005 reform) escape clause: allows not opening an EDP if deficit is close to its ceiling and the breach is temporary; allows extension of deadlines for correction in case of adverse economic developments.
  - WAEMU escape clause triggered by a large and temporary negative shock to real GDP and revenues but lacks a specified transition path back to the rule.
- Automatic correction mechanisms:
  - Built into very few rules but can enhance enforceability.
  - Switzerland and Germany: structural budget balance rules with “debt brakes” that store deviations in a notional account and require correction when thresholds are exceeded.
    - Germany thresholds: 1.0 percent of GDP per ordinary law and 1.5 percent per constitution (treatment differences on which deviations enter the notional account).
    - Switzerland threshold: 6 percent of expenditure; excess amount must be eliminated within the next three annual budgets.
  - Poland and Slovakia debt rules (60 percent of GDP ceiling) include staged triggers:
    - Slovakia triggers at 50 percent (Minister clarifies and suggests measures), 53 percent (cabinet trims debt and freezes wages), 55 percent (automatic 3 percent expenditure cut and next year's budgetary expenditures frozen except EU co-financing), 57 percent (cabinet submits a balanced budget).
    - After 2017 Slovakia’s debt limit will be lowered to 50 percent of GDP and correction mechanism will start when debt approaches 40 percent of GDP.
  - United States example: sequesters as a one-time automatic spending cut scheduled to take effect from January 2013.
  - Under the Fiscal Compact, signatory EU members must include automatic correction mechanisms in national structural budget balance rules, in line with European Commission guidelines.
- Supporting institutional arrangements:
  - Reliable data, technical forecasting capacity, comprehensive budget reporting, internal and external audit, and timely public release of fiscal data are needed to support rules.
  - Top-down budgeting and Medium-Term Budget Frameworks (MTBFs) improve alignment of budgets with rules.
  - Fiscal Responsibility Laws (FRLs) have become widespread, especially in emerging economies; some FRLs include numerical targets, others focus on procedural and transparency requirements.
  - Independent Fiscal Councils (or similar bodies) are increasingly used to set budget assumptions, monitor implementation, and assess compliance; examples include Sweden’s Fiscal Policy Council, and newly established councils in Ireland, Portugal, Romania, Serbia, and the United Kingdom.

### Responses to the crisis: “next-generation” fiscal rules
- Crisis impact and adjustments:
  - Many countries temporarily suspended or loosened rules during the crisis to accommodate countercyclical measures; where escape clauses were absent, rules were often relaxed or redefined.
  - Examples of crisis-period rule adjustments:
    - Bulgaria: expenditure rule discontinued in 2010–2011 after breach in 2009; reintroduced in 2012; deficit limit adjusted to 2 percent of GDP from 2012.
    - Chile: structural budget balance ceiling widened from a surplus of 1 percent of GDP (2001–07) to a surplus of 0.5 percent in 2008 and zero in 2009; transition path to converge to 1 percent of GDP structural deficit by 2014.
    - Denmark: revisions to expenditure rule and structural budget balance target changes (multiple dated targets including structural deficit less than 0.5 percent in 2015 and balanced structural budget by 2020).
    - Finland: structural surplus target of 1 percent of potential GDP (since 2007) allowed temporary deviation in February 2009; since 2011 central government balance target of 1 percent deficit.
    - Israel: Deficit Reduction Law ceilings relaxed in July 2009 to allow deficits of 6 and 5.5 percent of GDP for 2009 and 2010; laws set a transition path to 2014 (1 percent of GDP deficit).
    - Panama: nonfinancial public sector deficit limit adjusted in June 2009 to 2–2.5 percent of GDP with extended transition; debt target extended to 2017.
    - United Kingdom: temporary operating rule from Nov. 2008–Dec. 2009 to improve cyclically adjusted current budget each year post-downturn.
- “Next-generation” features:
  - Many new rules combine sustainability with flexibility for shocks by setting cyclically adjusted targets or accounting for the cycle (examples: Austria, Colombia, Portugal, Spain, United Kingdom; Chile and others account also for commodity price deviations).
  - Some rules incorporate automatic correction for past deviations (e.g., Serbia; Germany and Switzerland “debt brakes”).
  - Combinations of expenditure rules with debt or balance rules provide operational guidance and anchoring for debt sustainability (e.g., Israel, Poland).
- Challenges:
  - Increased complexity and interactions among multiple rules make implementation, explanation, and monitoring more difficult.
  - Reforms to budgetary procedures and MTBFs, and establishment of fiscal councils, are common complementarities to address these challenges.

### Fiscal rules dataset and indices (coverage and methodology)
- Dataset scope and coverage:
  - Covers all IMF members for which national and supranational fiscal rules were identified during 1985 to end-March 2012.
  - Includes rules that have taken effect or where clear transition regimes have been specified; rules adopted but not yet in place are described but not codified.
- Dataset content:
  - Comprises about 70 variables on fiscal rules, including quantitative and qualitative information on number and type of rules, legal basis, coverage, escape clauses, enforcement, supporting procedures, and a description of each rule and key elements.
- Indices and analysis:
  - The chapter derives fiscal rules indices summarizing key features and analyzes recent trends, especially during the crisis; more details, robustness checks, and preliminary correlations with changes in general government debt are in Appendices 3 and 4.

*Source: IMF staff assessment and related material in the provided chapter.*

### Appendix 2 provides the list of countries in the dataset.

### _wp12187 - Appendix 2 provides the list of countries in the dataset.

### Data coding and variable construction
- Each qualitative characteristic of fiscal rules is codified in the dataset.
- For most characteristics a binary coding was used with a score of one if a country’s fiscal rule had a specific feature and a score of zero otherwise.
- A few design features allow greater differentiation (see Box 2).
- For all characteristics, a higher score reflects the presence of a feature in line with those identified in earlier studies as supporting the rule’s effectiveness (examples cited: Kumar and others, 2009; Debrun and others, 2008).

### Box 2 — Score by Fiscal Rules Characteristics (assignment rules)
- The following scores were assigned to each characteristic of national and supranational fiscal rules and by types of rules (when applicable):
  - Legal basis (national rules only): What is the highest legal basis of the rule?
    - 1: Political commitment
    - 2: Coalition agreement
    - 3: Statutory
    - 4: Constitutional
  - Coverage: Which sector of the government is covered by the rule?
    - 1: Central government
    - 2: General government or wider public sector
  - Enforcement:
    - Formal enforcement procedure (Yes: 1, No: 0)
    - Monitoring mechanism of compliance outside the government (Yes: 1, No: 0)
  - Supporting procedures and institutions (national rules only):
    - Multi-year expenditure ceilings (Yes: 1, No: 0)
    - Fiscal responsibility law (Yes: 1, No: 0)
    - Independent body setting budget assumptions (Yes: 1, No: 0)
    - Independent body monitoring budget implementation (Yes: 1, No: 0)
  - Flexibility (note: baseline overall index does not include flexibility):
    - Clearly-defined escape clauses (Yes: 1, No: 0)
    - Fiscal balances defined in cyclically adjusted terms (Yes: 1, No: 0)
- Footnotes in source:
  - 1/ The four types of fiscal rules in the dataset are budget balance rules (BBR), debt rules (DR), expenditure rules (ER), and revenue rules (RR).
  - 2/ The differentiation in the legal basis is only relevant for national rules since all supranational rules are based on international treaties.
  - 3/ The baseline overall index does not include the flexibility variables (see Chapter VI.B for details).

### Scoring judgment and interpretation
- Some degree of judgment is needed in assigning the scores.
- To get a score of one, escape clauses need to be clearly defined to allow the use only in well-specified exceptional circumstances.
- For effective enforcement and accountability, fiscal agencies that project and monitor fiscal outturns should be independent, yielding in a score of one.
- A high score can coexist with poor fiscal outcomes because the presence of a feature does not necessarily imply that it is also soundly implemented.

### Fiscal Rules Index: Methodology
- The overall fiscal rules index is created from a set of sub-indices.
- Sub-indices are developed for each type of rule and each key characteristic, then combined into an overall index.
- The overall index does not include the “flexibility” characteristic in the baseline index.
- Each sub-index is a simple sum of its five or six indicator terms (legal basis, coverage, formal enforcement procedure, expenditure ceilings, fiscal responsibility law, and independent body setting budget assumptions and monitoring the budget implementation).
- Indicators range between zero and one, with the exception of coverage and legal basis; these are re-scaled to run between zero and one before entering composite scores.
- Aggregation details:
  - Sub-indices are standardized to run between zero and five.
  - Sub-indices for each type of rule or each key characteristic are combined (summed) and the overall index is standardized to range from zero to five.
  - Combining the different types of rules or the different characteristics yields almost identical results; unless otherwise notified, the second method (combining characteristics) is reported throughout the paper.
  - The overall index captures both rules’ characteristics and the number of numerical rules in place.
- Rationale for summation (from source):
  - (i) Several fiscal rules would be more binding than a single one.
  - (ii) Different characteristics of the rules are deeply complementary for their effectiveness.

### Figures and sub-index structure (as described)
- Figure 12: Fiscal Rules Sub-indices by Type of Rule — each sub-index includes: Legal basis, Coverage, Enforcement procedure, Multi-year exp. ceilings, FRL, Budget assumptions, Budget monitoring, Independent body — applied for Debt rule (National/Supra), Budget balance rule (National/Supra), Expenditure rule (National), Revenue rule (National).
- Figure 13: Fiscal Rules Sub-indices by Key Characteristics — shows how multi-year exp. ceilings, FRL, independent fiscal body, supporting procedures (national), formal enforcement (national/supra), coverage (national/supra), legal basis (national) enter sub-indices for DR, BBR, ER, RR.

### Key findings
- Design features of fiscal rules have become more encompassing during the last two decades, particularly in emerging economies.
- For emerging economies this trend started around 2000 and continued through the crisis.
- By end-March 2012 the overall fiscal rules index for national rules puts emerging economies slightly ahead of advanced economies.
- When accounting also for supranational rules, the gap to advanced economies has narrowed but not yet fully closed.
- Development drivers:
  - Adoption of multiple national rules with wide government coverage.
  - Increased support by institutional features such as formal enforcement procedures, fiscal responsibility laws, and independent fiscal councils.
- Advanced economies also adjusted fiscal rules to include these features, especially in response to the crisis.
- For low-income countries, indices have remained relatively stable over the past decade with changes in the supranational index reflecting changes to rules in the ECCU and CEMAC.

- Trends by type of rule (summary from Figures):
  - Over the last decade, design features of budget balance rules, debt rules, expenditure rules, and revenue rules have become more comprehensive, particularly at the national level in advanced and emerging economies.
  - There is convergence of design features between advanced and emerging economies.

- Trends by key characteristics (summary from Figures):
  - Coverage of fiscal rules has broadened, particularly for emerging economies during the last decade.
  - Supporting procedures, such as monitoring of budget implementation by an independent body, have become more widespread in advanced and emerging economies, particularly after the onset of the recent global crisis.
  - Other characteristics such as a strong legal basis or a formal enforcement procedure have also been more common across country groups.

### Robustness checks: alternative weighting and aggregation
- The overall fiscal rules index is robust to alternative weighting schemes, including random weights.
- Given uncertainty about relative importance of characteristics, the paper tests robustness using random weights technique (references: Sutherland and others, 2005; European Commission, 2006).
- Introducing uncertainty on weights does not lead to sizeable changes of the indices (see Appendix 3 for details on random weight).
- Accounting for decreasing marginal gain of additional rules:
  - A second set of indices uses weighted sums of different types of fiscal rules to reflect possible decreasing marginal gain.
  - Assumed hierarchy of rules (most directly linked to debt sustainability objectives first): the debt rule; budget balance rule; expenditure rule; revenue rule.
  - Weights assigned:
    - 1 to the most binding rule
    - ½ to the second most binding rule
    - ¼ to the third most binding rule
    - ⅛ to the less binding rule
  - Footnote: Only three weights (1, ½, and ¼) or two weights (1 and ½) are assigned for countries with three or two rules respectively. The European Commission applies a similar weighting scheme by assigning a weight of one to the rule with the higher fiscal rules index score and a weight of ½ to the other lower-score rule. The variable capturing the number of fiscal rules in place is excluded for this robustness check.
- Alternative aggregation methods and results:
  - Indices generated with principal component analysis (PCA) capturing at least 80 percent of the original data variance.
  - Indices obtained through various aggregation methods and assumptions are highly correlated.
  - Table 9 reports Spearman’s Rank Correlation Coefficients and simple correlation coefficients showing high correlation among:
    - Standardized sum (baseline)
    - Standardized sum with decreasing marginal gain
    - PCA and PCA with decreasing marginal gain
    - Index including flexibility
    - Index based on different rules aggregation
    - Lower weight to supranational rules
  - Reported correlation examples (from Table 9):
    - Correlation between Standard. sum and Standard. sum (decreasing marginal gain): 0.96* (0.97*)
    - Correlation between Standard. sum and Principal component analysis (PCA): 0.97* (0.97*)
    - Correlation between PCA and PCA (decreasing marginal gain): 0.94* (0.93*)
  - Asterisks indicate significance at 1 percent where reported.

*Source: IMF staff (from the content of _wp12187 - Appendix 2 provides the list of countries in the dataset.)*

### Chapter VI.B, we also define an index that includes rules’ flexibility features for the

### _wp12187 - Chapter VI.B, we also define an index that includes rules’ flexibility features for the

### E. Fiscal Rules and Fiscal Performance: Avenues for Future Work
- The fiscal rules indices developed in this paper provide opportunities for future empirical work, including to assessing their effectiveness.
- Previous empirical studies suggest that national fiscal rules have been generally associated with improved fiscal performance; most comprehensive analyses focused on national fiscal rules in EU member states (Debrun and others, 2008; European Commission, 2006; Deroose, Moulin, and Wierts, 2006; Debrun and Kumar, 2007).
- Empirical results should be interpreted with caution because of potential omitted variable bias and reverse causality.
- Iara and Wolff (2011) assess impact of rules on spreads for euro area members.
- The dataset provided here expands empirical work possibilities because it:
  - accounts for the most recent developments during the crisis,
  - includes the entire Fund membership in terms of coverage,
  - explicitly distinguishes between national and supranational rules.
- Preliminary data indications:
  - Fiscal rules with more encompassing design features are associated with better fiscal performance.
  - Appendix 3 provides scatter plots with simple correlations between the overall fiscal rules index and changes in public debt (the key fiscal indicator for debt sustainability).
  - The data broadly suggest a significantly negative correlation for national fiscal rules, consistent with the literature.

### VII. CONCLUSIONS
- Use and spread of fiscal rules:
  - The use of fiscal rules has become more wide-spread, including anchoring the fiscal exit from the crisis.
  - Three “waves” observed:
    - First surge: early and mid-1990s, responding to bank and debt crises and consolidation needs to qualify for the euro area.
    - Second wave: early 2000s, driven largely by emerging economies adopting multiple rules and reforming fiscal frameworks after fiscal excesses.
    - Third wave: response to the recent crisis; many countries, especially in the euro area, are complementing supranational rules with national ones or “upgrading” fiscal frameworks.
- Current rule architecture:
  - Most countries now have several rules in place, often combining objectives of sustainability with flexibility for economic shocks (via budget balance rules that correct for the cycle).
  - “Next-generation” fiscal rules tend to be more complex, creating new challenges.
    - Budget balance rules that adjust for the economic cycle consider stabilization objectives but bring challenges in design (in particular estimating the output gap) and communication.
  - Communication policies have been slow to respond; some countries are placing greater emphasis on independent fiscal councils as monitoring and assessment devices.
- Convergence and design features:
  - Design features continue to differ across countries, but convergence has started in some areas.
  - Most fiscal rules have at a minimum a statutory basis.
  - Anchoring national fiscal rules in the constitution (or other durable legislation) is part of the commitments under the EU “Fiscal Compact.”
  - Until recently few fiscal rules included well-specified escape clauses; recent adopters have defined clearer trigger points.
  - Automatic correction mechanisms and sanctions are not yet widespread; automatic correction mechanisms are a required feature under the “Fiscal Compact.”
- Index-based findings:
  - Using an index that summarizes the number of fiscal rules and their key elements:
    - Countries in the top quartile have at least two numerical rules in place.
    - These top-quartile countries share many supporting features, such as a monitoring mechanism of compliance outside the government and coverage of the general government.
    - This pattern applies to advanced and emerging economies.

*Source: IMF staff paper content provided in the content unit above.*

### Appendix 1. Escape Clauses: Country Examples
- Brazil (since 2000)
  - Real GDP growth below 1 percent over four quarters, and natural disaster but can only be invoked with Congressional approval.
- Colombia (since 2011)
  - In case of extraordinary events threatening macroeconomic stability, enforcement of the fiscal rule may be temporarily suspended, subject to the favorable opinion of CONFIS (an internal fiscal council headed by the Finance Minister).
- Germany (since 2010)
  - Natural disasters or unusual emergency situation outside government control with major impact on government financial position.
  - Absolute majority of parliament needed to trigger the escape clause.
  - Parliament must approve an amortization plan with a specified timeframe for reducing the accumulated deviation.
  - Until 2010, escape clause in case of a "distortion of the macroeconomic equilibrium."
- Jamaica (since 2010)
  - Targets may be exceeded on grounds of national security, national emergency, or other exceptional grounds, as the Minister may specify in an order subject to affirmative resolution.
- Mauritius (since 2008)
  - Temporary deviations in case of emergencies and large public investment projects.
- Mexico (since 2006)
  - If non-oil revenues are below their potential due to a negative output gap, there can be a deficit equivalent to the shortfall.
- Panama (since 2008)
  - If real GDP grows by less than 1 percent, the non-financial public sector deficit ceiling can be relaxed to 3 percent of GDP in the first year, followed by a gradual transition to the original ceiling (1 percent of GDP) within 3 years.
- Peru (since 2000)
  - If real GDP declines or in case of other emergencies declared by Congress at the request of the Executive, the deficit ceiling can be relaxed up to 2.5 percent of GDP.
  - The Executive must specify deficit and expenditure ceilings during the exception period.
  - A minimum adjustment of 0.5 percent of GDP is required until the 1 percent deficit ceiling is reached.
- Romania (since 2010)
  - In case of a government change, the new government will announce whether its program is consistent with the Medium-Term Budgetary Framework (MTBF); if not, the Ministry of Finance will prepare a revised MTBF for parliamentary approval and Fiscal Council review/opinion.
- Slovakia (since 2012)
  - Escape clauses for a major recession, banking system bailout, natural disaster, and international guarantee schemes.
- Spain (since 2002)
  - In case of natural disasters, exceptional slowdown, exceptional budget deficits are accompanied by a medium-term financial plan to correct the situation within the next 3 years (to be approved by a majority vote by the parliament).
- Switzerland (since 2003)
  - Government can approve by supermajority a budget deviating from the budget balance rule in "exceptional circumstances" (natural disaster, severe recession, changes in accounting methods).
- EU member states/euro area (since 2005)
  - An excessive deficit procedure may not be opened when the 3 percent deficit limit is exceeded only temporarily and exceptionally, and the deficit is close to the deficit limit (both conditions need to apply).
  - Deadlines for excessive deficit correction can be extended in case of adverse economic developments.
- WAEMU (since 2000)
  - Temporary and pronounced shortfall of real GDP (at least 3 percentage points below the average of the previous 3 years) and budget revenue (at least 10 percentage points below the average of the previous 3 years average).

*Source: National authorities; and IMF staff assessment.*

### Appendix 2. New Fiscal Rules Adopted since 2010
- Austria
  - Parliament passed on December 7, 2011, an amendment to the federal budget law stipulating that, from 2017 onward, the structural deficit at the federal level (including social insurance) shall not exceed 0.35 percent of GDP.
  - Amendment conceptually similar to the German debt brake but not yet anchored in the constitution; operational details still being prepared.
- Colombia
  - Structural budget balance rule for the central government approved by Congress in June 2011.
  - Sets a path lowering the structural deficit to 2.3 percent of GDP by 2014 and provides a ceiling of 1 percent of GDP effective in 2022.
  - Rule allows fiscal expansion when expected output growth rate is at least 2 percentage points lower than the long-term rate and creates a sovereign wealth fund.
- Ecuador
  - New expenditure rule adopted in 2010 and took effect in 2011; existing budget balance and debt rules were dropped.
  - Expenditure rule: current expenditure cannot be higher than permanent income including oil revenue.
  - External financing and oil revenues to be used only to finance public investment.
- Italy
  - Constitutional amendment approved in April 2012 introducing principle of a balanced budget in structural terms; details to be specified in secondary legislation by end-February 2013.
- Hungary
  - A debt rule included in the Constitution will come into effect in 2016 and require cutting government debt-to-GDP ratio annually until it falls to below 50 precent of GDP.
  - Debt reduction can be suspended when real GDP contracts.
- Japan
  - The Fiscal Management Strategy (including a pay-as-you-go rule) was adopted in 2010 (by cabinet decision).
  - Rule implies measures increasing expenditure or decreasing revenue need to be compensated by permanent expenditure reductions or permanent revenue-raising measures.
  - A Medium-Term Fiscal Framework, including a limit on expenditure, was also introduced.
- Namibia
  - An expenditure rule took effect in 2010 that caps the ratio of expenditures to GDP at 30 percent.
- Poland
  - New expenditure rule (from 2011) limits increase in central government discretionary spending and all newly enacted spending to 1 percent in real terms (based on consumer price index inflation) (defined in 2011 budget law).
- Portugal
  - New budgetary framework law (May 2011) approved a fiscal rule establishing that the general government structural balance cannot be less than the medium-term objective in the Stability and Growth Pact.
  - Includes requirements for correction of the multiannual plan whenever deviations occur.
  - Rule to come into effect in 2015.
- Romania
  - From 2010 general government expenditure growth should not exceed projected nominal GDP for three years until the budget balance is in surplus.
  - Personnel expenditure limits binding for two years.
- Serbia
  - October 2010 fiscal responsibility provisions introduced in the 2009 budget system law, including numerical fiscal rules and adoption of a fiscal council.
  - Fiscal rules include a budget balance rule correcting for past deficit deviations and allowing partial operation of automatic fiscal stabilizers.
  - A debt rule provides a ceiling on general government debt of 45 percent of GDP.
- Slovak Republic
  - December 2011 constitutional bill (effective March 1, 2012) caps public debt at 60 percent of GDP.
  - Automatic adjustment mechanisms take effect when debt-to-GDP ratio reaches 50 percent.
  - Bill calls for setting up a Fiscal Council to monitor and evaluate fiscal performance.
- Spain
  - Constitutional amendment (2011) and organic legislation (2012) require structural deficit for all levels of government stay within EU limits and set debt limits for each level of government.
  - Rules to enter into force from 2020, with transition rules until then.
  - Amendment introduces expenditure ceilings and constrains expenditure growth for all levels of government.
- United Kingdom
  - New cyclically adjusted budget balance rule from 2010 aims to achieve cyclically adjusted current balance by end of the rolling five-year forecast period (currently by FY2016/17).
  - New debt rule (from 2010) targets a falling public sector net-debt-to-GDP ratio by FY2015/16.
- United States
  - Statutory pay-as-you-go rules for revenue and mandatory spending reinstated in February 2010 but subject to important exemptions.
  - August 2011 Congress enacted discretionary spending caps, saving about $900 billion over the next decade.
  - Additional automatic spending cuts (sequesters) scheduled to take effect from January 2013 to produce savings of US$1.2 trillion over a decade, with one-half coming from defense spending and the other half from domestic programs, excluding Social Security, Medicaid, parts of Medicare, and certain other entitlement programs.
  - Note: pay-as-you-go rules are not codified (counted) in the dataset of this report as considered procedural rather than numerical rules.

*Source: National authorities; and IMF staff assessment.*

### Appendix 3. Country Coverage
- List of countries which had national and/or supranational fiscal rules in effect during 1985 to end-March 2012 (or with clearly specified transition regimes) is provided.
- Examples by category (as listed):
  - Advanced Economies: Australia; Austria; Belgium; Canada; Cyprus; Czech Republic; Denmark; Estonia; Finland; France; Germany; Greece; Hong Kong SAR; Iceland; Ireland; Israel; Italy; Japan; Luxembourg; Netherlands; New Zealand; Norway; Portugal; Russia; Slovak Republic; Slovenia; Spain; Sweden; Switzerland; United Kingdom; United States.
  - Emerging Economies: Antigua and Barbuda1/; Argentina2/; Botswana; Brazil; Bulgaria; Chile; Colombia; Costa Rica; Ecuador; India2/; Indonesia; Jamaica; Latvia1/; Lithuania; Malta1/; Mexico; Namibia; Pakistan; Panama; Peru; Poland; Romania; Serbia; Sri Lanka.
  - Low-income Countries: Armenia; Benin1/; Burkina Faso1/; Cameroon1/; Cape Verde; Central African Republic1/; Chad1/; Congo1/; Cote d'Ivoire1/; Equatorial Guinea1/; Dominica1/; Gabon1/; Grenada1/; Guinea Bissau1/; Kenya; Kosovo; Mali1/; Niger1/; Nigeria; Senegal1/; Togo1/; St. Kitts and Nevis1/; St. Lucia1/; St. Vincent and the Grenadines1/.
- Footnotes in list:
  - 1/ Countries with only supranational rules in effect by end-March 2012.
  - 2/ Countries that had rules in effect at some point during 1985 and end-March 2012 but no longer at end-March 2012.

*Source: Country coverage list as provided in the content unit above.*

### Appendix 4. Fiscal Rules Index Using Random Weights

### Appendix 4. Fiscal Rules Index Using Random Weights

### Methodology: random weights technique
- The random weights technique uses 1,000 sets of randomly-generated weights to generate 1,000 fiscal rule overall indices.
- The random weights are drawn from uniformly distributed random observations between zero and one and are normalized to sum to the total number of indicators in each index.
- The property of the assumed uniform distribution implies that the mean value of each synthetic indicator is asymptotically equivalent the indicator assuming equal weights across the components (un-weighted sum).

### Main robustness finding
- The overall fiscal rules index, which combines different characteristics of the rules, is robust to alternative weighting schemes based on 1,000 randomly-generated weights.
- Altering the weighting of the sub-components does not lead to sizeable changes of the fiscal rules index.

### Appendix Figure 1 (description)
- Appendix Figure 1 illustrates the distribution of 90 percent of the 1,000 generated fiscal rules indices for a selected sample of euro area countries.
- Countries shown (National and Supranational Rules / National Rules): Estonia; Slovak Republic; France; Austria; Germany; Luxembourg; Spain; Finland; Netherlands.
- Figure boxplot interpretation provided in source:
  - The higher limit of each box represents the upper quartile; the lower limit the lower quartile; and the diamond the median of the generated indices.
  - The dots correspond to outliers.
  - The lines stretching above and below each box represent the maximum and minimum, excluding the outliers. These lines go as far as 1.5 times the inter quartile range (the distance between the upper and lower quartile).
- Note in source: "The results are similar for other countries and for different type of fiscal rules."

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### Appendix 5. Fiscal Rules and Fiscal Performance: Some Preliminary Statistical Evidence

### Literature summary and main empirical findings
- Several econometric studies find that fiscal rules are associated with stronger fiscal performance; literature mainly on EU countries and some emerging economies.
- Main findings reported:
  - (i) Tighter and more encompassing fiscal rules are correlated with stronger cyclically adjusted primary balances in EU countries.
  - (ii) Budget balance and debt rules have contributed to better budgetary outcomes than expenditure and revenue rules.
  - (iii) Rules covering wider levels of government have been associated with more fiscal discipline.
  - Some features of the rules such as a strong legal basis and strict enforcement appear to have a beneficial impact on fiscal performance.

### Empirical caveats emphasized in source
- Positive correlation between fiscal rules and fiscal performance could reflect omitted variables (for example, political commitment to fiscal discipline) leading to statistical bias.
- Reverse causality could bias results because fiscal rules could be adopted to "lock in" gains from consolidation.
- International experience shows fiscal rules can be circumvented, ignored, or abandoned over time and cannot substitute for strong commitment to fiscal discipline.

### Simple correlations presented (not causal claims)
- Objective: present simple correlations between various fiscal rules indices and the change in public debt to indicate whether more encompassing design features are associated with better fiscal performance.
- Key descriptive result in source: "National fiscal rules with more comprehensive design features are associated with lower debt accumulation. The correlation is however not significant when both national and supranational are considered. This could reflect the limited changes in supranational rules during the last decade and suggests a higher role of national rules."

### Appendix Figure 2 (regression summaries and data coverage)
- Data coverage: "Data from 1985-2011 for 79 countries."
- National and Supranational Fiscal Rules Index (regression shown in source):
  - y = -3.1x + 4.8
  - [t = -1.19]
  - R-squared = 0.02
  - Horizontal axis label in source: Overall fiscal rule index (10-Year Average)
  - Vertical axis label in source: Change in 10-Year Average Debt/GDP Ratio
- National Fiscal Rules Index (regression shown in source):
  - y = -7.7x + 13.1
  - [t = -2.66]***
  - R-squared = 0.10
  - Horizontal axis label in source: Overall fiscal rule index, National rules (10-Year Average)
  - Vertical axis label in source: Change in 10-Year Average Debt/GDP Ratio

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### Appendix 6. Fiscal Responsibility Laws in Selected Countries: Main Features

- Source compilation: Corbacho and Schwartz (2007); national authorities; and IMF staff assessment.
- Notes from source (exact wording preserved):
  - 1/ BBR = budget balance rules; DR = debt rule; ER = expenditure rule;
  - 2/  GG = general government; CG = central government, PS=public sector; NFPS=Non-financial public sector.
  - 3/ Includes only well-specified escape clauses. In India’s FRL, for example, the escape clause is very general.
  - 4/ The FRL has de facto been suspended since 2009.
  - 5/ Also includes public bodies.
  - 6/ These countries operate (de facto) rules, which are however not spelled out in the FRL.

- Selected country entries (as presented in source table, preserving exact terms and punctuation):
  - Argentina: Federal Regime of Fiscal Responsibility (2004) 1999, 2001 Yes ER; DR CG No Yes 4/
  - Australia: Charter of Budget Honesty (1998) Yes -- 6/ CG No No
  - Brazil: Fiscal Responsibility Law (2000) Yes ER; DR PS Yes Yes
  - Chile: FRL (2006) Yes BBR CG No No
  - Colombia: Original Law on Fiscal Transparency and Responsibility (2003) 1997, 2000 Yes BBR NFPS Yes No
  - Ecuador: Fiscal Responsibility Law (2010) 2002, 2005 Yes ER PS No No
  - India: Fiscal Responsibility and Budget Management Act (2003) Yes BBR CG No No
  - Jamaica: Fiscal Responsibility Law (2010) 2010 Yes BBR; DR CG 5/ Yes No
  - Mexico (2006) Yes BBR CG Yes Yes
  - Nigeria (2007) BBR CG No No
  - New Zealand: Public Finance (State Sector Management) Bill (2005) 1994 Yes -- 6/ GG No No
  - Pakistan: Fiscal Responsibility and Debt Limitation Act (2005) Yes BBR; DR CG Yes No
  - Panama: New Fiscal Responsibility Law (2009) Law No. 2 on Economic Activity Promotion and Fiscal Responsibility (2002) Yes BBR; DR NFPS Yes No
  - Peru: Fiscal Responsibility and Transparency Law (2003) 1999 Yes BBR; ER NFPS Yes Yes
  - Romania (2010) Yes ER GG Yes Yes
  - Serbia (2010) FRL provisions introduced in the 2009 Budget System Law Yes BBR; DR GG No No
  - Spain: Budget Stability Law (2007) 2001 Yes BBR NFPS Yes Yes
  - Sri Lanka: Fiscal Management Responsibility Act (2003) Yes BBR; DR CG No No
  - United Kingdom: Budget Responsibility and National Audit Act (2011) Code for Fiscal Stability (1998) Yes BBR; DR PS No No

*Source: IMF staff (content unit: Appendix 4–6 as provided).*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2012/_wp12187.pdf_