Promoting Fiscal Discipline

Books, October 18, 2007

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Promoting Fiscal Discipline

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Bibliographic details

• Authors: Manmohan S. Kumar, Teresa Ter-Minassian
• Published: October 18, 2007
• Series: Books
• DOI: https://doi.org/10.5089/9781589066090.071

Core findings and framing

• Fiscal discipline is essential to improve and sustain economic performance, maintain macroeconomic stability, and reduce vulnerabilities.
• Discipline is important for both industrial and developing countries to meet the challenges and reap the benefits of economic and financial globalization.
• Lack of fiscal discipline generally stems from the injudicious use of policy discretion.
• Benefits of discretion:
  • Ability of policymakers to respond to unexpected shocks.
  • Allows elected political representatives to fulfill their mandates.
• Risks of misuse of discretion:
  • Persistent deficits and procyclical policies.
  • Rising debt levels.
  • Over time, a loss in policy credibility.

Analysis: discretion and procyclicality

• The authors explore:
  • The role of discretion in fiscal policy.
  • The extent, consequences, and causes of procyclicality, particularly in good times.
• Procyclicality is identified as a central problem arising from discretionary policy choices that undermine long-term fiscal stability.

Institutional approaches to strengthening discipline

• Institutional mechanisms examined:
  • Fiscal rules.
  • Fiscal responsibility laws.
  • Fiscal agencies.
• Each approach can play a useful role in improving fiscal discipline.
• Recommendation:
  • A strategy combining fiscal rules, fiscal responsibility laws, and fiscal agencies is likely to be particularly beneficial.
  • Such a combined strategy requires political commitment and effective fiscal management.
  • The strategy itself can bolster political commitment by highlighting restraints on government and raising the costs of failing to respect them.

Subject coverage and keywords

• Subjects: Budget planning and preparation, Expenditure, Fiscal policy, Fiscal stance, PFM legal and regulatory frameworks, Public financial management (PFM)
• Keywords include: Africa, Australia and New Zealand, BOOK, Budget planning and preparation, country, debt ratio, deficit, deficit bias, East Asia, Eastern Europe, Europe, expenditure rule, fiscal policy bias, fiscal policy choice, Fiscal stance, FRL provision, Global, government, market, PFM legal and regulatory frameworks, policy outcome