A New Fiscal Rule: Should Israel “Go Swiss?”
April 1, 2008
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Summary
We propose a fiscal rule that fulfills a specific debt reduction objective while maintaining significant fiscal flexibility-two overarching concerns in Israel. Not unlike the Swiss "debt brake," the rule incorporates an error-correction mechanism (ECM) through which departure from the debt objective affects binding medium-run expenditure ceilings. Two variants of our ECM rule are shown to be superior to a comparable deficit rule in terms of attaining the debt objective and allowing for fiscal stabilization while supporting medium-term expenditure planning. Given its relative sophistication, a proper implementation of the ECM rule requires supportive fiscal institutions, including independent input and assessment.
Subject: Budget planning and preparation, Expenditure, Fiscal policy, Fiscal rules, Public debt
Keywords: deficit target, expenditure ceiling, expenditure growth ceiling, expenditure rule, Medium-run expenditure plan, WP
Pages:
27
Volume:
2008
DOI:
Issue:
087
Series:
Working Paper No. 2008/087
Stock No:
WPIEA2008087
ISBN:
9781451869484
ISSN:
1018-5941
