Pandemic Tests Resilience and Credibility of Fiscal Rules

IMF Blog, January 27, 2022

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Since 1990, a growing number of countries have adopted fiscal rules to strengthen budgetary discipline and enhance the credibility of public finances.
Fiscal rules are numerical limits on spending, deficits, or debt that signal a government’s commitment to prudence.
Fiscal councils—independent, non-partisan agencies—are becoming more common to provide independent oversight and monitor compliance with rules.
The pandemic forced governments to balance emergency support with preserving the credibility of rules-based fiscal frameworks.

Nearly 40 percent of economies with fiscal rules activated escape clauses during the pandemic (examples given: European Union, Jamaica, Paraguay, the United Kingdom).
By contrast, 5 percent activated such clauses during the global financial crisis.
In 2020:
- About 90 percent of countries had deficits larger than the rule limits—by about 4 percent of gross domestic product, on average.
- Public debt exceeded the limit for over half of the countries with rules in place.
- Public debt surpassed the limits by about 50 percent of GDP on average in advanced economies and by about 25 percent in emerging markets.
Deviations from rules—especially debt limits or anchors—are difficult to reverse, as evidenced after the global financial crisis:
- Advanced economies slowly returned to pre-crisis deficit rule limits, but debts remained elevated.
- In emerging markets and developing economies, deficits first declined toward limits but then widened again after 2014 when commodities prices fell.
Empirical evidence suggests that deviations from deficit limits are associated with higher financing costs.

Fiscal councils assessed crisis-related policy responses and the appropriate use of escape clauses, providing transparency and credibility.
Typical council functions include: costing policy measures, assessing budgetary forecasts, and monitoring rules.
Councils sometimes advised on the size and type of fiscal support and emphasized the need for greater transparency of COVID-19 fiscal measures.
Key supporting institutional features highlighted: monitoring bodies, fiscal responsibility laws, legal basis, coverage, escape clauses, enforcement procedures, and channels of influence (remit, tasks, independence, accountability, human resources).

A central post-pandemic challenge: whether and how to modify the rules-based framework after major deviations.
Countries face difficult choices; robust fiscal institutions and medium-term frameworks are important to preserve credibility during transition.
Recommendations / elements for effective rules-based frameworks:
- Strong political commitment and a good record of compliance.
- Right incentives to build buffers during good times.
- Well-designed escape clauses to manage large adverse shocks.
- Strengthening fiscal councils’ ability to operate independently and fulfill their mandates to improve credibility and accountability.
Countries could use the post-crisis period to further strengthen fiscal rules given that existing frameworks, while flexible during crises, have failed to prevent large and persistent public debt buildup.

The IMF released updates of two global datasets on fiscal rules and fiscal councils.
As of end-2021:
- About 105 countries had rules, an increase from fewer than 10 in 1990.
- The number of countries with fiscal councils rose from 19 in 2010 to 49 today.
Dataset 1: Information on national and supranational fiscal rules in 106 countries from 1985 to 2021, including types and characteristics of rules (legal basis, coverage, escape clauses, enforcement procedures) and supporting features (monitoring bodies, fiscal responsibility laws).
Dataset 2: Key features of fiscal councils as of December across the IMF’s membership, including remit, tasks, channels of influence, and institutional characteristics (independence, accountability, human resources).
Purpose: Help policymakers strengthen fiscal governance using the best available international evidence.

Paulo Medas and Raphael Lam, January 27, 2022 — Pandemic Tests Resilience and Credibility of Fiscal Rules