A New Fiscal Rule: Should Israel “Go Swiss?”

IMF Working Papers, April 1, 2008

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A New Fiscal Rule: Should Israel “Go Swiss?”

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Bibliographic details

• Authors: Steven A. Symansky, Xavier Debrun, Natan P. Epstein
• Published: April 1, 2008
• Series: IMF Working Papers
• DOI: https://doi.org/10.5089/9781451869484.001

Summary

• Authors: Steven A. Symansky, Xavier Debrun, Natan P. Epstein
• Date: April 1, 2008
• Core proposal: A fiscal rule that fulfills a specific debt reduction objective while maintaining significant fiscal flexibility.
• Conceptual inspiration: 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.
• Comparative claim: Two variants of the 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.
• Implementation caveat: Given its relative sophistication, a proper implementation of the ECM rule requires supportive fiscal institutions, including independent input and assessment.

Proposed rule design and mechanics

• Error-correction mechanism (ECM):
  • Departure from the debt objective directly affects binding medium-run expenditure ceilings.
  • ECM provides an automatic, rule-based adjustment channel to steer debt toward the objective while preserving expenditure planning horizons.
• Variants:
  • Two ECM variants are developed and analyzed (variants are described conceptually in the paper).
• Comparison framework:
  • ECM variants are compared to a comparable deficit rule on the basis of debt attainment, fiscal stabilization, and support for medium-term expenditure planning.

Key findings and performance

• Superiority of ECM variants:
  • Both ECM variants outperform a comparable deficit rule in:
  • Attaining the specified debt reduction objective.
  • Allowing fiscal stabilization (enabling countercyclical responses when appropriate).
  • Supporting medium-term expenditure planning via binding medium-run expenditure ceilings linked to the debt gap.
• Trade-offs and strengths:
  • ECM retains significant fiscal flexibility relative to strict deficit targets.
  • By embedding error correction into expenditure ceilings, ECM balances discipline and stabilization capacity.

Policy recommendations and institutional requirements

• Implementation prerequisites:
  • Supportive fiscal institutions are required for effective implementation.
  • Independent input and assessment are necessary to operationalize the ECM rule given its sophistication.
• Policy implications:
  • Adoption of an ECM-based rule can help Israel meet a specific debt objective without unduly constraining fiscal stabilization.
  • Medium-run expenditure planning should be integrated with the ECM to ensure binding ceilings function as intended.

Content in this bundle

• 1. Central Government: DRL Ceiling Versus Actual Deficits, 1992–2009
  • 1. Central Government: DRL Ceiling Versus Actual Deficits, 1992–2009 (Markdown version)
  • 1. Central Government: DRL Ceiling Versus Actual Deficits, 1992–2009 (PDF)