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

_IMF Working Papers, April 1, 2008_

## Source details

**Canonical URL:** [A New Fiscal Rule: Should Israel “Go Swiss?”](https://www.imf.org/en/publications/wp/issues/2016/12/31/a-new-fiscal-rule-should-israel-go-swiss-21855)

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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

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### 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.

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## 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)](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2008/_wp0887.pdf.md){rel="alternate" type="text/markdown"}
  - [1. Central Government: DRL Ceiling Versus Actual Deficits, 1992–2009 (PDF)](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2008/_wp0887.pdf){rel="external" type="application/pdf"}

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_Source: https://www.imf.org/en/publications/wp/issues/2016/12/31/a-new-fiscal-rule-should-israel-go-swiss-21855_