Fiscal Rules and Fiscal Councils: Recent Trends and Performance during the COVID-19 Pandemic

IMF Working Papers, January 27, 2022

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Canonical URL: Fiscal Rules and Fiscal Councils: Recent Trends and Performance during the COVID-19 Pandemic

Authors: Hamid R Davoodi, Paul Elger, Alexandra Fotiou, Daniel Garcia-Macia, Xuehui Han, Paulo A Medas
Published: January 27, 2022
Series: IMF Working Papers
DOI: https://doi.org/10.5089/9798400200472.001

Adoption of fiscal rules and fiscal councils continued to increase globally over the last decades based on two new global datasets.
During the pandemic, fiscal frameworks were put to test.
The widespread use of escape clauses was one of the novelties in this crisis, which helped provide policy room to respond to the health crisis.
The unprecedented fiscal actions have led to large and widespread deviations from deficit and debt limits.
The evidence shows that fiscal rules, in general, have been flexible during crises but have not prevented a large and persistent buildup of debt over time.
Experience shows that deviations from debt limits are very difficult to reverse.
The paper presents evidence on the benefits of a good track record in abiding by the rules.
These findings highlight difficult policy choices ahead and the need to further improve rules-based fiscal frameworks.

Trends in institutional adoption:
- Continued global increase in adoption of fiscal rules and fiscal councils (based on two new global datasets).
Crisis response and institutional design:
- Escape clauses were widely used during the COVID-19 pandemic to create policy room for health-related spending.
- Flexibility of rules during crises allowed large fiscal actions but undermined adherence to deficit and debt limits.
Debt dynamics and reversibility:
- Large and persistent buildup of debt occurred despite the existence of fiscal rules.
- Deviations from debt limits are very difficult to reverse, implying long-term fiscal implications.
Track record and credibility:
- A good historical record of abiding by fiscal rules provides measurable benefits (evidence presented in the paper).

Policy choices ahead are difficult given the trade-off between crisis responsiveness and long-term debt sustainability.
There is a demonstrated need to further improve rules-based fiscal frameworks to enhance resilience while preserving fiscal credibility.
Strengthening the track record of compliance with fiscal rules can yield benefits for fiscal governance and outcomes.