Are (Fiscal) Rules Made to Be Broken? The Law and Economics Analysis of the Numerical Fiscal Constraints

Abstract

By constraining political incentives and discretion, the numerical fiscal rules are among the main institutional (legal) instruments to ensure fiscal discipline. As stated in this paper, in order to be effective, the numerical fiscal rules need to inflict sufficiently high costs for their violation, which would outweigh the political benefits of excessive deficits. The paper attempts to answer two questions with regard to fiscal rules. First, it inquiries whether there is a difference in effectiveness between the numerical fiscal rules imposed by the international treaties and those enacted domestically. Second, it examines the effectiveness of the selected qualitative features of the national numerical fiscal rules. The results included in this paper show that while the national fiscal rules are associated with improved budget balance, this link is weaker for the supranational rules. Also, according to the results, the formal enforcement mechanism turned out to be the most important institutional element in guaranteeing the rules’ effectiveness.

Keywords: Numerical Fiscal Rules, Fiscal Policy

JEL Classification: E62, C23