Final Fixing the Roof While the Sun is Shining Ten Lessons from Country Experiences with Fiscal Policy Rules

Country experiences was reviewed in this paper together with the implementation of fiscal policy rules with the objective of deriving policy relevant lessons for developing countries. To that end, it commenced by discussing what fiscal rules are, and why governments may choose to adopt them. Following onto that, it also explored country experiences centering on a range of design and implementation features, along with various supporting requirements that would ensure the success of fiscal rules. Fiscal rules could be useful devices for tackling fiscal indiscipline, regulating the size of the government, supporting inter generational equity, cementing policy credibility, and lessening vulnerability to crisis. In particular, they are potentially useful when introduced as part of an adjustment program, or as part of a broader effort to strengthen key national institutions and adopt best practices in the management of public finances. Fiscal rules can function as a meaningful commitment device only if well designed, properly implemented, and backed by robust institutional infrastructure. Fiscal rules require discipline and governments need to resist the temptation to spend, while safely investing the savings. Political considerations make these decisions difficult to implement but they are also the reasons why the rules are needed. Incumbents typically do not want to leave resources for someone else to benefit politically, while special interest groups put pressure on the government to spend those resources. To solve these problems, countries like Chile have institutionalized some rules. Empirical evidence suggests that fiscal policy rules are statistically associated with better fiscal performance. Fiscal rules have also been identified as an important factor accounting for the success of fiscal consolidation. Empirical studies on advanced countries show that stronger and wider fiscal rules as measured by a fiscal rules index were associated with a greater likelihood for successful fiscal consolidation. They reveal that coverage, design and strength of fiscal rules, as well the quality of budgetary procedures promote fiscal consolidation.