What are numerical fiscal rules?

According to the most widespread definition, fiscal rules set permanent constrains on fiscal policy, typically defined in terms of a summary indicator of fiscal performance often expressed as a numerical ceiling or target in proportion to GDP (see Kopits and Symansky, 1998*). Thus, three main features characterize a well-defined fiscal rule, namely 1) a permanent character, meaning that the constraint must be perceived to be binding for a sufficiently long period of time; 2) specification in terms of an overall fiscal performance indicator (such as the government budget deficit, debt, expenditure, revenue, etc.); and 3) the provision of a numerical ceiling or target. While the first primary objective of fiscal rules is to enhance budgetary discipline, they can also foster policy coordination between different levels of government depending on their institutional coverage. Additionally, fiscal rules may further contribute to the reduction of uncertainty about future fiscal policy developments. However, fiscal rules can only yield these benefits if appropriate institutions for monitoring and enforcement mechanisms are in place, or if they are supported by strong political commitment.

Database on numerical fiscal rules

Commission services have compiled a dataset on domestic fiscal rules in force since 1990 across EU countries by collecting directly this information from the EU Member States. The dataset covers all types of numerical fiscal rules (budget balance, debt, expenditure, and revenue rules) at all levels of government (central, regional, and local, general government, and social security). The information was first collected in a 2006 survey, with annual updates scheduled since 2008. The latest available update covers developments that occurred in the course of 2017. The scope of information includes the description and definition of the fiscal rule and its coverage, its statutory base, monitoring bodies, correction mechanisms in case of deviation from the rule, as well as experience with the respect of the rule.

Numerical indicators capturing the design strength of fiscal rules

To be effective in containing budgetary imbalances, fiscal rules need to be equipped with appropriate characteristics within the institutional framework of budgetary policy: whether a fiscal rule will be respected or not depends to a large extent on its institutional features. To capture the influence of these features, the Directorate General for Economic and Financial Affairs (DG ECFIN) has constructed an index of strength of fiscal rules, using information on i) legal base, ii) binding character, iii) monitoring bodies, iv) correction mechanisms, and v) resilience to shocks.

Based on the fiscal rule strength index for each rule, a comprehensive time-varying fiscal rule index for each Member State was constructed by summing up all fiscal rule strength indices in force in the respective Member State weighted by the coverage of general government finances of the respective rule (i.e. public expenditure of the government sub sector(s) concerned by the rule over total general government expenditure). In the presence of more than one rule covering the same government sub-sector, the second, third and fourth rules obtain weights ½, ⅓, and ¼, to reflect decreasing marginal benefit of multiple rules applying to the same sub-sector. The assigned weights are mainly determined by the fiscal strength of the rule and its coverage.  The fiscal rules database contains the 1990-2017 time series for the fiscal rule index.

In light of the broad-ranging reforms to national fiscal frameworks in recent years, the methodology used to construct the fiscal rules indicators was changed in 2015 following an in-depth review carried out by DG ECFIN. The new and improved methodology  has been implemented since the 2015 vintage of the database. The 'old' methodology has been discontinued, but the historical data vintages computed according to it are still available for download at the link below. To provide a bridge between the 'old' and 'new' data series, the 2015 vintage of the database has been computed according to both methodologies. The latest vintage of the database refers to the year 2017.

*Kopits G., and Symansky S., 1998, "Fiscal policy rules", IMF, Occasional Paper Nr. 162




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