Model Fiscal Rules

The empirical and theoretical literature has identified the key characteristics of a model fiscal rule. The rule should be as follows:
• Well-defined: indicator, institutional coverage, specific escape clauses:
- Overall balance preferred over current balances as investment expenditure suffers from both conceptual and measurement weaknesses;
-Public sector rather than general government (to include off-budget operations and the cost of quasi-fiscal activities of public enterprises; however, it may be desirable to exclude the social security system as assets cover future contingent liabilities).
• Transparent: accounting, forecasting, and institutional arrangements.
• Adequate: contain inflation (limits on borrowing from the central bank), reduce remaining external vulnerabilities (limits on budget deficit), sustainability of public-debt-to-GDP ratio (limits on government debt, or a minimum primary surplus).
• Consistent: criteria need to be internally consistent and with other macroeconomic or policy rules (inflation targeting).
• Simple: appeal to legislature and public.
• Flexible: accommodate external shocks by allowing room for automatic stabilizers and discretionary policies to work (i.e., use of structural primary surplus rule or balanced-budget rules over a medium-term horizon).
• Enforceable: constitutional or legal statutes, perhaps with penalties; independent fiscal councils.
• Efficient: the rule should prevent structural one-off measures (frequent adjustment in tax rates); a fiscal rule should be a catalyst for fiscal reforms that ensure sustainability.

-FISCAL POLICY DURING DOWNTURNS AND THE PROS AND CONS OF ALTERNATIVE FISCAL RULES, chapter in
Philippines: Selected Issues