What are the best practices for designing and implementing fiscal rules to ensure fiscal sustainability?
Fiscal rules are laws or regulations that constrain the fiscal policy of governments, such as limiting the budget deficit, the public debt, or the expenditure growth. They are often adopted to ensure fiscal sustainability, which means that the government can meet its current and future obligations without resorting to excessive borrowing or defaulting. But how can fiscal rules be designed and implemented effectively? Here are some best practices based on the experience and recommendations of international organizations and experts.
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Prioritize spending categories:In crafting fiscal rules, ensure nondiscretionary spending—essential expenses that can’t be reduced—is adequately prioritized. This helps maintain critical services even during budget cuts.
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Balance income and out-go:Fiscal sustainability requires monitoring both revenue and expenses. Implementing rules that stabilize income, like preventing drastic changes during economic shifts, helps maintain a balanced budget.