Posted by Victor Lledó
Fiscal rules and fiscal councils have been increasingly recognized as important tools to promote sound fiscal policies. By constraining discretion and fostering transparency, they enhance fiscal discipline and make fiscal policy more predictable. In particular, fiscal rules can help governments establish fiscal targets that support fiscal sustainability, while fiscal councils help ensure those targets are realistic.
Together, they can raise the financial and reputational costs of deviating from the announced targets. In doing so, they help prevent excessive fiscal deficits and unstable debt dynamics. Fiscal rules and fiscal councils also contribute to improve fiscal behavior over the business cycle and encourage better risk management as building buffers in good times makes space to conduct countercyclical policies in bad times and to absorb the realization of fiscal risks. Healthy and resilient public finances, in turn, give policymakers the room needed to serve other objectives, including economic efficiency and growth, as well as achieving a more equitable distribution of income.