National Expenditure Rules – Why, How and When

Expenditure rules present a number of features in terms of simplicity, transparency, monitoring and accountability that make them particularly appealing relative to other types of rules and may substantially contribute to an improved fiscal policy making. They also show an appropriate balance between budgetary discipline and macroeconomic stabilization. In turn, they have represented a cornerstone in the fiscal strategy adopted by some EU Member States to sustain successful episodes of fiscal consolidation over the last decades. However, their final effectiveness to promote fiscal discipline depend on a number of design issues such as the appropriate target definition, the time horizon of the rule, the existence of well defined corrective mechanisms, and a suitable coverage both in terms of budgetary items (i.e. spending categories excluded from the coverage) and government layers. Since spending norms only focus on the expenditure side of the budget they need to be supplemented by other types of rules and arrangements (e.g. controls over tax expenditure) to ensure a proper functioning. Last but not least, the design of national spending rules should ensure that government spending developments are in line with the expenditure benchmark included in the reformed SGP and effectively sustain the achievement of the MTOs.