Fiscal Rules From A strongPolitical Economystrong Perspective.pdf

Fiscal Rules From A Political Economy Perspective Allan Drazen Tel Aviv University, University of Maryland, NBER, and CEPR January 25, 2002 This version June 9, 2002 Prepared for the IMF-World Bank Conference on Rules-Based Fiscal Policy in Emerging Market Economies, Oaxaca, Mexico, February 14-16, 2002. I wish to thank George Kopits, Andres Conesa, and conference participants for useful comments. Financial support from the Yael Chair in Comparative Economics, Tel Aviv University is gratefully acknowledged. 1 1. Introduction Persistent deficits, implying secular growth of debt, have led many to argue that fiscal rules may play an important role in helping reduce or eliminate deficits and help control the growth of government debt. There are two general classes of fiscal rules. First, there are legislated quantitative constraints on fiscal policy. These limits take a variety of forms: restrictions on deficit financing, including balanced budget laws; expenditure ceilings; numerical targets for fiscal variables; borrowing rules; and, restrictions on issuance of debt. Much of the discussion of fiscal rules concerns such restrictions.1 Second, there are restrictions or rules on the procedure by which fiscal decisions are made. Procedural rules may concern both the general procedures by which fiscal policy is formulated, as well as procedures to help ensure that policy rules are actually executed. Examples of the former include: the extent to which the process of formulating the budget is “hierarchical”; effect