Fiscal rules are long-term restrictions on fiscal policy operating through numerical limits on the budgetary aggregates, usually based in legislation. As such, they can act as concrete indicators of the government’s commitment to prudent budgetary management. They can counter the tendency of government to accommodate internal and external demands by spending more than it has, given the open-ended nature of the budget process.
There is no one-size-fits-all model for designing and implementing fiscal rules. Economic, political and social factors at the national level and the budget process’s specific institutional arrangements must be taken into account in formulating fiscal rules. Commonly, fiscal rules include escape clauses to deal with unforeseen circumstances (e.g. force majeure) or external shocks.
Fiscal rules may focus on different elements of government fiscal aggregates: expenditure, budget balance (in terms of deficit or surplus), public debt and revenue. Across SEA countries, the most widespread types of fiscal rules are budget balance (70%) and debt rules (60%). These types of rules are also common in OECD countries, where all reported countries have budget balance rules, in some cases as part of the European Union and euro area membership requirements. Only 40% of the SEA countries have expenditure rules. In stark contrast, a majority of OECD countries have adopted such rules, often to complement their deficit and debt rules. Only Lao PDR and Viet Nam have implemented a revenue rule; the low incidence of such rules is also found in OECD countries (45%).
Fiscal rules can have different legal foundations. Singapore is the only SEA country that has enshrined fiscal rules in their constitution. A common legal foundation for fiscal rules in SEA countries and OECD countries is primary and secondary legislation, including complementary international rules for EU members. In exceptional cases, fiscal rules can be based primarily on a long-term political commitment, such as in Australia and New Zealand.
To avoid deviating from conditions set in the rules, countries often rely on tools such as political commitment and monitoring by independent fiscal institutions. However, many countries have enforcement mechanisms outlining the procedures in the event of an unjustified deviation from the rule’s target. Several SEA countries have chosen mechanisms where the entity responsible for the overrun must implement corrective measures, or submit a proposal detailing corrective measures to the legislature. In the OECD, 13 countries out of 33 (39%) have indicated enforcement measures where “explanation with reasons for non-compliances were presented to legislature”.