Fiscal rules or objectives in relation to public spending, deficit, or debt levels act as a commitment mechanism for governments, signalling their fiscal intentions and ensuring thar their fiscal strategy will be conducted in a transparent and accountable manner. The lack of fiscal rules or objectives, or their lack of credibility, can significantly undermine public finances by eroding citizens’ trust in the government's capacity to deliver its policies, diminishing investors’ confidence in public finances and ultimately increasing borrowing costs.
Fiscal Frameworks
Fiscal frameworks outline the government's fiscal intentions and explain how these will be implemented concretely. Well-designed fiscal frameworks provide clarity and stability in government fiscal operations, ensuring that spending on policy priorities of governments, like healthcare, education, and climate adaptation, are funded and sustainable. Additionally, they build resilience by helping governments prepare effectively for economic challenges.
Key messages
Medium-Term Budget Frameworks (MTBFs) and Medium-Term Expenditure Frameworks (MTEFs) help governments explain how they will achieve their economic, social, and environmental goals in a fiscally responsible manner. To do so, MTBFs generally comprise three key elements: a revenue forecast, cost estimates of existing policies (the baseline) and new policies, and expenditure ceilings. In contrast, MTEFs focus on expenditure. The elements in these frameworks align spending, revenues and fiscal rules for three to five year periods, providing a clear plan for government operations.
Government spending plans can be disrupted by unforeseen events. Disruptions can come from large shocks like the global financial crisis or the COVID-19 pandemic and from a variety of other causes, such as natural disasters or financial difficulties of subnational governments. Effective fiscal management involves identifying, analysing, and addressing these risks to ensure that MTEFs and expenditure ceilings are adhered to, even in the face of unexpected challenges and maintain financial stability and resilience.
Context
New generation of fiscal rules and objectives is needed to foster trust in fiscal frameworks.
Most OECD countries have fiscal objectives and rules. In the recent past, in particular during economic shocks, these rules have however been breached, revised and have multiplied, showing the need for better design. By re-establishing government and public commitment to simple, credible, and appropriately flexible fiscal rules, governments can deliver better fiscal management and restore trust in sustainability of public finances.
Stronger MTBFs are needed to enhance fiscal credibility.
MTBFs and MTEFs are among the most innovative and widely adopted budgetary tools in OECD countries today. Their potential for improving fiscal planning and discipline is immense. However, to fully realise this potential, it is important to ensure that annual budgets consistently align with the expenditure ceilings set in previous years. By strengthening MTEFs through robust processes for preparing baselines and determining expenditure ceilings, OECD countries can enhance the effectiveness of their fiscal frameworks and build greater confidence in their financial management.
Related policy issues
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The OECD Network on Fiscal Relations across Levels of Government, also known as the “Fiscal Network”, provides a platform for countries to engage on intergovernmental fiscal relations and fiscal decentralisation policy issues. Its core mission is to improve the efficiency, equity and stability of fiscal systems through cross-country policy analysis and international comparisons. The Network facilitates best practice sharing through high-level meetings and maintaining a comprehensive decentralisation database, informing policymaking and reforms. Through collaborative efforts like workshops and the Fiscal Federalism publication series, the Network enables policymakers to access and contribute to research and insights on managing financial relationships across government levels. Supported by a multidisciplinary OECD team, the Network emphasises concrete outcomes, offering members a structured environment to learn, share and apply successful policy strategies.Learn more
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Gender budgeting is a public governance tool that governments can use to assess how budget decisions impact gender equality. When implemented effectively, gender budgeting helps expose how gender inequalities may have inadvertently become embedded in public policies and the allocation of resources and promotes budget measures that will be effective at closing gender gaps.Learn more
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Green budgeting uses the tools of budgetary policy making to provide policy makers with a clearer understanding of the environmental and climate impacts of budgeting choices, while bringing evidence together in a systematic and co-ordinated manner for more informed decision making to fulfil national and international commitments.Learn more
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Without a major policy shift, health spending is projected to outstrip both expected growth in the overall economy and in government revenues across OECD countries. Competing priorities for government spending are also squeezing health budgets. Urgent action is therefore needed to finance more resilient health systems while ensuring the fiscal sustainability of health systems.Learn more
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Our work with parliaments and independent fiscal institutions (IFIs) supports fiscal transparency and accountability. At a time when the sustainability of public finances is under close scrutiny, these oversight institutions play a crucial role in raising the quality of the debate on fiscal policy and ensuring that public budgets are managed effectively.Learn more
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In an environment of budget constraints and high citizen expectations it is necessary to demonstrate that public expenditure is providing value for money and delivering on performance. The availability of good-quality performance information not only assists policymakers in making more informed budgetary decisions but also enables the broader public to hold the government accountable for delivering the outcomes promised to citizens.Learn more
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Good management of public money is vital for good governance, ensuring essential services like healthcare and education run smoothly. Public accounts track government income and spending, they show how money is managed and if the government can fund these crucial services.Learn more
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Prudent public debt management is critical for well-functioning national financial systems and helps to reinforce sound fiscal and monetary policies. However, public debt portfolios, both because of their size and composition, can generate substantial risk to countries’ balance sheets and overall financial stability. The OECD promotes good practices in public debt and risk management and provides recommendations to assist policy makers in their efforts to adopt and implement prudent debt management policies.Learn more
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Spending reviews are tools for systematically analysing the government’s existing expenditure. The OECD has found that spending reviews have proved to be an important tool for governments, not only to control total expenditure by making space for more resources, but also to align spending allocations with government priorities and to improve the effectiveness of policies and programmes.Learn more