The EU fiscal framework and national fiscal rules: effects on budget balance dynamics

Abstract The EU fiscal framework represented by the Stability and Growth Pact (SGP) has been an effective tool for improving average government budget balances. This paper studies how EU and national-level fiscal rules have determined the dynamics of general government budget balances during the last 30 years. The results suggest that the SGP has had, on average, a statistically significant positive effect on the development of general government budget balances, which remains robust when controlling for national fiscal rules and across multiple estimation approaches, indicating effects beyond domestic frameworks. The effects for national fiscal rules appear very heterogeneous and dependent on the specifics of the rules as well as the public sector level they apply to. The effectiveness of different forms of rules for various levels of government can differ significantly due to country-level institutional differences, but the results of the study can help policymakers in designing and implementing more efficient and better targeted fiscal rules.