Abstract
Fiscal rules are institutional constraints on budget policymakers’ decision-making discretion aimed at fostering prudent fiscal policy, promoting overall fiscal discipline, and ensuring long-term fiscal sustainability. Since the European sovereign debt crisis, fiscal rules have been at the centre of the debate on the EU’s economic governance, the need to strengthen fiscal frameworks and improve policy co-ordination. This chapter outlines the origin, purpose, design, and coverage of local fiscal rules in EU countries over a decade after the 2008 financial crash. It presents a review of the empirical evidence on subnational fiscal rules and their impact and effectiveness on fiscal outcomes. The chapter ends with some concluding remarks and lessons drawn from the experience of fiscal rules across both time and space and outlines how policymakers can learn from this international experience.
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Notes
- 1.
Fiscal rules are a special case of policy rules, which, in turn, are part of the much wider rules versus discretion strand of literature in macroeconomics and, particularly, fiscal and monetary policy. For a discussion on local fiscal rules, the more relevant literature relates to local public finance, fiscal decentralisation, subnational borrowing and, in the case of this book, fiscal regulation.
- 2.
Another relevant policy rule is the no-bailout clause where an upper tier of government is precluded by law from bailing out a lower tier of government that is in financial trouble or distress. Although not unimportant, we omit this rule from our analysis.
- 3.
Although our focus is on local fiscal rules, these design features apply to all fiscal rules, i.e. regional, national or supranational rules. A breakdown of numerical fiscal rules by type of government is provided by the EC database on fiscal rules. In the context of design attributes, Kopits and Symansky (1998) have identified the following criteria of internationally accepted good practice – definition, transparency, adequacy, consistency, simplicity, flexibility, enforceability and efficiency. This is an alternative to the list outlined in Table 2.
- 4.
Although there is no established definition of second-generation fiscal rules, they appeared after the global financial crisis and are in general more enforceable, flexible and operational than their predecessors (Eyraud et al. 2018).
- 5.
Due to a word count limit (an editorial rule!), we are prevented from providing more details on country-specific examples of fiscal rules. Country examples of changes to local fiscal rules post crisis can be found in sources cited in this chapter, most especially in OECD/KIPF (2016) and Geissler et al. (2019).
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Appendix
Appendix
Austria | Austrian municipalities are obliged to adhere to the BBR. Nonetheless, not every respective state law contains this rule explicitly. Debts are generally restricted to fund capital spending and are subject to state approvals |
Belgium | BBR in place in all three regions. Municipalities can take out loans, which are used for capital expenditure. This ‘golden rule’ restricts borrowing to investment purposes. Moreover, there are region-specific regulations. In Wallonia, there is a nominal per capita debt limit. Exceptions in certain fields (like security) are possible. In Flanders, there are no direct limits to outstanding debts of a municipality |
Bulgaria | BBR in place. The annual amount of municipal debt payments for each municipality may not exceed 15 per cent of the annual average amount of own revenue and the block equalising grants for the past 3 years. As for the expenditure rule, the average growth rate of expenditure for the forecasted medium-term period is limited to the average growth rate of the reported expenditure for local activities for the last 4 years |
Croatia | A general constraint for all local government units is that total local loans cannot exceed 2.3% of the revenue generated by all local government units in the previous year, while the total debt service of an individual subnational government unit cannot exceed 20% of budget revenues from the previous year. There are limits on the salaries of local officials |
Cyprus | According to the Municipal Act, municipalities can borrow to fund capital expenditure and debt refinancing. Municipal loans have to be approved by the Council of Ministers |
Czech Republic | BBR in place. Debt limit at 60% of 4-year average of revenues |
Denmark | BBR in place. Loans restricted to capital spending. Expenditure limits in place, on the aggregate |
Estonia | BBR at general government level but with a breakdown by level of government. Municipalities can borrow but only to fund investment projects. Total debt is limited to 60% of operational revenues in the respective budget year. Depending on self-financing capacity, this ceiling may rise to 100% |
Finland | BBR in a 4-year planning period. No formal debt limits. Indirect local government spending limit |
France | BBR in place. There is no limit to the amount borrowed for all local governments, as long as it is for investment purposes. No formal debt limit |
Germany | BBR in place. Debt is restricted to fund capital spending. No formal debt limits |
Greece | Total local debt is restricted to a maximum of 60% of annual revenues. Debt service to a maximum of 20% of annual revenues |
Hungary | Debt service in any year has to be under 50% of the own-source municipal revenues |
Ireland | BBR in place. Debt is restricted to fund capital spending |
Italy | BBR in place. Golden rule allows debt to finance investment |
Latvia | Borrowing is permitted to finance investment projects. Overall debt of each local government cannot exceed 20% of last year’s revenues |
Lithuania | The annual budget law limits municipal borrowing to 60% of forecasted revenue, and all borrowing limits are approved by the MoF during the budgeting process. Municipalities can borrow within these limits but are expected to balance their budgets in 3 years’ time. As part of the broader legal framework on fiscal rules, each municipality is required to produce a nominal balanced budget on cash basis |
Luxembourg | BBR in place. Borrowing permitted to finance investment |
Netherlands | BBR in medium-term perspective. There is short- and a long-term debt ceiling. They apply more to the term structure of government debt then to total debts. The short-term ceiling demands that the average net short-term debt (due within 1 year) is limited to 8.5% of budgeted spending for each quarter of a fiscal year. The long-term ceiling limits the amount of long-term debt (maturity more than 1 year) for which the interest rate is subject to change in a given year to 20% of budgeted spending. These ceilings can indirectly limit the amount municipalities can borrow in practice |
Poland | BBR in place. The amended individual debt limits (total debt and debt service) are based on gross savings calculated over a 3-year period |
Portugal | BBR in place. Debt limit of 150% of average net current revenues in the three preceding years |
Romania | Local government budgets, excluding loans to finance investment and debt refinancing, have to be balanced. Local governments cannot contract or guarantee loans, if their annual public debt service (principal payment, interest, commissions) including the loan they want to contract is higher than 30% of their own revenue |
Slovakia | Local governments’ current budget has to be adopted either as balanced or in surplus. Total debt cannot exceed 60% of current revenue in the previous budget year in nominal terms; annual instalments to reimburse debt cannot exceed 25% of revenue in the previous budget year in nominal terms |
Slovenia | No normative budget balance rule for Slovenian municipalities. There are debt rules pertaining to municipal debt (expressed as a percent of budget) |
Spain | A 2012 law passed a structural budget balanced rule and debt ceilings for all levels of government, as well as expenditure rules for SNGs. The debt ratio of the general government must not exceed 60% of GDP. This general debt ratio distributes as follows: Central government 44%, CAs 13% and 3% for all local governments. The provisions within the SGP are considered within the Spanish public administrations’ expenditure rule. Article 12 establishes that the growth rate of the adjusted primary expenditures of all levels of government cannot exceed the Spanish medium-term GDP growth rate. Local governments must take this growth rate as reference for their local budgets |
Sweden | According to the local government act, local governments are obliged to balance their budgets. No countrywide local debt limits |
UK | BBR in place. Borrowing restricted to capital spending |
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Turley, G., Raffer, C., McNena, S. (2021). Budget Institutions for Subnational Fiscal Discipline: Local Fiscal Rules in Post-Crisis EU Countries. In: Geissler, R., Hammerschmid, G., Raffer, C. (eds) Local Public Finance. Springer, Cham. https://doi.org/10.1007/978-3-030-67466-3_2
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