Working Paper: NBER ID: w17884
Authors: Charles Wyplosz
Abstract: Fiscal indiscipline is a feature of many developed countries. It is generally accepted that the source of the phenomenon lies in the common pool problem, the fact that recipients of public spending to fail to fully internalize the costs that taxpayers must assume. As a result, democratically elected governments are led to postpone tax collection, or to cut spending. Solving the fiscal discipline problem requires internalizing this externality. This calls for adequate institutions or for rules, or both. This paper reviews the various types of solutions that have been discussed in the literature and surveys a number of experiments. With the European debt crisis in mind, the paper pays particular attention to the common pool problem that emerges in federal states. The main conclusions are the following. First, rules are unlikely to exist unless they come with supporting institutions. Second, fiscal institutions are neither necessary nor sufficient to achieve fiscal discipline, but they help. Third, because institutions must bind the policymakers without violating the democratic requirement that elected officials have the power to decide on budgets, effective arrangements are those that give institutions the authority to apply legal rules or to act as official watchdogs.
Keywords: Fiscal discipline; Fiscal rules; Common pool problem; Institutions
JEL Codes: E61; E62; H62; H77
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| institutions (D02) | fiscal rules (E62) |
| institutions + rules (D02) | fiscal discipline (E62) |
| common pool problem (Q25) | fiscal indiscipline (E62) |
| political dynamics (D72) | fiscal outcomes (H68) |
| rules (Z28) | fiscal discipline (E62) |
| institutions (D02) | fiscal outcomes (H68) |