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Do Fiscal Rules Undermine Public Investments? A Review of Empirical Evidence

Author

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  • Sebastian Blesse
  • Florian Dorn
  • Max Lay
Abstract
Fiscal rules are a frequent policy measure to restrict deficit-taking among incumbent politicians. In times of increased and sustained investment needs to mitigate the consequences of climate change, and to promote the digital and structural transformation, fiscal rules have become subject to criticism for undermining public investments. We review 20 existing empirical studies examining the impact of numerical fiscal rules on public investments. We also discuss whether more public investments typically come at the cost of higher deficits and whether the effect on public investments differs between rigid and more flexible fiscal rules. Overall, we do not find systematic evidence for a negative effect of fiscal rules on overall public investments. Rigid fiscal rules seem to deter public investments as compared to more flexible and investment-friendly rules which, by contrast, rather increase public investments. Existing evidence does not suggest that public investments systematically come at the cost of higher public deficits (except for more flexible fiscal rules). The design of fiscal rules appears to be crucial for higher public investments.

Suggested Citation

  • Sebastian Blesse & Florian Dorn & Max Lay, 2023. "Do Fiscal Rules Undermine Public Investments? A Review of Empirical Evidence," ifo Working Paper Series 393, ifo Institute - Leibniz Institute for Economic Research at the University of Munich.
    • Handle: RePEc:ces:ifowps:_393
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    References listed on IDEAS

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    Cited by:

    1. Niklas Potrafke, 2023. "The Economic Consequences of Fiscal Rules," CESifo Working Paper Series 10765, CESifo.
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    3. Philipp Weber & Laura A. Zell & Lars P. Feld & Christoph A. Schaltegger, 2024. "Functionality of Fiscal Rules in a Low Interest Rate Environment – New Empirical Results for Swiss Cantons," CESifo Working Paper Series 11351, CESifo.
    4. Sebastian Blesse & Florian Dorn & Max Lay, 2023. "Schwächen Fiskalregeln öffentliche Investitionen?," ifo Schnelldienst, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 76(06), pages 22-28, June.

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    More about this item

    Keywords

    Fiscal rules; public investment; fiscal sustainability; golden rule; literature review;
    All these keywords.

    JEL classification:

    • H50 - Public Economics - - National Government Expenditures and Related Policies - - - General
    • H54 - Public Economics - - National Government Expenditures and Related Policies - - - Infrastructures
    • H60 - Public Economics - - National Budget, Deficit, and Debt - - - General
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

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