Fiscal Rules and Public Spending Efficiency

Abstract

Rising public debt and persistent fiscal imbalances have renewed interest in fiscal rules as key instruments of fiscal governance. While existing research largely focuses on their role in promoting fiscal discipline, less attention has been paid to whether fiscal rules are associated with the efficiency of public spending. This study examines the relationship between fiscal rule stringency and public spending efficiency using panel data for 35 OECD countries from 2006 to 2019. Employing fixed effects, dynamic panel estimators, and instrumental variable approaches, the analysis shows that stronger fiscal rules are positively and significantly associated with higher spending efficiency. The relationship is particularly pronounced during periods of fiscal deterioration and is strongest for expenditure-based rules. Overall, the findings indicate that fiscal rules operate not only as constraints on fiscal aggregates but also as institutional mechanisms that promote a more efficient use of public resources.