Intelligent Budget Rules

Following up on the idea of an ‘unbalanced budget amendment’, here are some articles discussing countries that have written into the law the need for budget surpluses during good times:

How Intelligent Budget Rules Help Chile Prosper: Lessons for the US

In addition to having a workable target (structural balance) and institutions to implement it (the independent commissions), Chile has another crucial element of sound fiscal policy: the necessary political will to make the institutions work. In a forthcoming paper, Jeffrey Frankel of Harvard provides an example to illustrate the commitment. In 2008, the world price of copper hit an all-time high and at the same time, the popularity of President Michele Bachelet hit a low of 39 percent. The reason was simple: people wanted her to spend the income pouring into the country from commodity exports. She refused. A year later her policy was vindicated. The global recession had arrived and copper prices had crashed. However, funds saved during good times provided the cushion needed to maintain a steady-as-you go fiscal policy that moderated the downturn. Bachelet’s popularity soared to 78 percent.

How Smart Fiscal Rules Keep Sweden’s Budget in Balance

Sweden’s approach has a bit more flexibility in allowing for countercyclical policy and a bit less year-to-year discipline than Chile’s. A set of rules for the United States might also need to be tilted more toward discipline. There are two reasons the United States may need more fiscal discipline even at the expense of flexibility. One is the two-year U.S. election cycle, the shortest among the world’s major democracies. The short election cycle increases the pressure for government to spend increased revenues during an economic expansion rather than running the surplus needed for sustainable fiscal policy. It may be that the U.S. political system is not mature enough to think three years ahead.

Another reason the United States needs to tilt toward discipline is a lower level of political consensus. In Sweden, the major political parties agree on the importance of following the rules. […] Compare that to the radical change change from the budget discipline of the Clinton years to the fiscal irresponsibility of the Bush years. A very strong set of chains indeed would have been needed to prevent euphoric Republicans from squandering the once-in-a-lifetime budget surpluses they inherited after the election of 2000.

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Posted at 4:29pm • Permalink  • Tags: politics debt fiscal policy economics



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