On the Unintended Consequence of Fiscal Rules: Evidence from Fiscal Expenditures

Rabah Arezki, Grégoire Rota-Graziosi () and Dao Le Van
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Rabah Arezki: CERDI - Centre d'Études et de Recherches sur le Développement International - IRD - Institut de Recherche pour le Développement - CNRS - Centre National de la Recherche Scientifique - UCA - Université Clermont Auvergne, FERDI - Fondation pour les Etudes et Recherches sur le Développement International, Harvard Kennedy School
Grégoire Rota-Graziosi: CERDI - Centre d'Études et de Recherches sur le Développement International - UCA [2017-2020] - Université Clermont Auvergne [2017-2020] - CNRS - Centre National de la Recherche Scientifique, FERDI - Fondation pour les Etudes et Recherches sur le Développement International
Dao Le Van: International School, Vietnam National University, Hanoi, Vietnam.

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Abstract: This paper documents the unintended consequence of fiscal rules in the form of tax expenditures using both theory and data. We first introduce a simple fiscal model where the government has time-inconsistent preferences with a present bias toward public spending in line with Halac and Yared (2014). We then empirically validate the main prediction of the model by providing evidence that the adoption of a binding fiscal rule on public spending leads to an increase in tax expenditures, whereas revenue rules, which do not constrain spending, leave them unaffected. Our findings suggest the existence of a robust "innovation channel" in the fiscal domain—paralleling regulatory capital requirements in banking.

Keywords: Fiscal Rule; Tax Expenditures; Deficit Bias; Innovation (search for similar items in EconPapers)
Date: 2026-06-17
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