Fiscal Rules' Compliance and Social Welfare

Kea Baret

Annals of Economics and Statistics, 2023, issue 150, 25-66

Abstract: The post-pandemic economic reality seeks deep economic policies adjustment, including redesigning fiscal rules. This paper contributes to feeds the debate by investigating the side-effects of fiscal rules' compliance on social welfare. It considers national Budget Balance Rules' (BBR) compliance effects on social welfare proxies and the channel through which it operates between 2004 and 2015. Instead of fiscal rules strength or fiscal rules presence effectiveness, the study focuses on fiscal rules' compliance to assess the impact of fiscal rules' performance on social welfare, using a so-called ``Double/Debiased Machine Learning (DML)'' approach (Chernozhukov et al. (2018)). The results show that governments seem to reallocate their spending to achieve both BBR's compliance and economic objectives, with negative consequences on social expenditure. We also conclude to an increasing effect on social inequalities, suggesting that governments face a trade-off between fiscal rules' compliance and social objectives. Thanks to the DML methodology, we also identify the key determinants of national BBR's compliance, taking care of voter preferences by computing a new proxy variable through a Latent Factor Analysis. We conclude that voter preferences appear as a significant factor of BBR's compliance, supporting that the Wyplosz (2012)'s bias may matter when assessing fiscal rules' performance.

Keywords: Fiscal Rules Compliance; Social Welfare; Fiscal Surveillance; Machine Learning (search for similar items in EconPapers)
JEL-codes: E61 H11 H50 H61 H62 (search for similar items in EconPapers)
Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:adr:anecst:y:2023:i:150:p:25-66

DOI: 10.2307/48731468

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