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

Rabah Arezki, Gregoire Rota-Graziosi and Le Van Dao

No 12741, CESifo Working Paper Series from CESifo

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)
JEL-codes: D02 D82 E6 H1 P16 (search for similar items in EconPapers)
Date: 2026
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Persistent link: https://EconPapers.repec.org/RePEc:ces:ceswps:_12741

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