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'Etudes et de Recherche en Droit de l'Immatériel - Université Paris-Saclay, Harvard Kennedy School, FERDI - Fondation pour les Etudes et Recherches sur le Développement International
Grégoire Rota-Graziosi: FERDI - Fondation pour les Etudes et Recherches sur le Développement International, CERDI - Centre d'Etudes et de Recherche en Droit de l'Immatériel - Université Paris-Saclay
Dao Le Van: VNU - Vietnam National University [Hanoï]

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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 domainparalleling regulatory capital requirements in banking.

Keywords: Fiscal Rule; Tax Expenditures; Deficit Bias (search for similar items in EconPapers)
Date: 2026-06-12
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