Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/247694 
Year of Publication: 
2021
Series/Report no.: 
ZEW Discussion Papers No. 21-085
Publisher: 
ZEW - Leibniz-Zentrum für Europäische Wirtschaftsforschung, Mannheim
Abstract: 
In 2012, 22 EU countries signed the Fiscal Compact, an intergovernmental agreement aimed at backing EU fiscal rules with national arrangements. The main objective of the Compact was to strengthen compliance. Based on a survey of national independent fiscal institutions, we take a closer look at the correction mechanism, the core of the Fiscal Compact. As the name suggests, the correction mechanism is meant to automatically trigger fiscal adjustment in case public finances deviate from 'the path of virtue'. While design choices vary considerably across countries, a cluster analysis reveals distinct patterns. In particular, better compliance tend to be associated with a superior design of the correction mechanism, higher government efficiency and a stronger media presence of independent fiscal institutions. Economic growth can make up for a less sophisticated design. Additional inferential analysis confirms the link between compliance, design and other relevant valiables. Our survey also indicates that many countries have linked the trigger of the correction mechanism to formal decisions at the EU level rather than to independent assessors at the national level. This choice defeats the original purpose of correction mechanisms, namely to decouple key fiscal policy decisions from political considerations and discretion.
Subjects: 
Fiscal policy
fiscal governance
budgetary forecasts
correction mechanism
Fiscal Compact
independent fiscal institutions
fiscal councils
JEL: 
E62
H62
H68
H77
Document Type: 
Working Paper

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