IMF on expenditure rules

An IMF paper looks at expenditure rules:

Our findings suggest that expenditure rules are associated with spending control, counter-cyclical fiscal policy, and improved fiscal discipline. We find that fiscal performance is better in countries where an expenditure rule exists. This appears to be related to the properties of expenditure rules as compliance rates are generally higher than with other types of rules (on the budget balance or debt, for example). In particular, we find that compliance with expenditure rules is higher if the expenditure target is directly under the control of the government and if the rule is not a mere political commitment, but enshrined in law or in a coalition agreement. 

So the most effective type of fiscal rule is a binding expenditure rule.

Evidence of adverse side effects is mixed. The introduction of expenditure rules is associated with a decrease in public investment only in emerging economies. A possible explanation is that any adverse effects on public investment could be mitigated in advanced economies by welldesigned budgetary frameworks and procedures. Instead, the empirical analysis points to two positive side effects. First, expenditure rules reduce the volatility of expenditure, thus imparting a degree of predictability to fiscal policy and making it less destabilizing. Second, expenditure rules are associated with higher public investment efficiency.

I’d love NZ to have an expenditure rule, such as restricting core crown expenditure to 25% of GDP over say a three year cycle or restricting the growth in expenditure to say 1% after taking account of population growth and inflation.

Expenditure rules are currently in place in 23 countries (11 in advanced and 12 in emerging economies)

So we would not be alone if we did this.