Fiscal Rule

Governments may be tempted to run large deficits, especially before elections, leaving future taxpayers to pay. Fiscal rules aim to limit this by setting clear targets that apply over many years.

Common types include budget balance rules, such as limiting the deficit to a percentage of GDP; debt rules, capping debt relative to GDP; expenditure rules, limiting spending growth; and revenue rules. Many include escape clauses for recessions or emergencies.

For example, the European Union’s rules have long referred to limits of 3% of GDP for budget deficits and 60% of GDP for government debt, and were reformed in 2024 to focus more on country-specific plans and spending paths. Germany has a constitutional debt brake limiting structural borrowing, which was loosened in 2025 for defence and infrastructure investment.

Fiscal rules can improve credibility and discipline, but they can also be too rigid, forcing spending cuts during downturns, or encourage creative accounting to meet targets. Many countries also use independent fiscal councils to monitor whether rules are being followed.