Fiscal Rules and Long-Term Inclusive Growth

1. Defining fiscal responsibility primarily through deficit and debt targets can be self-defeating. Cutting spending in a weak economy reduces growth and investment and can leave the ratio of debt to gross domestic product (GDP) higher, not lower.

2. Fiscal rules shape these outcomes. When governments must meet deficit, debt or expenditure targets, public investment is often cut first. Short forecast horizons compound this problem by recording investment costs before the returns emerge.

3. What public money does matters. Investment in infrastructure, technology and innovation builds productive capacity, but so does spending on health, education, care, skills and social protection. Fiscal frameworks need to protect both.

4. How the fiscal position is measured also matters. Debt measures record what the state owes but not necessarily the assets it creates through spending. Public sector balance sheets and net worth offer a fuller picture, while investments should be assessed over the full period in which they generate returns.

5. Countries do not face the same fiscal constraints. Access to foreign exchange and the currencies in which governments borrow, exposure to volatile capital flows and the structure of the international financial system all shape fiscal space. The same fiscal rule can therefore have very different consequences across countries.

6. Governments can improve fiscal frameworks now. They can protect essential and productive spending through the business cycle; account for public assets and longer-term investment returns; steer investment through procurement and public finance; raise revenue fairly; and reduce exposure to volatile external finance.

7. Domestic reform is not enough where the binding constraint is external. International rules must provide greater space for productive investment through better-designed lending programmes and debt sustainability assessments, reliable access to liquidity, earlier debt resolution, long-term public development finance and stronger international tax cooperation.

8. Stability when shocks hit also depends on global and regional cooperation. Buffer stocks and coordinated stabilisation measures can reduce price shocks before they reach national budgets, preserving fiscal space.

9. Fiscal responsibility should ultimately be judged by whether public finances strengthen the economy’s capacity to grow, withstand shocks and meet public obligations over time, not by whether a single fiscal number falls in the short term.