The fiscal and debt problem in the region has been engendered in part by weak fiscal institutions and frameworks that have perpetuated chronic fiscal procyclicality. Without binding rules geared towards budgetary discipline, can Caribbean countries successfully overcome their fiscal and debt challenges?
In a recent working paper, issues surrounding the applicability, design and adoption of fiscal rules as a transformative shift towards promoting a new and improved fiscal-structural culture were explored. The study argued that Caribbean countries cannot adequately surmount their fiscal and debt challenges in the absence of an institutionalized and legitimate discretionary-constraining mechanism, such as fiscal rules. The implementation of fiscal rules, which are idiosyncratic given varying contexts, but which are all are geared towards entrenching discipline, curbing pro-cyclicality, enforcing counter-cyclical policies, and improving budget transparency and credibility, are considered an urgent development priority.
Simulations carried out to assess consumer welfare and macroeconomic volatility under various fiscal rules-scenarios, found that of the different types of fiscal rules, simulated expenditure rules perform best in terms of reducing macroeconomic volatility. In that regard, it appears to be the most welfare enhancing. The results suggest that achieving crucial economic goals depend on governments’ ability to design and manage binding rules to guide an effective fiscal framework. This requires assessing the country’s major fiscal challenges and institutional frameworks through continuous monitoring preferably by an independent authority. Improving fiscal governance and strengthening institutions are imperative to restore medium-term fiscal sustainability to better support socioeconomic development. The findings of the study evince useful insights for policymakers on how the design and conduct of fiscal policy might be improved for better fiscal, and by extension, development outcomes.
To learn more, download a copy of the working paper “Fiscal Rules: Towards a New Paradigm for Fiscal Sustainability in Small States” here: https://publications.iadb.org/handle/11319/8208
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