Expenditure rules: Limiting the level or the variation of public expenditure?

Menguy, Séverine Article Expenditure rules: Limiting the level or the variation of public expenditure? Economies Provided in Cooperation with: MDPI – Multidisciplinary Digital Publishing Institute, Basel Suggested Citation: Menguy, Séverine (2024) : Expenditure rules: Limiting the level or the variation of public expenditure?, Economies, ISSN 2227-7099, MDPI, Basel, Vol. 12, Iss. 11, pp. 1-21, https://doi.org/10.3390/economies12110295 This Version is available at: https://hdl.handle.net/10419/329222 Standard-Nutzungsbedingungen: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen. Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in EconStor may be saved and copied for your personal and scholarly purposes. You are not to copy documents for public or commercial purposes, to exhibit the documents publicly, to make them publicly available on the internet, or to distribute or otherwise use the documents in public. If the documents have been made available under an Open Content Licence (especially Creative Commons Licences), you may exercise further usage rights as specified in the indicated licence. https://creativecommons.org/licenses/by/4.0/ Citation: Menguy, Séverine. 2024. Expenditure Rules: Limiting the Level or the Variation of Public Expenditure? Economies 12: 295. https://doi.org/10.3390/ economies12110295 Academic Editor: Fabio Masini Received: 27 September 2024 Revised: 20 October 2024 Accepted: 25 October 2024 Published: 29 October 2024 Copyright: © 2024 by the author. Licensee MDPI, Basel, Switzerland. This article is an open access article distributed under the terms and conditions of the Creative Commons Attribution (CC BY) license (https:// creativecommons.org/licenses/by/ 4.0/). economies Article Expenditure Rules: Limiting the Level or the Variation of Public Expenditure? Séverine Menguy FacultéSociétés et Humanités, UniversitéParis Cité, 75270 Paris CEDEX 06, France; [email protected] Abstract: The main goal of the first-generation expenditure rules was to ensure fiscal discipline: preserving a sound fiscal framework and public debt sustainability. Regarding this goal, analytically as well as empirically, limiting the share of public expenditure in GDP would be more appropriate in case of weak potential economic growth or if the public expenditure-to-GDP ratio is high. On the contrary, limiting the variation of public expenditure would be more appropriate for countries with high potential economic growth or with a weak public expenditure-to-GDP ratio. The second goal of expenditure rules is to contribute to sustaining economic activity. Regarding this goal, limiting the level of public expenditure appears as more favorable than limiting the variation of public expenditure. Indeed, a rule in terms of variation could hamper economic growth, especially for countries with a high public expenditure-to-GDP ratio. Keywords: fiscal rules; expenditure rules; public expenditure; fiscal discipline; economic activity 1. Introduction Since the 1990s, many countries have adopted one or many fiscal rules, including advanced countries but also increasingly emerging and developing economies. Beyond national rules, supranational rules (for example in the European Union) were also introduced (see Davoodi et al. 2022b). Additionally, the index of the strength of enforcement of these fiscal rules (flexibility and resilience) has continuously improved over time. These fiscal rules can be related to fiscal aggregates such as public deficit, public debt, public expenditure, or (more rarely) fiscal revenue. However, the most common combination of fiscal rules is a debt rule, with as an operational tool an expenditure rule (or a budget balance rule). Among fiscal rules, Ayuso-i-Casals (2012) mentions that expenditure rules have many advantages. They target the most common origin of excessive deficits: a tendency to spend more than contemplated in initial budget plans. They target the most controllable part of the budget for the governments; their communication to the public is easy and transparent. Additionally, empirical fiscal consolidations that were empirically successful in the 1970s and 1980s were mainly based on expenditures, typically linked to a decrease in current primary expenditure (mainly public wages and transfers). Therefore, recently, and in particular in the context of the revision of European fiscal rules that were suspended in March 2020 because of the large COVID-19 health crisis, the economic literature has underlined the advantages of expenditure-based fiscal rules. The new Stability and Growth Pact, which was reintroduced and reformed in January 2024, is public expenditure-based. Indeed, except for unemployment expenses (largely pro-cyclical) or interest rate payments on public debt, government spending is more independent from the business cycle and manageable by the government than a structural balance. Furthermore, an expenditure rule maintains stabilization properties by enabling automatic stabilizers to operate completely on the revenue side (revenues can fluctuate with the business cycle). Therefore, the current paper is interested in analyzing the respective advantages of various derivatives of public expenditure rules. Economies 2024,12, 295. https://doi.org/10.3390/economies12110295 https://www.mdpi.com/journal/economies Economies 2024,12, 295 2 of 21 First-generation fiscal rules only aimed at ensuring the long-term sustainability of the public debt by reducing the bias towards excessive increases in public expenditure and deficits. However, since the financial crisis in 2008, second-generation fiscal rules have also aimed at avoiding pro-cyclical effects and protecting long-term economic growth. Indeed, the origin of excessive public deficits often involves spending pressures, which can be addressed through expenditure rules. As mentioned by Cordes et al. (2015), they have the ability to lessen the effect of economic and political cycles; they provide spending control and better fiscal discipline. To ensure public debt sustainability, they are often associated with a balanced budget or public debt rules. They consist of a cap on nominal expenditure growth, a cap on real expenditure growth, a ceiling on the expenditure-to-GDP ratio (mainly in emerging market economies), or a specific nominal ceiling (mainly in advanced economies). Nevertheless, among the large economic literature analyzing public expenditure rules, the respective advantages of fiscal rules in terms of the level or in terms of the variation of public expenditure are usually not studied. The current paper aims to fill this gap in the economic literature. To contribute to the debate on the respective advantages of fiscal rules in terms of the level or variation of public expenditure, the rest of the paper is organized as follows: Section 2provides a review of the economic literature on the potential advantages or drawbacks of fiscal rules in terms of the level or variation of public expenditure. In Section 3, we make the research hypothesis that this choice could depend on the specific situation of the countries. One kind of expenditure rule is not universally beneficial for all countries; the choice could depend on economic parameters, such as potential growth or the share of public expenditure in GDP. So, we define an analytical model that deliberately remains simple but allows us to study the respective advantages of fiscal rules limiting the level or the variation of public expenditure to ensure fiscal discipline or to sustain economic activity. This simple model brings out potential theoretical results on the respective advantages and the efficiency of various expenditure rules. Then, Section 4analyzes empirical data to confirm this potential relation between various expenditure rules and the budget deficit, the public debt, or economic activity. However, the current paper is not an econometric paper; we only try to shed light on economic causalities. We only rely on scatter plots to show how empirical data can confirm and sustain our theoretical results. Section 5concludes the paper. 2. Review of the Economic Literature The first goal of expenditure rules was to improve fiscal discipline and public debt sustainability. Regarding this goal, obviously, the economic literature concludes on the efficiency of constraining public expenditure. For example, Wierts (2008) investigates the effect of expenditure rules on fiscal behavior. Empirical econometrical estimations then confirm the hypothesis of his macroeconomic model: such rules can restrain spending biases if the political and institutional costs of non-compliance are sufficiently large. Therefore, according to the author, well-designed expenditure rules have a restraining impact on expenditure outcomes and mitigate the effect of shocks on expenditure developments. Herrero-Alcalde et al. (2024) evaluate how effectively the Spanish expenditure rule, which has been in place since 2012, controls an increase in public expenditure. To avoid endogeneity problems inherent in traditional econometric approaches, they contract a counterfactual unit for the Spanish public sector in a scenario where there are no expenditure rules applied whatsoever. Their findings indicate that the expenditure rule has largely contributed to the improvement of budget sustainability by restricting both current and primary expenditures. These results are reliable across different levels of government. Eyraud et al. (2018) asserts that a spending rule that is deficit neutral on average will increase the likelihood of the budget staying in balance over the macroeconomic cycle. Indeed, if economic conditions are better than anticipated, there will not be any extra financial resources to spend or tax cuts, and the budgetary bonus is meant to be saved. On the contrary, if there is a recession, a spending rule would permit a budget deficit Economies 2024,12, 295 3 of 21 through automatic stabilizers, but would not allow any additional discretionary expenditures. By implementing a spending rule, budgetary expectations and budget line funding in a multi-year framework can be more stable. According to Ayuso-i-Casals (2012), the effective promotion of a sound fiscal situation in some Nordic European countries (Netherlands, Sweden, Denmark, and Finland) has been achieved through the implementation of institutional reforms and the introduction of expenditure rules. In contrast, the difficulty in avoiding an uncontrolled increase in public expenditure is largely the reason for the fiscal difficulties in other southern European countries before 2007. A large set of 29 countries with fiscal rules that were both national and supranational between 1985 and 2013 were examined by Cordes et al. (2015). They find that expenditure rules are connected to controlling spending, implementing a counter-cyclical fiscal policy, and enhancing fiscal discipline (better compliance). Countries with expenditure rules have on average lower primary spending and higher primary balances. With the help of econometric regressions, they show that only in emerging economies does the introduction of expenditure rules lead to a decrease in public investment. Additionally, the use of expenditure rules alleviates the fluctuation of expenditures, thereby granting fiscal policy a high level of predictability and lessening its destabilizing effects. In the same way, Hauptmeier et al. (2011) examine the expenditure patterns of Euro area countries from 1999 to 2009 and compare them to ‘alternative’ trends that could have prevailed if countries had implemented neutral policies based on expenditure rules since the beginning of the EMU. They find that all sample countries except Germany applied expansionary expenditure policies; this was particularly the case for imbalanced countries (Ireland, Greece, Portugal, and Spain). Primary public expenditure increased before the crisis, in particular public consumption (public wages) and transfers. The policy stance was typically pro-cyclical, whereas strong budgetary institutions could prevent this spending bias. The effect of expenditure rules on economic activity stabilization is not obvious. Some authors assess that expenditure rules can create fiscal buffer in good times, which can then be used to mitigate the impact of revenue shortfalls in a downturn. With econometric regressions, Grosse-Steffen et al. (2021) show that empirically, between 1970 and 2018, countries with fiscal rules perform better following exogenous shocks (large, random natural disasters) than countries without rules. GDP and private consumption are persistently higher, as fiscal policies can be more expansionary in bad times (more deficit spending) due to more endogenous fiscal space because of tight policies in good times and the existence of escape clauses (as in the case of the COVID-19 crisis). Analyzing stylized facts, and with an econometric estimation over the 1999–2016 period in the European Union, Belu Manescu and Bova (2020) validate that the EU indeed has a pro-cyclical fiscal policy, but this procyclical bias is reduced when there are well-designed and wide coverage expenditure rules. Furthermore, they find that expenditure rules are better complied with for multi-annual expenditure ceilings than for rules specified as growth rates, both ex ante and ex post. They are also associated with lower expenditure volatility and higher investment efficiency. For a sample of eleven EU countries over the period of 1980–2005, with econometric estimations of fiscal reaction functions and probit regressions, Turrini (2008) finds that the fiscal policy’s pro-cyclical bias would mostly be caused by factors that are driven by expenditures, as there is a significant counter-cyclical response of cyclically adjusted revenue. It seems that expenditure increased greatly during good times and only slightly decreased during bad times. However, countries that have strict expenditure rules tend to experience less of an impact on the pro-cyclical dynamic of primary cyclically-adjusted expenditures in good times. In the same way, Holm-Hadulla et al. (2012) investigate the results of governments’ actual expenditure policies in comparison to previously formulated plans; they examine how governments adapt to economic news. Then, their econometric estimations demonstrate that numerical expenditure rules reduced the pro-cyclical spending bias for EU countries from 1998 to 2005. Additionally, this bias was higher for spending items with a high degree of budgetary flexibility (subsidies and investment: gross fixed capital formation) than for more rigid expenditures (primary expenditures and interest payments). Economies 2024,12, 295 4 of 21 In a monetary union, Bruck and Zwiener (2006) use a quarterly macro-econometric model of Germany for the period of 1980–2001 to examine the efficiency of fiscal policy rules for business cycle stabilization. They compare a deficit target and an expenditure target under a range of supply, demand, and fiscal shocks. Then, they show that an expenditure target improves output stabilization and has more beneficial anti-cyclical effects than a deficit target, especially in case of demand shocks. Using a New–Keynesian small open economy model, Buss et al. (2024) find that, in contrast to having only a structural balance rule, having an expenditure growth rule tends to produce more stable macroeconomic outcomes but more volatile public finances. At minimal cost to long-term macroeconomic stability, public debt volatility is contained by strong enough debt correction for both fiscal rules. Furthermore, in contrast to the structural balance rule, an expenditure growth rule tends to delay fiscal consolidations to later periods, resulting in higher near-term growth at the expense of slower future growth. The design and effectiveness of expenditure rules can also be affected, beyond economic factors, by political stability, governance quality, and institutional strength. For example, Schuknecht (2004) underlines the advantages of strong fiscal institutions; by putting limits to governments’ behavior and making policy decisions more transparent to the public and financial markets, they aid in containing political pressures on tax and spending decisions. The author also emphasizes the significance of clear and simple rules in anchoring expectations for fiscal discipline; a well-designed law can increase incentives for the regulations to become ‘self-enforcing’. Furthermore, expenditure rules can help coalition governments with various and sometimes opposite preferences to agree on given economic policies by allowing them to fix goals and targets. Indeed, Hallerberg et al. (2007) underline that in EU countries, between 1985 and 2004, the centralization of budgeting procedures was useful for fiscal discipline. Additionally, in countries with ideologically dispersed coalitions, fiscal contracts with multi-year targets can be a good means to increase this fiscal discipline, whereas they are less useful in countries with one-party governments or when parties are closely aligned. Finally, with strict expenditure rules, the danger is that they crowd out productive but electorally unappealing projects (Cordes et al. 2015). Belu Manescu and Bova (2020) also recall that expenditure rules can imply a change in expenditure composition to the detriment of growth-friendly public investment if the latter is not excluded from the ceiling by a kind of golden rule. They can favor public consumption, which is politically harder to cut (wages and transfers). Moreover, they reduce incentives for revenue mobilization, as only public expenditure is taken into account, and not the value of the budget deficit. Therefore, the efficiency of expenditure rules mainly depends on the institutional framework, the statutory basis, and the enforcement mechanisms surrounding them; but if they are misused, they can endanger economic activity. Nevertheless, fiscal rules’ potential to increase public expenditure efficiency is investigated by Apeti et al. (2023). Then, after 159 countries’ efficiency scores were computed between 1990 and 2017, the implementation a fiscal rule was found to have a significant positive impact on expenditure efficiency. Indeed, fiscal rules could promote better output, as more outcomes could be achieved with the same or less amount of public resources. The decline in resources by limiting the opportunity for debt financing under fiscal rules leads governments to reallocate spending to more productive sectors. For example, Afonso and Jalles (2013) study the relevance of fiscal rules for growth in a panel of 25 EU countries for the period of 1990–2008. Econometric estimations show that they foster growth, while stricter fiscal rules mitigate the adverse impact on growth from such rules in the biggest governments. Cordes et al. (2015) also find that expenditure rules are associated with higher public investment efficiency; the global size of the government is then reduced with benefits. Additionally, according to Ayuso-i-Casals (2012, p. 29), an expenditure rule at the EU level runs the risk of forcing homogeneous (or quasi-homogeneous) social preferences on all EU member states. The significant variations and oscillations in the expenditure-to-GDP ratio among the member states are a clear indication of the existence of diverse social Economies 2024,12, 295 5 of 21 preferences among EU countries. Regarding the role, the proper size of the government, and the composition of public spending, the EU member states generally have differing and sometimes conflicting preferences. For example, regarding social security expenditure, the situation strongly varies between European countries. The social security budget is included in the budget of the central government in the Netherlands. In France, the government oversees a portion of social security, but social partners manage a large and more decentralized portion of it (unemployment insurance). On the contrary, in Spain, health services are highly decentralized and under the responsibility of regional governments. However, regarding public expenditure rules, the abovementioned papers do not study the respective advantages of fiscal rules in terms of level or terms of variation of public expenditure for fiscal discipline or economic activity. The current paper aims to fill this gap in the economic literature. Ayuso-i-Casals (2012, p. 30) assesses that the public expenditure target should be set in levels or growth rates; indeed, a target in percentage of GDP may entail pro-cyclical policies. A rule of public expenditure in the percentage of GDP risks encouraging higher expenditure at times of economic expansion and lower expenditure during contractions. So, it cannot avoid a pro-cyclical bias. On the contrary, the reference to a growth rate would be less pro-cyclical. Differently, our paper highlights, analytically (Section 3) as well as empirically (Section 4) the advantages of a rule in terms of level of public expenditure to ensure fiscal discipline, as well as to sustain economic activity, especially for countries with a high share of public expenditure in GDP. We will show that the choice of the best expenditure rule is not straightforward and always in the same direction, but it depends on two main parameters: the potential growth and public expenditure-to-GDP ratio. To our knowledge, there are many papers in the economic literature underlying the advantages of fiscal rules. However, there is no paper really comparing the respective advantages of limiting the level or the variation of public expenditure. Additionally, our paper has the advantage of providing a theoretical analysis of this comparison, as well as an empirical verification of this theoretical link, with data for various countries with specific and different public expenditure rules. 3. Analytical Model To evaluate the respective advantages and drawbacks of a fiscal rule in terms of the variation or level of public expenditure, we use a simple analytical model of the budget equilibrium for a given country. In this section, capital letters indicate levels of the variables, lowercase letters indicate variables in percentage of GDP, and a dot indicates a change in time. 3.1. Budget Deficit and Public Debt The primary budget surplus of a country in a given period (t) is as follows: PSt=Tt−Gt(1) and in the percentage of GDP it is as follows: pst=τt−gt(2) where ( Tt ) is fiscal resources; ( Gt ) is the primary public expenditure; ( PSt ) is the primary budget surplus; ( Yt ) is the economic activity; and variables are presented in nominal terms. If we use ( εT ), the cyclical sensitivity of revenue, and ( εG ), the cyclical sensitivity of public expenditure, to calculate the output gap, we obtain the following: Tt=Ts t Yt Yp t!εT (3) Economies 2024,12, 295 6 of 21 Gt=Gs t Yt Yp t!εG (4) where the superscript ‘s’ indicates structural values of revenue and expenditure; and ( Yp t ) is the potential economic activity. Since revenues and the cycle are almost exactly correlated, most countries have revenue elasticity that is near unity. In contrast, the cycle has very little effect on expenditures, and expenditure elasticity is almost zero. However, these elasticities can be affected by the complexity of real-world constraints; fiscal revenues and expenditures may not react linearly to economic cycles. Therefore, by combining Equations (1), (3) and (4), the primary budget surplus is as follows: PSt=(Ts t−Gs t)+Ts t" Yt Yp t!εT −1#−Gs t" Yt Yp t!εG −1#(5) In Equation (5), the first term ( Ts t−Gs t ) is the structural primary surplus, whereas the second and third terms are the conjectural primary surplus. So, the primary budget surplus as percentage of GDP is pst=(Ts t−Gs t) Yp t +Ts t Yp t  Yp t Yt!1−εT −1 +Gs t Yp t 1− Yp t Yt!1−εG (6) Under these conditions, the variation of the structural primary budget surplus as a percentage of GDP is . pss t=  . Ts t Ts t − . Yp t Yp t  Ts t Yp t −  . Gs t Gs t − . Yp t Yp t  Gs t Yp t (7) Fiscal resources and the potential GDP vary nearly in phase. According to Equation (7), the potential output and public expenditure should therefore rise at the same rate in conjunction with an expenditure rule intended to stabilize the variation of the structural portion of the budget deficit. Indeed, with a higher potential output, higher fiscal resources and thus higher public expenditure are allowed. Then, while revenues vary based on economic activity, spending growth is evaluated in tandem with a reference GDP growth rate. However, an expansionary fiscal policy is being implemented if public spending increases more quickly than the growth of the economy over the medium term. Conversely, a contractionary fiscal policy is being carried out if the rate of increase in public spending is lower than the rate of growth in the economy. The global budget surplus ( St ) is calculated as the primary budget surplus minus interest rates on the former public debt. So, we obtain St=PSt−rtBt−1(8) where (rt) is the interest rate on the public debt and (Bt) is the public debt in period (t). Therefore, in the percentage of GDP, Equations (6) and (8) imply st=Ts t Yp t Yp t Yt!1−εT −Gs t Yp t Yp t Yt!1−εG −rt (1+γt)bt−1(9) where (γt=Yt−Yt−1 Yt−1) is the nominal GDP growth rate. Furthermore, the public debt is as follows: Bt=Bt−1−St=(1+rt)Bt−1−PSt(10) Economies 2024,12, 295 7 of 21 Then, as a share of the GDP, the public debt is bt=(1+rt) (1+γt)bt−1−Ts t Yp t Yp t Yt!1−εT +Gs t Yp t Yp t Yt!1−εG (11) 3.2. Consequences of Alternative Public Expenditure Rules The paper aims to analyze the respective advantages of fiscal rules in terms of the level or variation of public expenditure. First, the fiscal authority can put a limit on the absolute level of the public expenditure-to-GDP ratio. The condition is then as follows: Gs t Yp t ≤ Gs t Yp t!(12) Otherwise, the fiscal authority can constrain the growth of nominal primary structural public expenditure, as follows: . Gs t Gs t!≤  . Gs t Gs t (13) For example, in the European Union, this limit is the medium-term potential economic growth: . Gs t Gs t!=. Yp t Yp t . Indeed, net primary expenditure growth is supposed to stay below the potential output growth, according to the Reformed Stability and Growth Pact, which was adopted in January 2024. Equation (13) then implies the following condition: Gs t Yp t ≤Gs t−1 Yp t−1 1+  . Gs t Gs t − . Yp t Yp t  Gs t Yp t (14) According to Equations (9) and (11), fiscal discipline is then better ensured and the budget deficit and the public debt are weaker if ( Gs t Yp t ) is small. So, according to Equations (12) and (14), the fiscal discipline is better ensured with a rule in terms of the level of public expenditure if 1−Gs t Yp t Gs t−1 Yp t−1+   . Gs t Gs t −  . Yp t Yp t   Gs t Yp t ≥0 (15) If the potential GDP growth increases, this growth reduces the absolute value of public expenditure in terms of the GDP, and it increases the structural primary balance according to Equation (9). However, according to Equation (7), with a rule in terms of variation of public expenditure, potential GDP growth should also be higher than the growth of public expenditure to increase the structural primary budget surplus. So, if the potential GDP strongly increases, a rule in terms of the variation of public expenditure could reinforce fiscal discipline. On the contrary, if the potential GDP increases weakly and less than public expenditure, a rule in terms of the level of public expenditure would reinforce fiscal discipline. If the share of the state in the economy (G/Y) is weak in the previous period (t − 1), limiting the variation of public expenditure is more beneficial to ensure fiscal discipline. Indeed, with a rule in terms of the level of public expenditure, if the public expenditure- to-GDP ratio is initially weak, public expenditure can largely and excessively increase without exceeding the limit. On the contrary, with a rule in terms of the variation of public expenditure, even if the share of public expenditure is initially weak, the constraint is strong on its variation. On the contrary, if the public expenditure-to-GDP ratio (G/Y) is already high, limiting the level of public expenditure is better suited to ensure fiscal discipline. Economies 2024,12, 295 8 of 21 Indeed, even a small evolution in the percentage of GDP of this public expenditure strongly deteriorates the structural primary surplus and is then harmful to fiscal discipline. Furthermore, economic activity is obviously higher with a fiscal rule in terms of the level of public expenditure. Indeed, with such a rule, productivity and economic growth are higher as the public expenditure-to-GDP ratio is limited, whereas private consumption and investment are higher. On the contrary, with a rule in terms of variation of public expenditure, if public expenditure increases at the same pace as the potential GDP, the share of public expenditure in GDP remains constant, only allowing stable long-term economic growth. Nevertheless, having both rules at the same time could be detrimental to economic growth. Indeed, constraining public expenditure both in the level and regarding its growth rate could be detrimental, as public expenditure is then fixed by the most binding constraint between Equations (12) and (14). Therefore, if the public expenditure-to-GDP ratio is already high and if Equation (12) is binding, public expenditure grows below the potential GDP, and the restrictive fiscal policy is then detrimental to economic growth. On the contrary, if Equation (14) is binding and if public expenditure grows at the potential GDP growth rate, the public expenditure-to-GDP ratio can remain below the level necessary for an optimal economic activity growth rate. 4. Empirical Results The list of countries used for our empirical estimations comes from the IMF Database reported by Lledóet al. (2017) and updated by Davoodi et al. (2022a). The sample is made of all countries with various expenditure rules (see Section 4.1). The database for these countries covers all the periods during which they applied an expenditure rule as a fiscal rule. Additionally, the COVID-19 crisis created unprecedented fiscal pressures and disruptions in all countries, and therefore, the fiscal rules in place before the crisis dramatically changed. As mentioned by Davoodi et al. (2022b), many countries activated escape clauses, suspended fiscal rules, or modified their targets to adjust to the huge increase in public expenditure due to the pandemic (see Section 4.1 below). Fiscal rules were widely relaxed during the COVID-19 pandemic, without avoiding increases in public deficits and public debts. Therefore, to compare the ‘normal’ functioning of expenditure rules in terms of the level or variation, in the empirical part of the paper, we have chosen to stop our database at the year 2019. 4.1. Countries with Expenditure Rules Canada (1998–2005) has temporarily used an expenditure rule in its debt repayment plan. Although there was a ‘balanced budget or better’ policy, it was not enacted into federal law. In Georgia, an expenditure rule was temporarily introduced between 2014 and 2018. In Hungary, a rule limiting the variation of public expenditure was temporarily introduced in 2010–2011. In Iceland, an expenditure rule was temporarily introduced between 2004 and 2008, but it was politically abandoned afterward. In Japan, expenditure rules were temporarily introduced between 2006 and 2008, 2010 and 2012, and 2015 and 2018; but the economic situation did not make them sustainable. Between 2006 and 2008, a temporary expenditure rule was implemented in Kosovo; however, it was not followed and, as of 2009, it was only formally applicable to municipalities. In Romania, an expenditure rule (both in terms of the variation and absolute level) was temporarily introduced between 2010 and 2012, and in Serbia, such a rule was introduced between 2016 and 2018; however, they were very short-lived. In Thailand (2018–), the expenditure rule defines the minimal amount of capital expenditure. In the United Kingdom (2014–2019), a ceiling was temporarily imposed on a subset of welfare spending; but due to this limited scope, it cannot be considered a fiscal rule. In Azerbaijan, an expenditure rule has only existed since 2019, in Costa Rica since 2020, and in Uruguay since 2021. Therefore, we will not consider these countries in the database of our empirical results in the current section. Some countries have national rules both in terms of the variation and absolute level of public expenditure. For example, in Denmark (2007–), in 2007–2008, in addition to Economies 2024,12, 295 15 of 21 in GDP is particularly weak (below 30% of the GDP) in Ireland, India, Paraguay or Peru, whereas economic growth is usually higher than in other countries. Economies 2024, 12, x FOR PEER REVIEW 15 of 22 when the public expenditure-to-GDP ratio is weak, this rule would allow economic activity to increase by 2.31 percentage points in comparison with other OECD countries. On the contrary, economic activity would only increase by 1.54 percentage points with a rule in terms of the variation of public expenditure, whereas the relation is not significant with both types of expenditure rules. In the same way, when the public expenditure-to-GDP ratio is high, a rule in terms of the level of public expenditure would increase economic activity by 1.23 percentage points in comparison with other OECD countries. On the contrary, economic activity would decrease by 0.5 percentage points with a rule in terms of the variation of public expenditure, and even by 0.94 percentage points when both types of expenditure rules are present (see Appendix C). For example, in 2019, the average economic growth was 1.7% in OECD countries, whereas economic growth rates were 3% in Botswana and even 5.8% in Tanzania and 7.4% in Vietnam, where the public expenditure-to-GDP ratio was weak and with a rule in terms of the level of public expenditure. In countries with a rule in terms of the variation of public expenditure and a weak public expenditure-to-GDP ratio, economic growth was high in Estonia (3.7%), Romania (3.9%), Lithuania (4.7%), Ireland (5.3%) and Mongolia (5.6%), but was weak in Argentina (−2%), Paraguay (−0.4%), Australia, and Mexico (−0.3%). Finally, economic growth was weak in countries with a high share of public expenditure in GDP, and with a rule in terms of the variation of public expenditure such as Italy (0.5%), or with both types of public expenditure rules such as Denmark (1.5%) or Finland (1.2%). For all countries, whether they have fiscal rules or not, empirical data show a decreasing relation between the share of public expenditure in GDP and real economic activity (see Figure 4). For example, the share of public expenditure in GDP is particularly high (already above 50% of the GDP in 2019) in Belgium, Finland or France, whereas economic growth is mainly weaker than in other countries. On the contrary, the share of public expenditure in GDP is particularly weak (below 30% of the GDP) in Ireland, India, Paraguay or Peru, whereas economic growth is usually higher than in other countries. Figure 4. Public expenditure and real economic activity. Government expenditure (% of the GDP) and annual real GDP growth (% change from the previous year). Source: OECD and IMF data between 2000 and 2019, 55 countries, and the author’s own calculations. Moreover, we can study whether this influence of the share of public expenditure in GDP on economic activity is also influenced by the existence and the nature of a potential fiscal rule. Then, the empirical data show that the share of public expenditure in GDP is detrimental to economic growth whatever the existing public expenditure rule. However, y = -0.137x + 8.3 R² = 0.154 -20 -15 -10 -5 0 5 10 15 20 25 30 0 10203040506070 real economic growth (in %) public expenditure (% of GDP) Figure 4. Public expenditure and real economic activity. Government expenditure (% of the GDP) and annual real GDP growth (% change from the previous year). Source: OECD and IMF data between 2000 and 2019, 55 countries, and the author’s own calculations. Moreover, we can study whether this influence of the share of public expenditure in GDP on economic activity is also influenced by the existence and the nature of a potential fiscal rule. Then, the empirical data show that the share of public expenditure in GDP is detrimental to economic growth whatever the existing public expenditure rule. However, it would be less detrimental for countries with limits on the level of public expenditure, and much more detrimental for countries with both types of fiscal rules in terms of the level and also of variation of public expenditure (see Figure A7 in Appendix C). 5. Conclusions Expenditure rules aim to ensure fiscal discipline, a sound fiscal framework, and public debt sustainability. Regarding this first goal, analytically, we find that to limit the budget deficit and the public debt, a rule in terms of the level of public expenditure is more appropriate if potential economic growth is weak and/or if the public expenditure-to-GDP ratio is high. Therefore, it could be more appropriate for developed countries subject to the danger of a recessionary framework. On the contrary, a rule in terms of the variation of public expenditure would be more appropriate to ensure fiscal discipline for emerging countries with high potential economic growth and a weak public expenditure-to-GDP ratio. Indeed, empirically, it seems that in OECD countries, an expenditure rule improves fiscal discipline: the budget deficit is weaker and the public debt decreases more (or increases less). Furthermore, the empirical results confirm that a rule in terms of the variation of public expenditure could better improve fiscal discipline for countries with a weak public expenditure-to-GDP ratio, whereas a rule in terms of the level of public expenditure could better improve fiscal discipline for countries with a high public expenditure-to-GDP ratio. In addition, expenditure rules must also avoid being harmful to economic growth and should even contribute to sustaining economic activity. Regarding this second goal, a fiscal rule limiting the level of public expenditure appears more favorable to economic growth than a rule limiting the variation of public expenditure. Indeed, the sustainability of the public debt and preserving fiscal margins by sound fiscal policies and budget surpluses when economic activity is sufficiently high can contribute to allowing automatic stabilizers Economies 2024,12, 295 16 of 21 to be afterward more efficient at sustaining economic activity in a recessionary context. However, limiting at the same time the variation and the level of public expenditure could be detrimental to economic growth. Indeed, strongly constraining public consumption could have recessionary consequences because of the fiscal multiplier. Empirically, a rule in terms of the level of public expenditure seems more appropriate to sustain economic activity. Indeed, a rule in terms of the variation of public expenditure could hamper economic growth, especially for countries with a high public expenditure-to-GDP ratio. This paper contributes to the debate about the advantages and drawbacks of fiscal rules by shedding light on economic causalities between fiscal discipline, economic growth, and the share of public expenditure in GDP. The policy implication is that for countries with weak potential economic growth and a high public expenditure-to-GDP ratio, such as European countries, it could have been useful in the new European fiscal framework to limit not only public expenditure growth but also its absolute level as a share of the GDP. Nevertheless, we have only underlined potential causalities, whereas the effectiveness of fiscal rules can dramatically be influenced by the unique institutional, political, and economic context of each country. Another paper could test our hypotheses with a rigorous econometric framework and test the influence of other institutional, political, or economic variables on the relative efficiency of various expenditure rules. Funding: This research received no external funding. Informed Consent Statement: Not applicable. Data Availability Statement: Our database comes from OECD statistics, https://www.oecd.org/en/ data/indicators.html?orderBy=mostRelevant&page=0 (accessed on 10 July 2024), and IMF statistics, https://www.imf.org/en/Data (accessed on 10 July 2024). Conflicts of Interest: The author declares no conflicts of interest. Appendix A. Database for Empirical Estimations Our database comes from OECD and IMF statistics. The share of public expenditure is considered weak if it is below 40% of the GDP and high if it is above 48% of the GDP. •Countries with an expenditure rule both in terms of the variation and level: Weak share of public expenditure in GDP—Armenia (2018–2019), Bulgaria (2012–2019), Latvia (2012–2019), Medium share of public expenditure in GDP—Luxembourg (2014–2019), and the Netherlands (2012–2019). High share of public expenditure in GDP—Denmark (2007–2019), Finland (2012–2019), Greece (2012–2019), and Sweden (2012–2019). •Countries with an expenditure rule in terms of the variation: Weak share of public expenditure in GDP—Andorra (2014–2019), Argentina ( 2000–2008 ; 2018–2019), Australia (2009–2019), Colombia (2000–2019), Estonia (2012–2019), Grenada (2015–2019), Ireland (2012–2019), Lithuania (2008–2019), Mexico (2014–2019), Mongolia (2013–2019), Paraguay (2015–2019), Peru (2000–2019), Romania (2012–2019), Medium share of public expenditure in GDP—Croatia (2012–2019), Cyprus ( 2012–2019 ), the Czech Republic (2012–2019), Germany 1 (1991–2019), Israel (2005–2019), Luxembourg (1990–2013), Malta (2012–2019), Poland (2011–2019), Portugal (2012–2019), the Slovak Republic (2012–2019), Slovenia (2012–2019), Spain (2011–2019), and the United Kingdom (2012–2019). High share of public expenditure in GDP—Austria (2012–2019), Belgium (1993–1998, 2012–2019), Denmark (1994–2006), France (1998–2019), Hungary (2010–2019), and Italy (2012–2019). •Countries with an expenditure rule in terms of the level: Economies 2024,12, 295 17 of 21 Weak share of public expenditure in GDP—Botswana (2003–2019), Namibia (2010–2019), Russia (2013–2019), Singapore (1991–2019), Tanzania (2015–2019), the United States ( 1990–2002 , 2011–2019), Vietnam (2016–2019). Medium share of public expenditure in GDP—Brazil (2000–2019), Ecuador (2010–2019), and the Netherlands (1994–2011). High share of public expenditure in GDP—Finland (2003–2011) and Sweden (1997–2011). Regarding the share of public expenditure in GDP between 2000 and 2019 shown in Figure 4, countries included in our database are Argentina, Australia, Austria, Belgium, Botswana, Brazil, Bulgaria, Canada, Chile, China, Colombia, Costa Rica, Croatia, Cyprus, the Czech Republic, Denmark, Ecuador, Estonia, Finland, France, Germany, Greece, Grenada, Hungary, Iceland, India, Indonesia, Ireland, Israel, Italy, Japan, Korea, Latvia, Lithuania, Luxembourg, Mexico, Mongolia, Namibia, the Netherlands, New Zealand, Norway, Paraguay, Peru, Poland, Portugal, Romania, Russia, the Slovak Republic, Slovenia, Spain, Sweden, Switzerland, Türkiye, the United Kingdom, and the United States. Appendix B. Fiscal Discipline and Public Expenditure-to-GDP Ratio Economies 2024, 12, x FOR PEER REVIEW 18 of 22 (a) (b) (c) Figure A1. Expenditure rules and budget balances in countries with a weak public expenditure-to- GDP ratio. (a) Case of a rule for the level of public expenditure (b) Case of a rule for the variation of public expenditure. (c) Case for both types of fiscal rules. (a) (b) (c) Figure A2. Expenditure rules and budget balances in countries with a high public expenditure-to- GDP ratio. (a) Case of a rule for the level of public expenditure (b) Case of a rule for the variation of public expenditure. (c) Case for both types of fiscal rules. Budget balance: general government net lending (+) or borrowing (−) as a percentage of the GDP. Source: OECD and IMF database, and the author’s own calculations. y = x + 0.0312 R² = 0.0354 -20% -15% -10% -5% 0% 5% 10% 15% -10% -5% 0% In countries with a rule for the level of public expenditure Average OECD Values y = x + 0.0263 R² = 0.156 -20% -15% -10% -5% 0% 5% 10% -10% -5% 0% In countries with a rule for the variation of public expenditure Average OECD Values y = x + 0.0296 R² = 0.033 -6% -5% -4% -3% -2% -1% 0% 1% 2% 3% -10% -5% 0% In countries with both types of fiscal rules Average OECD Values y = x + 0.0566 R² = 0.143 -4% -3% -2% -1% 0% 1% 2% 3% 4% 5% 6% -10% -5% 0% In countries with a rule for the level of public expenditure Average OECD Values y = x + 0.0141 R² = 0.3983 -8% -6% -4% -2% 0% 2% 4% 6% -10% -5% 0% In countries with a rule for the variation of public expenditure Average OECD Values y = x + 0.0281 R² = 0.1936 -15% -10% -5% 0% 5% 10% -10% -5% 0% In countries with both types of fiscal rules Average OECD Values Figure A1. Expenditure rules and budget balances in countries with a weak public expenditure-to- GDP ratio. (a) Case of a rule for the level of public expenditure (b) Case of a rule for the variation of public expenditure. (c) Case for both types of fiscal rules. Economies 2024, 12, x FOR PEER REVIEW 18 of 22 (a) (b) (c) Figure A1. Expenditure rules and budget balances in countries with a weak public expenditure-to- GDP ratio. (a) Case of a rule for the level of public expenditure (b) Case of a rule for the variation of public expenditure. (c) Case for both types of fiscal rules. (a) (b) (c) Figure A2. Expenditure rules and budget balances in countries with a high public expenditure-to- GDP ratio. (a) Case of a rule for the level of public expenditure (b) Case of a rule for the variation of public expenditure. (c) Case for both types of fiscal rules. Budget balance: general government net lending (+) or borrowing (−) as a percentage of the GDP. Source: OECD and IMF database, and the author’s own calculations. y = x + 0.0312 R² = 0.0354 -20% -15% -10% -5% 0% 5% 10% 15% -10% -5% 0% In countries with a rule for the level of public expenditure Average OECD Values y = x + 0.0263 R² = 0.156 -20% -15% -10% -5% 0% 5% 10% -10% -5% 0% In countries with a rule for the variation of public expenditure Average OECD Values y = x + 0.0296 R² = 0.033 -6% -5% -4% -3% -2% -1% 0% 1% 2% 3% -10% -5% 0% In countries with both types of fiscal rules Average OECD Values y = x + 0.0566 R² = 0.143 -4% -3% -2% -1% 0% 1% 2% 3% 4% 5% 6% -10% -5% 0% In countries with a rule for the level of public expenditure Average OECD Values y = x + 0.0141 R² = 0.3983 -8% -6% -4% -2% 0% 2% 4% 6% -10% -5% 0% In countries with a rule for the variation of public expenditure Average OECD Values y = x + 0.0281 R² = 0.1936 -15% -10% -5% 0% 5% 10% -10% -5% 0% In countries with both types of fiscal rules Average OECD Values Figure A2. Expenditure rules and budget balances in countries with a high public expenditure-to- GDP ratio. (a) Case of a rule for the level of public expenditure (b) Case of a rule for the variation of public expenditure. (c) Case for both types of fiscal rules. Budget balance: general government net lending (+) or borrowing ( − ) as a percentage of the GDP. Source: OECD and IMF database, and the author’s own calculations. Economies 2024,12, 295 18 of 21 Economies 2024, 12, x FOR PEER REVIEW 19 of 22 (a) (b) (c) Figure A3. Expenditure rules and variations of public debt in countries with a weak public expenditure-to-GDP ratio. (a) Case of a rule for the level of public expenditure (b) Case of a rule for the variation of public expenditure. (c) Case for both types of fiscal rules. (a) (b) (c) Figure A4. Expenditure rules and variations of public debt in countries with a high public expenditure-to-GDP ratio. (a) Case of a rule for the level of public expenditure (b) Case of a rule for the variation of public expenditure. (c) Case for both types of fiscal rules. Public debt: general government public debt as a percentage of the GDP; difference between the public debt in a given country and the average public debt in OECD countries in points of the GDP. Source: OECD and IMF database, and the author’s own calculations. y = x - 0.0263 R² = 0.125 -10% -5% 0% 5% 10% 15% 20% -10% 0% 10% 20% In countries with a rule for the level of public expenditure Average OECD Values y = x - 0.0477 R² = 0.166 -50% -40% -30% -20% -10% 0% 10% 20% 30% 40% -10% 0% 10% 20% In countries with a rule for the variation of public expenditure Average OECD Values y = x - 0.023 R² = 0.0302 -15% -10% -5% 0% 5% 10% 15% 20% -5% 0% 5% 10% 15% In countries with both types of fiscal rules Average OECD Values y = x - 0.0582 R² = 0.1471 -15% -10% -5% 0% 5% 10% -10% 0% 10% 20% In countries with a ruel for the level of public expenditure Average OECD Values y = x - 0.0469 R² = 0.549 -10% -5% 0% 5% 10% 15% 20% -5% 0% 5% 10% 15% In countries with a rule for the variation of public expenditure Average OECD Values y = x - 0.0407 R² = 0.566 -15% -10% -5% 0% 5% 10% 15% 20% -5% 0% 5% 10% 15% In countries with both types of fiscal rules Average OECD Values Figure A3. Expenditure rules and variations of public debt in countries with a weak public expenditure-to-GDP ratio. (a) Case of a rule for the level of public expenditure (b) Case of a rule for the variation of public expenditure. (c) Case for both types of fiscal rules. Economies 2024, 12, x FOR PEER REVIEW 19 of 22 (a) (b) (c) Figure A3. Expenditure rules and variations of public debt in countries with a weak public expenditure-to-GDP ratio. (a) Case of a rule for the level of public expenditure (b) Case of a rule for the variation of public expenditure. (c) Case for both types of fiscal rules. (a) (b) (c) Figure A4. Expenditure rules and variations of public debt in countries with a high public expenditure-to-GDP ratio. (a) Case of a rule for the level of public expenditure (b) Case of a rule for the variation of public expenditure. (c) Case for both types of fiscal rules. Public debt: general government public debt as a percentage of the GDP; difference between the public debt in a given country and the average public debt in OECD countries in points of the GDP. Source: OECD and IMF database, and the author’s own calculations. y = x - 0.0263 R² = 0.125 -10% -5% 0% 5% 10% 15% 20% -10% 0% 10% 20% In countries with a rule for the level of public expenditure Average OECD Values y = x - 0.0477 R² = 0.166 -50% -40% -30% -20% -10% 0% 10% 20% 30% 40% -10% 0% 10% 20% In countries with a rule for the variation of public expenditure Average OECD Values y = x - 0.023 R² = 0.0302 -15% -10% -5% 0% 5% 10% 15% 20% -5% 0% 5% 10% 15% In countries with both types of fiscal rules Average OECD Values y = x - 0.0582 R² = 0.1471 -15% -10% -5% 0% 5% 10% -10% 0% 10% 20% In countries with a ruel for the level of public expenditure Average OECD Values y = x - 0.0469 R² = 0.549 -10% -5% 0% 5% 10% 15% 20% -5% 0% 5% 10% 15% In countries with a rule for the variation of public expenditure Average OECD Values y = x - 0.0407 R² = 0.566 -15% -10% -5% 0% 5% 10% 15% 20% -5% 0% 5% 10% 15% In countries with both types of fiscal rules Average OECD Values Figure A4. Expenditure rules and variations of public debt in countries with a high public expenditure- to-GDP ratio. (a) Case of a rule for the level of public expenditure (b) Case of a rule for the variation of public expenditure. (c) Case for both types of fiscal rules. Public debt: general government public debt as a percentage of the GDP; difference between the public debt in a given country and the average public debt in OECD countries in points of the GDP. Source: OECD and IMF database, and the author’s own calculations. Economies 2024,12, 295 19 of 21 Appendix C. Economic Activity and Public Expenditure-to-GDP Ratio Economies 2024, 12, x FOR PEER REVIEW 20 of 22 Appendix C. Economic Activity and Public Expenditure-to-GDP Ratio (a) (b) (c) Figure A5. Expenditure rules and economic activity in countries with a weak public expenditure- to-GDP ratio. (a) Case of a rule for the level of public expenditure (b) Case of a rule for the variation of public expenditure. (c) Case for both types of fiscal rules. (a) (b) (c) Figure A6. Expenditure rules and economic activity in countries with a high public expenditure- to-GDP ratio. (a) Case of a rule for the level of public expenditure (b) Case of a rule for the variation of public expenditure. (c) Case for both types of fiscal rules. Economic activity: annual real GDP growth, percentage change from the previous period. Source: OECD and IMF data, and the author’s own calculations. y = x + 2.3064 R² = 0.191 -20 -15 -10 -5 0 5 10 15 20 -5 0 5 In countries with a rule for the level of public expenditure Average OECD Values y = x + 1.5414 R² = 0.1051 -20 -15 -10 -5 0 5 10 15 20 25 30 -5 0 5 In countries with a rule for the variation of public expenditure Average OECD Values y = x + 0.9207 R² = 0.029 -1 0 1 2 3 4 5 6 7 8 9 0123 In countries with both types of fiscal rules Average OECD Values y = x + 1.234 R² = 0.709 -10 -8 -6 -4 -2 0 2 4 6 8 -5 0 5 In countries with la rule for the level of public expenditure Average OECD Values y = x - 0.5027 R² = 0.4191 -6 -4 -2 0 2 4 6 -5 0 5 In countries with a rule for the variation of public expenditure Average OECD Values y = x - 0.937 R² = 0.3439 -8 -6 -4 -2 0 2 4 6 -4 -2 0 2 4 In countries with both types of fiscal rules Average OECD Values Figure A5. Expenditure rules and economic activity in countries with a weak public expenditure-to- GDP ratio. (a) Case of a rule for the level of public expenditure (b) Case of a rule for the variation of public expenditure. (c) Case for both types of fiscal rules. Economies 2024, 12, x FOR PEER REVIEW 20 of 22 Appendix C. Economic Activity and Public Expenditure-to-GDP Ratio (a) (b) (c) Figure A5. Expenditure rules and economic activity in countries with a weak public expenditure- to-GDP ratio. (a) Case of a rule for the level of public expenditure (b) Case of a rule for the variation of public expenditure. (c) Case for both types of fiscal rules. (a) (b) (c) Figure A6. Expenditure rules and economic activity in countries with a high public expenditure- to-GDP ratio. (a) Case of a rule for the level of public expenditure (b) Case of a rule for the variation of public expenditure. (c) Case for both types of fiscal rules. Economic activity: annual real GDP growth, percentage change from the previous period. Source: OECD and IMF data, and the author’s own calculations. y = x + 2.3064 R² = 0.191 -20 -15 -10 -5 0 5 10 15 20 -5 0 5 In countries with a rule for the level of public expenditure Average OECD Values y = x + 1.5414 R² = 0.1051 -20 -15 -10 -5 0 5 10 15 20 25 30 -5 0 5 In countries with a rule for the variation of public expenditure Average OECD Values y = x + 0.9207 R² = 0.029 -1 0 1 2 3 4 5 6 7 8 9 0123 In countries with both types of fiscal rules Average OECD Values y = x + 1.234 R² = 0.709 -10 -8 -6 -4 -2 0 2 4 6 8 -5 0 5 In countries with la rule for the level of public expenditure Average OECD Values y = x - 0.5027 R² = 0.4191 -6 -4 -2 0 2 4 6 -5 0 5 In countries with a rule for the variation of public expenditure Average OECD Values y = x - 0.937 R² = 0.3439 -8 -6 -4 -2 0 2 4 6 -4 -2 0 2 4 In countries with both types of fiscal rules Average OECD Values Figure A6. Expenditure rules and economic activity in countries with a high public expenditure-to- GDP ratio. (a) Case of a rule for the level of public expenditure (b) Case of a rule for the variation of public expenditure. (c) Case for both types of fiscal rules. Economic activity: annual real GDP growth, percentage change from the previous period. Source: OECD and IMF data, and the author’s own calculations. Economies 2024,12, 295 20 of 21 Economies 2024, 12, x FOR PEER REVIEW 21 of 22 (a) (b) (c) Figure A7. Public expenditure-to-GDP ratio and economic activity. (a) Case of a rule for the level of public expenditure (b) Case of a rule for the variation of public expenditure. (c) Case for both types of fiscal rules. Government expenditure (% of the GDP). Economic activity: annual real GDP growth, percent change from the previous period; difference between the economic growth in a given country and the average economic growth in OECD countries. Source: OECD and IMF data, and the author’s own calculations. Note 1. For Germany, we consider data from 1991, after the reunification. 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European Journal of Political Economy 23: 338–59. y = -0.054x + 0.030 R² = 0.153 -15% -10% -5% 0% 5% 10% 15% 0% 20% 40% 60% Difference compared with the average activity in OECD countries Public expenditure (% GDP) y = -0.097x + 0.046 R² = 0.127 -15% -10% -5% 0% 5% 10% 15% 20% 25% 10% 30% 50% 70% Difference compared with the average activity in OECD countries Public expenditure (% GDP) y = -0.134x + 0.058 R² = 0.328 -10% -8% -6% -4% -2% 0% 2% 4% 6% 8% 20% 70% Difference compared with the average activity in OECD countries Public expenditure (% GDP) Figure A7. Public expenditure-to-GDP ratio and economic activity. (a) Case of a rule for the level of public expenditure (b) Case of a rule for the variation of public expenditure. (c) Case for both types of fiscal rules. Government expenditure (% of the GDP). 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