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Every government faces a temptation to make two popular choices at the same time: hold taxes lower and raise spending higher. But of course, the result is higher debt. Thus, a number of countries have been attempting to set up rules that would prevent governments from giving into temptation. One immediate challenge for such rules is that they need to contain some flexibility: after all, tying the hands of govenment during a pandemic or a deep recession doesn’t seem sensible. A second challenge is governments today would prefer not to follow the rule passed by government yesterday.

A group of IMF economist describe these issues after studying a databased of fiscal rules in more than 120 countries in “Fiscal Guardrails against High Debt and Looming Spending Pressures” (IMF Staff Discussion Note SDN/2025/004, September 2025, by Julien Acalin, Virginia Alonso-Albarran, Clara Arroyo, Waikei Raphael Lam, Leonardo Martinez, Anh D. M. Nguyen, Francisco Roch, Galen Sher, and Alexandra Solovyeva).

Here’s the rise in countries with a fiscal rule of some kind since 1990. The upward trend started in advanced economies, but has since been spreading.

The IMF authors describe how the fiscal rules are working along these lines:

Although earlier fiscal rules were often too rigid, efforts to introduce greater flexibility have not translated into stronger compliance. … [F]ewer than two-thirds of countries adhere to their deficit rules on average, with lower share for emerging market and developing countries and debt rules. … Fiscal deficits four years after the pandemic continue to exceed fiscal rule limits by a median of 2.0–2.5 percentage points of GDP for about 40 percent of advanced economies and 60 percent of EMDEs (Alonso and others, 2025b). In most countries, public debt has surpassed the ceilings in the debt rule by an average of 25 percentage points of GDP. Such large deviations from fiscal rule limits in many countries are driven by both severe shocks and limitations in the design of fiscal rules (Davoodi and others 2022a). During the severe shocks, the magnitudes and the share of countries that deviate from fiscal rule limits increased as expenditures or deficits tend to rise. But even in normal times, some countries have deficits and debt persistently exceeding their fiscal rule limits, partly because of multiple exclusions from the rules, limited fiscal oversight, or lack of fiscal adjustments to reduce debt and deficits. In recent years, fiscal adjustments have been limited, complicating the return to fiscal rule limits (Caselli and others 2022).

Choosing a fiscal rule is easy enough: for example, a government can specify thar it will balance its budget annually, or that total government debt will not surpass a certain debt/GDP ratio, along with other approaches. The rule can also offer some flexibility for pandemic and recessions. The hard part is what to do when the government is either thinking about blowing right through the rule, or has already done so. To address the harder part, the IMF team describes two useful elements of a fiscal rule.

First, any agreement on a fiscal rule should also be an agreement on what corrective action will be taken if the rule is bent or broken. For example:

Ecuador and Spain mandate corrective actions when fiscal outcomes are close to the fiscal rule limits. Some countries implement progressive triggers with corresponding tighter measures. For example, Czech Republic sets thresholds on the debt-to-GDP ratios, each involving larger fiscal adjustments if triggered. … In the event of deviations, many fiscal rules require corrective actions to be implemented within one and a half or two years (Finland, Spain) after the breach, and sometimes within three years (Grenada). More stringent correction mechanisms may require remedial action to be included in the next budget. … Some fiscal rules … call for fully unwinding past cumulative deviations in the corrective mechanism. For example, Switzerland’s mechanism accumulates any deviation from the budgeted expenditures in a notional account, requiring the government to take sufficient measures to bring the expenditures within the limit in next three annual budgets if the negative balance in the account exceeds 6 percent of expenditure. Mechanisms in Germany, Grenada, and Jamaica require corrective actions for cumulative deviations. … Some countries specify particular measures; for instance, the fiscal rule in Slovak Republic mandates a freeze on public sector wages if debt exceeds 53 percent of GDP, with further spending cuts if debt surpasses 55 percent of GDP.

In short, if your proposed fiscal rule doesn’t specify what consequences will result from breaking it, and the timing for those consequences, it isn’t much of a rule. the other main element of a successful fiscal rule is that, given that the current government is either breaking the rule or on the verge of doing so, it’s important to have some institutions that can create pressure from outside the government.

For example, many countries publish a “medium-term fiscal framework,” or MMTF, which seeks to read broad agreement on budgetary decisions before getting down into the details. The IMF economists write:

The MTFF sets top-down limits on government expenditure and fiscal balance, guiding the annual budget process. The MTFF report should include the fiscal strategy, medium-term macro fiscal projections, measures for achieving fiscal targets, and fiscal risks assessment (Curristine and others 2024). The MTFF should be prepared and published before the budget, incorporating multiyear ceilings for fiscal aggregates, which can also be disaggregated into sector-specific or programmatic frameworks (for example, France, Rwanda, South Africa, Sweden) to facilitate the translation of targets into annual budgets and spending priorities.

I confess that in the context of the US federal budget, which seems to be run by a combination of continuing resolutions punctuated by an occasional omnibus bill that loads everything together, the idea of agreement on an MMTF seems very hard. But a number of countries do manage it. Another form of outside pressure is to have a “fiscal council” with a degree of operational independence, which has the power to point out and publicize whether the fiscal rules are under threat.

Fiscal oversight can take different institutional forms, ranging from parliamentary budget committees and auditor offices to independent fiscal councils. Fiscal councils can provide technical assessments of compliance with fiscal rules and can alert in year deviations. Their expertise is critical for evaluating risks to public finances and the realism of macro-fiscal forecasts in the budget and MTFF. Fiscal councils should have direct communication with the media. To secure their operational independence, they should have a well-defined mandate aligned with their resources, budget safeguards, and timely access to information …

In a US context, the idea of a fiscal council also doesn’t seem very realistic. The U.S. government decided back in the 1930s that the Federal Reserve would have its goals set by laws duly passed by Congress and signed by the President, but would then be operationally independent from politics. But that arrangement is now under political challenge, and an independent fiscal council responsible for fiscal strategy and targets seems even less politicall plausible.

Again, fiscal rules are easy. The hard part is specifying what corrective actions will happen if the rules aren’t followed, and what credible institutions will advocate for the rules and the corrective actions when needed.

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