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Luc Eyraud, Andrew Hodge, Mr. John Ralyea, and Julien Reynaud

borrowing for investment but not to finance current expenditure, was applied in more than 40 percent of countries with fiscal rules (37 reported countries). This contrasts with the use of the golden rule at the central or general government levels, which is virtually nonexistent ( Lledó and others 2017 ). Other popular rules include debt rules (31 countries) and debt service rules (19 countries). Rules on the budget balance, debt, and debt service are frequently accompanied by annual limits on borrowing. 17 Some 30 countries, mostly emerging market and low

Luc Eyraud, Andrew Hodge, Mr. John Ralyea, and Julien Reynaud
This note discusses how to design subnational fiscal rules, including how to select them and calibrate them. It expands on the guidance provided at the national level on rule selection and calibration in IMF (2018a) and IMF (2018b). Thinking on subnational fiscal rules is still evolving, including their effectiveness (for example, Heinemann, Moessinger, and Yeter 2018; Kotia and Lledó 2016; Foremny 2014), and this note only provides a first analysis based on international experiences and the technical assistance provided by the IMF. Main findings are summarized in Box 1. The note is divided into five sections. The first section defines fiscal rules. The second section discusses the rationale for subnational rules. The third section provides some guidance on how to select the appropriate rule(s) and whether they should differ across individual jurisdictions. The fourth section explores the issue of flexibility by looking at how rules should adjust to shocks. Finally, the last section focuses on the “calibration” of the rules.
International Monetary Fund. European Dept.

, and debt/debt service rules—that are relatively onerous compared to those of other European emerging economies ( Table 1 ); A system of municipal finance defined by the law on LG finance introduced in 2007; and, Laws at the CG level defining transfers and revenue sharing arrangement to subnational governments. Table 1: Subnational Fiscal Rules in Selected Transition Economies 1 / Country Type of rule Description Armenia Borrowing constraint All borrowings are prohibited unless approved by the Ministry of Finance and

Luc Eyraud

FR RG Self-imposed Debt service Rules are self-imposed and vary by state, but national FRL recommends adoption of state FRLs. Some states have debt service rules. India FR RG Self-imposed Debt stock Rules are self-imposed and vary by state, but national FRL recommends adoption of state FRLs. Some states have debt stock rules. Mexico FR RG Imposed Domestic borrowing The constitution prohibits domestic borrowing, except for the construction of works intended to produce directly an increase in their revenues. Mexico FR

International Monetary Fund

Federalism in Theory and Practice (IMF 1997) 11 The best designed systems of fiscal rules combine stock and flow rules; however, the interest rule here is virtually equivalent to a debt stock rule, rather than a true flow (deficit or expenditure) rule. 12 Illustrative calculations (assuming a constant revenue-to-GDP ratio, an average interest rate of 13 percent, and five-year average maturity on contracted debt) indicate that for debt and debt-service rules to become binding by 2005, new jurisdictions could raise annual expenditures by some 7½ percent, in real

International Monetary Fund

in the debt rule are weak and could be strengthened. The debt servicing rule should also be revised to exclude debt repayments under the definition of ‘debt servicing’ which provides disincentives for earlier debt repayments and inceases tendencies towards longer term borrowing ( OECD, 2006 ). 25. Special consideration for funding future pension liabilities is also needed . While a separate spending ceiling covers extra-budgetary funds, state pensions remain within the state budget. Assuming pension spending is contained, state pensions are expected to run a

International Monetary Fund

pillar at 9 percent, which is high by CEE standards ( Annex I ). 21. A broad fiscal institutional reform is under preparation . The plans include a constitutional debt limit at 55 percent of GDP (below the Maastricht threshold) with increasingly strong sanctions—starting with a letter to Parliament, followed by an expenditure freeze, and ultimately the resignation of the government—when debt exceeds 45 percent of GDP. The debt ceiling will be complemented with rolling medium-term expenditure ceilings at the state level. Enhanced debt and debt service rules and a

International Monetary Fund
This Selected Issues paper examines two key questions on fiscal policy reform in the Czech Republic. First, how can the fiscal institutional framework be strengthened to maintain discipline and enhance transparency? Second, what are the priorities in expenditure reform that can be implemented without sacrificing the quality of spending? The paper discusses the recent Czech experience with the medium-term expenditure framework and some proposals for strengthening it. It also discusses cross-country analyses of spending efficiency and flexibility, and proposes areas for fiscal adjustment that reduce inefficiencies.
International Monetary Fund
The Slovak economy showed recovery from sharp recession. Executive Directors suggested that restoring fiscal sustainability and removing unemployment while maintaining external competitiveness within the monetary union should be given priority. The fiscal consolidation strategy could be facilitated by adopting real expenditure growth with deficit targets and expenditure policy priorities, including reforming health care and pensions. However, public procurement and absorption of EU funds are important for enhancing the business environment and strengthening public sector governance.