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

(such as budget balance rules or borrowing constraints) rather than rules that constrain only part of the fiscal position (such as expenditure rules or debt service rules). Second, budget rigidities are common at the subnational level and can complicate the implementation of the rules. Subnational governments in OECD countries spend half of their budgets on politically sensitive education, health, and social support programs ( OECD 2015 ). In addition, requirements for expenditures are often set by higher levels of government, leaving little autonomy to pare

International Monetary Fund. Research Dept.

these pressures and their negative consequences may have lasting effects on future generations ( Corak, 1993 ). Question 5: How can governments intervene in order to stem inequality? The most direct way for governments to intervene is to implement progressive tax and transfer policies. As Figure 3 shows, governments in OECD countries vary substantially in how successful their policies are in reducing inequality. Figure 3: Gini Coefficients Before and After Taxes and Transfers, Mid-2000s Note: Countries are ranked, from left to right, in increasing

Bill Francis

. Governments in OECD countries have decades of experience in implementing direct programs to mobilize venture capital in support of small and technology-based firms and to produce public benefits through innovation and job creation. Government involvement aims to remedy deficiencies in private capital markets, to leverage private sector financing, and to reduce aggregate risk by diversifying the economy. Evidence is ample that government involvement can provide greater social rates of return than the private sector. Various schemes can bring public benefits by targeting

International Monetary Fund

, a smaller general government in Chile, as the average size of the general government in OECD countries was equivalent to 43 percent of GDP, twice the size of Chile’s. 9 Among the OECD, México is the only economy with a smaller public sector than Chile. It is important to bear in mind that different government sizes do not fully translate into different levels of provision of public services. Countries with pay-as-you-go pension systems tend to channel significant contributions and pension payments through the budget. This would not happen if the pension system is

Mr. James P. F. Gordon

, “ Does Government Employment ‘Crowd-out’ Private Employment? Evidence from Sweden ,” Scandinavian Journal of Economics , Vol. 98 ( 2 ), pp. 289 - 302 . Saunders , P. , 1993 , “ Recent Trends in the Size and Growth of Government in OECD Countries ,” in The Growth of the Public Sector: Theories and International Evidence , ed. by N. Gemmell , ( Brookfield, Vt. : Edward Elgar ). Young , Alwyn , 1995 , “ The Tyranny of Numbers: Confronting the Statistical Realities of the East Asian Growth Experience ,” Quarterly Journal of Economics , Vol

Mr. James P. F. Gordon
In contrast to the experience in industrial countries, government sectors in a number of African countries grew rapidly in relative size through the 1980s and early 1990s, implying a differential between measured GDP growth and growth of private sector activity. In these countries, the government sector was also an important source of employment growth. Leaving aside issues of crowding out, boosting growth in this way raises questions of fiscal sustainability. It also urges caution in interpreting growth performance.
Mr. Alberto Alesina

consumption, and public investment. Figures 10.3 and 10.4 plot, respectively, the ratio of transfers to total primary spending and the ratio of transfers and government wages to total primary spending. The picture that emerges from these plots speaks for itself: governments in OECD countries are becoming larger, and increasingly turning themselves into redistributive machines. Although public investment shows a declining trend, transfers show a sharply upward movement. As a result, in the 1990s, about three-fourths of total spending has been for transfers and public

Mr. Alberto Alesina and Mr. Roberto Perotti

parties to govern and the veto power of each coalition member can delay the legislative process. Majoritarian systems have the opposite features, since they imply that, when in office, a party is unconstrained. Alesina and Drazen (1991) and Spolaore (1993) provide formalization of these ideas. Grilli, Masciandaro and Tabellini (1991) , Roubini and Sachs (1989) and Alesina and Perotti (1995b) discuss empirical evidence on fiscal deadlocks and delayed fiscal adjustments in coalition governments in OECD countries. A related discussion refers to “divided government