Fiscal rules or objectives in relation to public spending, deficit, or debt levels act as a commitment mechanism for governments, signalling their fiscal intentions and ensuring thar their fiscal strategy will be conducted in a transparent and accountable manner. The lack of fiscal rules or objectives, or their lack of credibility, can significantly undermine public finances by eroding citizens’ trust in the government's capacity to deliver its policies, diminishing investors’ confidence in public finances and ultimately increasing borrowing costs.
Fiscal Frameworks
Fiscal frameworks outline the government's fiscal intentions and explain how these will be implemented concretely. Well-designed fiscal frameworks provide clarity and stability in government fiscal operations, ensuring that spending on policy priorities of governments, like healthcare, education, and climate adaptation, are funded and sustainable. Additionally, they build resilience by helping governments prepare effectively for economic challenges.
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Key messages
Medium-Term Budget Frameworks (MTBFs) and Medium-Term Expenditure Frameworks (MTEFs) help governments explain how they will achieve their economic, social, and environmental goals in a fiscally responsible manner. To do so, MTBFs generally comprise three key elements: a revenue forecast, cost estimates of existing policies (the baseline) and new policies, and expenditure ceilings. In contrast, MTEFs focus on expenditure. The elements in these frameworks align spending, revenues and fiscal rules for three to five year periods, providing a clear plan for government operations.
Government spending plans can be disrupted by unforeseen events. Disruptions can come from large shocks like the global financial crisis or the COVID-19 pandemic and from a variety of other causes, such as natural disasters or financial difficulties of subnational governments. Effective fiscal management involves identifying, analysing, and addressing these risks to ensure that MTEFs and expenditure ceilings are adhered to, even in the face of unexpected challenges and maintain financial stability and resilience.
Context
New generation of fiscal rules and objectives is needed to foster trust in fiscal frameworks.
Most OECD countries have fiscal objectives and rules. In the recent past, in particular during economic shocks, these rules have however been breached, revised and have multiplied, showing the need for better design. By re-establishing government and public commitment to simple, credible, and appropriately flexible fiscal rules, governments can deliver better fiscal management and restore trust in sustainability of public finances.
Stronger MTBFs are needed to enhance fiscal credibility.
MTBFs and MTEFs are among the most innovative and widely adopted budgetary tools in OECD countries today. Their potential for improving fiscal planning and discipline is immense. However, to fully realise this potential, it is important to ensure that annual budgets consistently align with the expenditure ceilings set in previous years. By strengthening MTEFs through robust processes for preparing baselines and determining expenditure ceilings, OECD countries can enhance the effectiveness of their fiscal frameworks and build greater confidence in their financial management.
Related publications
Related policy issues
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