Fiscal Guardrails against High Debt and Looming Spending Pressures

Disclaimer: This Staff Discussion Note represents the views of the authors and does not necessarily represent IMF views or IMF policy. The views expressed herein should be attributed to the authors and not to the IMF, its Executive Board, or its management. Staff Discussion Notes are published to elicit comments and to further debate.

Many countries have adopted fiscal rules to foster fiscal discipline, but compliance has been mixed. Recent policy shifts and heightened policy uncertainty further intensify spending pressures and persistent debt challenges, underscoring the need for stronger fiscal guardrails. Results from a major update of IMF databases on fiscal rules and councils suggest that two-thirds of countries have revised their fiscal rules but deficits and debt continue to be well above countries' rule limits. Robust correction mechanisms, with predefined timelines and measures, could better guide the return to rule limits and reduce sovereign spreads. In addition, supportive fiscal institutions, such as independent fiscal councils, reinforce compliance. Finally, revisions to fiscal rules to meet spending pressures should be carefully designed to preserve their integrity and transparency.

Subject: Debt sustainability, Expenditure, External debt, Fiscal councils, Fiscal governance, Fiscal policy, Fiscal rules, Public debt, Public investment spending

Keywords: Debt sustainability, Expenditures, Fiscal councils, Fiscal councils, Fiscal governance, Fiscal rules, Fiscal rules, Medium-term fiscal frameworks (MTFFs), Public debt, Public investment, Public investment spending, SOVEREIGN RISK, Sovereign risks