The key characteristic of the second broad class of fiscal rules, expenditure rules (or “spending rules” for
short), is that they aim to limit policy-induced increases in spending and reductions in taxes, rather than to
focus directly on the deficit. Note, importantly, that the terms “expenditure rules” and “spending rules”
should not be construed necessarily to exclude controls on revenue-losing changes in tax policy. The
now-expired US system was in some respects the most elaborate model. It used dollar-denominated caps
on annually appropriated spending, with pay-as-you-go (PAYGO) restrictions on the aggregation of
spending mandated by permanent appropriations (mostly for programmes with important automatic
stabilisation implications) and taxes. In the US case, it is unlikely (in the judgment of the present authors)
that the rule would have succeeded without including revenues as well as spending. Other examples of
spending rules use caps on all spending, or on a broader range of spending than did the United States; this
is a policy choice that can accommodate the rule to different countries and institutions, as is discussed
further below.
A second characteristic of the US version of a spending rule is that it has its effect ex ante, rather than
ex post. In other words, the spending rule constrains policy actions as they are taken, and thus their future
effects, rather than requiring remedial action for their budgetary results after those results are recorded for
a past fiscal year. The enforcement of the spending caps therefore constrains appropriations as they are
enacted, and the enforcement of the PAYGO rule constrains the estimated future effects of changes in tax
policy and in mandatory spending programmes. The US system used across-the-board spending cuts
(“sequesters”) to remedy policy overages shortly after they were enacted.
The US version of an expenditure rule was enacted at the start of fiscal year 1991, to replace the prior
deficit-based rule. It continued in force, having been re-enacted twice, through the end of fiscal 2002,
when it expired. It was, however, overridden by statute numerous times in the last three years of its life,
after helping the budget to leave fiscal deficit and enter surplus in the late 1990s.^3
This paper will analyse an expenditure rule generally following the US model in more detail, as an
alternative to a deficit rule (with or without cyclical adjustment). In keeping with the discussion above,
this comparative analysis will aim to determine which of the two alternative classes of rules might better
satisfy, on balance, several criteria. To be preferred, an alternative should achieve the better mix of debt
control and counter-cyclical macroeconomic policy, taking into account the administrability, political
viability and credibility of the rule itself.^4
3. Evaluating two alternatives
3.1. Background: Uncertainty and fiscal rules
At the outset, it is important to discuss a possible simple misconception. A deficit rule might be assumed
to be superior to a spending rule for purposes of long-term sustainability and control of debt, for the
simple reason that it at least in name targets precisely the ultimate cause of additional public borrowing,
the deficit, rather than the controllable proximate causes, spending increases or tax decreases. However,
(^3) The failure of the United States to follow its own rule in recent years should not be seen as an inherent flaw of the rule,
any more than should the SGP necessarily be indicted because the larger member countries have flouted it. Rather, the
current analysis seeks to evaluate the alternative rules for their relative merits, understanding that “Although all rules,
including those prescribed by legislation, are intended to apply strictly and permanently – over successive
governments – they are, in practice, open to some interpretation and conceivably can be revised, suspended, or repealed
through subsequent legislative action” (Kopits and Symansky, 1998, p. 8).
(^4) Kopits and Symansky (1998, p. 4) and Kopits (2001, p. 6) would characterise the US budget rule not as a fiscal policy
rule, but as a procedural rule. Readers who prefer the latter characterisation may construe this paper as a comparative
analysis of a deficit fiscal policy rule and a spending procedural rule. The current authors see no reason to conclude pre-
emptively that either rule is necessarily superior or inferior on the basis of such a characterisation.