Do Fiscal Rules Enhance States' Fiscal Capacity?

Abstract

This paper examines the impact of fiscal rules on fiscal capacity. It is based on the premise that fiscal rules can enhance citizens' tax morale and willingness to pay taxes, thereby improving fiscal capacity. Using a global dataset spanning from 1985 to 2021, we find that stricter fiscal rules have a positive impact on fiscal capacity. This relationship holds when excluding EU countries, differentiating between supranational and national rules and employing alternative measures of fiscal capacity. Robustness checks further reveal that while fiscal capacity tends to rise with the number of rules in place, the combination of rules plays a relevant role. These findings underscore the importance of deliberately selecting and designing fiscal rules to effectively strengthen fiscal capacity.