Fiscal Rules and Fiscal Surveillance Institutions in the European Union and their Impact on Stability of Public Finances

In the Economic and Monetary Union, monetary policy has been conducted at the supranational level by the European Central Bank, while fiscal policy remains a national matter for the Member States of the euro area and the European Union. The economic and financial crisis of 2007 to 2013 demonstrated that the fiscal policies of the EU countries are a matter of common interest. Thus, there is a strong focus on the ability of the Member States to properly coordinate economic policies, to ensure the sustainability of public finances and to ensure that fiscal automatic stabilisers function to cushion economic shocks. The EU fiscal surveillance framework has been put in place to ensure responsible implementation of fiscal policies, with the aim of limiting government deficit and debt in the EU countries, but there are also a number of national fiscal surveillance elements. It should be added that the issue of the sustainability of public finances has become even more urgent in the context of the outbreak of the crisis caused by the Covid-19 pandemic. The presented dissertation examines the impact of fiscal institutions on public finances in the EU Member States, where for the purpose of this dissertation fiscal institutions are understood as numerical fiscal rules, budgetary processes, medium-term budgetary frameworks, independent fiscal institutions and forms of fiscal governance. In this context, it has also been examined which factors contribute to compliance with the rules of the Stability and Growth Pact. To this end, the above-mentioned elements of fiscal surveillance in the EU countries are examined. The empirical part of the dissertation then consists mainly in analysing the impact of selected institutional elements (the national and EU ones) on the discretionary behaviour of fiscal policy, as well as on the implementation of the rules of the Stability and Growth Pact. This analysis was mainly carried out using the so-called fiscal reaction function, i.e. a regression method for examining the impact of various explanatory variables (e.g. macroeconomic, structural or institutional) on the fiscal indicator. This method was used to examine the impact of national and EU fiscal rules, medium-term budgetary frameworks and fiscal councils on the discretionary behaviour of fiscal policies. The same method was applied to examine the impact on the degree of compliance with the Stability and Growth Pact. The research is deepened by taking into account the different forms of fiscal governance and the specific attributes of fiscal councils. The results of the analysis suggest that the fiscal institutions examined are crucial for higher fiscal discipline in the EU Member States, specifically in terms of national and EU numerical fiscal rules, medium-term budgetary frameworks and independent fiscal institutions. The findings of the dissertation also show that national fiscal rules and fiscal councils are complementary aspects of institutional surveillance in the Member States, and that they also have positive effects on the compliance with the preventive and corrective arm of the Stability and Growth Pact. At the same time, it should be noted that the impact of fiscal surveillance institutions varies considerably in the light of national electoral systems and, inter alia, the party constellation of governments. Nevertheless, a strict categorisation between Member States according to the form of fiscal governance is not appropriate, especially in light of the significant heterogeneity of the national institutional set-up of the EU countries. Compared to the mere existence of fiscal councils, their selected attributes, such as monitoring of compliance with fiscal rules or approving macroeconomic and budgetary forecasts, are more justified. Following the conclusions of the dissertation, certain recommendations for the functioning of fiscal policy can be drawn: (i) fully respect the pre-established rules of fiscal surveillance; (ii) build up fiscal buffers in preparation for future economic downturns; (iii) avoid pro-cyclical fiscal policies; (iv) strengthen to a certain extent the national ownership of the EU surveillance framework; (v) independently assess the volume of expenditure to be subject to the application of the flexibility elements of the fiscal rules; (vi) strengthen the role of fiscal councils, inter alia, in the delegation states; (vii) active participation of fiscal councils in the application of specific procedures under EU fiscal surveillance; (viii) independent assessment in case of differentiation of fiscal consolidation requirements. Regardless of the future design of fiscal surveillance, its ability to achieve fiscal sustainability in the interest of broader economic welfare, including economic performance and intergenerational equity, is crucial.