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Appropriate enforcement mechanisms, including requirements of timely correction of deviations of budget outcomes from the target.
The growing trend towards fiscal decentralization poses particular challenges for the design and implementation of fiscal rules. In a very decentralized system, and especially when the prerequisites for an effective market discipline on SNGs are not fulfilled, appropriate subnational fiscal rules can be an important instrument to promote overall fiscal sustainability and minimize pro-cyclicality. Sub-national fiscal rules should: • • • •
Have a robust legal foundation, consistent with the constitutional status of SNGs in each country Be as comprehensive as possible in coverage; clearly formulated; and reflect the debt servicing capacity of each jurisdiction Be consistent with the (frequently more limited than at the CG level) implementation capacity of SNGs; and Be supported by adequate enforcement mechanisms.
To minimize pro-cyclicality, it would be desirable in principle to allow some play for automatic stabilizers in sub-national fiscal rules. In practice, however, it may be quite difficult to design and implement structural-type rules at the sub-national level, given the difficulties of measuring the cycle at that level. Moreover, even if technically feasible, the use of such rules should be accompanied by steps (such as the building up by SNGs of adequate “rainy day” funds during boom periods) to avoid the emergence of financing constraints during cyclical downturns. Other reforms in the intergovernmental arrangements (revenue and expenditure assignments, and the transfers systems) may be more feasible and effective than the adoption of structural fiscal rules in reducing pro-cyclicality at the sub-national government level.