Do Balanced Budget Rules Work?
Robert P. Inman No 5838, NBER Working Papers from National Bureau of Economic Research, Inc Abstract: The `Excessive Deficit Procedure’ of the Maastricht Treaty on Economic and Monetary Union proposes two fiscal convergence conditions for entry and continued membership in the EMU: 1) a country’s overall budget deficit for each fiscal year must be equal to or below 3% of GDP, and 2) a country’s stock of gross public debt must be equal to or less than 60% of GDP. Will the current EMU Excessive Deficit Procedure work as an effective constraint on countries’ deficit behaviors? When understood within the context of a political economy model of deficit behavior, recent U.S. evidence on balanced budget rules strongly suggests that effective deficit constraints must use ex post deficit accounting, must be constitutionally grounded, must be enforced by an open and politically independent review panel or court with significant sanctions for violations, and costly to amend. While ex post, constit
