Iv. Fiscal Stance over the Cycle: the Role of Debt, Institutions, and Budget Constraints

Fiscal stance may respond pro-cyclically to the business cycle... This chapter describes the extent to which fiscal policy has been a stabilising or destabilising influence on economic activity in the OECD area over the last two decades, and investigates some of the institutional factors which may have led to the observed outcome. The concerns motivating the chapter relate to the fact that discretionary fiscal interventions may be pro-cyclical, as in the case of fiscal tightening during downturns especially. In part, this may be because of unsustainably high government indebtedness. But pro-cyclicality could also be due to implementation problems or to the institutional framework in which policies are designed and managed, including some rules-based approaches to fiscal stability, which may hamper the symmetrical operation of built-in stabilisers over the cycle.