Phil Gerson: Fiscal Rules and COVID–Preliminary Evidence

A number of countries–Advanced Economy, Emerging Market and Low-Income–entered the COVID crisis with fiscal rules that were intended to help meet debt and/or deficit objectives. Despite concerns that these rules might constrain the ability of countries to respond to large shocks, debt and deficits rose markedly among almost all these countries during the pandemic. Moreover, countries that more successfully complied with their fiscal rules prior to the pandemic typically responded more forcefully than others to COVID, possibly reflecting greater credibility or fiscal space. Thus, there is reason to believe that the adoption (and implementation) of fiscal rules can actually enhance the capacity of fiscal authorities to deal with large shocks. However, debt and deficits now stand at unprecedented levels in many countries, and experience from prior episodes indicates that it may take many years for fiscal indicators to return to their prepandemic levels. A new generation of rules may thus be called for.