Fiscal rules to the test: The impact of the Spanish expenditure rule

Abstract

Despite the large spread of fiscal rules around the world, there is still not enough evidence of their effectiveness in ensuring fiscal sustainability. Furthermore, there is little evidence of the impact of expenditure rules in countries’ fiscal performance. This paper evaluates the effectiveness of the Spanish expenditure rule that has been in force since 2012 in controlling the growth of public expenditure. We use a synthetic control methodology to analyze the impact of the rule on the evolution of current and primary expenditure within Spanish public administrations (2001–2018), avoiding the potential endogeneity problems of traditional econometric approaches. Overall, we find that the expenditure rule has largely improved budget sustainability by limiting both current and primary expenditure. These results are robust to different levels of government.