Fiscal rules and fiscal sustainability at sub-national government level: experiences of Slovakia, Slovenia and Croatia

Relationship of fiscal rules and fiscal sustainability is subject to ongoing debate which was intensified by adoption of EU fiscal rules. Task of the fiscal rules is simple - to prevent the unsustainable growth of debt and spending. However, the problem of fiscal rules that have been applied in past is in ignoring the economic fundamentals that determine fiscal sustainability. So far, fiscal rules were focused on the control of spending without taking care about possible output fluctuations or effects of debt financing on growth. That led to paradox that even with the sound fiscal policy guided by the fiscal rules there is no guarantee of fiscal sustainability. This flaw became obvious when countries hit by economic crises start abandoning the criteria set up by fiscal rules in order to confront impact of worsening economic conditions to fiscal variables. Therefore, there is a need for development of new fiscal rules, particularly on the sub-national government levels. These new fiscal rules should encompass both short-term and long-term sustainability and particularly stimulus to economic efficiency. In order to determine necessary content of fiscal rules to achieve such goals it is important to conduct comparative research on the issue. This paper presents experiences of Slovakia, Slovenia and Croatia and tries to draw useful lessons.