Fiscal Rules, Fiscal Space, and the Procyclicality of Fiscal Policy

We analyze the interaction of fiscal rules and fiscal space. We find strong evidence for fiscal rules being associated with higher fiscal space for the EU27 countries for the period 1990–2014. Furthermore, the analysis shows that countries with more fiscal space tend to have higher discretionary expenditures, but that this effect is significantly reduced if fiscal rules are in place. Moreover, we find support for the hypothesis that the procyclicality of fiscal policy is significantly higher in an environment of ample fiscal space and that fiscal rules can help lowering this procyclicality.