On Constitutionalizing a Balanced Budget

Do constitutional rules that mandate a balanced budget promote fiscal discipline? Although such rules are at the heart of austerity debates across the world, we know surprisingly little about their consequences. We leverage original data on constitutional budget provisions and analyze their effect on governments’ primary budget balances. We find that constitutional rules that require balanced budgets are robustly associated with fiscal discipline. The constitutional effect remains even after controlling for statutory balanced-budget rules. Furthermore, the effect strengthens as constitutions become more difficult to amend and under conditions of borderline solvency—two implications consistent with a constitutional impact. The results will be surprising to those who appreciate both the strong pressures against fiscal discipline and the creativity of governments in devising strategies to evade spending limits. These findings provide a reference point for policy debates surrounding financial crises in many national contexts.