Five findings on fiscal rules in EMDEs

Emerging market and developing economies (EMDEs) have been hit by a series of deep, overlapping shocks in recent years. The fiscal fallout is clear. Government debt has climbed to a 55-year high, while interest payments are consuming a growing share of public revenues, thereby constraining much-needed productive expenditure. In this environment, rebuilding fiscal space is not optional—it is urgent.

Over the past few decades, many countries have sought to strengthen their policy frameworks to strengthen resilience and deliver better economic outcomes. A special focus chapter of the January 2026 Global Economics Prospects report offers a detailed analysis of the role that fiscal rules can play in these efforts.

Fiscal rules set numerical limits on key fiscal variables—deficits, debt, spending, or revenues—with the goal of improving fiscal sustainability. Once largely the domain of advanced economies, fiscal rules have since become widespread across EMDEs (Figure 1). As of 2024, 85 EMDEs (55 percent of these economies) had adopted fiscal rules.

Fiscal balances typically improve after policy makers adopt fiscal rules. Over the first five years, the cyclically adjusted primary balance (CAPB) improves by a cumulative 1.4 percentage points of trend GDP in EMDEs, on average, before narrowing in the long term (Figure 2A).

Sustaining progress usually takes more than a rule on paper. A supportive institutional environment—transparent budget processes, democratic accountability, and rule of law—helps lock in improvements to fiscal conditions following the adoption of fiscal rules (Figure 2B). Still, public institutions are not the whole story. Rule design matters too. In particular, rules that directly constrain the fiscal deficit stand out and can deliver medium- to long-term gains even where institutions are weaker.
 

Figure 2. Fiscal rule effectiveness

The timing of fiscal rules also matters. When fiscal rules are adopted in strong economic conditions, fiscal improvements tend to build gradually and persist (Figure 3). Rules adopted in weaker conditions, on the other hand, often do not yield better fiscal outcomes than having no rule. This could be because rules introduced in a weak economy are more likely to be rushed through, launched under pressure, or sold on the promise of quick wins, thus limiting their credibility. 

Figure 3. Change in CAPB following rule adoption, by conditions at adoption

Although fiscal rules help rein in deficits, they do not guarantee permanent fiscal stability. Deficits can return, and debt can climb quickly, especially after major shocks such as the global financial crisis and the COVID-19 pandemic. Therefore, periodic fiscal adjustments may still be necessary.

The encouraging news is that fiscal adjustments—defined as multi-year episodes of significant improvement in the CAPB—are more likely when rules are in place. In any given year, the probability of starting an adjustment is 14 percent with fiscal rules, versus 5 percent without them (Figure 4). When EMDEs do adjust, they tend to do so decisively. In the median EMDE adjustment episode, the CAPB strengthens by 1.6 percentage points of trend GDP per year, compared to 1 percentage point in advanced economies.

How countries adjust is not just about politics or pain tolerance—it is also about rule design. Enforcement provisions are important for the effect of fiscal rules on fiscal adjustments. Rules that specify who monitors compliance and what happens when limits are breached are more strongly associated with expenditure-based adjustment than those that do not (Figure 5A). At the same time, complexity is not necessarily a virtue. When fiscal rule frameworks have simple design, they are more strongly linked to revenue-based adjustment (Figure 5B). 
 

Figure 5. Increase in likelihood of fiscal adjustment

Fiscal rules can help EMDEs to rebuild fiscal space, but credibility—not highly elaborate design—is what ultimately matters for their effectiveness. Yet credibility is built, not declared. Once in place, rules are most effective when tailored to domestic fiscal challenges and supported by early, visible steps and sustained political commitment.