Fiscal rules for subnational entities

an analysis of the effectiveness of the rrf spending rule using the synthetic control method

Abstract

This work analyzes the effectiveness of the expenditure rule imposed by the Fiscal Recovery
Regime in controlling the growth of primary expenditures in the Brazilian states that joined the
Regime: Goiás, Rio de Janeiro and Rio Grande do Sul. Using the Synthetic Control Method, the
study compares the actual trajectories of primary expenditures in these states with counterfactual
scenarios, revealing that while Goiás and Rio Grande do Sul significantly reduced their primary
expenditures, the expenditure rule proved ineffective in Rio de Janeiro. The analysis highlights
limitations in the design of the rule, such as its rigidity and the lack of clear penalties, suggesting
that, although the rule was successful in some states, adjustments are needed for its effective
application in different fiscal and economic contexts.