Do any nations have in place formal mechanisms to "save in good years/spend in bad years"?

Question

One tenet of Keynesian economics is that a government can improve long term economic efficiency, and individual well-being, by deficit spending during recessions.

Some examples of that might be:

• US ABC agencies during the Great Depression
• deficit spending during the 2008 financial crisis
• most importantly from our current point of view, the current Covid-related schemes to support furloughed workers

I have no conceptual issues with the above, but I am also not very keen on long term deficit spending, especially when the %GDP value of the debt continuously goes up. This is doing future voters no favor to be saddling them with ever-increasing debt and it limits capacity to respond to future emergencies. For those with a more left-leaning viewpoint, high interest payments on large debts risk eventually crowding out education, health and welfare spending.

Keynes' focus on the business cycle implies that, for the growth parts of those cycles, the government should be running a surplus, not a deficit.

Now, some governments, like France, have no rules and have managed to run a deficit 45 years running.

Some governments, like the US, have debt ceilings but then always wave them away.

Some governments, like Germany, have a no-deficit rule, but then waived it for the COVID emergency. To some extent, it looks like this is an answer to my question, but it doesn't totally suit me: there is no official recognition of emergency spending until the emergency happens, so there is in fact no formal rule for Keynesian type save/spend cycles.

At the state level, many US states indeed have balanced budget requirements. But that's basically abdicating responsibility of responsible deficit spending and appealing to the Feds to make it up.

Canada lowered its debt from 1997 to 2008, but then has been running a deficit ever since. While it was good to address both the 2008 financial crisis and 2020 Covid, I find it disheartening that no attempt was made to lower deficit from say 2013 to 2020. And that's despite the fact that, after the initial adjustments in 1997, the notion of a surplus enjoyed broad popular support in Canada. A more formal policy might have steered us back towards balanced budgets, now it's too late for a while.

Short-term, it's always easier to spend money to buy goodwill and votes than it is to cut spending to balance a budget. Keynesian stimuli are a useful mechanism to improve economies and the lives of individuals. But constant debt increases is not what Keynesian economics postulate either.

What are examples of nations that have formalized the need to save in good times? I.e. not a year-to-year balanced budget rule, but a cyclical balanced budget rule, or perhaps a rule that says "no more than 5 years of deficit spending in a row".

Answer 1

California has something like this, though it's not a nation (although it is bigger than most).

The California Constitution was amended in 2004 and 2014 to create a Budget Stabilization Account (BSA), or "rainy day fund". After the modifications in 2014, the amendment:

requires lawmakers to set aside 1.5 percent of General Fund revenues each year for the state’s budget stabilization fund until the fund reaches a full 10 percent of general fund spending. Unlike the current reserve funding requirement, which can be waived annually by the governor, suspending deposits or making a withdrawal from the fund would require that the governor declare a state of fiscal emergency. Additionally, for the next fifteen years, half of that 1.5 percent will be used to pay off long-term debt so California can balance its need to save with its need to pay down growing liabilities

California's New Rainy Day Fund Rules to Be Closely Watched - Governing.com

Combined with the balanced budget requirement approved in 2004, this requires California to save money and build up a sizable reserve fund, and places restrictions on how and when that money can be used.

While this covers the "save in good times" part, their ability to "spend in bad times" is limited by the balanced budget requirement. In the current economic crisis, even $20 billion doesn't go that far in a state as big as California and their inability to borrow will result in spending cuts just when increased stimulus would be desirable.

Answer 2

Many countries have sovereign wealth funds in which they put their surpluses.

Using these funds have several advantages:

• Clearly separates the budget funds from the surplus.

• Helps to shield the budget from variations in the income, specially if a significant part of the income is due to a single economic activity.

• Limits political interference in how the funds are invested (there are less opportunities for politics to cherry-pick investments in order to, for example, help a local struggling company).

One of those is Norway's Government Pension Fund(previously called Norway Petrol Fund, as it is funded by income from oil extraction activity).

Answer 3

Actually Germany might fit because various public agencies can and do keep reserves. Going into the reserves is automatic once unemployment claims go up and insurance premiums go down (they're tied to income). When the shortfall is significant, there are calls to balance it from the general budget, but the reserves are used first.

• In 2019 the unemployment insurance had €25 billion, small fry by corona standards but a significant amount at any other time.
• Early 2019 the public health insurances had €21 billion.
• The €40 billion of the pension fund are not supposed to be used that way.

Whenever the reserves become "too large" there is a public call to reduce mandatory insurance premiums, which are a significant reduction of the payroll of German employees (often more than income taxes).

Answer 4

The german debt brake, as you have already suspected, is indeed the example you are looking for, as it was created precisely for that purpose.

Let me quote from the german constitution :

"The budgets of the Federation and the Länder shall, in principle, be balanced without revenue from credits. The Federation and Länder may introduce rules intended to take into account, symmetrically in times of upswing and downswing, the effects of market developments that deviate from normal conditions, as well as exceptions for natural disasters or unusual emergency situations beyond governmental control and substantially harmful to the state’s financial capacity. For such exceptional regimes, a corresponding amortisation plan must be adopted. Details for the budget of the Federation shall be governed by Article 115 with the proviso that the first sentence shall be deemed to be satisfied if revenue from credits does not exceed 0.35 per cent in relation to the nominal gross domestic product. The Länder themselves shall regulate details for the budgets within the framework of their constitutional powers, the proviso being that the first sentence shall only be deemed to be satisfied if no revenue from credits is admitted."

I would argue that this is probably the best you will get. It is really hard to define the parameters of an emergency or economic crisis precisely until it has happened. However, since this debt brake is ingrained in the constitution, any budget that violates the debt break could theoretically be challenged in the german supreme court, which is different than for example the U.S. where congress basically just has to agree to raise the debt ceiling.
The german debt break was established after the financial crisis of 2007 for exactly the purpose you mentioned: So that Germany would be able to go into debt when the next crisis or economic downturn hits. This is currently paying off.

Answer 5

The Swiss "Schuldenbremse" does exactly this.

Article 126 of the Constitution:

1. The Confederation shall maintain its income and expenditure in balance over time.

2. The ceiling for total expenditure that is to be approved in the budget is based on the expected income after taking account of the economic situation.

3. Exceptional financial requirements may justify an appropriate increase in the ceiling in terms of paragraph 2. The Federal Assembly shall decide on any increase in accordance with Article 159 paragraph 3 letter c.

4. If the total expenditure in the federal accounts exceeds the ceiling in terms of paragraphs 2 or 3, compensation for this additional expenditure must be made in subsequent years.

5. The details are regulated by law.

The law in question is the Finanzhaushaltsgesetz (FHG) (german version; the government does not publish an english one). They account for economic variance using a modified Hodrick–Prescott filter.

In practice, this means that whenever parliament approves a change to recurring expenses, they must, in the same vote, also approve a compensatory change to income. For instance, parliament might decide to cover a structural deficit in the Swiss pension fund by increasing the value added tax by 1%.

In an assessment of the effects of that law, the Swiss government writes:

The debt brake ensures that expenditure and receipts are balanced over the longer term in the federal budget. The federal budget has consistently achieved structural surpluses since 2006.

The debt brake enjoys strong support among the population: 85% of voters approved the constitutional provision on the debt brake in 2001, and approval remains very high according to surveys. With a debt ratio of less than 30%, Switzerland remains in excellent shape by international standards. The debt brake has not only helped Switzerland to withstand the financial and economic crisis relatively well; it has also allowed for a considerable reduction in federal debt.

Nevertheless, the mechanism is occasionally criticised too: among other things, it has led to the federal financial statements always being significantly better than anticipated in the budget. Although the debt brake is undisputed in principle, its design and implementation are thus nevertheless a recurrent topic of discussion. In this context, the Federal Council examined whether the structural surpluses which currently flow automatically into debt reduction should also be used in the future to compensate for losses in the case of tax reforms or to finance higher expenditure. Acting on the basis of various reports, the Federal Council spoke out against adjusting the debt brake at its meeting on 22 May 2019. The Confederation can sufficiently cover its current expenditure, investments and growth in priority task areas with existing tax revenues.

That report was from December 2019, and part of the ongoing discussion about budget surpluses.

When the finance minister announced the COVID emergency relief package in April 2020, he referenced this discussion, saying that "we can afford the relief package thanks to the debt brake". Since then, talk of revising the debt brake to allow for higher regular expenditures has ceased abruptly :-)

(the debt brake does apply to the relief funding, but only mandates that it must be paid back within the same economic cycle)

Answer 6

Sweden has exactly that, it is called överskottsmålet (literally surplus target). There is a legal requirement that the governmental budget should run with a surplus over an economic cycle. From the early 90s until 2007, that number was 2 % of GDP, in 2007 it was decreased to 1 % and since last year it is ⅓ %. If you look at the Swedish public debt in the last 25 years it has more or less constantly decreased. Currently there is a goal that the debt should be 35 % of GDP over time.

Of course there is constantly a lot of discussions about if the current majority is following this rule. The opposition always thinks the government is not saving enough while the government constantly argues that they are at the brink of a recession and need to spend. Research indicates that they haven't achieved the long term goal completely, don't remember the details but when the goal was 2 % they maybe achieved 1,5 % over an economic cycle (besides, there is no clear definition of an economic cycle so...)

Answer 7

I'm pretty sure that nearly all countries have that hidden sack for a bad day.

Russian equivalent of it is Stabilization Fund with a very simple rule:

• when the price for Urals oil exceeds the set cut-off price, money goes to that fund.
• when the price for Urals oil hits lower than cut-off price, money may be used to fill budget deficit.

That cut-off price is now set to $27

After 2008 fund was reorganized - National Wealth Fund was separated from it, but general structure and rules are the same. National Wealth Fund is now about $168,35 bln according to Ministry of Finance statistics.