How to Design and Implement Rules-based Fiscal Frameworks Based on Debt Anchors?

This paper develops a step-by-step guide for the design and implementation of fiscal rules based on prudent public debt levels aimed at reconciling two critical fiscal policy objectives: ensuring debt sustainability while preserving flexibility to respond to exogenous shocks. The approach combines a medium-term anchor for the ratio of public debt to GDP with rolling medium-term fiscal frameworks (MTFFs) that guide fiscal policy toward convergence with the anchor, complemented by mechanisms to correct temporary deviations from the convergence path. In particular, the main components of the framework include: (i) selecting a public debt anchor and defining a credible convergence path; (ii) preparing MTFFs and annual budgets consistent with this path; (iii) establishing correction mechanisms to accommodate temporary deviations from the convergence path and well-structured escape clauses for major exogenous shocks; and (iv) creating independent fiscal institutions responsible for ensuring adequate external scrutiny of fiscal projections. Finally, by illustrating how the proposed framework can be applied in a specific country setting (Honduras), we demonstrate its potential to enhance rules-based fiscal frameworks across Latin America and the Caribbean in the post-pandemic context.