The Debt Brake
The proposed MP rule follows the Swiss precedent by imposing a brake on spending when debt approaches a debt tolerance level (Merrifield and Poulson 2016b, 2017). The debt tolerance level chosen in the European Union is 60% of GDP. Other countries such as Switzerland have chosen their own debt tolerance levels, so there is room for debate.
In designing the MP rule, we assume that when the debt is at or close to a 60% tolerance level, a debt brake should impose limits on federal spending. This means reducing the cap on spending growth proportionate to the distance from the 60% tolerance level. There may be disagreement regarding how stringently the debt brake should be applied to bring debt below the tolerance level. The MP rule provides for a debt brake multiplier to give legislators flexibility in applying this fiscal rule. With a debt brake greater than unity, the debt brake is applied more stringently to achieve the desired debt level more quickly (see accompanying box).
The Deficit Brake
Even if the debt level is below the debt tolerance level, fiscal policies may expose the country to increased risk. The precedent for a deficit brake was set in the European Union. In the European Union, a deficit level equal to 3% of GDP was chosen as the deficit tolerance level above which restrictions are placed on spending.
In designing the MP rule, we assume that when deficits are at or close to the deficit tolerance level of 3% of GDP, a deficit brake is imposed to limit spending. This means reducing the cap on spending growth proportionate to the distance from the 3% tolerance level. As in the case of the debt brake, legislators have flexibility in determining how stringently to apply the deficit brake. With a multiplier greater than unity, the deficit brake is applied more stringently to reduce deficits below the tolerance level more quickly (see the accompanying box).