budgeting procedures and economic performance in eu hagen

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BCN ICHPBRSCOMMISSIOII OF THE EUROPEAIT COMMUTTITIES O DIBECTORATE-GEITERAT FOR ECOTTOMIC AilO FIIIAITCIAI

AIFAIRS

Number 96 October 1992

pudgeting Proceduresand Fiscal Performance

in the European Communities

J0rgen von Hagen*



Economic Papers are written by the Staff of the Directorate-General for Economic and Financial Affairs, or by expertsworking in association with them. The Papers are intended toincrease awareness of the technical work being done by the staffand to seek comments and suggesfions for f urther analyses.They may not be quoted without authorisation. Views expressedrepresent exclusively the positions of the author and do notnecessa rily correspond with those of the Commission of theEuropean Communities. Comments and enquiries shou/d beaddress ed to:

The Directorate-General for Economic and Financial Affairs,

Commission of the European Communities,200, rue de la Loi1 049 B russe ls, Be lg i u m



336 1tJ 3

~ ·ECONOMIC P PERS ~ ?

Number9 October 1992

jJudgeting Proceduresand Fiscal Performance

n the European Communities

Jiirgen von Hagen

• University ofMan nheim .Ind iana University School ofBusi ness, and CEPR

This research was supportedy

the Commissionof

European Communities. The views expressed inthis paper are those of the author and do not reflect views of the Commission of the EuropeanCommunities. Helpful comments by Michele Fratianni and Suzanne Lohmann are gratefully acknowledged.

11/453/92-ENIREV This p per exists in English only.

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Abst rac t

We i nves t iga t e the ro l e o f budge t ing procedures fo r f i s c a l performance.Using 1970s and 1980s E f i s c a l da t a and expe r t cha rac t e r i za t ions o f budget ing

procedures, we f i nd s t rong empir ica l suppor t fo r the s t r u c t u r a l hypo thes i st h a t a budgeting process with s t r a t e g i c dominance o f the prime or f inance (ort reasury) min i s t e r over the· spending min i s t e r s , l i m i t s on par l iamentaryamendment power, and l imi t ing changes during the. execut ion process i s s t rong lyconducive to f i s c a l d i sc ip l ine . In con t ra s t , the ro l e o f long- te rm f i s c a lcons t r a in t s i n achiev ing f i s c a l d i sc ip l ine , while genera l ly pos i t i ve , i s nots t a t i s t i c a l l y s i g n i f i c a n t . he r e s u l t s suggest t h a t i n s t i t u t i o n a l reform o fthe budgeting process i s a promising avenue to achieve and mainta in a l a rge rdegree o f f i s c a l d i sc ip l ine .



Non-technical Abst rac t

The approach o f a monetary union in Europe has r a i sed concerns about theappropr ia te f i s c a l po l i cy regime in the EC One important worry i s t ha t asys temat ic lack of f i s ~ ls t a b i l i t y of some members o f the European monetaryunion might c rea t e p o l i t i c a l pressures for monetary expansions which theEuropean c e n t r a l bank w i l l f i nd hard to escape, r e s u l t i n g i n p e r s i s t e n ti n f l a t i o n . As a r e s u l t , the revis ions of the Trea t i e s of Rome adopted inMaast r ich t i n December 1991 incorpora te a procedure to superv ise the f i s c a lperformance o f the members by the Community and to increase f i s c a l d i sc ip l ine .

The bas i c approach taken i n the Maastr icht Accord i s one o f con t ro l l i ng ,ex-ante and ex-pos t , the Member S t a t e s f i s c a l performance by the Communityspe l l ing out budget c r i t e r i a and procedures fo r monitoring f i s c a l performancei n the EC To be e ffec t ive , such a s t r a t egy must r e l y on the c r e d i b i l i t y o fthe pena l t i e s i t e n t a i l s for v io la t ing these c r i t e r i a . Experience with budgetnorms in the U.S. suggests t h a t governments ·find ways to circumvent f i s c a lr e s t r a i n t s in prac t i ce , with the r e s u l t t ha t they are l a rge ly ine ffec t ive . Inthe European context , the absence of a s t r i c t enforcement mechanism of f i s c a lcons t r a in t s among sovereign nations other than the t h r e a t or poss ib l eapp l i ca t ion o f peer pressure and f inanc ia l sanct ions r a i s e s the problem o f howto ensure the prospec ts of budget c r i t e r i a to be successful .

This study looks a t the i ssue from another perspect ive . We s t a r t fromthe presumption t h a t budgeting procedures, i . e . , the ru l e s according to whichbudgets a re dra f t ed by a government, amended and passed by par l iament , andimplemented by the government, are important fo r the degree o f f i s c a ls t a b i l i t y a t t a ined . In other words, we claim t h a t i n s t i t u t i o n s shape theoutcome o f the p o l i t i c a l processes v o l v i ~ zwithin them. One var i an t of t h i sclaim - t h a t the grea te r c r e d i b i l i t y of an independent cen t ra l bank scommitment to pr i ce s t a b i l i t y l eads to lower i n f l a t i o n r a t e s - i s , o f course,one o f the important j u s t i f i c a t i o n s for the European monetary union i t s e l f .Our main proposi t ion i s t ha t a budgeting procedure enabl ing a government tocommit i t s e l f to f i s c a l d i sc ip l ine i s an essen t i a l condi t ion for f i s c a ls t a b i l i t y . Commitment mechanisms are important on a l l three l eve l s o f thebudget process , the barga in ing within the cabine t of min i s t e r s , the pass ing ofthe budget law through parl iament, and the execution o f the budget .

Budgeting i n government i s a process of a l loca t ing resources to spec i f i cp o l i t i c a l programs and d i s t r ibu t ing the cos t over cur ren t and fu ture t axpayers. There are a t l e a s t ) two aspec ts of t h i s process which generateproblems o f f i s c a l d i sc ip l ine and give r i s e to the importance of i n s t i t u t i o n s .One i s the difference between the shor t - run and the long-run ne t benef i t s off i s c a l programs, which, i f pol icy makers discount the fu ture , induces a b iastowards s h i f t i n g tax burdens to fu ture tax payers v i a d e f i c i t f inanc ing . Theother i s the difference between the perceived marginal b e n e f i t and marginalcos t o f a f i s c a l program. Spending minis ters and indiv idual members ofpar l iament are exposed to p o l i t i c a l pressures from i n t e r e s t groups and, s incetaxes f a l l on the genera l publ ic while expenditures benef i t p a r t i c u l a r groups,are b iased towards la rge expenditures and la rge d e f i c i t s . The prime minis terand the f inance or t reasury minis ter and broadly-based p o l i t i c a l p a r t i e s inpar l iament , i n con t ras t , do not depend on p a r t i c u l a r i n t e r e s t groups to thesame extent ; t h e i r decis ions are more s t rong ly guided by genera l economiccons idera t ior t s . The d i s t r i b u t i o n of power between these two groups, therefore ,determines the s i ze o f the spending bias b u i l t in to the budgeting procedure.

In view of t h i s , we develop two propos i t ions : (1) I n s t i t u t i o n s conduciveto long-run o r i e n t a t i o n of f i s c a l po l i c i e s enhance f i s c a l d i s c i p l i n e . The



bas i c idea i s t h a t long- run or i en ta t ion mit iga tes the c o n f l i c t between sho r trun and long- run ne t b e n e f i t s . We c a l l t h i s the l ong - t e rm-cons t r a in thypothes is . 2) I n s t i t u t i o n s which weaken the ro l e o f spec ia l i n t e r e s t s i n thebudge t ing process a re conducive to f i s c a l d i sc ip l ine . h ~ bas i c idea i s t h a tsuch i n s t i t u t i o n s mit iga te the spending b ia s a r i s i n g from the d i ff e r encebetween benef i c i a r i e s and the genera l t ax payer. We c a l l t h i s the s t r u c t u r a lhypothes is . We t e s t both hypotheses us ing f i s c a l data from the E membercount r ies o f the 1970s and 1980s, and cha rac t e r i za t ions o f the na t iona lbudge t ing procedures obtained from exper t assessments .

he main empir ica l r e s u l t i s a s t rong support fo r the s t r u c t u r a lhypothes is . Spec i f i ca l ly, our r e s u l t s sugges t t h a t a budgeting process lendingthe prime or f inance or t reasury) minis te r a p o s i t i o n o f s t r a t e g i c dominanceover the spending min i s t e r s , l imi t ing the amendment power o f par l iament , andl i m i t i n g changes in the budget during the execution process i s s t rong lyconducive to f i s c a l d i sc ip l ine . In con t ra s t , the ro l e of long-term f i s c a lcons t r a in t s i n achiev ing f i s c a l d i sc ip l ine , while in most cases p o s i t i v e , i snot found to be s i g n i f i c a n t While we do not conclude from t h i s t h a t long-termcons t r a in t s lack importance, our conclusion i s t h a t a long-term c o n s t r a i n talone i s i n s u f f i c i e n t to overcome the problems o f f i s c a l d i s c i p l i n e fo r acountry whose budgeting procedure has s t r u c t u r a l weaknesses.

Our r e s u l t s suggest t ha t i n s t i t u t i o n a l reform o f the budgeting processi s a promising avenue to achieve a l a rge r degree o f f i s c a l d i s c i p l i n e Suchreform may be r equ i r ed in some count r ies to achieve the f i s c a l t a rg e t s spe l l edout r ecen t ly i n the Maast r ich t Accord, which can be regarded as a s p e c i a l formo f long-term cons t r a in t s on f i s c a l p o l i c i e s . What i s more, i n s t i t u t i o n a lreform meeting the requirements and p a r t i c u l a r i t i e s of i nd iv idua l membercount r ies ~ y be a promising route to maintain f i s ~ ls t a b i l i t y i n the t h i r ds tage of European Monetary Union as a complement to the impos i t ion o f f i s c a lc r i t e r i a under the cu r ren t i n s t i t u t i o n a l arrangements .



1 . In t roduc t ion

The approach o f a monetary union in Europe has r a i s e d concerns about the

appropr ia te f i s c a l po l i cy regime in the European Community (EC). One impor tan t

aspec t of t h i s i s the l i n k between the degree of f i s c a l d i s c i p l i n e the member

governments o f a monetary union adopt and the un ion s long- run i n f l a t i o n

r a t e . 1 Many p a r t i c i p a n t s i n t h i s discuss ion f ea r t h a t a sys temat ic lack o f

f i s c a l s t a b i l i t y o f some members o f the European monetary union might c rea t e

pressures on the European cen t ra l bank to conduct a too expans ionary monetary

po l i cy fo r the Community with the r e s u l t o f l a s t i n g excess ive i n f l a t i o n .

Some have even argued t h a t the i m p l i c i t p o s s i b i l i t y of t ax ing c i t i z e n s o f

other count r ies which e x i s t s i f the un ion s c e n t r a l bank can be induced to

b a i l out governments i n f inanc ia l c r i s e s would l ead to a d e t e r i o r a t i o n o f

f i s c a l d i s c i p l i n e in the Community once the European monetary union i s i n

p lace . s a r e s u l t the r ev i s ions o f the Trea t i e s o f Rome adopted i n

Maast r ich t i n December 1991 incorpora te a procedure to superv ise the f i s c a l

performance o f the members by the Community and to increase f i s c a l d i s c i p l i n e .

Although the Maast r ich t Accord c a l l s for the adoption o f appropr ia te

budgetary procedures by the member s t a t e s 2 the bas i c approach t t akes i s

one o f c o t r o l l i n g ex-ante and ex-pos t , t h e i r f i s c a l performance by the

Community. The hope i s t h a t by spe l l i ng out budget c r i t e r i a and procedures

and pena l t i e s for deal ing with v io la t ions o f these c r i t e r i a member

governments can be induced to f i s c a l s t a b i l i t y i . e . long- run budget balance

or debt growth not exceeding nominal GOP growth. To be e f f e c t i v e such a

s t r a t egy must r e ly on the c r e d i b i l i t y of the t h rea t t impl ies for members

with deviant f i s c a l p o l i c i e s . Experience with budget norms in the U.S.

suggests t h a t governments f i nd ways to circumvent f i s c a l r e s t r a i n t s i n

prac t i ce , with the r e s u l t t h a t they are l a rge ly i n e f f e c t i v e (von Hagen, 1991,

1992) . In the European context , the absence of a s t r i c t enforcement mechanism

o f f i s c a l cons t r a in t s among sovereign nat ions other than the t h r e a t o r



poss ib l e app l i ca t ion o f peer pressure and f inanc ia l sanc t ions r a i s e s the

problem of how to ensure prospec ts o f budget c r i t e r i a to be succes s fu l .

This s tudy looks a t the i s sue from another perspect ive . We s t a r t from

the presumption t h a t budgeting procedures, i . e . the ru l e s according to which

budgets are dra f t ed by a government, amended and passed by par l iament , and

implemented by the government, have important consequences fo r the degree o f

f i s c a l s t a b i l i t y a t t a ined . In o the r words, we claim t h a t i n s t i t u t i o n s shape

the outcome of the p o l i t i c a l processes evolv ing wi th in them. This r equ i r e s

t h a t i n s t i t u t i o n s a re f i xed r e l a t i v e to the p o l i t i c a l processes they govern,

i . e . the formation o f ru l e s and procedures for dec i s ion making i s not p a r t o f

the same p o l i t i c a l process . Ins tead , the ac to r s a re l e g a l l y bound or have a

common understanding t h a t the i n s t i t u t i o n s should be regarded as given. Of

course, t h i s does not exclude t h a t the i n s t i t u t i o n s themselves can be changed

over time, however, doing so would requi re a d i f f e r e n t p o l i t i c a l process . One

var i an t of t h i s bas i c claim t h a t the grea te r c r e d i b i l i t y o f an independent

c e n t r a l bank s commitment to p r i c e s t a b i l i t y l eads to lower i n f l a t i o n r a t e s

i s o f course, one o f the important j u s t i f i c a t i o n s fo r the European monetary

union i t s e l f . Following the same l og i c , our approach l eads to the conclus ion

t h a t i n s t i t u t i o n a l reform of the budge t ing process may be a promising

a l t e rna t ive fo r the E to f o s t e r f i s c a l s t a b i l i t y .

The main propos i t i on o f t h i s paper i s t h a t a budget ing procedure

enabling a government to commit i t s e l f to f i s c a l d i s c i p l i n e i s an e s s e n t i a l

condi t ion fo r f i s c a l s t a b i l i t y . Commitment mechanisms are important on a l l

three l eve l s of the budget process , the barga in ing wi th in the cabine t o f

min i s t e r s , the pass ing o f the budget law through par l iament , and the execut ion

of the budget . Commitment i s f a c i l i t a t e d by r e s t r i c t i n g the e f f e c t barga in ing

processes on each l e v e l can have on t o t a l spending and revenues. I t can be

provided by formal guidel ines determining the outcome of the budgetary process



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or by r e s t r i c t i n g the scope o f changes par t i c ipan t s in the bargaining process

can make; i t can be the r e s u l t of l ega l r e s t r i c t i o n s on the process or of

long-standing t r ad i t ions which are expected, both by the par t i c ipan t s in the

budgetary process and the pub l i c , to be respected i n the fu tu re North and

Yeingast , 1989). e develop and t e s t t h i s propos i t i on in two vers ions : One

focusing on the exis tence and implementation of long-term f i s c a l plans and the

other focusing on the s t r u c t u r a l c h a r a c t e r i s t i c s o f the budgeting process. Our

empirical r e s u l t s us ing data from the EC sugges t t h a t s t r u c t u r a l

c h a r a c t e r i s t i c s are important . Spec i f i ca l ly, dominance o f the prime min i s t e r

or f inance min i s t e r over the spending min i s t e r s in s e t t i n g budget parameters ,

l imi t a t ions to modificat ions o f the budget proposa l by the l e g i s l a t u r e , and

l imi t a t ions to budget changes during the execut ion are i n s t i t u t i o n s conducive

to f i s c a l s t a b i l i t y

This study proceeds as fo l lows . _Section 2 presen t s some_sty.lized

evidence o f f i s c a l performance i n the Community over the pas t two decades.

Sect ion 3 ou t l ines our bas ic t heore t i ca l argument. Section 4 begins with a

review o f the main c h a r a c t e r i s t i c s o f the budgeting procedures cur ren t ly used

in the 12 countr ies of the Community based on a ques t ionnai re sen t t o the

member Finance Mini s t r i e s or Treasur ies in 1991. Section 5 presents the

empirical t e s t s o f our main hypotheses o f i n t e r e s t Section 6 summarizes our

main conclus ions .

2. Fisca l Performance in the EC 1971-90: Some Sty l i zed Facts

Figures 1 through 8 give an impression o f the f i s c a l performance o f the

12 EC member s t a t e s over the pas t decades. Figures 1 and 2 dep ic t the growth

of genera l government expenditures r e l a t i v e to gross domestic product GDP).

Throughout the 1960s, there was remarkable s i m i l a r i t y among the s i x EC members

and I re land, Denmark and the U.K Ratios o f expendi tures to GDP var i ed



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between 25 and 35 percent a t the beginning o f t h i s decade; by i t s end they

had r i s e n to between 30 and 40 percent . In f ac t these r a t i o s gene ra l ly

decl ined in the l a t e the 1960s. The 1970s brought two important changes: a

f a s t e r r i s e o f expendi tures r e l a t i v e to GOP in most countr ies - the exceptions

being France and a f t e r i n i t i a l surges Br i t a in and Germany - and an increase

in the var iance o f these r a t i o s across the E members. Expenditure r a t i o s

genera l ly peaked i n the ea r ly 1980s followed by moderate decl ines i n Germany

France and the U.K. and more s ign i f i can t reduct ions in Denmark Belgium

Luxembourg I re land and the Netherlands. In con t ras t Greece Spain and

I t a l y maintained pos i t ive ly t rending expenditure r a t i o s throughout the decade.

Figures 3 and 4 show the development of ne t government lending i . e .

t o t a l revenues l e s s expendi tures throughout the same per iod . 3 Once again

during the 1960s we f ind a s t r i k i n g s i m i l a r i t y among the European countr ies .

The r a t i o s o f ne t lendiqg to GDP d i ffe red by a maximum of about_ s.ev:en perc.ent.

Once again the 1970s brought much l a rge r var ia t ion among these countr ies .

After 1975 I t a l y Belgium and I r e l and had the most r ap id ly de te r io ra t ing

budgets . Belgium and I re land showed some improvement in the mid- and l a t e

1980s bu t s t i l l r e t a ined some o f the l a rges t r e l a t i v e d e f i c i t s i n the group.

Denmark and Luxembourg are most noteworthy fo r the wide swings i n t h e i r ne t

lending r a t i o s during t h i s period. In con t ras t France Germany and the U.K.

enjo ied s teady developments and moderate d e f i c i t s . With the exception o f

I t a l y Greece and Belgium the E count r ies achieved a grea te r degree o f

convergence o f ne t lending r a t i o s again towards the end o f the 1980s.

Figures 5 and 6 look a t the r e l a t i v e budget balances in terms of ne t

government lending excluding i n t e r e s t payments ca l l ed primary ne t lending fo r

shor t . 4 Primary ne t lending shows to what ex ten t governments accumulate new

debt during a per iod over and above what i s requi red to service ex i s t ing

i n t e r e s t ob l iga t ions and thus gives a b e t t e r i nd ica t ion than t o t a l ne t lending



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of a government s need and wil l ingness to change budget developments. Here, we

observe a grea te r degree of conformity among the 12 count r ies throughout the

whole per iod . Only I t a l y and I r e l and s t a r t e d the 1970s with primary d e f i c i t s

(ne t borrowing), only I t a l y and Greece ended the 1980s in t h i s way. Denmark

and Luxembourg are most noteworthy for the la rge swings in t h e i r primary ne t

lending. I r e l a n d s primary d e f i c i t de te r io ra t ed very rapid ly in the mid-1970s,

i t improved s t e a d i l y from s i x percent to a surp lus of s ix percent of GDP

between 1981 and 1989. While France and the U.K. had primary surpluses during

most of t h i s per iod , Germany experienced d e f i c i t s from 1974 through 1982.

Figures 7 and 8 demonstrate the r a t i o s of gross publ ic debt to GDP from

1971 to 1990. At the beginning of the 1970s, the EC was div ided in two groups,

a r e l a t i v e l y high-debt group inc luding I t a l y Belgium, the Netherlands,

I re land, and the U.K., with r a t i o s of debt to GDP between 50 and 85 percent ,

and .a . r e l a t ive ly low-debt. group compris ing Denmark West Germany .France,

Luxembourg Spain, Greece, and Por tugal , with r a t i o s between 10 and 30

percent . y the end of the 1980s, three groups are d iscernable : Luxembourg

France, Spain, the U.K. and Germany a l l with debt to GDP r a t i o s o f no more

than 40 percent ; Denmark the Netherlands, Portugal and Greece, whose r a t i o s

are between 60 and 80 percent ; and Belgium, I re land, and I t a l y whose r a t i o s

are above 80 percent .

Apart from these differences in the debt r a t i o s themselves, the dynamics

vary s i g n i f i c a n t l y among the 12 countr ies . The U.K. and Luxembourg

cons i s t en t ly experienced f a l l i n g debt r a t i o s throughout the per iod , and the

French r a t i o was v i r t u a l l y f l a t . All other count r ies experienced s i g n i f i c a n t

growth i n t h e i r debt r a t i o s fol lowing the second o i l pr i ce shock in 1979;

onlyi re land and Denmark had s i g n i f i c a n t l y r i s i n g debt r a t i o s al ready e a r l i e r

in the 1970s. Only these two coun t r i e s managed to reduce t h e i r debt r a t i o s

s i g n i f i c a n t l y during the 1980s, while other count r ies merely succeeded i n



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4

Table 1: Average Net Government Lending. 1971 1990

Country 1971 75 1976 80 1981 85 1986 90

Net Lending of Government ( o f GOP

Belgium 3.54 6.76 10.52 7.10

Denmark 2.94 1.20 5.86 0.86

Germany 1.16 2.66 2.42 1.44

Greece 10.16 15.70

Spain 0.22 0.32 5.30 3.78

France 0.16 0.64 2.70 1.86

I r e l and 6.72 10.00 12.00 6.48t a l y 7.06 8.10 11.48 10.88

Luxembourg 2.68 2.22 1.24 2.80

Netherlands 0.74 2.98 6.02 5.70

Por tugal 10.16 5.72

u. K. 2.20 3.80 3.02 0 .42

EC Average ~ 1 5 4 3.42 6 .53 4 .62St .D. 3.43 3.82 4.29 5.18Median 1.16 2.91 6.02 5.70

Net Government Lending Excluding n t e r e s t{ o f GOP

Belgium 0.10 2.00 1.02 3.70

Denmark 4.26 1.38 1.90 8.78

Germany 0.02 0.94 0.38 1.38

Greece 6.32 7 .62

Spain 0.74 0.76 3.56 0.22

France 1.18 0.48 0.26 1.00I r e l and 2.28 4.16 2.92 2.80

t a l y 4.50 3.28 4.16 2 .20

Luxembourg 3.66 3.08 2.28 3.70

Netherlands 2.12 0.22 0.56 0.36

Portugal 3.76 2.32

U.K. 1.58 0 .54 1.88 3.50

EC Average 0.66 0.54 1.51 1.46

S.t.D. 2.61 2.17 2.73 3.94Median 0.74 0 .76 1.02 2.32



5

Table 2: Average Gross Public Debt. 1971 1990

Country 1971 75 1976 80 1981 85 1986 90

Gross Public Debt ( of GDP

Belgium 63.5 68.04 105.08 128.44

Denmark 9.12 23.72 68.68 63.58

Germany 20.10 29.82 40.16 43.82

Greece 22.52 26.34 46.58 77.06

Spain 13.48 15.06 35.58 46.06

France 23.78 23.52 29.26 35.35

I re land 59.92 71.96 94.68 110.34I t a ly 56.88 59.88 72.14 95.30

Luxembourg 21.68 15.28 14.54 10.16

Netherlands 44.54 41.88 60.74 76.26

Portugal 20.13 35.80 56.70 70.50

U.K. 68.56 57.80 58.12 50.40

EC Average 35.35 39.09 56.86 67.27St . D. 21.66 20.43 26.17 33.23Median 22.52 29.82 56.70 63.58



- 6

prevent ing f u r t h e r i nc reases . The three count r ies in the h igh -deb t group o f

1990 were i n the h igh-debt group of 1971; four of f i ve coun t r i e s i n the low

debt group o f 1990 were i n the low-debt group o f 1971. Only the U.K. movedfrom being the h igh-debt group in 1971 to the low-debt group i n 1990. In sum

r e l a t i v e debt performances are very p e r s i s t e n t in Europe. 5

Tables 1 , 2 , and 3 i l l u s t r a t e the same developments by r epo r t i ng f i ve -

year moving averages of ne t government l ending , primary ne t government

l ending , g ross pub l i c debt , and genera l government expendi ture , a l l expressed

as f r ac t ions o fGDP.

The r i s i n g s tandard devia t ions of the f i r s t t h r eevar i ab le s over t h i s pe r iod r e f l e c t the i nc r ea s ing d i s p a r i t y i n f i s c a l

performance among the 12 European coun t r i e s . Only the s t anda rd dev ia t ion o f

expendi tures r a t i o s decl ines towards the end o f the 1980s.

While the preceding graphs and t ab l e s demonstrate cons iderable v a r i a t i o n

of f i s c a l outcomes in the EC they do not t e l l us anything about the source of

these d i ff e rences .Two

extreme scenar ios are poss ib l e : Fisca l outcomes ini nd iv idua l coun t r i e s could be completely determined by coun t ry - spec i f i c ,

mutua l ly uncorre la ted shocks. Al te rna t ive ly, f i s c a l outcomes could r e f l e c t

coun t ry - spec i f i c responses to the same shock(s) . Consider the fol lowing two

country model as an i l l u s t r a t i o n :

Y , t = f ixt u i , t

y j t = fJ ~ u j . tc o v ( u 1 , t , u j , t ) = 0,

1 )

where Yi,t denotes country i s f i s c a l ~ u t o m evar i ab le , xt i s the under ly ing

shock common to both coun t r i e s , the coeff i c i en t { descr ibes a c o u n t r y s

r eac t ion to the common shock, and u i s i t s r eac t ion to pure ly coun t ry - spec i f i c

shocks. The f i r s t scenar io o f pure ly coun t ry - spec i f i c shocks impl iesXt

- 0,

which in t u rn impl ies t h a t Yi,t and Yj,t a re unco r r e l a t ed . The second scenar io



7

Table 3: Average Government Expenditure

Country 1971 75 1976 80 1981 85 1986 90

Government Expenditure ( of GOP

Belgium 42.98 51.32 57.96 53.46

Denmark 44.36 51.32 60.44 57.66

Germany 43.16 47.90 48.44 46.32

Greece 42.70 49.94

Spain 23.60 29.18 38.70 41.32

France 39.12 44.54 50.86 50.48

I re land 40.18 45.88 53.30 47.84

t a l y 35.84 39.50 48.38 51.42

Luxembourg 38.84 51.92 54.58 51.20

Netherlands 44.96 54.38 60.58 58.88

Portugal 44.34 43.50

U.K. 39.90 42.30 44.66 39.78

EC Average 39.29 45.80 50.41 49.32St . D. 6.20 7.50 7.14 5.94Median 39.12 45.88 48.88 49.94



- 1 8 -

Table 4: Factor Analysis o f Government Expenditure. Net Lending. and Debt

Country

Belgium

Denmark

Germany

Greece

Spain

France

I r e l and

I t a l y

Luxembourg

GovernmentExpenditure

Varianceexplained

96.5

94.1

90.0

76.0

96.4

97.0

90.0

93.5

85.0

Netherlands 93.2

Portugal

UnitedKingdom

16.5

91.8

Factorpa t t e rn

n

n n

n

n n

Net Lending l e s sI n t e r e s t Paid

Varianceexplained

99.2

84.3

92.7

94.5

98.7

95.6

95.0

90.9

98.8

96.3

96.4

98.2

Factorpa t t e rn

n

n

n

n

n

Gross Public Debt

Varianceexplained

98.1

96.4

95.5

83.3

96.3

96.6

95.9

97.0

92.9

96.7

20.7

-94.9

Factorpa t t e rn

n

n

n

n

n n

Note: Variance explained i s the percentage of variance explained by two ommon

fac tors . Factor pa t t e rns : + or - i nd ica t e s tha t the es t imated c o e f f i c i e n tfor t h i s f ac to r i s above or below the average es t imate for a l l 12 countr ies .n i nd ica t e s f ac to r i s not s ign i f i can t a t the 10 percent l eve l . Per iod for

est imation: 1971 - 1990; 1981 - 90 for Greek and Portuguese expenditurer a t i o s .

holds when u 1 , t = uj, t = 0, and 1 di ffe r s from fJj Note tha t we can extend

equation 1) in a simple way to conta in two ommon shocks:

Yi , t = f J 1 , i x l , t f J2 , i x2 , t u i , t

Yj, t = fJ1 , jx l , t f J2 , jx2 , t u j , t

c o v ( u 1 , t ,uj,t = 0 ,

2 )



- 1 9 -

i n which case the two outcomes a re l e s s than per fec t ly co r re l a t ed , even i f

there a re no coun t ry - spec i f i c shocks, provided t ha t the pa i r s o f r eac t ion

c o e f f i c i e n t s are d i f f e r e n t between the coun t r i e s .

To see which o f these two paradigms descr ibes the European case

bes t , we apply f ac to r ana lys i s to our r a t i o s of general government spending,

ne t government l ending , and gross publ ic debt to GDP This technique al lows to

es t imate the unobserved common shocks expla in ing a s e t o f t ime s e r i e s , t h e i r

common f a c t o r s , cor responding to the va r i ab l e s x 1 , t and x 2 , t i n model (2 ) . By

cons t ruc t i on , these shocks are unco r r e l a t ed with each o the r and with the

coun t ry - spec i f i c shocks. Having obta ined es t imates o f these f ac to r s , we can

then use r eg re s s ion ana lys i s to see how much o f the var iance o f the observed

f i s c a l outcomes i s expla ined by r eac t ions to common shocks as opposed to

count ry s p e c i f i c shocks. The r e s u l t s of t h i s procedure are summarized i n Table

4 . For each var i ab le , two common £ac to r s were es t imated . The £ i r s t _o£ .each

p a i r of columns i nd i ca t e s the percentage o f the t o t a l var iance o f the var i ab le

explained by a coun t ry s r eac t ion to the two common shocks. For a l l t h r ee

va r i ab l e s , we f ind t h a t almost a l l the var iance i s explained by the two common

f ac to r s . Greece and Por tuga l a re the only two except ions to t h i s r e s u l t . 6 The

second column i n each p a i r gives some in format ion about the coun t ry s r eac t ion

to the common f ac to r as determined by the regress ion ana lys i s . Here, a +

means t h a t the r eg re s s ion c o e f f i c i e n t on t h i s f ac to r i s s i g n i f i c a n t and above

the average o f the s i g n i f i c a n t es t imates fo r a l l 12 coun t r i e s , a - i nd i ca t e s

a s i g n i f i c a n t c o e f f i c i e n t below the average es t imate , and a n i nd i ca t e s t h a t

the f ac to r was not s i g n i f i c a n t in the regress ion . The main conclusion from

t h i s exe rc i s e i s t h a t f i s c a l p o l i c i e s in the EC coun t r i e s , as descr ibed by

d e f i c i t s , spending and debt pa t t e rns , can bes t be cha rac t e r i zed by count ry

spec i f i c r eac t i ons to common shocks, r a the r than responses to coun t ry - spec i f i c

shocks. To the ex ten t t h a t f i s c a l i n s t i t u t i o n s determine a coun t ry s f i s c a l -



2

pol icy response to economic shocks, i n s t i t u t i o n a l d i ff e r ences across these

count r ies may be important to expla in t h i s var i a t ion in f i s c a l outcomes.

In Table 5,we

address the r e l a t i o n s h i p between government expendituresand n e t l ending . According to a popular hypothes is , l a rge and growing d e f i c i t s

and, t he re fo re , growing debt to GDP r a t i o s are caused by l a rge and growing

l eve l s o f government expendi ture ( see e .g . Roubini and Sachs, 1989a, Larkey e t

a l . , 1981). I f t h i s was t r u e , g r e a t e r f i s c a l d i sc ip l ine could be achieved by

reducing government spending. To t e s t t h i s hypothes is , we check for Granger-

Table 5: Causa l i ty o f Government Expenditure for Net Lending

Country R2 o f Test F-Test for F-Test for Ser ia lRegression Causa l i ty Cor re l a t i on of

Residua ls

Belgium 0.89 0.16 0.95

Denmark ~ h 04H.l 6

Germany 0.44 0.19 0.93

Greece 0.83 0.53 0.30

Spain 0.54 0.30 0.41

France 0.53 0.91 0.64

I r e l and 0.83 0.08 0.79

I t a l y 0.87 0.04 0.42

Luxembourg 0.45 0.83 0.80

Netherlands 0.87 0.08 0.93

Por tuga l 0.95 0.09 n .a .United Kingdom 0.61 0.33 0.84

Note:Tests are for Granger-causa l i ty o f changes in the expenditure/GOP r a t i ofo r ne t government l ending GDP Test r eg re s s ion inc ludes two l ags o f thedependent and two l ags of the independent var i ab le . Sample pe r iod i s 19611990 except for Spain 1 9 7 1 - 1990), Greece (1980-1990) and Portugal (19801990) . Tests for s e r i a l cor re l a t ion of r e s idua l s check the s ign i f i cance o ffour a t e s t r eg re s s ion o f the r e s idua l s from the causa l i ty t e s t r eg re s s ion onfour of own l ags . All e n t r i e s a re p r o b a b i l i t i e s of F values l a rge r thanes t imated F s under the Null-hypotheses o f non-causa l i ty and no s e r i a l

c o r r e l a t i o n .

c a u s a l i t y o f government spending fo r ne t l ending , both measured r e l a t i v e to



4 )

2

GDP. Defining rlt as the r a t i o o f ne t l ending to GOP and gt as the r a t i o o f

expenditure to GOP we es t imate the fol lowing r eg re s s ion model:

( 3 )

where et i s a s e r i a l l y uncorre la ted regress ion e r ro r. The t e s t fo r Granger

c a u s a l i t y in t h i s context i s an F - t e s t on the j o i n t s ign i f i cance o f 1 1 and

The f i r s t column in Table 5 shows t h a t the t e s t regress ions exp la in most

o f the var iance of the dependent var i ab le . The second one i nd ica t e s t h a t

expenditure r a t i o s do not genera l ly Granger-cause ne t l ending r a t i o s , i f

s tandard s ign i f i cance l eve l s are appl ied . I t a l y i s the only except ion . 8 The

l a s t column shows tha t the regress ion e r ro r s are indeed s e r i a l l y uncorre la ted

an important condi t ion for the r e l i a b i l i t y o f the F - t e s t . Overa l l Table 5

produces two in te res t ing f ind ings : F i r s t , the r eg re s s ion R2 s show t h a t the

low-debt count r ies of 1990 Luxembourg Spain France Germany, and the U.K.

have the s ~ a l l e s tdegree o f pe r s i s t ence in ne t l ending r a t i o s in the sense

t h a t t h e i r pas t ne t l ending r a t i o s are the l e a s t he lp fu l to pred ic t cu r ren t

r a t i o s . Tnis s u ~ e s t st ha t count r ies which manage to change t h e i r budgets l e s s

e a s i l y over t ime are more prone to la rge d e f i c i t s and debt . Second with the

exception of I t a l y, the simple hypothes i s t h a t r i s i n g d e f i c i t s are the r e s u l t

of growing expenditures i s not warranted by the data .

While t ab l e s 4 and 5 compare t ime s e r i e s prope r t i e s o f the data across

coun t r i e s t ab l e 6 takes a d i f f e r e n t perspect ive and compares average r e l a t i v e

performances among the 12 European count r ies during the 1980s. The t ab l e i s

based on the moving averages ca l cu l a t ed i n t ab l e 1. After order ing the 12

count r ies according to the s i z e of each v a r i a b l e we compute the Spearman rank

c o r r e l a t i o n c o e f f i c i e n t s shown in t ab l e 6. The f i r s t four coeff i c i en t s - a l l

s i g n i f i c a n t l y p o s i t i v e - confirm and extend the e a r l i e r f ind ing t h a t r e l a t i v e



Table 6: Rank Corre la t ion Coeff ic ients

Items

Net Lending 1981-85 vs .Net Lending 1986-90

Net Lending Excl.I n t e r e s t , 1981-85 vs.1986-90

Gross Public Debt,1981-85 vs. 1986-90

Government Spending,1981-85 vs . 1986-90

Net Lending vs .Net Lending Excl.I n t e r e s t

Net Lending vs.Gross Public Debt

Net Lending Excl.I n t e r e s t vs. GrossPublic Debt

Net Lending vs .Government Spending

Net Lending Excl.I n t e r e s t vs . GovernmentSpending

Gross Public Debt vs .Government Spending

1981-85

0.85.0005)

0.750.005)

0.890.00)

0.800.001)

0.720.002)

-0 .820.001)

-0 .250.43)

0.010.983)

0.570.055)

0.360.245)

1986-90

0.620.03)

-0 .810.001)

-0 .140.649)

-0 .090.779)

0.140.665)

0.300.354)

Note: All var iables measured as percentages of GDP Upper en t r i e s are Spearmanrank cor re la t ion coeff i c i en t s . Entr ies in parantheses are the probab i l i tyes t imates for t - t e s t s t ha t the cor re la t ion coeff i c i en t i s zero.

rankings in f i s c a l performances are very p e r s i s t e n t over t ime. That i s acountry t h a t was ranked highly in terms of , say, i t s net lending r a t i o in the

ea r ly 1980s was very l i k e l y to be ranked highly in the second h a l f of t h i s

decade. The f i f t h row of table 6 indica tes t h a t countr ies with r e l a t i v e l y high

low) ne t lending r a t i o s tend to be countr ies with r e l a t i v e l y high low)

primary net lending r a t i o s . The f i f t h row indica tes t h a t the same i s t rue with

regard to net lending r a t i o s and gross publ ic debt r a t i o s .The fol lowing rows of table 6 show t h a t there i s no s ign i f i can t



2 3

c o r r e l a t i o n between a count ry(s rank i n primary ne t l ending and i t s rank in

gross pub l i c debt . That i s t he re i s no sys temat ic l i n k between r e l a t i v e l y

high (low) primary d e f i c i t s and r e l a t i v e l y high (low) debt l e v e l s . Furthermore

t he re a re no sys temat ic r e l a t ionsh ips between r e l a t i v e l y l a rge d e f i c i t s la rge

primary d e f i c i t s or l a rge debt r a t i o s and r e l a t i v e l y l a rge expendi ture

r a t i o s . Once again , t h i s r e fu te s the simple not ion t h a t l a rge d e f i c i t s or

l a rge debts are due to excess ive spending.

3. Budgeting Procedures and Fisca l Outcomes: Theory

The previous sec t ion has demonstrated the s i g n i f i c a n t v a r i a t i o n in the

f i s c a l performance o f the E member coun t r i e s over the p a s t two or t h ree

decades. Despite the differences in outcomes i t sugges ts t h a t f i s c a l po l i c i e s

i n the E were mainly dr iven by shocks common to a l l coun t r i e s . The

i n t e r e s t i n g ques t ion then i s what expla ins the l a rge d i ff e rences i n t h e i r

r eac t ions?

Economic Models of F i sca l Performance

Conventional economic ana lys i s dctes not say much about the determinants

o f f i s c a l performance. I t genera l ly t akes f i s c a l po l i cy as exogenously

determined by p o l i t i c a l processes . One s t r and o f l i t e r a t u r e t r i e s to expla in

the secu la r growth o f government expendi tures r e l a t i v e to the economy, a

tendency f i r s t formulated as Wagner s Law (Wagner, 1890). Although the l i n k

between economic growth and the r e l a t i v e s i ze o f government expendi tures ,

which Wagner a t t r i b u t e d to the growing r e s p o n s i b i l i t i e s o f government in the

process o f i n d u s t r i a l i z a t i o n seems apparent fo r many countr ies a t f i r s t

glance , empir ica l s tud ie s genera l ly found no or l i t t l e suppor t fo r the Law

( e .g . Larkey e t a l . 1981; Cameron, 1978). Other a t tempts a t gene ra l i z ing

empir ica l observa t ions have been equal ly unsuccessfu l to withs tand c lose r



s t a t i s t i c a l sc ru t iny. 9

Another l i n e of research at tempts to i den t i fy f i s c a l po l i cy r eac t ion

funct ions l i nk ing f i s c a l var i ab les such as expendi tures or d e f i c i t s to macro

economic var iab les , such as growth or unemployment. Roubini and Sachs (1989a)

es t imate expenditures and revenues react ion functions for 5 OECD governments.

They f ind t h a t expenditure r a t i o s , on average across the OECD respond

negat ive ly to output growth and pos i t ive ly to r i s i n g unemployment r a t e s ;

revenue-to-GOP r a t i o s respond negat ive ly to output growth and negat ive ly to

unemployment r a t e s . They conclude t h a t the slowdown in economic growth and the

r i s e in unemployment a f t e r the f i r s t o i l pr ice shock in 973 were respons ib le

for the subsequent r i s e i n government expenditures r e l a t i v e to GDP.

Roubini and Sachs ' s argument would sugges t , however, t h a t the r i s e in

expendi tures expla ins much of the de te r io ra t ion o f budget d e f i c i t s in the

1970s. Ear l i e r, we saw t h a t t h i s simple r e l a t i o n s h i p s not confirmed by ~ u r

data . Since t h e i r es t imated react ion functions are the same across countr ies ,

d i ff e rences i n the observed outcomes would have to be due to d i ffe rences in

the economic shocks indiv idual governments were r eac t ing to , w h i h ~ i sno t

cons i s t en t with our e a r l i e r observat ions , e i t h e r. Even i f d i f f e r e n t r eac t ion

functions were es t imated , t h e i r approach leaves the ques t ion o f why such

d i f f e r e n t react ions occurred unanswered.

The same authors (1989b) take a s t ep i n a d i f f e r e n t d i rec t ion , l i nk ing

f i s c a l performance to p o l i t i c a l c h a r a c t e r i s t i c s . They argue t h a t government

d e f i c i t s r e l a t i v e to GDP have been l a rg e s t in OECD countr ies with r e l a t i v e l y

unstable governments. More spec i f i ca l ly, while the post-1973 slowdown in

economic growth and r i s e in unemployment expla in the r i s e in expenditure and

d e f i c i t s in the OECD they f ind t h a t mult i -par ty c o a l i t i o n governments,

espec ia l ly those wi th a shor t expected tenure , a re poor a t reducing budget

d e f i c i t s i b i d . , p. 922). Roubini and Sachs propose three i n t u i t i v e



2 5

explanations for t h i s f inding: The d ive r s i ty of i n t e r e s t s and cons t i t uenc ie s

o f c o a l i t i o n par tne r s , a tendency o f coa l i t i ons to be s ta tus-quo biased , as

indiv idual c o a l i t i o n members can block changes from the s t a t u s quo but cannot

organize enough support to push through a change from i t and a l ack o f

enforcement mechanisms for coopera t ive behavior - which, by assumption, would

fos te r f i s c a l d i sc ip l ine - in shor t - l ived coa l i t ions .

Roubini and Sachs s argument i s however, not e n t i r e l y _convincing. Thei r

view of unstable governments presupposes t h a t indiv iduals or p a r t i e s take

off i ce for a shor t t ime and then d isappear from the government sphere.

Commitment to longer- run or ien ted po l i c i e s does not pay o f f for such

p o l i t i c i a n s , hence t h e i r unwil l ingness to combat d e f i c i t s and avoid the

accumulation o f fu ture tax l i a b i l i t i e s through the c rea t ion o f publ ic debt .

However even i f governments change r e l a t i v e l y f requent ly, i t may s t i l l be

t rue t h a t the members of_ government are drawn from a pool .o-f. candida tes or

p a r t i e s which does not change much over time. In such an environment,

commitment to longer- run goals does pay o ff , because government p o l i t i c i a n s

can expect t h a t they or t h e i r par ty w i l l have another t u rn i n the fu ture .

While Roubini and Sachs s da ta suggests t ha t countr ies with la rge d e f i c i t s

tend to have unstable governments, i t does not show t h a t countr ies with small

d e f i c i t s exh ib i t more government s t a b i l i t y than o the r s . This sugges ts the

importance o f o the r, omitted p o l i t i c a l c h a r a c t e r i s t i c s .

P o l i t i c a l Economy o f Budgeting Procedures

Recent poli t ico-economic l i t e r a t u r e has explored the ro le o f

i n s t i t u t i o n a l arrangements governing the budgeting process , vot ing

arrangements and commitment mechanisms for f i s c a l performance. Although t h i s

l i t e r a t u r e i s heavi ly inf luenced by the p e c u l i a r i t i e s o f the U.S. , t he re a re

genera l lessons to i n f e r from t h i s research . The most important one i s t h a t



6

i n s t i t u t i o n a l s t r u c t u r e s i . e . the arrangements ass igning the ro le s

indiv idual p a r t i c i p a n t s play and the scope and sequence of dec i s ions , have

important e f f e c t s on the f i n a l outcomes of the budgeting process . Here,we

review some o f the main arguments.

In the most pr imi t ive form o f a budgeting process , budgets would be

voted by par l iament a f t e r a genera l debate i n which each member o f par l iament

submit can proposa l . Arrow s (1963) well-known Imposs ib i l i t y Theorem impl ies

t h a t such a procedure does not genera l ly lead to an equi l ibr ium outcome. Only

under r e s t r i c t i v e condi t ions on the preferences o f the members o f par l iament

does a majo r i t y ru le induce an equi l ibr ium. Of course, such i s not the

prac t i ce o f a c t u a l budgeting procedures. In prac t i ce , budgeting procedures are

div ided between government or par l iamentary committees dra f t ing a proposa l ,

par l iament which may amend the proposa l sub jec t t o c e r t a i n r e s t r i c t i o n s and

_pass i t and_ again .the execut i v e carry ing out the budget l a w ~ The p o li t i c o -

economic l i t e r a t u r e focuses on how the spec i f i c i n s t i t u t i o n a l arrangements

a f f e c t the ex i s t ence and the prope r t i e s of the equi l ibr ium outcome.

Shepsle (1979a, b) d i s t ingu i shes three c h a r a c t e r i s t i c s o f budget ing

procedures. The d i v i s i o n o f labor arrangement ass igns i nd iv idua l ac to r s i n the

process to s p e c i f i c r o l e s . For example, a t yp ica l European arrangement i s t h a t

government d r a f t s a budget proposa l to be presented to the l e g i s l a t u r e . 10 The

arrangement may be t h a t the proposa l i s dra f t ed by a l l cab ine t members

together or in b i l a t e r a l t a lks between the f inance (or t r ea su ry ) min i s t e r and

the var ious spending min i s t e r s . In the U.S. , in con t ras t , the d i v i s i o n o f

l abor arrangement i s a system o f par l iamentary appropr ia t ions committees . A

spec ia l i za t ion o f l abo r arrangement i s an assignment o f j u r i s d i c t i o n s to

indiv idual groups of ac to r s . A committee may have j u r i s d i c t i o n over only one

dimension o r seve ra l dimensions o f government se rv ices . Spending min i s t e r s

usua l ly only have j u r i s d i c t i o n over t h e i r own f i e l d . Fina l ly, an amendment



2 8

under l ines the importance o f i n s t i t u t i o n a l arrangements for f i s c a l outcomes.

Second, the c h a r a c t e r i s t i c s o f the p a r t i c u l a r equi l ibr ium outcome depends on

the combination o f a l l t h r ee i n s t i t u t i o n a l c h a r a c t e r i s t i c s . This impl ies t h a t

d i f f e r e n t i n s t i t u t i o n a l se t -ups among the EC coun t r i e s may expla in d i f f e r e n t

reac t ions to the same under ly ing shocks. Third, the s t a t u s quo w i l l be most

powerful in determining the outcome, i f t he re i s a one-to-one mapping between

par l iamentary committees and j u r i s d i c t i o n s and i f the l e g i s l a t u r e i s bound by

a ru le t h a t p roh ib i t s amendments i f the committee proposes the s t a t u s quo.

Thus, regardless o f whether or not the government i s formed by a s t a b l e

c o a l i t i o n which would determine the assignment o f i nd iv idua l s to commit tees

or mini s t r i e s but would not the a f f e c t budget ing procedure i n s t i t u t i o n a l

s t ruc tu res are impor tan t determinants of how l i k e l y a dev ia t ion from s t a t u s

quo w i l l be.

DivisioiL and, s p e c i a l i z a t i o n o £ l abo r arrangements _to:gether determine the

degree of c e n t r a l i z a t i o n o f the budgeting process . In the European con tex t , we

d i s t ingu i sh , wi th in government, between a decen t r a l i zed approach, i n which

each spending min i s t e r with au thor i ty over one budget dimension i s engaged i n

b i l a t e r a l t a lks with the f inance or t r easu ry min i s t e r, and a cen t ra l i zed

approach, in which the cab ine t as a whole discusses the budget proposa ls . In

the par l iamentary procedure, the r e l evan t d i s t i n c t i o n i s between a sequence o f

votes proceeding on an i t em-by- i tem b a s i s , or a genera l vo te on the e n t i r e

budget fol lowing a genera l debate . The importance o f t h i s aspect comes from

the l i m i t s i t puts on universa l i sm and r ec ip roc i ty (Alt and Chrys ta l , 1981).

Universal ism r e f e r s to the proper ty o f budget proposa ls to con ta in something

for everyone , i . e . to d i s t r i b u t e favors more generously than an i nd iv idua l

decis ion maker would want. Reciproci ty r e f e r s to the pr inc ip le of not

at tacking another per son s approp r i a t i on proposa l in r e tu rn for he r no t

a t t ack ing one s own. Both t end to increase expendi tures .


http://slidepdf.com/reader/full/budgeting-procedures-and-economic-performance-in-eu-hagen 35/85 5)

2 9

Chrys ta l and Al t summarize the bas i c argument asfo l lows: Consider a

government where each spending min i s t e r pursues only h i s i nd iv idua l i n t e r e s t

and the budget law r equ i r e s a minimal winning c o a l i t i o n wi th in the cabinet .

Under such circumstances, i t i s always r a t i o n a l fo r a min i s t e r to vote aga ins t

o the r m i n i s t e r s proposa ls for i nc reas ing t h e i r budgets on cos t -bene f i t

grounds. y impl ica t ion , no min i s t e r i s able t o push an expansion o f h i s

budget through and government s e t t l e s on the cheapes t poss ib l e budget ,

al though each min i s t e r would l i k e a l a rg e r one. One way to ge t around t h i s i s

to engage i n mutual agreements , i . e . proposa ls which b e n e f i t more than one

min i s t e r, or to agree t a c i t l y not to vote down each o t h e r s proposa ls . The

r e s u l t i s t h a t each spending min i s t e r obta ins a l a rg e r budget . Chrys ta l and

Al t argue t h a t pai rwise bargain ing between the f inance min i s t e r and the

spending min i s t e r favors universa l i sm and r ec ip roc i ty. They base t h e i r view on

repor ts t h a t B r i t i s h Cabinet min i s t e r s r e f r a in . f rom t t ~ c k i n gspending

reques ts from other departments and the observat ion t h a t the B r i t i s h system

does embed pai rwise bargain ing . Beyond t h a t empir ica l observa t ion , however,

t h e i r argument seems implaus ib le . Tac i t agreements requi re monitoring to be

e f f e c t i v e , which i s e a s i e r in m u l t i l a t e r a l bargain ing s i t u a t i o n s than in

decen t r a l i zed ones, because the former give a l l p a r t i c i p a n t s the oppor tuni ty

to observe each o the r s behavior. Furthermore, universa l i sm requi res the

p o s s i b i l i t y to decide over mul t ip l e budget dimensions simultaneously, which

would t yp ica l ly not be poss ib l e in a decen t r a l i zed s e t t i n g . We w i l l

hypothes ize , t he re fo re , t h a t both prac t i ces a re more l imi t ed i n decen t r a l i zed

than in cen t ra l i zed procedures.

Ferejohn and Krehbie l (1987) analyze the importance of the sequence of

decis ions i n the budgeting process for the f i n a l outcome. Spec i f i ca l ly, they

compare a process in which approp r i a t i ons a r e voted i nd iv idua l ly and the

overa l l budget s i ze i s a r e s idua l with one in which the budget s i z e i s voted



3

f i r s t and the s t r u c t u r e o f the budget i s determined af terwards , given the

t o t a l s i z e . Contrary to popular b e l i e f , the l a t t e r procedure does not always

l e ad to a smal ler budget than the f i r s t . hen vo t ing on the t o t a l s i z e ,

dec i s ion makers a n t i c i p a t e the l i m i t s they c rea t e fo r subsequent a l loca t ions .

Decis ion makers with s t rong ly skewed preferences i n favor o f p a r t i c u l a r budget

i tems are l i k e l y to produce l a rg e r budgets in the two-step procedure, because

they do not accept the i m p l i c i t need t o t r ade o f f i nd iv idua l expendi tures in

the second s t ep . In con t ras t , dec i s ion makers with more balanced preferences

are l i k e l y t o f ind smal ler budget agreements i n t h i s way.

Mackay and Weaver (1979) show t h a t , again con t r a ry to popular b e l i e f ,

committees with the power to propose budgets for p a r t i c u l a r government

se rv ices do no t always propose a l a rge r budget than the median v o t e r would

propose, even i f the committee members preference fo r the p a r t i c u l a r se rv ice

are much s t ronge r than the median v o t e r s preference . Applying t h e i r ~ g u m e n t

to Europe, t h i s means t h a t proposa ls put f o r t h by spending min i s t e r s do no t

necessa r i ly aim a t l a rg e r spending for t h e i r j u r i s d i c t i o n than proposa ls

r e s u l t i n g from a genera l deba te .

North and Weingast (1989) analyze the ro le o f B r i t i s h f i s c a l

i n s t i t u t i o n s in t roduced a f t e r the Glorious Revolut ion o f 1688. The new f i s c a l

c o n s t i t u t i o n r e s u l t e d i n a s p e c i f i c d iv i s ion o f l abo r between the Crown

Parl iament, and the Bank of England and c rea t ed an e f f e c t i v e commitment

mechanism for the Crown to serve i t s debt o b l i g a t i o n s . Comparing publ ic

f inances i n B r i t a i n before and a f t e r the Revolut ion sugges ts t h a t these

changes f a c i l i t a t e d a more s t a b l e and r e l i a b l e f i s c a l po l i cy. Bordo and White

(1992) compare B r i t i s h and French publ ic f inances between 1790 and 1814 and

conclude t h a t i n s t i t u t i o n a l def i c i enc ies in the French system undermined the

c r e d i b i l i t y o f the French government and forced France to conduct

s i g n i f i c a n t l y l e s s e f f i c i e n t and s t a b l e f i s c a l p o l i c i e s than B r i t a i n dur ing



3 1

t h a t pe r iod .

A Simple Model o f the Budgeting Process

According to Wildavsky (1975, p. 4) the budget process i s a mechanism

through which p o l i t i c a l i n t e r e s t groups bargain over conf l i c t ing goals , make

s ide-payments , and t r y to motivate one another to accomplish t h e i r

ob jec t ives . In essence, i t i s a device fo r p o l i t i c a l c o n f l i c t r e so lu t ion . In

t h i s sec t ion , we propose a simple model charac te r i z ing the budgeting process

as i t i s found in the E coun t r i e s , and der ive some hypotheses concern ing

f i s c a l d i sc ip l ine .

Our model descr ibes the budget ing process in t h ree s t ages . On the f i r s t

s t age , government prepares a budget d r a f t to be presented before par l iament .

The government comprises spending min i s t e r s , a f inance or t r easu ry min i s t e r

. p r e s i i ~ gover f inanc ia l resources , and a prime min i s t e r . ac t ing as t he

chairman. 11 Conf l i c t s o f i n t e r e s t between the min i s t e r s must be resolved i n

the d r a f t i n g process . On the second s t age , the budget i s submitted to

par l iament , which can amend the proposa l and e i t h e r pass or r e j e c t i t We

t h ink o f t h i s pr imar i ly as a bargain ing process between government, which now

r ep resen t s a un i f i ed pos i t ion expressed in i t s proposa l , and the p a r t i e s

r ep re sen ted in par l iament , which e i t h e r suppor t o r oppose the government. On

the t h i r d s t age , the budget law i s executed and fu r the r modif ica t ions o f the

law may be poss ib l e .

To cha rac t e r i ze the process , we assume t h a t taxes are not earmarked fo r

spec ia l purposes. Spending min i s t e r s are i n t e r e s t e d i n expanding the resources

o f t h e i r own mini s t r i e s , but i nd i ffe ren t about the resources of o the r

minis t r i e s . Thei r p o l i t i c a l success i s measured i n terms o f the s i z e o f t h e i r

budgets . In con t ras t , the prime min i s t e r and the f inance min i s t e r a re not

bound by p a r t i c u l a r i n t e r e s t s or not to the same ex ten t and, t he re fo re ,



3

are more c o n s t r a i n t by cons idera t ions o f genera l publ ic welfare than the

spending min i s t e r s . For a given amount o f t o t a l spending, i nc reas ing the

genera l t ax burden of the economy reduces publ ic wel fare .

Spending and f inanc ing government programs involve d i f f e r e n t t ime

hor izons . e assume t h a t the bene f i t s from spending money for the major i ty of

government programs are obta ined immediately or over a r e l a t i v e l y shor t t ime

per iod . In con t ras t , the wel fare e f f e c t s of higher t axes imposed on cur ren t

t ax payers a re f e l t to a la rge ex ten t only i n the medium and long run, s ince

they involve pr iva te sec to r adjustment to changes in t ax i ncen t ives o r ne t

asse t r e tu rns . In add i t i on , we assume t h a t t ax payers are a t l e a s t p a r t l y non

Ricard ian , so t h a t d e f i c i t f inanc ing al lows to s h i f t p a r t o f the tax burden to

f inance cur ren t expendi tures on fu ture tax payers . 12 Fina l ly, we assume t h a t

p o l i t i c i a n s discount the fu ture , so t h a t presen t o r nea r pay-offs o f t h e i r

ac t ions a re weighed more heavi ly than those in the more d i s t a n t fu tu re .

Spending min i s t e r s are inhe ren t ly biased to push for increased spending

of t h e i r own m i n i s t r i e s , s ince the r e s u l t i n g t axes or d e f i c i t s to f inance the

e x t r a expendi ture f a l l on the genera l publ ic or, in the case o f d e f i c i t s on

the genera l publ ic in the fu tu re ) , while the spending b e n e f i t s t h e i r own

cons t i tuency and r a i s e s t h e i r p o l i ~ i c lsuppor t . A budget c o n f l i c t between two

spending min i s t e r s , A and B therefore , has the s t r u c t u r e desc r ibed i n f i g . 9.

Here, we compare two bas i c s t r a t e g i e s : small and l a rge expendi tures . I f both

choose small expendi tures , the r e s u l t i n g l eve l of t axes and the d e f i c i t remain

small , i f both choose la rge expendi tures , t axes and the d e f i c i t a re l a rge .

Both spending min i s t e r s rece ive the same pay-offs - denoted by the numbers i n

the upper l e f t corner fo r A and the lower r i g h t corner fo r B when they adopt

the same s t r a t egy. Each would pre fe r an outcome i n which the o the r chooses the

small expendi ture s i ze . However because a min i s t e r faces a l o s s o f p o l i t i c a l

support i f h i s col league reaps a l a rge r a l loca t ion wi th in a given budget than



Minis t ry As t r a t e g i e s

smallexpendi tures

l a rgeexpendi tures

Figure 9:

Minis t ry B s t r a t e g i e s

smal l expendi tures

40low t axes , smal ld e f i c i t

60medium t axes ,medium d e f i c i t

40

2

la rgeexpendi tures

2medium taxes ,medium d e f i c i t

60

50high t axes , l a rged e f i c i t

50

he does, the equi l ibr ium i s the la rge budget with h igh taxes and a l a rge

d e f i c i t . That i s , the spending b ias works aga ins t f i s c a l d i s c i p l i n e .

The prime min i s t e r and the f inance min i s t e r have a la rge r tendency to

l i m i t spending in order to r e s t r a i n the l eve l o f presen t and fu tu re

t axa t ion . 13 From t h e i r perspect ive , the pre fe r red outcome would be t h a t both

spending min i s t e r s adopt the smal l -expendi tures s t r a t egy, e spec ia l ly so i n

t imes where the s t a t u s - q u o budget has high l eve l s o f spending and t axa t ion

and a high d e f i c i t to begin wi th .

n important aspec t o f the process wi th in government concerns the

sequence o f decis ions determining the s i z e o f the budget . In a bottom-up

approach, the t o t a l s i ze i s determined r e s i d u a l l y a f t e r co l l ec t ing spending

reques ts from a l l mini s t r i e s . Al te rna t ive ly, the cab ine t may agree on a

genera l cons t r a in t , f i r s t , and decide on i nd iv idua l a l loca t ions or the

s t ruc tu re of the budget given t h i s cons t r a in t af terwards . The genera l

c o n s t r a i n t may f ix the overa l l s i ze o f the budget , t o t a l expendi tures or the

d e f i c i t , o r cons i s t of a golden r u l e clause , i . e . , the prov i s ion t h a t

d e f i c i t s cannot exceed investment or c a p i t a l expendi tures . Cons t r a in t s f ix ing

only the d e f i c i t or a golden ru l e clause would, however, be l e s s binding fo r



fu ture decis ions than t o t a l expenditures or the overa l l s i z e . A genera l

c o n s t r a i n t can be s t rengthened agains t universa l i sm and r ec ip roc i ty by giv ing

the prime min i s t e r (or the f inance min i s t e r ) the au thor i ty to f i x the overa l l

s i ze be fo re i nd iv idua l budgets are determined.

Another c h a r a c t e r i s t i c o f the process within government concerns the

p a r t i c i p a t i o n in dec i s ions . Budget decis ions may be reached by the e n t i r e

cab ine t c o l l e c t i v e l y, or, a l t e r n a t i v e l y, through b i l a t e r a l discuss ions between

the f inance min i s t e r and each o f the spending m i n i s t r i e s . Fina l ly, we can

d i s t ingu i sh budget processes by the ex ten t to which they connect the cur ren t

budget t o p a s t and fu ture budgets through mul t i -pe r iod budget p lans . I f m u l t i

pe r iod budget plans e x i s t a t a l l they may be regarded pr imar i ly as a genera l

o r i e n t a t i o n or as a binding cons t r a in t .

The government s budget proposa l i s submit ted to par l iament where t

becomes sub jec t to another barga in ing process . . Members o f pa r l i amen t r ep re sen t

l oca l o r o the r cons t i t uenc ie s and are , the re fo re , cha rac t e r i zed by a s imi la r

i f not s t ronge r spending b ias as spending min i s t e r s . n the o the r hand,

members o f par l iament are bound by par ty d i s c i p l i n e . European p a r t i e s which

are co l l ec t ions o f groups of cons t i t uenc ie s , are l i k e l y to give l a rg e r weight

to the genera l i n t e r e s t as opposed to p a r t i c u l a r cons t i t uenc ie s i n par ty

decis ions than i nd iv idua l members of par l iament would do in the absence o f

pa r ty d i s c i p l i n e . Furthermore, for the members of the par ty or the p a r t i e s

backing the government in o f f i c e , par ty d i s c i p l i n e e n t a i l s vo t ing to suppor t

the government, even i f the outcome does not f u l l y match the preferences o f

the ind iv idua l member of par l iament .

Par l i amen t s ro le i s to amend the budget proposa l , and to pass or to

r e j e c t i t . While government s e t s the agenda for the par l iamentary debate, i t s

proposa l w i l l a n t i c i p a t e par l i amen t s r eac t ion to i t . The r e l a t ionsh ip between

government and par l iament i s cha rac t e r i zed , f i r s t by the scope o f amendments



3 5

par l iament can cons ider. In the s imples t case , t he re may be no r e s t r i c t i o n s on

amendments a t a l l Otherwise, amendments may only be permi t ted fo r c e r t a i n

p a r t s o f the budget , or par l iament may be r e s t r i c t e d to amendments proposing

increases i n expendi tures only i f they i d e n t i f y the necessary sources o f

add i t iona l f inance , or only such amendments t h a t do not (or only negat ive ly)

a f f e c t the overa l l s i ze of the budget .

The second dimension o f the r e l a t ionsh ip between par l iament and

government concerns the p o l i t i c a l impl ica t ions of r e j e c t i n g the budget favored

by the government. The s t r a t e g i c e f f e c t of the p o s s i b i l i t y to r e j e c t the

budget proposa l i s two-fold. On the one hand, the more l i k e l y a r e j e c t i o n

l eads to the demise o f the government, the more i t i s i n government s i n t e r e s t

to propose a budget t h a t can be expected to f ind a s o l i d majo r i t y i n

par l iament . This tends to weaken the pos i t ion o f government i n the process . On

the o the r hand, members o f .the _par ties . support ing gov ernment . in par l iament

w i l l r e f r a i n from proposing changes to the budget proposa l i f doing so may

e n t a i l the f a l l o f the government, unless the changes a re regarded o f outmost

importance. This second e f f e c t tends to s t rengthen government s p o s i t i o n i n

the process . While the combined e f f e c t i s ambiguous, we assume t h a t the l a t t e r

e f f e c t p r e v a i l s .

Another dimension of the r e l a t ionsh ip between government and par l iament i s

the qua l i ty o f in format ion the budget proposa l conveys about pub l i c f inances

and government s i n t en t ions . A low degree o f in format iveness a l lows government

to send mixed s igna l s about i t s f i s c a l i n t en t ions , making par l i amen t s t a sk o f

monitoring the budget more d i f f i c u l t At the same t ime, the informat iveness o f

the budget a l so determines the degree to which the budget can be monitored

e f f e c t i v e l y by p o l i t i c a l forces outs ide par l iament , e .g . the media.

Voting procedures within par l iament can be cha rac t e r i zed by the order

and scope o f the vo tes . s within government, they determine the ex ten t to



3 6

which r ec ip roc i ty and universa l i sm can preva i l . Parl iament may debate and then

vote on the e n t i r e budget i n one s t ep . A l t e rna t ive ly, i t may d i scuss and vote

on the budget i tem by i tem, poss ib ly fol lowed by a genera l vote on the budget

as a whole. Fina l ly, par l iament may f i r s t vote on the overa l l budget s i z e and

then debate and vote over the i nd iv idua l i tems. We conjec ture t h a t the l a t t e r

approach i s most conducive to f i s c a l d i sc ip l ine , while the f i r s t approach i s

most l i k e l y to r e s u l t i n l a rge budgets and la rge d e f i c i t s .

he t h i r d s tage o f the budget procedure conta ins the execut ion o f the

budget law under the con t ro l o f government. During the execut ion new demands

for spending or reduced t axa t ion occur in response to unforeseen economic

events , as wel l as discrepancies between planned and a c t u a l revenues and

expendi tures . s i n the d r a f t i n g process , we assume t h a t for t h e i r p o l i t i c a l

i n t e r e s t s spending min i s t e r s are more l i k e l y to give i n to demands for

increased s p e n d i ~ gand more .prone to o v r r u n n i ~ gthe l i m i t s s e t by the budget

law than the prime min i s t e r or the f inance minis ter. Two c o n f l i c t i n g forces

become important: the degree to which the budget law binds government s

ac t ions dur ing the f i s c a l year, and the degree of f l e x i b i l i t y to respond t o

unforeseen events . How binding the budget law i s for government depends on the

p o s s i b i l i t y to propose supplementary budgets during the f i s c a l year, on the

r e l a t i v e importance of open-ended appropr ia t ions in the budget , such as s o c i a l

secur i ty or unemployment compensat ion commitments, and on the power o f the

f inance min i s t e r to impose spending l imi t s on mini s t r i e s which exceed t h e i r

budget norms. he degree o f f l e x i b i l i t y i n the execut ion of the budget depends

on the p o s s i b i l i t y to t r a n s f e r expendi tures between budget t i t l e s the

exis tence of a budget r e se rve , and the p o s s i b i l i t y to carry unused funds

forward.


http://slidepdf.com/reader/full/budgeting-procedures-and-economic-performance-in-eu-hagen 43/85 6)

7

The Long-term Const ra in t Hypothesis and the St ruc tu ra l Hypothesis

Our model pred ic t s t h a t the s t ruc tu re o f i n t e r e s t s among spending

minis ters and members of par l iament pa t t e rns o f decis ion making and vot ingconducive to universa l i sm and r ec ip roc i ty and a la rge degree o f f l e x i b i l i t y

i n the execut ion o f the budget a l l genera te a b ias for outcomes with la rge

expenditures high taxes and l a rge d e f i c i t s Conversely i n s t i t u t i o n a l

arrangements l imi t ing these forces should be conducive to grea te r f i s c a l

d i sc ip l ine . We pursue t h i s genera l proposi t ion in two vers ions . The f i r s t

vers ion borrows an i n s igh t from the l i t e r a t u r e on time cons is tency of po l i cy

making. 14 We conjec ture t h a t po l i cy makers are more i nc l ined to adopt f i s c a l

d i sc ip l ine when they cons ider the genera l long-run t rends and consequences o f

t h e i r p o l i c i e s than when they are engaged in bargain ing over d e t a i l s o f the

budget or in the budget execution i n t h e i r da i ly ac t ions . Pol icy makers who

are able to agree on and announce a long-run program of f i s c a l s t a b i l i t y w i l l

be tempted to devia te from t h a t program once i t s implementation i s under way,

because such devia t ions serve shor t - run p o l i t i c a l i n t e r e s t s This sugges ts

t ha t s t rong i n s t i t u t i o n s enforc ing long-run or ien ta t ion o f f i s c a l p o l i c i e s are

conducive to f i s c a l s t a b i l i t y This i s our

LONG TERM CONSTRAINT HYPOTHESIS: The more budgetary decis ions are t i e d to amult i -per iod f i s c a l program the grea te r the degree of f i s c a l s t a b i l i t y

achieved.

The second hypothes is focuses on the s t ruc tu re of negot ia t ions and decis ion

making procedures during the budgeting process and the execution o f the budget

law. e c a l l i t the

STRUCTURAL HYPOTHESIS: Budgeting procedures lead to grea te r f i s c a l d i sc ip l inei f they give a s t rong prerogat ive to the prime minis ter or the f inancemini s t e r i f they l i m i t universa l i sm r ec ip roc i ty and par l iamentaryamendments, and f a c i l i t a t e s t r i c t execut ion of the budget law.



8

In the next sec t ion , we develop empir ica l t e s t s of these hypotheses

us ing da ta fo r the European Community.

4. Budgeting Procedures i n t he EC A Charac te r i za t ion

The da ta fo r the fol lowing charac te r i za t ion o f the n a t i o n a l budgeting

procedures in the EC a re based on an assessment o f information on na t iona l

procedures provided by the European Commission. 15 This in format ion was

ava i l ab le fo r a l l member governments, a l though in vary ing degrees o f d e t a i l .

No i nd ica t ion o f the ranks o f the exper ts wi th in t h e i r mini s t r i e s was made.

The advantage o f t h i s da ta base over the a l t e r n a t i v e o f studying each

coun t ry s r e l evan t l ega l code i s t h a t the information r e f l e c t cur ren t

p rac t i ces , not simply l ega l norms. This i s p a r t i c u l a r l y impor tan t fo r a

country l i k e the U.K., where many o f the procedures depend on a common

understanding o f the ac to r s r a t h e r than cod i f i ed law (Wildavsky, ·.1975). Of

course, t h i s advantage i s achieved a t the expense o f sub jec t iv i ty in the

assessment . Our da ta base does not gene ra l ly ind ica t e changes in the na t iona l

procedures in the pas t .

Tables Al - A S summarize the assessments . 16 Table Al begins with a

genera l charac te r i za t ion o f the l eve l s of government in each count ry. Levels

o f government vary between two and four. Socia l secur i ty systems are t r e a t e d

as a sepa ra t e e n t i t y wi th in the genera l government in most coun t r i e s . The

t h i r d column of t h i s t ab le character izes the budgetary s t a t u s o f l ower- l eve l

governments. Only Denmark and France have regional governments sub jec t to a

binding balanced-budget cons t r a in t ; i n Belgium, Luxembourg and Greece such

cons t r a in t s e x i s t bu t a re not cons idered to be binding . Lower-level

governments in Germany the Nether lands and the U.K. are sub jec t t o a golden

r u l e . In four coun t r i e s , Belgium, Denmark Greece, and I t a l y, r eg iona l

governments are r equ i r ed to ob ta in au tho r i za t ion fo r borrowing from the



3 9

genera l government. In four coun t r i e s , I r e l and , Luxembourg Por tugal , and

Spain, lower- level governments are autonomous in t h e i r budget plans , i n a l l

other coun t r i e s t h i s autonomy i s l imi t ed , o rl o w r ~ l v l

governments can be

placed under the su rve i l l ance o f h ighe r- l eve l governments. The f i n a l column

shows t h a t the c e n t r a l government s budget i s dra f t ed , in most member s t a t e s

by a s ing le minis t ry, the except ions be ing Denmark Greece, I t a l y and

Por tugal .

Table A reviews the exis tence and s t r eng th of mult i -annual budget

p lans . Belgium, France, Greece, Luxembourg, Spain, and Por tugal do not spec i fy

any mult i -annual budget t a rg e t s a t a l l . However, with the except ion o f

Belgium, these coun t r i e s do use some form o f mult i -annual pro jec t ions as

in ter tempora l guide l ines of t h e i r budget p lans . Germany I r e l and , I t a l y and

the Netherlands use the overa l l s i ze o f the budget as a mul t i -pe r iod t a r g e t .

The commitment to these t a rg e t s s p o l i t i c a l i . e .. .i t i s not binding, . but

expresses p o l i t i c a l preferences and the wi l l i ngness t o make s i g n i f i c a n t

e f f o r t s to come close to these t a rg e t s . Only i n the Netherlands i s the mul t i

annual t a rg e t p a r t of the c o a l i t i o n agreement o f the government. Denmark and

the U.K. have more s p e c i f i c mult i -annual t a r g e t s such as t o t a l government

revenue or expendi tures . In Denmark these t a rg e t s are only i nd ica t ive , i . e .

they carry l e s s weight than a p o l i t i c a l commitment. The same i s t rue fo r

revenue and publ ic sec to r borrowing t a rg e t s i n the U.K., t he re , however, the

spending t a rg e t i s a p o l i t i c a l commitment.

Table A3 cha rac t e r i zes the ru l e s for prepar ing the budget d r a f t . Here,

the exis tence of a gene ra l c o n s t r a i n t i nd ica t e s t h a t the d r a f t begins wi th

the s ta tement of overa l l parameters such as t o t a l spending, revenues,

d e f i c i t s or government debt . Belgium, Greece and Por tugal opera te under no

e ffec t ive genera l cons t r a in t , the Netherlands and Por tugal in t roduced t h e i r

cons t r a in t s only r ecen t ly. Of the remaining coun t r i e s , Denmark France,



4

Germany, Luxembourg, and the U.K. observe spending t a rg e t s i n the d r a f t ; the

same countr ies except Luxembourg plus I r e l and observe a d e f i c i t t a rge t ;

France, I r e l and and I t a l y a l so have cons t r a in t s on government debt

outs tanding . Government guarantees to non-government e n t i t i e s are genera l ly

not inc luded in the budget; i f they a re , they en te r as a t o t a l (France), an

es t imated spending amount I t a l y ) , or a maximum (Po r tuga l ) . Seven of the

twelve government budgets do not inc lude reserve funds; the French reserve

fund i s o f very l imi t ed s i z e . In con t ras t , Greece, I t a l y, Por tugal , and the

U.K. ca r ry reserve funds on the budget . Specia l funds e x i s t in a l l member

coun t r i e s , they are usua l ly included i n the budget a t l e a s t to some ex ten t or

annexed to i t . Fina l ly, the budget i s proposed in one comprehensive document

i n most coun t r i e s . Exceptions are the U.K. and I r e l and , where revenues and

expendi tures are presented in d i f f e r e n t documents, whi le in I t a l y and Greece

.s.eparate documents are dra f t ed fo r d i f f e r e n t po l i cy domains.

Table A reviews the informat iveness o f the budget . I t begins wi th an

overa l l judgement , ranging from t r anspa ren t (France, Germany, Greece and the

U.K.) to hard ly t r anspa ren t I t a l y ) . Expenditures a re genera l ly broken down

by funct ion and admin i s t r a t i ve r e s p o n s i b i l i t y ; I r e l and , I t a l y, and the

Netherlands being the except ions . Revenues a re presented in a breakdown by

source in a l l countr ies . Only in Germany, the U.K., the Netherlands, and

France (though in a separa te s ta tement ) can expendi ture and revenue ca tegor i e s

be l i nked d i r e c t l y to na t iona l accounting s t a t i s t i c s to f a c i l i t a t e the

assessment of t h e i r macro-economic e f f e c t s . Loans extended by the government

are genera l ly repor ted , al though i n some cases Germany, I r e l and and Greece)

only in separa te s ta tements . Most countr ies use a cons i s t en t accounting base

in t h e i r budget documents e i t h e r cash or t r ansac t ions ) ; only I t a l y and

Belgium use mixed accounting bases . Table AS cons iders the importance o f o f f -

budget a c t i v i t i e s by looking a t the budgetary t rea tment o f spec ia l funds a t



4

the government. Greece, I t a l y, and, u n t i l r ecen t ly, Por tugal and Belgium

appear to use spec ia l funds and off -budget a c t i v i t i e s ex tens ive ly. In a l l

other coun t r i e s , off -budget opera t ions are very l i m i t e d and spec ia l funds are

e i t h e r inc luded in the budget , or repor ted as p a r t o f i t .

Table A cha rac t e r i zes the vot ing procedures wi th in government and the

l e g i s l a t u r e as wel l as the scope of ac t ions the l a t t e r has ava i l ab le . An

agenda , i . e . i n i t i a l budget gu ide l ines , i s s e t e i t h e r by the prime min i s t e r

o r the f inance (o r t r ea su ry ) min i s t e r (Belgium, France, Germany Greece,

I t a l y or by the e n t i r e cab ine t . The agenda may speci fy overa l l l i m i t s on the

budget s i z e (Belgium, France, Germany Spain, U.K.) , l i m i t s on spending or

d e f i c i t s (Denmark, Greece, I r e l and) , or determine s p e c i f i c budget t a rg e t s

together with one o f the former. Subsequent nego t i a t ions are b i l a t e r a l between

the spending mini s t r i e s and the f inance min i s t ry i n Denmark France, Germany

the e t h e r l a n d s ~P o r t ~ g a land the U.K., m u l t i l a t e r a l in I t a l y and involve the

e n t i r e cab ine t in Belgium, Greece, I re land, and Spain.

Par l iaments gene ra l ly do not have the power to make budget proposa ls .

The only except ions are Germany and Luxembourg even t he re , t h i s p o s s i b i l i t y

i s of no p r a c t i c a l importance. Amendments are sub jec t to var ious r e s t r i c t i o n s .

Unlimited amendments a re poss ib l e in Belgium, Denmark Germany Greece, the

Netherlands and Por tugal . In Denmark and Spain amendments must be o f f s e t t i n g

i n the sense t h a t proposa ls to increase expendi tures in one budget t i t l e must

be accompanied by proposa ls to reduce expendi ture in o the r t i t l e s , or t h a t a

proposed t ax reduct ion must be matched with an increase i n another tax . The

French ru le i s even s t r i c t e r , proh ib i t i ng proposa ls to r a i s e expendi tures in

one t i t l e and to reduce expendi tures under another t i t l e . Only i n Greece,

I t a l y, and Spain amendments are not perce ived to be a p o t e n t i a l cause for the

government to f a l l .

Parl iaments in Belgium, Luxembourg and Spain vote on expendi tures and



t axes s imul taneous ly. In France ex i s t ing en t i t l emen t s a re voted upon in a

f i r s t genera l vo te the subsequent discuss ion on new au thor i za t ions proceeds

chapter by chapter. In most EC coun t r i e s the par l iamentary debate ends with a

f i n a l global vote on the budget . Only in France and the U.K. such a vote i s

t aken before the par l iamentary debate begins . In the Nether lands a genera l

d i scuss ion on the revenue and expenditure s ides o f the budget opens the

par l iamentary process bu t no vote i s taken. Most par l iaments a re sub jec t to

e x p l i c i t t ime l imi t s by which the budget must have been passed. Exceptions are

only I r e l and the Netherlands and Spain. Prov i s iona l budgets a re implemented

i f the t ime l i m i t i s not met. In most cases the prov i s iona l budget i s a

prolongat ion o f the previous budget on a monthly or four-months b a s i s .

Table A repor ts the budget monitoring ru l e s dur ing the execut ion

process . Supervis ion i s gene ra l ly the t a sk of the f inance minis t ry ; only i n

Denmark and Germany are the ~ p e n i ~ gmin i s t e r s respons ib le fo r moni tor ing

t h e i r budgets . The French case i s an in te rmedia te one where the f inance

minis t ry places supervisors in the spending m i n i s t r i e s . Par l iaments a re

gene ra l ly informed about the execution on a monthly or quar t e r ly bas i s but

have no fu r the r ro l e in the process . In a l l countr ies except Belgium the

f i n a l c losu re of the budget occurs during the year fol lowing the execut ion .

Table AS summarizes the provis ions governing the execut ion of the budget

law and in p a r t i c u l a r the degree of f l e x i b i l i t y governments have a t t h a t

s tage to r e a c t to unforeseen events or devia te from e a r l i e r plans . Finance

min i s t e r s in France Germany Greece and Luxembourg can block expendi tures i f

budget overruns a re foreseen . In these count r ies and Denmark Por tugal and the

U.K. spending m i n i s t r i e s a re sub jec t to cash l i m i t s dur ing the year imposing

cons t r a in t s on the t iming of expendi tures . Only in Belgium France and

Germany spending min i s t e r s genera l ly have to ob ta in au thor i za t ion fo r ac tua l

disbursements; in the Netherlands and Por tugal t h i s may be the case



4

occas iona l ly.

There are var ious degrees of l imi t a t ions to t r a n s f e r i n g expendi tures

between chapters o f the budget during the execut ion . Trans fe r s of ten r equ i r e

au thor i za t ion by the f inance min i s t e r or the par l iament . The German and the

Greek f inance min i s t e r, and the Dutch government with some l i m i t a t i o n s , may

author ize l a rge r budget changes; in a l l o the r coun t r i e s , a new budget law i s

r equ i r ed and must be passed under the same ru le s as the o r i g i n a l one. In

Belgium and I t a l y the submission of supplementary budgets dur ing the f i s c a l

year i s a s tandard prac t i ce in March or i n June and before October,

r e spec t ive ly ) . Carrying-over unused spending au thor i za t ions to the next f i s c a l

yea r i s gene ra l ly al lowed i n I t a l y impossible in Greece and I r e l and , and

sub jec t to l i m i t a t i o n s i n the other coun t r i e s .

_Const ruc t ion o f the Long-term Const ra in t and the S t r u c t u r a l Indexes

o t e s t our hypotheses about the e f f e c t of i n s t i t u t i o n a l arrangements on

f i s c a l outcomes, we need numerical r ep resen ta t ions o f the i n s t i t u t i o n a l

c h a r a c t e r i s t i c s of the 2 coun t r i e s . Such r ep resen ta t ions can be der ived by

cons t ruc t ing indexes ranking the budgeting procedures accord ing to the

r e l evan t i n s t i t u t i o n a l proper t i e s . For t h i s purpose, we s e l e c t those

c h a r a c t e r i s t i c s from t ab l e s Al - A S , which genera te the l a r g e s t d i ff e rences

between i n s t i t u t i o n a l arrangements. Considering the remaining ones would not

add more d i sc r imina t ing information to our indexes, bu t simply i nc rease the

index value for a l l coun t r i e s . We group these c h a r a c t e r i s t i c s under f ive

l a rge r i tems: the s t r u c t u r e o f nego t i a t i ons wi th in government, the s t r u c t u r e

o f the par l iamentary process , the informativeness o f the budget d r a f t the

f l e x i b i l i t y of the budget execut ion , and the longterm planning c o n s t r a i n t . For

each c h a r a c t e r i s t i c we use numbers ranging from zero to four to descr ibe i t s

qua l i ty, with a low number i nd ica t ing a qua l i ty conducive to a smal l degree o f



f i s c a l disc ip l ine . This assures t h a t each c h a r a c t e r i s t i c w i l l con t r ibu te

equal ly to the overa l l indexes. 17 Where the avai lable information was not

e x p l i c i t about the r e l evan t sub-i tem for a country, we ass ign a number equal

to the average o f the ava i l ab le numbers for the other c h a r a c t e r i s t i c s o f the

same i tem. See the appendix for more d e t a i l s .

Next, we cons t ruc t two s e t s o f indexes. The s t r u c t u r a l indexes, S i l

SI3 p e r t a i n to the s t r u c t u r a l hypothesis formulated above. A la rge s t r u c t u r a l

index S i l s igna l s the fol lowing proper t i e s o f a coun t ry s budgeting procedure:

A s t rong pos i t ion o f the prime minis ter or f inance mini s t e r i n government and

government negot ia t ions evolving under a f i rm genera l cons t ra in t on the s i ze

o f the budget; a par l iamentary process with s t rong l i m i t s on amendments, votes

proceeding i tem-by-i tem on expenditures and a global vote on the t o t a l s i ze of

the budget preceding the par l iamentary debate; a l a rge degree o f t ransparency

o the budget; and an .execution proc.e.ss w i t hl imi t ed f ~ e x i b i l i t yand a s t r o n g

pos i t ion o f the f inance mini s t e r v i s - a - v i s the spending mini s t e r s . Our

s t r u c t u r a l hypothes is says t h a t countr ies with a la rge s t r u c t u r a l index should

be expected to exh ib i t a r e l a t i v e l y la rge degree of f i s c a l d i s c i p l i n e .

Computing the index S i l by summing up the sub-indexes for the indiv idual

c h a r a c t e r i s t i c s presumes t h a t these c h a r a c t e r i s t i c s are s u b s t i t u t e s fo r each

other in achieving the same degree o f f i s c a l d i s c i p l i n e . o see how important

t h i s s u b s t i t u t a b i l i t y assumption i s we compute two more s t r u c t u r a l indexes by

leaving out components from the overa l l index S i l . Spec i f i ca l ly, index SI2

drops the informativeness c h a r a c t e r i s t i c s . Index SI3 drops these and the

f l e x i b i l i t y c h a r a c t e r i s t i c s of the budget execution. Thus, the f inding t h a t

S l l i s s t rong ly r e l a t e d to f i s c a l d i sc ip l ine while SI2 i s not would i nd ica te

t h a t the informativeness aspect i s very important r e l a t i v e to the other

aspects . I f S i l and SI2 r e l a t e equal ly to f i s c a l d i s c i p l i n e , the

informativeness aspect would be l e s s important than the remaining



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c h a r a c t e r i s t i c s .

To t e s t the importance o f the long-term cons t ra in t we cons t ruc t the

indexes CONl CON3 · in a s imi la r matter. We conjec ture t h a t apar t from the

ex i s t ence o f a mult i -annual f i s c a l program a high degree of informativeness

o f the budget f a c i l i t a t i n g i t s monitoring l imi ted amendment power o f

par l iament and l imi t ed f l e x i b i l i t y i n the budget execut ion a re important to

make the long-term c o n s t r a i n t e f f e c t i v e . Thus a l a rge value o f CONl i nd ica te s

the exis tence o f a mult i -annual f i s c a l t a r g e t which i s seen as a s t rong

p o l i t i c a l commitment and i s embedded i n a cons i s t en t economic fo recas t ing

framework; a l a rge degree o f t ransparency o f the budget; l imi t ed amendment

power o f par l iament and l imi t ed f l e x i b i l i t y o f the budget execut ion . A l a rge

value o f the index should s igna l a r e l a t i v e l y high degree of f i s c a l

di-scipl ine. As be fo re we cons t ruc t a l t e r n a t i v e indexes to assess the_ implied

s u b s t i t u t a b i l i t y a s s ~ p t i o n sCON l e aves ·out· the t ransparency

c h a r a c t e r i s t i c s while CON3 leaves out t ransparency and amendment l i m i t s .

Graphica l r ep resen ta t ions o f a l l s i x indexes a re shown in f igu res 10 and 11.

5. Budgeting Procedures and Fisca l Performance: Empirical Tests

We now t u rn to t e s t i n g our two main hypotheses us ing nonparametr ic t e s t s

and r eg res s ion ana lys i s . While l i n e a r r eg res s ion ana lys i s i s more f ami l i a r and

eas ie r to i n t e r p r e t nonparametr ic t e s t s have the advantage of not r equ i r ing

the e x p l i c i t spec i f i ca t ion o f a funct ional form o f the r e l a t ionsh ip between

f i s c a l outcomes and our indexes charac te r i z ing budgeting procedures which i s

necessa r i ly l a rge ly a r b i t r a r y. Furthermore the nonparametr ic t e s t s have more

power in the small sample s i ze we a re confronted with.

Table presen t s the Spearman rank cor re la t ion coeff i c i en t s between our

indexes and gross debt r a t i o s ne t lending r a t i o s and primary l ending r a t i o s

fo r the f i r s t and the second h a l f o f the 1980s. Rankings for the debt and ne t



9

81-90 use 24 observat ions of the debt and ne t lending r a t i o s two for each

country.

Table 7: Rank Cor re l a t ion C oeff i c i en t s

Gross Debt/GDP Net Lending/GDP Net Lending Excl.Interest /GDP

per iod pe r iod pe r iod

81-85 86-90 81-85 86-90 81-85 86-90

St ruc tu ra l HypothesisS l l .42 .60** .68** .61** .57** .15

SI2 .26 .SO .56* .58** .63** .32

SI3 .37 .60** .67** .71*** .71*** .26

Long-term Const ra in t Hypothesis

CONl .15 .38 .39 .37 .31 - .19

CON2 - . 11 06 11 24 25 - .01

CON3 ; 26 - .10 - .03 .12 .12 - .02

Note: Table e n t r i e s are Spearman rank cor re la t ion coeff i c i en t s between thes t r u c t u r a l indeces and the f i s c a l performance var i ab les and the longtermcons t ra in t index and the f i s c a l performance var iab les , r e spec t ive ly. *, **,and *** i nd ica te tha t the cor re la t ion c o e f f i c i e n t i s s i g n i f i c a n t l y d i f f e r e n tfrom zero a t the ten , f ive , and one percent s ign i f i cance l eve l .

Table 8 s t rengthens the evidence shown in t ab le 7. We f ind t h a t the

s t r u c t u r a l index has a s ign i f i can t impact on the debt r a t i o the ne t lending

r a t i o and the r a t i o of net lending excluding i n t e r e s t payments to GDP As in

t ab le 7, the r e s u l t s are l e s s s t rong when the two subsamples are considered

separa te ly for the debt r a t i o and the r a t i o o f ne t lending excluding i n t e r e s t

payments, however, in the combined sample, the t e s t s are s t rongly s i g n i f i c a n t

for both . The implied r e l a t ionsh ip - not v i s i b l e in the t ab le - i s as

an t i c ipa ted under the s t r u c t u r a l hypothes is: Countries with high index values

have debt r a t i o s (ne t lending r a t i o s ) s i g n i f i c a n t l y more concent ra ted around



5

Table 8: Hypothesis Tests fo r S t ruc tu ra l Index

Gross Debt/GDP Net Lending/GOP Net Lending Excl .

Interest /GOPper iod pe r iod per iod

81-85 86-90 81-90 81-85 86-90 81-90 81-85 86-90 81-90

Kruskal Wallis Test

S i l .12 .02 .00 .03 .02 .00 .12 .53 .01

SI2 .74 .17 .16 .15 OS .01 OS .26 .00

SI3 .06 .02 .00 .03 .02 .00 .09 70 .01

van der Waerden Test

S l l .11 .03 .00 .03 .03 .00 .12 .45 .01

SI2 .69 .20 .17 .20 .06 .01 06 .24 .00

SI3 .06 .02 .00 .03 .03 .00 .10 .60 .09

Note: Both t e s t s a re Chi-square d i s t r i b u t e d under the Nul l -hypothes is o f noe f f e c t from bargain ing and vot ing s t ruc tu re . Table e n t r i e s are the marginalp r o b a b i l i t i e s of a l a rg e r than es t imated ~ s t s t a t i s t i c under the Null .

Table 9: Hypothesis Tests fo r Long Term Planning Cons t r a in t

Gross Debt/GOP Net Lending/GOP Net Lending Excl .Interest /GOP

per iod pe r iod pe r iod

81-85 86-90 81-90 81-85 86-90 81-90 81-85 86-90 81-90

Kruskal Wallis Test

conl .47 .39 .20 .20 .47 .11 .40 .87 .15

con2 ... . .

. .78 .72 .94 .69 .69 .67 .78 .43

con3 .66 .44 .25 .16 .35 .04 l l .46 .01

van der Waerden Test

conl .52 .44 .26 .21 .57 .19 .50 .94 .26

con2 .80 .81 .72 .99 .75 .83 .73 .90 .54

con3 .68 . 49 .28 .15 .35 .04 .13 .49 .01

Note: Both t e s t s are c i - s uare d1st r1 u ted under the Null-h· Y othes1s o f noe f f e c t from longterm planning con t ra in t . Table e n t r i e s are the marginalp r o b a b i l i t i e s o f a l a rge r than es t imated t e s t s t a t i s t i c under the Nul l .



5

lower values around zero) than coun t r i e s with h igh low index values . The

r e s u l t s fo r the gross debt r a t i o , where S i l and SI3 a re s i g n i f i c a n t , while SI2

i s no t , sugges t t h a t the c h a r a c t e r i s t i c s per t a in ing to the barga in ing and

vo t ing s t r u c t u r e s i n government and par l iament and the f l e x i b i l i t y o f

execut ion a re more important to determine debt r a t i o s than the informat iveness

o f the budget . In c o n t r a s t , the t ab le i nd ica t e s t h a t a l l th ree · indexes are

important fo r the n e t l ending r a t i o s .

Table 9 presen t s the corresponding t e s t r e s u l t s fo r the indexes o f long-

term c o n s t r a i n t . Here, we f ind only weak evidence t h a t the c o n s t r a i n t i s

e f f e c t i v e : Only fo r the ne t l ending r a t i o s and the index CON3 which comprises

the c h a r a c t e r i s t i c s o f the longterm planning c o n s t r a i n t and the f l e x i b i l i t y of

execut ion , and only i n the combined sample do the t e s t s i nd ica te a s i g n i f i c a n t

ro le of the longterm c o n s t r a i n t i n shaping f i s c a l outcomes.

Table 10 presen t s the r e s u l t s o f es t ima t ing the l i n e a r r eg res s ion

equat ion:

4 )

where y 1 i s count ry i s debt r a t i o , ne t l ending r a t i o , or primary ne t l ending

r a t i o , x 1 i s count ry i s s t r u c t u r a l index SI 1 1 or longterm cons t r a in index

CON1 1 and u 1 i s a r eg res s ion e r r o r. Table 10 presents the r e s u l t s o f

r eg re s s ions for the combined subsamples. Addi t iona l regress ions t e s t i n g for

d i f f e rences in the c o e f f i c i e n t s between these two subsamples i nd ica t ed no

parameter change and are not repor ted . The r e s u l t s for a l l t h ree f i s c a l

var i ab les and the s t r u c t u r a l index corrobora te our e a r l i e r f indings . The

s t r u c t u r a l index has a s i g n i f i c a n t pos i t ive impact on the ne t l ending r a t i o s

and a s i g n i f i c a n t l y negat ive impact on the debt r a t i o . These r e s u l t s can be

i n t e r p r e t e d as fo l lows: Implementing a s t r u c t u r a l reform of the budgetary

process in a count ry which increases the s t r u c t u r a l index by 25 po in t s



5

approximately the d i ffe rence between Belgium and the Netherlands, would

r e s u l t , in the long run, i n an increase in the net lending r a t i o by about 4.75

Table 10: Regression Estimates

Dependent Const . S l l CONl R RMSE FVariable t - r a t i o ) t - r a t i o ) t - r a t i o )

Net Lending/GOP

NL 1 -12.72 0.19 0.34 3.94 0.003

-5.64**) 3.39**)

NL 1 -11.88 0.21 0.19 4.38 I 0.034

-4.06**) 2.26)

NL 1 -12.26 0.20 -0.05 0.35 2.52 0.04

-4.56**) 2.25*) -0.33)

Net Lending Excl. I n t e r e s t / GOP

NLX 1 -5 .33 0.10 0.33 2.28 0.004

-4.09**) 3.28**)

NLX 1 -4 .81 0.12 0.18 2.52 0.04

-2.86**) 2.17)

NLX 1 -5 .04 0.12 -0.03 0.33 2.32 0.01

-3.24**) 2.22*) -0.37)

Gross Debt GOP

Bi 98.97 -0.93 0.24 26.6 0.02

6.50**) -2.60**)

Bi 89.86 -0.94 0.09 28.94 0.14

4.65**) 1.51)

Bi 92.27 -1.28 0.69 0.25 26.90 0.04

5.12**) 2.11*) 0.72)

Note: * and ** i nd ica te s ign i f i cance o f the t - r a t i o a t the f ive and onepercent l eve l s , r e spec t ive ly. F i s the marginal probab i l i ty o f a l a rg e res t imate o f the F-ra t io under the Null-hypothesis t h a t the model has noexplanatory power. RMSE i s the root mean squared er ro r.

percent , and the primary ne t lending r a t i o by about 2.5 percent , while

reducing the debt r a t i o by about 3 percent . Addit ional regress ions for the



5

s t r u c t u r a l indexes SI2 and SI3 y ie ld s imi la r r e s u l t s and are no t r epo r t ed .

They d id no t i nd ica t e major d i ff e rences in the importance o f the subindexes.

The r eg res s ion r e s u l t s for the longterm cons t r a in t index are very

d i f f e r e n t . Here, the only s i g n i f i c a n t c o e f f i c i e n t i s found in the model fo r

the ne t l ending r a t i o . The index does not , in con t ras t , expla in v a r i a t i o n i n

the gross debt r a t i o nor the r a t i o of ne t l ending exc luding i n t e r e s t payments.

Furthermore, the t h i r d r eg res s ion fo r the ne t l ending r a t i o which combines

both the s t r u c t u r a l index and the longterm cons t r a in t index, sugges ts t h a t the

s t r u c t u r a l index has more explana tory power, s ince the longterm c o n s t r a i n tindex i s no t s i g n i f i c a n t i n t h i s r eg re s s ion .

6. Conclusions

This paper i nves t iga te s the ro le of budgeting procedures i n determining

a coun t ry s f i s c a l performance. Recent t h e o r e t i c a l l i t e r a t u r e has developed

models showing t h a t the i n s t i t u t i o n a l framework in which budgeting takes

places can have impor tan t consequences fo r the degree o f f i s c a l d i s c i p l i n e

achieved by a count ry. e analyze t h i s bas i c p ropos i t i on in two ver s ions , one

focusing on s t r u c t u r a l c h a r a c t e r i s t i c s of the budgeting procedures and the

o the r focusing on the importance o f a longterm f i s c a l c o n s t r a i n t . The

empir ica l ana lys i s uses da ta fo r the European ommunity coun t r i e s dur ing the

1980s and charac te r i za t ions o f t h e i r budgeting procedures focusing on c u r r e n t

prac t i ces r a the r than simply on l ega l norms.

Our main r e s u l t i s t h a t we f ind s t rong empir ica l suppor t fo r our

s t r u c t u r a l hypothes is . Spec i f i ca l ly, our r e s u l t s sugges t t h a t a budgeting

process t h a t gives the prime or f inance (or t r ea su ry ) min i s t e r a p o s i t i o n o f

s t r a t e g i c dominance over the spending min i s t e r s , t h a t l i m i t s the amendment

power o f par l iament , and t h a t l eaves l i t t l e room fo r changes i n the budget

dur ing the execut ion process i s s t rong ly conducive to f i s c a l d i s c i p l i n e , i . e .



5

r e l a t i v e l y small d e f i c i t s and pub l i c debt . This r e s u l t can be i n t e r p r e t e d as

point ing to the importance o f a commitment mechanism in the budgeting process .

Spending min i s t e r s are exposed to p o l i t i c a l pressures from i n t e r e s t groups

and, s ince t axes f a l l on the genera l publ ic while expendi tures b e n e f i t

p a r t i c u l a r groups, are b iased i n t h e i r decis ions towards la rge expendi tures

and l a rge d e f i c i t s . The prime min i s t e r and the f inance or t r ea su ry min i s t e r,

in con t ras t , do no t depend on p a r t i c u l a r i n t e r e s t groups to the same ex ten t ;

t h e i r decis ions are more s t rong ly guided by genera l economic considera t ions .

s t rong p o s i t i o n o f the prime min i s t e r or the f inance or t r ea su ry ) m i n i s t e r

and l imi t ed par l iamentary power enable the government to commit f i s c a l

s t r a t e g i e s l imi t ing expendi tures and d e f i c i t s and to defend these s t r a t e g i e s

agains t the p o l i t i c a l pres su re s for more p r o f l i g a t e p o l i c i e s which spending

minis ters and members o f par l iament are exposed to in the day- to-day p o l i t i c a l

process .

In con t ras t , the ro le of long- te rm f i s c a l cons t r a in t s in achieving

f i s c a l d i sc ip l ine , while in most cases pos i t ive , i s not found to be

s i g n i f i c a n t . While w do no t conclude from t h i s t h a t long-term cons t r a in t s

lack importance, our conclus ion i s t h a t a long-term cons t r a in t w i l l only be

e ffec t ive i f governments have an e f f e c t i v e commitment mechanism i n the

budgetary process . That i s a long-term cons t r a in t may improve the f i s c a l

performance of a country wi th budgeting procedures which rank h igh on our

s t r u c t u r a l index, bu t the long- te rm cons t r a in t alone i s i n s u f f i c i e n t to

overcome the problems o f f i s c a l d i s c i p l i n e fo r a country t h a t ranks low on the

s t r u c t u r a l index.

Our r e s u l t s sugges t t h a t i n s t i t u t i o n a l reform o f the budgeting process

i s a promising avenue to achieve a l a rg e r degree o f f i s c a l d i s c i p l i n e . Of

course, t h i s i s not to say t h a t i n s t i t u t i o n a l reform can d i s c i p l i n e p o l i t i c a l

actors who are l a rge ly unwil l ing to accept l e s s spending, higher taxes , o r



smal le r d e f i c i t s . ur view i s however t h a t appropr ia te i n s t i t u t i o n a l reforms

can help governments and par l iaments to mate r i a l i ze a newly reached consensus

fo r grea te r f i s c a l d i s c i p l i n e . Such reforms may be r equ i r ed i n some count r ies

to achieve the f i s c a l t a rg e t s spe l l ed out r ecen t ly in the Maast r ich t Accord

which can be regarded as a spec ia l form o f longterm cons t r a in t s on f i s c a l

p o l i c i e s . What i s more i n s t i t u t i o n a l reforms meet ing the requ i rements and

p a r t i c u l a r i t i e s o f i nd iv idua l member coun t r i e s may be a promising route to

mainta in f i s c a l s t a b i l i t y in the t h i r d s tage o f European Monetary Union as a

complement to the impos i t ion o f uniform f i s c a l c r i t e r i a under the cu r ren t

i n s t i t u t i o n a l arrangements .



6

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NOTES1. For review o f t h i s discuss ion see von Hagen and Fra t i ann i (1991), Fra t i ann iand von Hagen (1992).

2. Art . 3 o f the Pro tocol on the Excessive Def ic i t Procedure r equ i r e s t h a tt h e Member Sta t e s s h a l l ensure t h a t n a t i o n a l procedures in the budgetary area

enable them to meet t h e i r o b l i g a t i n s in t h i s area der iv ing from t h i s Trea ty

3. Net government lending corresponds to the negat ive o f the genera lgovernment d e f i c i t .

4. Net l ending exc luding i n t e r e s t corresponds to the negat ive o f the primarygovernment d e f i c i t .

5 . More s p e c i f i c a l l y, we can ca lcu la t e the t r a n s i t i o n p r o b a b i l i t i e s from 1971to 1990 as fol lows:

pos i t ion in1971

high

low

· t o t a l

p o s i t i o n in 1990

high middle

3

0 3

3 4

low t o t a l

1 5

4 7

· i2

Thus, the probab i l i ty o f being in the high-debt group in 1990 fo r a count rybeing i n the high-debt group in 1971 i s 60 pe rcen t , the probab i l i ty o f being alow-debt count ry in 1990 fo r a low-debt count ry in 1971 i s 4/7 .

6. Note t h a t the Greek and Portuguese data s t a r t only in the 1980s. Thesecoun t r i e s could t he re fo re not be inc luded i n the es t ima t ion o f the commonf ac to r s without severe l o s se s o f degrees o f freedom.

7. A var i ab le x i s sa id to Granger-cause a v a r i a b l e y, i f inc luding pas tvalues o f x t oge the r with pas t values of y in a f o r e c a s t model fo r y reducesthe var iance o f the p r e d i c t i o n e r ro r compared to a fo recas t model t h a t usespas t values o f y a lone .

8. In add i t ion , t he re i s some weak evidence for Granger-causa l i ty for theNether lands , I r e l and , and Por tugal .

9. see Larkey a t a l . (1981). Among these a re the Displacement Effec tHypothes i s c la iming t h a t the r e l a t i v e expansion o f government expendi tures i sdr iven by the development o f government revenues, which increase r e l a t i v e toGNP i n t imes o f soc ia l tu rmoi l and are r i g i d downwards, af te rwards , andhypotheses about the uncon t ro l l ab i l i t y or s t i ck iness o f governmentexpendi tures fo l lowing severe macro economic shocks.

10. Here and · subsequently we use the term government i n the narrow sense o ft h ~ cab ine t of min i s t e r s .

11. Subsequently, we use the term f inance min i s t e r exc lus ive ly to descr ibet h i s ro le .



9

12. Tax-payers are sa id to be Ricardian i f they do not regard pub l i c debt asp a r t o f t h e i r ne t wealth and, hence, reduce current consumption one-for-onewith an increase in government def ic i t s . Ricardian tax-payers would carry thef u l l tax burden of a given amount o f government expenditure regardless o fwhether i t i s tax-f inanced current ly or def ic i t - f inanced and the taxes p lusin te res t ) are co l l ec ted l a t e r see e .g . Barra 1974).

13. o the extent t h a t a la rge budget conveys a powerful government, they mayhave a preference for enlarging the budget s ize . We assume t h a t th i s incent ivei s weaker than t h e i r concern fo r general i n t e r e s t s .

14. see Kydland and Presco t t 1977) for a c l a s s i c a l expos i t i on o f the timecons is tency problem in economic pol icy. In the monetary po l i cy context , thet ime consis tency problem genera l ly expressed as the problem of cen t ra l bankc r e d i b i l i t y has been shown to be an important source of p e r s i s t e n t in f la t ionand i s an important j u s t i f i c a t i o n for cen t ra l bank independence. see Neumann

1991) or F ra t i ann i and von Hagen 1992).

15. This da ta was p a r t l y obtained from Member States concerning t h e i rs i t u a t i o n i n 1991.

16. The fol lowing tables compress and summarize the assessment of informationon na t iona l budgeting procedures and are prepared by the present author. Theydo not r e f l e c t the judgement nor the in te rp re ta t ion of the EuropeanCommission.

17. Note t h a t t h i s normal iza t ion implies t h a t some index values are notin tegers .



6

Table Al: St ruc tu re o f General Government

Country Levels o f Government Budgetary Sta tus o f Regional Minis t r ies involved inAuthor i t i es d r a f t o f o v e r a l l balance

Balanced Borrowing PlanningBudget Author- AutonomyRequired 1 ized 2

Belgium 3 Socia l Secur i ty y y s Finance, Budget

Denmark 3 Socia l S e c u r i t y b y s Finance, EconomicA ff a i r s , Revenues

France 4 Socia l Secur i ty b l im Finance

Germany 3 Socia l Secur i ty g• n s Finance

Greece 2 Public E n t i t i e s y y n Finance, NationalEconomy for investment

I re land 2 n n y Finance

I t a l y 3 n y lim Finance, Treasury,Budget

Luxembg. 2 Socia l Secur i ty y n y Budget

Netherlands 3 Socia l Secur i ty g n s Finance

Portugal 2 Socia l Secur i ty n n y Budget, Fisca l A ff a i r s ,Treasury-

Spain 4 Autonomous Regions n n y Finance

United Kingdom 2 g n l im Treasury

1 n: no requirement; y: requirement e x i s t s but i s not considered binding; b: requirement i s binding; g:golden ru l e requirement e x i s t s , i . e . d e f i c i t s must not exceed investment expenditures.

2 y: Authorizat ion from higher level government i s required; n: no requirement.

, y: lower-level governments are autonomous; s : they may be placed under surve i l lance o f h i g h e r- l e v e lgovernment; l im: they have l imi ted autonomy; n: they have no autonomy.

4 Golden Rule app l i e s , i . e . d e f i c i t s must not exceed investmentexpendi tures .



6

Table A3: Rules for Prepa ra t i on o f Budget Draf t

Country

Belgium

Denmark

France

Germany

Greece

I re land

I t a l y

Luxembg.

Netherlands

Portugal

Spain

U.K.

genera l

c o n s t r a i n t

double norm onexpenditureand d e f i c i t(avoidable)

G, D

D/Y, G B/Y

Golden

r u l e , t a rg e t sfrom mul t iannual plan,sometimes morespec i f ic

D/Y, but no tobserved

B/Y, DIY

B/Y, DIY

G/Y

recent ly 0/Y,B/Y

recent ly

none

G/Y, D frommulti-annualplan

government

guaran teesinc luded

only borrowing o fpa ra s t a t a l andgovernment funds

no, only survey o fexis t ing

as t o t a l withoutspec i f ied l imi ts

guarantees to

sec tors outs idegenera l governmentnot included

not a l l

no

yes, as est imatedspending

guarantees tosec tors outs idegenera l governmentnot included

only annualmaximum

no

reserve

fundsinc luded

none

none

yes, bu tveryl imi ted

none

yes, a tFinanceMinistry

no

genera l ands p e c i f i c

no

none

severa l

none

yes

spec ia l

fundsinc luded

s ince recent lymost included

most included

included

no, but some

Sondervermogenannexed t obudget

annexed

severa l

at In t e r i o rand DefenseMin.

included

most included

yes

budget

i n onedocument

recent lyyes

yes

yes

yes

no

no

yes

yes

yes

yes

no

1 Public invesUment budget i s prepared by the Minis te r o f the Economy alone, Finance Minister has no say ini t

2 Budget law r e f l e c t s cur ren t l eg i s l a t u r e and cannot introduce new taxes nor expenditure. New l eg i s l a t i onaffec t ing the budget i s introduced in the Finance B i l l

There exis ts a rederve fund, which, however, i s not avai lab le for contingences. The reserve fund rece ivesannual budget surpluses and i s used to f inance investment in the fol lowing year.

4 Specia l and autonomous funds are repor ted in the budget , but not voted on by Parl iament.



6

Table A4: Transparency of the Budget

Country Overall E E R N c L A

assessment X X e a a 0 cp p v t p a c

i n tF A s A t su d 0 c a Bn m u c 1 ac i r st n c e

e

Belgium not always y y y nl y y mt ransparent

Denmark incomplete but y y y p y y t

t ransparentFrance t ransparent y y y 0 y t

Germany f u l l y t ransparent y y y y y 0

Greece t ransparent y y y g y 0

I re land incomplete not n y y n y 0 cf u l l y t ransparent

I t a l y hardly n n3 y n y y mt ransparent

Luxembg not fu l ly y y y pt ransparent

Nether- incomplete not y n y y y y clands fu l ly t ransparent

Portugal not f u l l y y y y p y n4 ct ransparent

Spain p a r t i a l l y y y ct ransparent

U K t ransparent y y y y y y c

Notes: Exp Funct . : breakdown of expenditures by functions; Exp Admin :breakdown of expenditures byadminis t ra t ive r e s p o n s i b i l i t y ; Rev Source: Breakdown o f revenues by source; National Ace.: l i n k tonat ional accounts es tab l i shed; Capi ta l : cap i t a l expenditures ident i f ied; Loans: Loans of governmentreported; Acct. Base: Accounting base; c: cash b a s i s ; g: National account codes provided; m: mixedaccounting base; o: provided separa te ly p: not provided but poss ib le ; s : t : t ransac t ions bas is

1 National account c l a s s i f i c a t i o n s are published with one-year delay; publ ica t ion i s planned to besuppressed.

1 The Appropriat ion B i l l contains a breakdown according to adminis t ra t ive function however t h i s

c l a s s i f i c a t i on of ten does not i d e n t i f y the department acua l ly in charge.

A breakdown i s provided in to 12 func t ions leav ing however a l a rge amount o f unal loca ted i tems.

4 Some information i s provided.



6 6

Table A6: Voting Procedures

Country Negotiat ions with in Par l ia - Amendments j o i n t globa l time prov.Government ment vote vote l im i t if

can on on nota l l G budget met

agenda type budget p a are are cans e t by n e g o t i - r m l t d . o ff - cause

a t ons 0 e s e t t i ng f a l l o fp n govern-

d ment

Belgium MB,HF b c n y n n y y A y 12s

Denmark c s,G b i l a t . n y n y y n A y 12s

France PM b b i l a t . n y y y yl nz B y TE

Germany HF b b i l a t . y y n n y n A y

Greece HF G c n y n n n y A y

I re land c D c n y yA n y n n n p

I t a l y HF b s mul t i - n y y n n n As y max.l a t . 4/12

Luxembg. y y Y n y A y 12s

Nether- c b s b i l a t . n y n p y n7 B n 4/12lands

Por tuga l c b , s b i l a t . n y n n n A y

Spain c b c n y y - y9 n y A n

U.K. HFIO b b i l a t . n y yll n y n IZ y TE

ote : A: at: ter general. debate; b: general. budget gul.del.l.nes; B: before general. debate; bl.l.at: bl.l.ateral.negot ia t ions between HF and r e so r t m i n i s t r i e s ; C: Cabinet; 0: previous budget continued; PM: Prime Minister;s : speci f ic budget ta rge ts determined; TE: temporary budget adopted.

1 MPs may propose t o reduce a r e c e i p t accompanied with an increase in another rece ip t , but not an increase inspending accompanied with a decrease in another spending i tem.

2 Global vote on exis t ing ent i t l ements , vote chapter by chapter on new author iza t ions .

By decree o f government.

4 Parl iament can only amend t ax provis ions , while expenditure proposals can only be refused or approved.

s Parl iament f i r s t votes on the Finance B i l l which s e t s the o v e r a l l cei l ing for government borrowing.However, t h i s c e i l i n g being only in commitment terms, it i s not a binding c o n s t r a i n t .

6 Legally unres t r ic ted , but very l imi ted in p r a c t i c e .

7 Expenditures are voted by chapters , revenues separa te ly.

1 Before discuss ing the ind iv idua l chapters , there i s a p o l i t i c a l discuss ion on the g loba l content o f thebudget.

9 Unless author ized otherwise by government.

10 MF submits proposa l to be voted y C.

11 Amendments t o the Finance B i l l may normally only reduce, but no t increase taxes . See a lso fn. 11.

12 ~ House of Commons f i r s t votes on the Budget reso lu t ions which cannot be amended. The reso lu t ionsdetermine what goes i n to the Finance B i l l and how t h a t B i l l might be amended. The r e s u l t i s t h a t Governmentcannot be confronted with a budget completely different from i t s proposal and, provided i t has a major i ty inthe Commons, it can l i m i t Par l iament s amendments to what it deems acceptab le .



7

Table A7: Budget Monitoring Rules

Country Expenditure Finance Role o f Parl iament FinalControl by i ~ i s t r y Report

records ue Afterspending

Belgium HF monthly informed Oct . , March of up tot+ l f ive

years

Denmark Minis t r ies yes informed 12 monthsquar te r ly

France HF monthly informed monthly, debate March t+ lin December

Germany Minis t r ies monthly no role , informed 4 monthsand HF quar te r ly

Greece HF monthly informed in November or a t 3 monthsrequest

I re land HF monthly informed quar te r ly 12 months

I t a ly M of Budget, monthly informed quar te r ly about D 6 monthsHF

Luxembg M of Budget quar- no ro let e r ly

Nether- HF monthly informed quar te r ly 9 monthslands

Portugal Auditors only monthly no ro le , regular ly 9 monthsfor Sta te with informed .

sec tor delay

Spain HF and M of monthly quar te r lyEconomy

U K HF monthly no ro le , bi-annually 3 monthsinformed

Parliamentary Committee (Haushaltsausschuss) monitores execution.



8

Table AS: Budget l e x i b i l i t y

Country MFcan Cash Limits Disbur- Transfers between Budget changes Carry-overblock on sement Chapters authorized by to next yearexpenditure Departments a p p r o v a l ~

Belgium yes within Depts 2 new law yes(March)

Denmark yes ye s 4 new law ye s

France G yes yes lim, by decree new la w 7 l imi ted

Germany yes yes yes within Depts.• MF' poss ib le 10

Greece yes yes approved by MF MF no

I re land within Votes new law noapproved by MF

I t a l y yes new law 12 yes

Luxembg. yes poss ib le

Nether- rare ly yesu Govt. 14 l imi tedlands

Por tuga l yes of ten with in Depts. new law l imi ted 15

approv. by Par l .

Spain l imi ted new law l imi ted

U.K. yes approved by MFI new law l i m i t e d 17

1 By author i ty o ther than executive of r e s so r t minis t r ies , e.g. MF or f inancia l cont ro l le r.

2 Transfers between Departments requi re rare p o l i t i c a l consensus.

Undiffe ren t ia ted appropr ia t ions carr ied over by Royal Decree only; d i f f e r en t i a t ed appropr ia t ions carr iedover automat ica l ly.

4 Only with approval by Finance Committee o f Parl iament.

5 But o f l i t t l e relevance in prac t ice .

6Government can block expenditure by decree.

7 In specia l cases , a d d i t i o n a l expenditure can be authorized by government decree which must be endorsed inthe next budget law.

Between departments, consent o f MF i s requi red .

Upon i n i t i a t i v e from government pa r t i e s .

10 Requires consent o f Parl iament.

11 MF can seek budget amendment during the discussion of the law c los ing the account or authorize spendingover cei l ing .

12 To be submitted on June 30 or before October 31.

u Cannot be used to f inance new expenditure.

14 Additional spending must be compensated with in the same chapter, save fore exceptions with approval by

Cabinet. In such cases , genera l compensation i s sought or emergency spending authorized.5 ~ ybe authorized for investment plans and autonomous or socia l secur i ty funds by the Budget Law.

M With approval by Parl iament only for t ransfers between v o t e s .

17 Five percent o f cap i t a l expenditures and defense expenditures.



9

Index Construct ion for the Empirical Analysis

Item 1. St ruc tu re o f nego t i a t ions within government

a) genera l cons t r a in t :none (0) , BfY (1) , B/Y and DfY (2) , GfY or Golden Rule (3) , GjY DfY

(4).

b) agenda s e t t i n g for budget negot ia t ions :MF or cabinet c o l l e c t s bids from spending minis ters (0); MF o r cab ine tc o l l e c t s b ids sub jec t to preagreed guidel ines (1) , cabinet decides onbudget norms f i r s t (2) , MF proposes budget norms to be voted on bycabinet (3) , MF or P determines budget parameters to be observed byspending minis ters (4) .

c) scope o f budget norms in the s e t t i n g o f agenda:expenditure or d e f i c i t (0) , s p e c i f i c (1 .33) , broad and s p e c i f i c(2. 66), broad (4) .

d) s t ruc tu re of nego t i a t ions :a l l cabinet members involved together (0) , m u l t i l a t e r a l (2) , b i l a t e r a lbetween spending minis ters and MF (4) .

General agenda s e t t i n g scope o f - s t ruc tu re o fcons t ra in t -budget norms nego t i a t ions

Belgium 0 1 1.33 0

Denmark 4 3 1.33 4

France 4 4 4 4

Germany 3 1 4 4

Greece 0 1 0 0

I re land 2 1 0 0

I t a l y 2 1 2.66 2

Luxembourg 3 - -

Netherlands 1 3 2.66 4

Portugal 1 2 2.66 4

Spain 0 2 4 0

U K 4 3 4 4



7

Item 2. Structure of parl iamentary process

a) amendments: unl imi ted (0) , l imi ted (4)

b) requi red to be o ff s e t t i n g : no (0), yes (4)

c) can cause f a l l o f government: no (0) , yes (4)

d) a l l expenditures passed in one vote :yes (0), mixed (2), votes a re chapter by chapter (4)

e) global vote on t o t a l budget s i ze : f i n a l only (0), i n i t i a l (4)

amendments amendments amendments one vote on globall imi ted o ff s e t t i n g cause f a l l expenditure vote

Belgium 0 0 4 0 0

Denmark 0 4 4 4 0

France 4 4 4 2 4

Germany 0 0 4 0 0

Greece 0 0 0 0 0_ ....

Irel.and 4 0 4 0 0

t a l y -4 0 0 2 0

Luxembourg 4 0 0 0

Netherlands 4 0 4 4 4

Portugal 0 0 0 1

Spain 4 0 0 0 0

U.K. 4 0 4 4 4



7

Item 3. Informativeness o f the budget d r a f t

a) spec ia l funds included:no 0) , some 1) , most 2) , yes , bu t annexed to budget d r a f t 3) , yes

4 ) .

b) budget submitted in one document: no 0) , r ecen t ly yes 2) , yes 4) .

c) assessment of budget t ransparency by respondents:hardly t ransparent 0) , not f u l l y t r anspa ren t 2) , fu l ly t r ~ s p r e n t4)

d) l i nk to na t iona l accounts:not provided 0) , poss ib l e 1 .33) , provided in separa te documents

2.66) , d i r e c t l i n k provided 4)

e) government loans to non-government e n t i t i e s included i n budget d r a f t :no 0) , repor ted in separa te document 2) , yes 4)

spec ia l one t ransparency na t iona l governmentfunds document accounts loans

Belgium 2 2 2 0 4

Denmark 2 4 2 1.33 4

France 4 4 4 2.66

Germany 3 4 4 4 2

Greece 3 0 4 1.33 2

I r e l and 1 0 2 0 2

I t a l y 1 0 0 0 4

Luxembourg 4 2 1.33

Netherlands 4 4 2 4 4

Portugal 0 4 2 1.33 0

Spain 3 4 2

U.K. 4 0 4 4 4



7

Item 4. F l e x i b i l i t y of Budget Execution

a) M can block expenditures: no 0) , yes 4)

b) spending minis t r i e s subject to cash l imi t s : no 0) , yes 4)

c) disbursement approval r equ i r ed from M or con t ro l l e r : no 0) , yes 4)

d) t r ans fe r s o f expenditures between chapters :unres t r i c t ed 0) , l imi ted 0 .8 ) , require consent of M 1.6) , requireconsent of par l iament 2 .4 ) , only within departments poss ib le 4) , onlywi th in departments and with consent o f M 5) .

e) changes in budget law during execution:a t d i sc re t ion o f government 0) , by new law which i s regular ly submittedduring f i s c a l year 1) , a t d i sc re t ion of M 2) , require consent o f M

and par l iament 3) , only by new budgetary law to be passed under thesame regula t ions as the ordinary budget 4) .

f) carry-over of unused funds to next year :unres t r i c t ed 0) , l imi ted 1.33) , l imi ted and requires author iza t ion byM or parl iament 2.66) , not poss ib le 4)

M can cash disburse- t r ans fe r s budget carry-block l imi t s ment changes over

approval

Belgium 0 0 4 3.2 4 0Denmark 0 4 0 2.4 4 0

France 4 4 4 3.2 4 1

Germany 4 4 4 1.6 3 2

Greece 4 4 0 1.6 2 3

I r e l and 0 0 0 4 4 3

t a l y 0 0 0 0 1 0

Luxembourg 4 0 0 0Netherlands 0 0 4 0 0 1

Portugal 0 4 4 0 4 2

Spain 0 0 0 0.8 4 1

U.K. 0 4 0 2.4 4 1



7

Item 5. Longterm Planning Const ra in t

a) multiannual t a rge t : none 0) , G or T 2) , t o t a l budget s i ze 4)

b) planning horizon years) : two 1) three· 2) , four 3) , f ive 4)

c) nature :ad hoc forecas t 1), f ixed forecas t 2) , updated forecas t , bu t not basedon cons i s t en t macromodel 3) , updated on bas i s o f cons i s t en t macromodel

4)

d) degree of commitment:in te rna l or ien ta t ion 1) , indica t ive 2) , weak p o l i t i c a l 3) , s t rongp o l i t i c a l 4)

t a rge t horizon nature commitment

Belgium 0 0 0 0

Denmark 2 2 2 2

France 0 1 1 1

Germany 4 3 4 3

Greece 0 2 1 2

I re land 4 4 1 3

t a l y 4 3 1 3

Luxembourg 0 0 0 0

Netherlands 4 4 2 4

Portugal 3 1 2

Spain 0 4 1 1

U K 2 4 4 3



7

conomic Papers

The following papers have be en issued. Copies may be obtained by applying to the address mentioned on the insidefront cover.

No. 1 EEC-DG II inflationary expectations. Survey based inflationary expecta tions for the EEC countries,by F. Papadia and V. Basano (May 1981 .

No.3 A review of the informal economy in the European Community, by Adrian Smith (July 1981).

No.4 Problems of interdependence in a multipolar world, by Tommaso Padoa-Schioppa (August 1981).

No. European Dimensions in the Adjustment Problems, by Michael Emerson (August 1981 .

No. 6 The bilatera l trade linkages of the Eurolink Model : n analysis of foreign trade and competitiveness, byP. Ranuzzi (January 1982).

No.7 United Kingdom, Medium term economic trends and problems, by D. Adams, S. Gillespie, M. Green andH. Wortmann (February 1982).

No.8 Oil en est la theorie macroeconomique, par E. Malinvaud (juin 1982).

No. 9 Marginal Employment Subsidies : n Effective Policy to Generate Employment, by Carl Chiarella andAlfred Steinherr (November 1982).

No. I 0 The Great Depression : A Repeat in the 1980s ? by Alfred Steinherr (November 1982).

No. 11 Evolution et problemes structurels de l economie neerlandaise, par D.C. Breedveld, C. Depoortere,A. Finetti. Dr. J.M.G. Pieters etC. Vanbelle (mars 1983).

No. 12 Macroeconomic prospects and policies for the European Community, by Giorgio Basevi,Olivier Blanchard, Willem Buiter, Rudiger Dornbusch, and Richard Layard (April 1983).

No. 13 The supply o f output equations in the EC-countries and the use o f the survey-based inflationary

expectations, by Paul De Grauwe and Mustapha Nabli (May 1983).No. 14 Structural trends of financial systems and capital accumulation: France, Germany, Italy, by G. Nardozzi

(May 1983).

No. 15 Monetary assets and inflation induced distorsions of the national accounts conceptual issues andcorrection of sectoral income flows in EEC countries, by Alex Cukierman and Jorgen Mortensen(May 1983).

No. 16 Federal Republic of Germany. Medium-term economic trends and problems, by F. Allgayer,S. Gillespie, M. Green and H. Wortmann (June 1983).

No. 17 The employment miracle in the US and stagnation employment in the EC, by M. Wegner (July 1983).

No. 18 Productive Performance in West German Manufacturing Industry 1 9 7 0 1 9 8 0 ~A Farrell FrontierCharacterisation, by D. Todd (August 1983).

No. 19 Central-Bank Policy and the Financing of Government Budget Deficits : A Cross-Country Comparison,by G. Demopoulos, G. Katsimbris and S. Miller (September 1983). .

No. 20 Monetary assets and inflation induced distortions of the national accounts. The case of Belgium, byKen Lennan (October I 983).

No. 21 Actifs financiers et distorsions des flux sectoriels dues a } inflation: le cas de Ia France, par J.-P. Bache(octobre 1983).

No. 22 Approche pragmatique pour une politique de plein emploi : les subventions a a creation d emplois,par A. Stemherr et B. Van Haeperen (octobre 1983).

No. 23 Income Distribution and Employment in the European Communities 1960-1982, by A. Steinherr(December I 983 .

No. 24 U.S. Deficits, the dollar and Europe, by 0 . Blanchard and R. Dornbusch (December 1983).

No. 25 Monetary Assets and inflation induced distortions of the national accounts. The case o f the FederalRepublic of Germany. by H. Witte lsberger (January 1984).



7

No. 26 Actifs financiers et distorsions des flux sectoriels dues }'inflation : le cas de l'Ita lie , par A Reati(janvier 1984).

No. 27 Evolution et problemes structurels de l'economie italienne, par Q. Ciardelli, F Colasanti et X. Lannes(janvier 1984).

No. 28 International Co-operation in Macro-economic Policies, by J.E. Meade (February 1984).

No. 29 The Growth of Public Expenditure in the EEC Countries 1960-1981 : Some Reflections, by DouglasTodd (Decem her 1983 ).

No. 30 The integration ofEEC qualitative consumer survey results in econometric modell ing: an application tothe consumption function, by Peter Praet (February 1984).

No. 31 Report of the CEPS Macroeconomic Policy Group. EUROPE : The case for unsustainable growth,by R. La yard, G Base vi, 0. Blanchard, W Buiter and R Dornbusch (April 1984 ).

No. 32 Total Factor Productivity Growth and the Productivity Slowdown in the West German Industrial Sector,1970-1981, by Douglas Todd (April 1984).

No. 33 n analytical Formulation and Evaluation of the Existing Structure of Legal Reserve Requirements of

the Greek Economy: n Uncommon Case, by G Demopoulos (June 1984).No. 34 Factor Productivity Growth in Four EEC Countries, 1960-1981, by Douglas Todd (October 1984).

No. 35 Rate of profit, business cycles and capital accumulation in U.K. industry, 1959-1981, by Angelo Reali(November 1984).

No. 36 Report of the CEPS Macroeconomic Policy Group. Employment and Growth in Europe : A Two-HandedApproach by P. Blanchard, R. Dornbusch, J Dreze, H Giersch, R Layard and M. Monti (June 1985).

No. 37 Schemas for the construction of an auxiliary econometric model for the social security system,by A. Coppini and G Laina (June 1985).

No. 38 Seasonal and Cyclical Variations in Relationship among Expectations, Plans and Realizations inBusiness Test Surveys by H Konig and M Nerlove (July 1985).

No. 39 Analysis of the stabilisation mechanisms of macroeconomic models: a comparison of the Eurolinkmodels by A Bucher and V Rossi (July 1985).

No. 40 Rate of profit, business cycles and capital accumulation in West German industry, 1960-1981, byA Reali (July 1985).

No. 41 Inflation induced redistributions via monetary assets in five European countri es: 1974-1982,by A Cukierman, K Lennan and F Papadia (September 1985).

No. 42 Work Sharing : Why ? How? How not ... , by Jacques H Dreze (December 1985).

No. 43 Toward Understanding Major Fluctuations of the Dollar by P Armington (January 1986).

No. 44 Predictive value of firms' manpower expectations and policy implications, by G Nerb (March 1986).

No. 5 Le taux de profit et ses composantes dans 1 industrie f r a n ~ a i s ede 1959 1981, par Angelo Reati(Mars 1986).

No. 46 Forecasting aggregate demand components with opinions surveys in the four main EC-Count ries - Experience wi th the BUSY model , by M. Biart and P. Praet (May 1986).

No. 47 Report of CEPS Macroeconomic Policy Group : Reducing Unemployment in Europe : The Role ofCapital Formation, by F Modigliani, M Monti, J Dreze, H. Giersch and R Layard (July 1986).

No. 48 Evolution et problemes structurels de l'economie f r a n ~ a i s epar X. Lannes, B Philippe et P. Lenain(aoiit 1986).

No. 49 Long run implications of the increase in taxation and public debt for employment and economicgrowth in Europe by G Tullio (August 1986).

No. S Consumers Expectations and Aggregate Personal Savings by Daniel Weiserbs and Peter Simmons(November 1986).

No. S 1 Do after tax interest affect private consumption and savings ? Empirical evidence for 8 industrialcountries: 1970-1983 by G Tullio and Fr. Contesso (December 1986).

No. 52 Validity and limits of applied exchange rate models : a brief survey of some recent contributionsby G Tullio (December 1986).



No. 53 Monetary and Exchange Rate Policies for International Financial Stability: a Proposal byRonald I McKinnon (November 1986).

No. 54 Internal and External Liberalisation for Faster Growth by Herbert Giersch (February 1987).

No. Regulation or Deregulation of the Labour Market: Policy Regimes for the Recruitment and Dismissal ofEmployees in the Industrialised Countries by Michael Emerson (June 1987).

No. 56 Causes of the development of the private ECU and the behaviour of its interest rates :October 1982- September 1985 by G. Tullio and Fr. Contesso (July 1987).

N 1 57 Capital/Labour substitution and its impact on employment by Fabienne Ilzkovitz (September 1987).

No. 58 The Determinants of the German Official Discount Rate and of Liquidity Ratios during the classicalgoldstandard : 1876-1913 by Andrea Sommariva and Giuseppe Tullio (September 1987).

No. 59 Profitabi lity, real interest rates and fiscal crowding out in the OECD area 1960-1985 (An examination ofthe crowding out hypothesis within a portfolio model) by Jorgen Mortensen (October I 987).

No. 60 The two-handed growth strategy for Europe :Autonomy through flexible cooperation by J. Dreze,Ch. Wyplosz, Ch. Bean, Fr. Giavazzi and H. Giersch (October 1987).

No. 61 Collusive Behaviour, R D, and European Policy by Alexis Jacquemin (November 1987).

No. 62 Inflation adjusted govenunent budget deficits and their impact on the business cycle :empir ica levidence for 8 industrial countries by G. Tullio (November 1987).

No. 63 Monetary Policy Coordination Within the EMS: Is There a Rule? by M. Russo and G. Tullio(April I 988).

No. 64 Le Decouplage de Ia Finance et de l'Economie- Contribution 'Evaluation des Enjeux Europeensdans Ia Revolution du Systeme Financier International par J.- Y. Haberer (Mai 1988).

No. 65 The completion of the internal market: results of macroeconomic model simulations by M. Catinat,E. Donni and A. Italianer (September 1988).

No. 66 Europe after the crash : economic policy in an era of adjustment by Charles Bean (September 1988).No. 67 A Survey of the Economies of Scale by Clif f Pratten (October 1988).

No. 68 Economies of Scale and Intra-Community trade by Joachim Schwalbach (October 1988).

No. 69 Economies of Scale and the Integration of the European Economy : the Case of Italy by Rodolfo Helgand Pippo Ranci (October 1988).

No. 70 The Costs of Non-Europe- An assessment based on a formal Model of Imperfect Competition andEconomies of Scale by A. Smith and A. Venables (October 1988).

No. 71 Competition and Innovation by P.A. Geroski (October 1988).

No. 72 Commerce Intra-Branche- Performances des firmes et analyse des echanges commerciaux dans IaCommunaute europeenne par le Centre d'Etudes Prospectives et d'Informations Internationales de Paris(octobre 1988).

No. 73 Partial Equilibrium Calculations of the Impact of Internal Market Barriers in the European Communityby Richard Cawley and Michael Davenport (October 1988).

No. 74 The exchange-rate question in Europe by Francesco Giavazzi (January 1989).

No. 75 The QUEST model (Version 1988) by Peter Bekx, Anne Bucher, Alexander Italianer, Mat thias Mors(March 1989).

No. 76 Europe 's Prospects for the 1990s by Herbert Giersch (May 1989).

No. 77 1992, Hype or Hope : A review by Alexander Italianer (February 1990).

No. 78 European labour markets : a long run view (CEPS Macroeconomic Policy Group 1989 Annual Report)by J.-P. Danthine, Ch. Bean, P. Bernholz and E. Malinvaud (February 1990).

No. 79 Country Studies- The United Kingdom by Tassos Belessiotis and Ralph Wilkinson (July 1990).

No. 80 See Linderstudien No. I

No. 81 Country Studies- The Netherlands by Filip Keereman, r a n ~ o i s eMoreau and Cyriel Vanbelle(July 1990).



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No. 82 ountry tudies Belgium by Johan Baras, Filip Keereman and r a n ~ o i s eMoreau July 1990).

No. 83 Completion of the internal market : An application of Public Choice Theory by Manfred TeutemannAugust 1990).

No. 84 Monetary and Fiscal Rules for Public Debt Sustainability by Marco Buti September 1990).No. 85 Are we at the beginning of a new long term expansion induced by technological change?,

by Angelo Reati August 1991 .

No. 86 Labour Mobility, Fiscal Solidarity and the Exchange Rate Regime: a Parable of European Union andCohesion, by Jorge Braga de Macedo October 1991 .

No. 87 The Economics of Policies to Stabilize or Reduce Greenhouse Gas Emissions: the Case of C02by Mathias Mors October 1991 .

No. 88 The Adequacy and Allocation of World Savings, by Javier Santillan December 1991 ).

No. 89 Microeconomics of Saving, by Barbara Kauffmann December 1991 .

No. 90 Exchange Rate Policy for Eastern Europe and a Peg to the ECU, by Michael Davenport March 1992).

NO. 91 The German Economy after Unification: Domestic and European Aspects, by Jorgen Kroger andManfred Teutemann April 1992).

No. 92 Lessons from Stabil isation Programmes of Central and Eastern European Countries, 1989-91,by Domenico Mario Nuti May 1992).

No. 93 Post-Soviet Issues: Stabilisation, Trade and Money, by D. Mario Nuti and Jean Pisani-Ferry May 1992).

No. 94 Regional Integration in Europe, by Andre Sapir September 1992).

No. 95 Hungary : Towards a Market Economy October 1992).

No. 96 Budgeting Procedures and Fiscal Performance in the European Communities, by JOrgen von Hagen October 1992 .



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Country Studies

See also Economic Papers No.79 (The United Kingdom), No.8 I (The Netherlands) and No.82 (Belgimn).

No. I

No 2

No 3

Nt . 4

No.

No 6

No 7

No 8

No 9

The Federal Republic of Germany (September 1990)

Portugal (February 1991)

United Kingdom (March 1991)

Denmark (April 1991)

France ( aoftt 1 991)

Ireland (September 1991)

Spain (March 1992)

Netherlands (June 1 992)

Greece (July I 992)

budgeting procedures and economic performance in eu hagen

Documents