Budget Processes and Commitment to Fiscal Discipline

TLDR

The paper develops a political‑economy model of the budget process to address the common‑pool problem of public budgeting and concludes with reform proposals. The model examines budget processes, using examples from European Commission countries to show how they lack or possess centralizing elements that affect fiscal discipline. The study finds that targeting public spending creates a bias toward excess spending and debt, but centralizing elements in the budget process reduce this deficit bias, as shown by empirical evidence.

Abstract

This paper develops a political-economy model of the budget process focusing on the common pool problem of the public budget. We show that the externality arising from the fact that public spending tends to be targeted at individual groups in society while the tax burden is widely dispersed creates a bias towards excessive expenditures and debt. This bias can be reduced by introducing elements of centralization in the budget process, that is, institutional structures that strengthen a comprehensive view of the budget over the particularistic view of the spending ministers and the members of parliament. Using examples from EC countries, we show how budget processes lack or possess such elements. We then present empirical evidence supporting the claim that centralizing elements reduce the deficit bias. The last section concludes with models for reform of the budget process.