Fiscal Discipline and the Budget Process

Alberto Alesina · Roberto Perotti

347 citations0/0 files storedAmerican Economic Review

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Fiscal Policies and Political Economy Economic and Fiscal Studies Local Government Finance and Decentralization

Abstract

The critical economic policy issue for many OECD countries, developing countries, and transition economies currently is fiscal consolidation, and the maintenance of long-run fiscal balance. Two related components underlie this general goal. First, several countries face the issue of deficit reduction, particularly those countries with high debt/GDP ratios. Second, it is becoming increasingly apparent that major reforms of the welfare system and, specifically, of social-security systems are critical ingredients of a long-lasting fiscal consolidation (see Alesina and Perotti, 1995a). In the case of monetary policy, a constructive discussion has generated a widespread consensus about the benefits of different monetary institutions. Relatively few economists dispute the benefits of a certain amount of central-bank independence, even though different commentators and policymakers may disagree on the optimal degree of independence. Also a contracting approach has highlighted the benefit of inflation-targeting and of certain institutional relationships ( contracts) between the executive and the central bank. A similar theoretical and empirical discussion on the role of budget procedures and budget institutions is just beginning. In this paper we ask the following two questions: (i) Do budget procedures matter for the determination of the budget balance and its composition? (ii) Are there certain institutional reforms that one should feel comfortable in recommending? Based on the relatively scarce empirical evidence available, we tentatively answer yes to the first question: budget procedures matter. On the second question we suggest that the two critical areas of reform are: first, more transparency; second, a strengthening of the roles of the executive branch vis 'a vis the legislature, and of the treasury minister vis a vis the rest of the executive branch, in order to achieve a centralized and top-bottom approach to the budget process.

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References

1979On the Determination of the Public Debt 1989Bargaining in Legislatures 1987Equilibrium Political Budget Cycles 1983Optimal fiscal and monetary policy in an economy without capital 1989Political and economic determinants of budget deficits in the industrial democracies 1995Fiscal Expansions and Adjustments in OECD Countries 1992budgeting procedures and fiscal performance in the european communities

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