Breaking Budgets: An Empirical Examination of Danish Municipalities

Abstract

When public budgets have been drafted and approved, a new and equally important game begins. Budgets are routinely broken when they are implemented, causing higher public spending than politicians originally intended. Institutional, political, and economic causes of budget overruns are examined in an empirical analysis of more than 17,000 cases. While political factors have only marginal effect, it turns out that tractability explains budget overruns well; if users and producers are strong, budget overruns tend to be large. In a reform perspective, the effect of institutional rules is especially interesting. No quick fixes to problems with budget overruns exist, but rules prohibiting supplementary appropriations for non-mandatory spending can reduce overruns, provided that politicians are willing and able to credibly commit themselves not to waive them later.

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