Budget Procedures and Institutions Influence Budget Outcomes

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Reviewing current theoretical work and recent empirical data from industrial and Latin American countries, Alberto Alesina and Roberto Perotti, in an IMF Working Paper entitled Budget Deficits and Budget Institutions, conclude that the variety of ways in which countries prepare their budgets, navigate the legislative approval process, and implement these budgets helps determine the degree of fiscal discipline exercised. Drawing from this survey of current research and data, the authors recommend an appropriate role for hierarchical procedures in the budget process, the creation of independent budget institutions, and the development of rules and practices that ensure accuracy and transparency in public budgets.

Over the past thirty years, public debt-to-GNP ratios have grown markedly in many industrial countries. In some instances, debt ratios have even exceeded 100 percent. Paralleling this sharp climb in debt ratios has been a dramatic change in the factors responsible for the growth of public debt. While twenty years ago the purchase of goods and services would have been the main such factor, transfers now play the major role in public deficits and debt. Transfers, which have proven notoriously difficult to cut because of their broad popularity with the electorate, have immeasurably complicated the process of fiscal adjustment.

Budgetary Institutions

Budgetary institutions encompass all the rules and regulations governing the drafting, approval, and implementation of the budget. Typically, a constellation of social, political, and historical factors have shaped these budget institutions over time, but the growth and persistence of deficits in recent decades have led countries to re-examine what could be done to promote more effective fiscal discipline.

Industrial country budgets are notably complex, but not always out of necessity.

A number of countries have weighed the merits of a balanced budget law, but Alesina and Perotti contend that this legal fix is neither necessary nor sufficient to achieve fiscal discipline. They cite both Keynesian objections (the straightjacket imposed on policymakers who wish to pursue countercyclical measures) and tax-smoothing goals (a balanced budget would constrain the appropriate use of budget deficits and surpluses over the cycle, which constitutes an optimal tax-smoothing policy). Appropriate procedures, argue the authors, need not sacrifice flexibility for fiscal discipline.

The key is developing appropriate budget procedures and creating greater budget...