Budget Processes and Commitment to Fiscal Discipline

IMF Working Papers, July 1, 1996

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Budget Processes and Commitment to Fiscal Discipline

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Bibliographic details

• Published: July 1, 1996
• Series: IMF Working Papers
• DOI: https://doi.org/10.5089/9781451850079.001

Political-economy model of the budget process

• Develops a political-economy model focused on the common pool problem of the public budget.
• Identifies an externality: public spending is often targeted at individual groups while the tax burden is widely dispersed, creating a bias toward excessive expenditures and debt.
• Emphasizes the role of actors with particularistic interests (spending ministers, members of parliament) in driving the bias.

Centralization as a corrective mechanism

• Argues that introducing elements of centralization in the budget process can reduce the deficit bias.
• Defines centralizing elements as institutional structures that strengthen a comprehensive (whole-budget) view over the particularistic views of spending ministers and MPs.
• Identifies the desired effect: reduce the externality from fragmented spending decisions and align incentives toward fiscal discipline.

Evidence from EC countries and empirical findings

• Uses examples from EC countries to illustrate variation in the presence or absence of centralizing elements in budget processes.
• Presents empirical evidence supporting the claim that centralizing elements reduce the deficit bias.

Policy implications and models for reform

• Concludes with models for reform of the budget process aimed at strengthening centralizing elements.
• Implied policy directions:
  • Strengthen institutions that provide a comprehensive view of the budget (central finance ministry roles, aggregate controls).
  • Reform budget processes to limit the ability of particularistic actors to generate common-pool spending externalities.
  • Use institutional design to align decentralized spending incentives with aggregate fiscal constraints.

Subjects and keywords covered

• Budget execution and treasury management
• Budget planning and preparation
• Expenditure
• Fiscal law
• Fiscal policy
• Government debt management
• Public financial management (PFM)
• Keywords: Budget planning and preparation, budget process, budget proposal, EC government, finance ministry, spending minister, WP

Budget Processes and Commitment to Fiscal Discipline, Working Paper No. 1996/078.