Fiscal Rules, Fiscal Institutions, and Fiscal Performance

THE ECONOMIC AND SOCIAL REVIEW

This tends to weaken the position of the executive as it now faces two opponent
bodies. To strengthen the executive, the budgetary authority of the upper
house may be limited as in France and Germany, where the lower house
prevails if an agreement between the two chambers cannot be reached. In the
UK, the upper house has no budgetary authority at all, leaving the executive
with only one chamber to deal with in the budget process.

At the implementation stage, finally, centralisation requires that the
finance minister be able to monitor and control the flow of expenditures during
the year. This may take the form of requiring that the spending departments
obtain the finance minister’s authorisation to disburse funds during the year.
The finance minister’s authority to impose cash limits during the year is
another control mechanism. Effective monitoring and control is also important
to prevent spending departments from behaving strategically, i.e., from
spending their appropriations early in the year and demanding additional
funds later with the threat of closing down important public services
otherwise.

Furthermore, centralisation requires tight limits on any changes in the
original budget law through the modification of appropriations once the fiscal
year has begun. One element here is the requirement that transfers of funds
between different chapters of the budget be authorised by the finance minister
or parliament. The same applies to transfers of funds between different fiscal
years. Although carry-over provisions have obvious efficiency gains, their use
should be limited and strictly monitored to assure that the finance minister
can keep track of a spending department’s financial position. Another point is
to restrict the use of supplementary budgets. Where supplementary budgets
during the fiscal year become the norm, as in Italy and Belgium in the 1980s
and Germany in the 1990s, one cannot expect that policy makers will take the
constraints embedded in the original budget law serious.

Contracts

Under the contract approach, the budget process starts with an agreement
on a set of binding fiscal targets negotiated among the members of the
executive. Emphasis here is on the bargaining process as a mechanism to
reveal the externalities involved in budget decisions and on the binding nature
of the targets. A prime example for this approach is the Danish budget process,
which, since 1982, starts with negotiations among the cabinet members fixing
spending limits for each spending department. Often, these spending limits
are derived from medium-term fiscal programmes or the coalition agreement
among the ruling parties. Irish coalition agreements since 1989 included
medium-term fiscal strategies to reduce the public debt, which provided the
background to the annual negotiations over budget targets.

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