Fiscal Rules, Fiscal Institutions, and Fiscal Performance



FISCAL RULES, FISCAL INSTITUTIONS AND FISCAL PERFORMANCE

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The finance ministry’s role under this approach is to evaluate the
consistency of the individual departments’ spending plans within these limits.
As in the Netherlands, for example, the finance minister usually has an
information advantage over the spending ministers in the budget
negotiations, but no extra strategic powers. Conflict resolution involves senior
cabinet committees and often the leaders of the coalition parties in the
legislature.

At the legislative stage, the contract approach places less weight on the
executive’s role as an agenda setter and more weight on the role of the
legislature monitoring the faithful implementation of the fiscal targets.
Institutionally, this means that the contract approach relies less on controlling
parliamentary amendments and more on the legislature’s ability to monitor
the fiscal performance of the executive. One important element of this is the
legislature’s right to request information from the executive. It can be
improved by setting up committees whose authorities reflect the authorities of
the spending departments, and by giving committees a formal right to request
information from the executive and to call witnesses from the executive to
testify before committees. The Danish parliament, for example, has all three
of these rights, while the German parliament has only the first and the British
parliament has neither one.

At the implementation stage, the contract approach resembles the
delegation approach in emphasising the monitoring and control powers of the
finance minister.

Institutional Choice

The delegation approach relies on hierarchical structures within the
executive, and between the executive and the legislature. In contrast, the
contract approach builds on a more even distribution of authorities in
government. In democratic settings, hierarchical structures typically prevail
within political parties, while relations between parties are more even. This
suggests that the institutional choice between the two approaches depends
critically on the number of parties in government. More specifically,
Hallerberg and von Hagen (1998) suggest that delegation is appropriate for
single-party governments, while the contracts approach is appropriate for
multi-party coalition governments There are two reasons behind this
conjecture.

First, a spending minister in a one-party government can be reasonably
sure that the finance minister shares his basic spending preferences;
disagreement with the finance minister will be mainly as a result of the
common pool problem. In a coalition government, in contrast, cabinet
members are likely to have more diverging views regarding spending



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