Fiscal Rules, Fiscal Institutions, and Fiscal Performance

THE ECONOMIC AND SOCIAL REVIEW

their ability to reach their fiscal targets despite unexpected economic
developments. States relying on delegation did nothing or little to achieve
that. This suggests that the Stability Programmes and the Stability and
Growth Pact will work more effectively in states where the domestic budget
process is characterised by a significant degree of centralisation under the
contract approach. They will be much less effective in assuring fiscal discipline
in states, where centralisation of the budget process relies on delegation, and
in states with rather fragmented budget processes.⁶

Empirical Evidence

A fast-growing literature starting with von Hagen (1992) has presented
empirical evidence supporting the hypothesis that centralisation of the budget
process leads to smaller government deficits and debts. Von Hagen (1992)
provided evidence from 12 European Union countries showing a significant
negative association between the centralisation of the budget process and
general government deficits and debts relative to GDP. Von Hagen and Harden
(1994b) extend and broaden the analysis and confirm the hypothesis that
centralisation of the budget process is associated with smaller deficits and
debts. De Haan and Sturm (1994) again work with European Union data and
show that the hypothesis holds up empirically even when a number of political
factors such as the composition and stability of governments is controlled for.
Hallerberg and von Hagen (1998, 1999) use panel data analysis for 15 EU
countries and show that centralisation of the budget process goes along with
smaller annual budget deficits even when controlling for a number of economic
determinants of the budget deficit and other political variables.

Gleich (2002) presents a study of the budget processes in ten Central and
East European countries, all candidates for accession to the EU. He
documents a considerable degree of variation in the design of these processes
across the ten countries. This is interesting, since a budget process in the
proper sense did not exist under the former, socialist regime. All ten countries
hold elections under various forms of proportional representation. Gleich
shows that centralisation conforms to the contract approach in these countries
and that there is a strong negative association between the degree of
centralisation of the budget process and the public sector deficits and debts
that emerged in the second half of the 1990s.

Turning to geographical areas outside Europe, Alesina et al. (1995) and
Stein et al. (1999) use panel data analysis from Latin American countries to
show that centralisation of the budget process goes along with lower govern-

⁶ This proposition is confirmed by the fact that neither France nor Germany bothered much to
announce their plans for tax reforms in the context of their stability programmes in 2000.

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