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ment deficits. Jones et al. (1999) analyse a panel of Argentine provinces and
confirm the same hypothesis. Lao-Araya (1997) provides similar results for
eleven Asian countries. Strauch (1998) uses data from the 50 US state
governments to show that centralisation significantly reduces annual budget
deficits. Taking a different methodological approach, the country studies of
Stienlet (2000), Molander (2000) and Strauch and von Hagen (1999) point to
the importance of centralisation in achieving (or, in the case of Germany
losing) fiscal discipline.
Finally, Strauch (1998) and Gleich (2002) show that centralisation of the
budget process is also associated with smaller levels of government spending,
as the common pool argument suggests.
To summarise, the hypothesis that centralisation of the budget process
leads to lower government deficits and debts can be considered as empirically
well established today. It has been confirmed in very different geographical
and political settings. Thus, one can conclude that centralisation of the budget
process is an important and effective way to mitigate the common pool
problem of public budgeting.
Centralisation and Flexibility of Budgetary Policies
Because centralisation emphasises strict adherence to fiscal targets, one
might suspect that it implies rigidity of budgetary policies and reduces the
scope for reaction to unforeseen events. If so, there could be a trade-off
between achieving a higher degree of fiscal discipline and achieving a
desirable degree of macroeconomic stabilisation.
However, flexibility to react to unforeseen events can be achieved at the
implementation stage of the budget process in a number of different ways
without working against centralisation, such as the possibility to charge
expenditures against future budgets or to transfer unused appropriations to
the next year or the creation of a “rainy day fund,” i.e., an unspecified
appropriation that can be used for emergencies. Hallerberg et al. (2001) show
that many of the EU states that have adopted a contract approach to
centralisation implemented rules enabling them to deal more effectively with
unexpected revenue or spending developments in recent years.
Hallerberg and von Hagen (1999) estimate the cyclical elasticity of
government deficits in the 15 European Union states. Based on panel data,
they find that centralisation per se does not change the cyclical elasticity. In
fact, countries with strong finance ministers are characterised by a relatively
larger cyclical elasticity. This suggests that a strong finance minister can react
more quickly to economic downturns and upswings. Importantly, there is no
indication of a trade-off between macroeconomic stabilisation and mitigating
excessive spending in the design of a budget process.