FISCAL RULES, FISCAL INSTITUTIONS AND FISCAL PERFORMANCE
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elections and presidential government lead to lower levels of general public
goods than proportional representation and parliamentary government.
Hallerberg (2000) studies the public finance impact of Italy’s electoral
reforms. In 1994, Italy replaced its system of proportional representation by
one that has three-quarters of all seats in parliament elected by plurality rule
and the remaining seats on the basis of proportional representation. The
reform was introduced with the hope that plurality rule would generate more
stable governments and a bi-polar party system. As it were, this did not
happen immediately. But when elections were called again in 1996, the
tendency towards a bi-polar system became stronger. Hallerberg argues that
this was an important step preparing Italy’s accession to EMU.
Thus, the existing evidence, scant as it is, supports the view that electoral
rules have important consequences for public spending. The policy implication
is that rules strengthening accountability and competition are effective
controls of rents and distributive policies.
IV LIMITING THE COMMON POOL PROBLEM:
THE BUDGET PROCESS
Public budgeting involves an externality - money from a general tax fund
is used to finance distributive policies. At the heart of the problem is a
misperception about the true budget constraint and true shadow relative
prices of public policy programmes. Individual politicians assume that an
increase in spending on targeted policies will provide their constituencies with
more of the public services they desire at only a fraction of the total cost, since
the rest is paid by other taxpayers. The less weight they give to the tax burden
of people outside their constituencies in their decisions, the greater the
tendency to ask for more public services than they would, if each benefiting
group were charged the full cost of the services delivered to it. The larger the
number of politicians drawing on the same general tax fund, the lower seems
marginal cost of distributive policies for each of them and the greater is the
overspending bias. Putting this argument into a dynamic context, where
money can be borrowed to finance current spending, one can show that the
common pool problem leads to excessive deficits and government debts in
addition to excessive spending levels (Velasco 1999; von Hagen and Harden,
1996).
The analogy with a common pool problem suggests that the excess spending
and deficit biases can be reduced by making politicians more aware of the true
budget constraint. This is the main role of the budget process in our context.
The budget process consists of the formal and informal rules governing