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THE ECONOMIC AND SOCIAL REVIEW
budgetary decisions within the executive and the legislative branches of
government. It includes the rules relating to the formulation of a budget by the
executive, to its passage through the legislature, and to its implementation by
the executive. The budget process distributes strategic influence and creates
or destroys opportunities for collusion. Appropriately designed, it can induce
policy makers to take a comprehensive view of the costs and benefits of all
public policies financed through the budget. Inappropriate design fails to do
that and encourages politicians to care only about the rents and distributive
policies they can attract for themselves. Where that is the case, we call a
budget process fragmented. The opposite of fragmentation is centralisation of
the budget process.
The budget process can serve its purpose effectively only if all conflicts
between competing claims on public finances are indeed resolved within its
scope. Four deviations from this principle undermine its functioning.
• The use of off-budget funds, which allow policy makers to circumvent the
constraints of the budget process and remove decisions altogether from
being challenged by conflicting distributional interests.
• “Non-decisions,” which occur when expenditures included in the budget are
determined by developments exogenous to the budget process. Prime
examples are the indexation of spending programmes and “open-ended”
spending appropriations, e.g., welfare payments based on entitlements
whose parameters are fixed by simple law.1 They allow policy makers to
avoid “tough” decisions (Weaver, 1986), but they degrade the budget process
to a mere forecast of exogenous developments.
• “Mandatory spending laws”, i.e., non-financial laws that make certain
government expenditures compulsory and the budget a mere summary of
spending mandates created by simple legislation. An effective budget
process requires a clear distinction between non-financial laws (which
create the authorisation for certain government undertakings) and the
budget, which makes specific funds available for a specific time period.
• Contingent liabilities such as guarantees for liabilities of public or non-
public entities. While one must recognise that contingent liabilities cannot
be fully avoided and that a proper accounting of them is a difficult task,
their existence and importance for the government’s financial stance can be
brought to the attention of decision makers in the budget process by
requiring the government to submit a report on the financial guarantees it
has entered into as part of the budget documentation.
1 Setting the relevant parameters of entitlement programmes is part of the annual budget process
in several countries. Another approach, used in Denmark, is to set cash limits on welfare
appropriations and require the relevant minister to propose spending adjustments and changes in
the relevant non-financial laws if these limits are overrun (von Hagen and Harden 1994a).