FISCAL RULES, FISCAL INSTITUTIONS AND FISCAL PERFORMANCE
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Institutional Elements of Centralisation
Budget processes can be approximately divided into four stages, each
involving different actors with different roles. The “executive planning stage”
usually begins about a year before the relevant fiscal year and ends with the
submission of a draft budget to the legislature. It involves the setting of budget
guidelines, bids for budget appropriations from the various spending
departments, the resolution of conflicts between the spending interests in the
executive, and the drafting of the revenue budget. The “legislative approval
stage” includes the process of parliamentary amendments to the budget
proposal, which may involve more than one house of parliament. This stage
ends with the passing of the budget law. The “executive implementation stage”
covers the fiscal year to which the budget law applies. During this stage,
deviations from the budget law can occur, either formally by adoption of
supplementary budget laws in parliament, or informally by shifting funds
between chapters of the budget law and by overrunning the spending limits
provided by the law. The “ex post accountability stage” involves a review of the
final budget documents by a court of auditors or a similar institution checking
the consistency of the actual spending and revenues with the legal
authorisation.
Institutional elements of centralisation primarily concern the first three
stages, with different elements applying to different stages.2 At the executive
planning stage, the purpose is to promote agreement on spending and deficit
targets derived from a comprehensive view of the budget. Maximum
fragmentation prevails, when the budget is degraded to a mere collection of
uncoordinated bids from the individual spending agencies. Elements of
centralisation promote the consistent setting of targets at the outset of the
process and assure that they constrain subsequent decisions effectively. Akey
issue is the process of conflict resolution among the members of the executive.
Uncoordinated and ad hoc conflict resolution involving many actors simultan-
eously promotes log-rolling and reciprocity and, hence, fragmentation. Cabinet
decision-making based on the principle of unanimity, as in Japan, has a
similar effect. Fragmentation can be limited by the introduction of senior
cabinet committees with the authority to decide in cases of budgetary conflicts.
At the legislative approval stage, elements of centralisation control the debate
and voting procedures in parliament. Because of the much larger number of
decision makers involved, the common pool problem is even larger in the
legislature than in the executive. Fragmentation is rampant, when parliament
2 At the last stage of the process, the legality of the budget is checked by the appropriate
accounting body. Obviously, the design of the budget process becomes ineffective, if policy makers
operate outside the law. Thus, the last stage provides an important, necessary condition for the
effectiveness of institutional design.