The Value and Reform of Budget Institutions
12 Pages Posted: 14 Feb 2012
Date Written: March 29, 2007
In a recent paper, we presented empirical evidence to show that strong budget institutions (rules and procedures of the budget process) were associated with more fiscal discipline even when the politics was unfavorable to such discipline. What then are the conditions under which budget institutions themselves may be improved (reformed)? We find, tentatively, that fiscal deficits do not focus the attention of policymakers on undertaking reforms. To the contrary, the larger is the deficit, the lower the likelihood of reforms. It is as if large deficits imply strong claims on the budget and, hence, create unwillingness to compromise and impose self-discipline. Countries will tend, therefore, to move to two outcomes: small fiscal deficits and good institutions or large deficits and weak institutions. The findings do suggest that economic shocks (if they are large enough) can help build a constituency for improving budget institutions.
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