Formal Fiscal Restraints and Budget Processes as Solutions to a Deficit and Spending Bias in Public Finances: US Experience and Possible Lessons for EMU

26 Pages Posted: 29 Jun 2012

See all articles by Rolf Strauch

Rolf Strauch

European Central Bank (ECB)

Jürgen von Hagen

University of Bonn

Date Written: February 1, 2001

Abstract

Against the commonly accepted view that in the run-up to EMU the Maastricht fiscal restraints were quite effective in re-aligning public finances in Member States that were showing large excessive deficits, Strauch and von Hagen stress that there are some objections concerning this initial sign of institutional effectiveness. They note that the restraining effect is much less apparent in the early stages of the post-1992 period for some larger countries. Moreover, some countries might have consolidated their public finance position even without the Maastricht fiscal criteria, given their debt level and the macro-economic environment. The authors argue that formal fiscal restraints may be an effective instrument for avoiding excessive deficits, provided they incorporate certain institutional features: the fiscal target must be clear-cut and comprehensive, enforcement should rely on independent agents, and the formal restraints involved should be difficult to amend. They find that EMU fiscal rules show some weaknesses with respect to these guidelines. The authors also stress that the budget process can be an effective instrument for solving the problem posed by a “deficit and spending bias” in public finance. In their opinion this holds also if strict fiscal rules already exist.

Suggested Citation

Strauch, Rolf and Hagen, Jürgen von, Formal Fiscal Restraints and Budget Processes as Solutions to a Deficit and Spending Bias in Public Finances: US Experience and Possible Lessons for EMU (February 1, 2001). Available at SSRN: https://ssrn.com/abstract=2095180 or http://dx.doi.org/10.2139/ssrn.2095180

Rolf Strauch (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Jürgen von Hagen

University of Bonn ( email )

Regina-Pacis-Weg 3
Postfach 2220
Bonn, D-53012
Germany

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