BUDGETARY REFORMS AND THE POLITICAL ECONOMY OF FISCAL CONSOLIDATION IN THE E.U.

Javier Salinas, University of Valladolid

salinasj@der.uva.es

phone: + (34)-983-423555

fax: + (34)-983-423012

Abstract

There is a recent lively literature of modern macroeconomics focussing on the study of the role played by politico-institutional factors in the very diversified way in which national fiscal policies cope with similar economic events. In its positive approach there are two strands in this literature: (a) the analysis of the political incentives leading fiscal performance; (b) the analysis of the weaknesses of institutional design paving the way for deficit bias. The improvements made in the understanding of the political economy of fiscal performance show that budget procedures and budget institutions have significant impact on fiscal outcomes.

Working on this explanation of fiscal performance, the normative approach of this literature searches for those arrangements that should be more conducive to fiscal discipline. Here the empirical findings point to three main factors:

(1) The existence of rules tying fiscal authority hands.

(2) Hierarchical budget procedures.

(3) Budget transparency.

Based on the aforementioned pioneering work this paper analyzes the institutional design of the European fiscal policy laid down by the Treaty of Amsterdam and the Stability and Growth Pact. Both documents provide countries in the EU, and in particular those which have adopted the Euro, with a common code of fiscal conduct that is expected to uphold discipline in the management of government finances. Nevertheless, from a public choice perspective, a simple review of this code of conduct shows the existence of serious drawbacks mainly derived from the asymmetry between the treatment given to outcomes of fiscal policy in comparison with that given to the procedures followed in generating them. It seems that the current design of the European fiscal co-ordination system disregards the findings of modern macroeconomics and neglects the relationship between budgetary processes/institutions and outcomes in fiscal policy. Moreover, this paper argues that, in the implementation of the broad reforms needed to achieve a sustainable fiscal consolidation, there are political complementarities (in the sense that the ability to gain political consent for one reform depends on the acceptance of other reforms) between the setting up of new fiscal policies of expenditure containment and new fiscal procedures.

All in all, this analysis points to a sorely needed procedural reform in public sector budgeting as the best contribution to pursuing the stabilization of European public finances: the fuller use of accrual concepts in budget reporting. Much more than an isolated technical exercise, the shift to accrual budgeting could be quite a useful tool to facilitate wider reforms aimed at improving public sector financial management and performance while enhancing transparency and accountability.