gabriel filc carlos scartascini research fellow economist*

Budget Institutions and Fiscal OutcomesBudget Institutions and Fiscal Outcomes

Ten years of inquiry on fiscal matters at Ten years of inquiry on fiscal matters at the Research Departmentthe Research Department

Gabriel Filc Gabriel Filc Carlos ScartasciniCarlos ScartasciniResearch Fellow Research Fellow Economist*Economist*

Office of Evaluation and OversightOffice of Evaluation and OversightInter-American Development BankInter-American Development Bank

* Former Junior Professional at the Research Department (2002 - 2003)

The views and interpretations expressed in this paper are those of the authors and should not be attributed to the InterAmerican Development Bank, or to any individual acting on its behalf.

Budget Institutions and Fiscal Outcomes.Budget Institutions and Fiscal Outcomes.Ten years of inquiry on fiscal matters at RESTen years of inquiry on fiscal matters at RES

ObjectiveObjective

To serve as a tribute to the work To serve as a tribute to the work on Budget Institutions and Fiscal on Budget Institutions and Fiscal Outcomes RES has engaged in Outcomes RES has engaged in since its creationsince its creation


MethodMethod

We construct a We construct a new indexnew index of fiscal rules and of fiscal rules and budget procedures following the budget procedures following the methodology in Alesina, Haussman, Hommes methodology in Alesina, Haussman, Hommes and Stein (1996, 1998), and we test their and Stein (1996, 1998), and we test their hypotheses in a sample of Latin American hypotheses in a sample of Latin American and in a larger sample of developing and in a larger sample of developing countriescountries

We review the new lines of research RES is We review the new lines of research RES is promoting and developing jointly with other promoting and developing jointly with other researchers. Basically, the PMP methodology.researchers. Basically, the PMP methodology.


The New IndexThe New Index Following Alesina, et al (1996, 1998) we construct a new Following Alesina, et al (1996, 1998) we construct a new

index and several sub-indexes using the OECD/WB(/IDB) index and several sub-indexes using the OECD/WB(/IDB) Budget Practices and Procedures Survey.Budget Practices and Procedures Survey.

The survey includes 359 questions on almost(?) every The survey includes 359 questions on almost(?) every topic related to budget practices and procedures. topic related to budget practices and procedures. Includes information on every stage of the budget Includes information on every stage of the budget process at each one of the branches of government.process at each one of the branches of government.

So far, 43 countries have answered the survey, So far, 43 countries have answered the survey, including 11 (12) Latin American countries and 21 including 11 (12) Latin American countries and 21 developing countries. developing countries.

We selected 22 questions that provide information on We selected 22 questions that provide information on fiscal rules, the degree of hierarchy and transparency of fiscal rules, the degree of hierarchy and transparency of budget procedures.budget procedures.


The New IndexThe New Index

Composite index (INDEX)Composite index (INDEX)

– Fiscal rules (FISCRULES)Fiscal rules (FISCRULES) Fiscal limits (FISCLIMITS)Fiscal limits (FISCLIMITS) Medium Term Fiscal Frameworks (MTFF)Medium Term Fiscal Frameworks (MTFF) Borrowing limits (BORRCONST)Borrowing limits (BORRCONST) Reserve Funds (RESERVFUND)Reserve Funds (RESERVFUND)

– Hierarchical procedures (HIERARCHICAL)Hierarchical procedures (HIERARCHICAL) Within the Executive Branch (RESTMINS)Within the Executive Branch (RESTMINS) Executive-Legislative relations (RESTLEGS)Executive-Legislative relations (RESTLEGS) Cash management (CASHMANAG)Cash management (CASHMANAG)

– Transparent procedures (TRANSPARENCY)Transparent procedures (TRANSPARENCY)


InsightsInsights Fiscal rules: Fiscal rules: laws and/or regulations which establish ex laws and/or regulations which establish ex

ante constraints on deficits and/or debt may be ante constraints on deficits and/or debt may be conducive to fiscal discipline.conducive to fiscal discipline.

Hierarchical procedures: Hierarchical procedures: (in contrast to more (in contrast to more “collegial” procedures) tend to reduce the incidence of “collegial” procedures) tend to reduce the incidence of the commons problem and give primacy in the the commons problem and give primacy in the bargaining over the budget to those agents with bargaining over the budget to those agents with political incentives to keep finances under control. political incentives to keep finances under control.

Transparent procedures:Transparent procedures: should lead to more fiscal should lead to more fiscal discipline as they could increase the chances of discipline as they could increase the chances of enforcement. Even the most stringent fiscal laws can enforcement. Even the most stringent fiscal laws can be circumvented if budget documents are be circumvented if budget documents are unintelligible and unrelated to the real fiscal situation.unintelligible and unrelated to the real fiscal situation.


Hypothesis:Hypothesis:

Countries with more stringent fiscal Countries with more stringent fiscal rules, hierarchical budget procedures rules, hierarchical budget procedures and more transparent budget and more transparent budget processes should present better processes should present better primary fiscal balances (lower primary fiscal balances (lower primary deficits).primary deficits).


Preliminary evidence seems to indicate that a country Preliminary evidence seems to indicate that a country within the group with high scores would have a more within the group with high scores would have a more positive primary fiscal balance than a country within positive primary fiscal balance than a country within the group with low scores.the group with low scores.

The following table shows the differences on primary The following table shows the differences on primary fiscal balances as percentage of GDP between fiscal balances as percentage of GDP between countries with the average high and low scores.countries with the average high and low scores.

INDEX Fiscal Rules Hierarchical Transparency

Developing Countries 2.01 0.60 2.71 0.34

Latin American Countries

1.55 2.38 2.16 0.20


For the econometric analysis, we run the For the econometric analysis, we run the regressions, based on the Alesina, et al (1998) regressions, based on the Alesina, et al (1998) model, for every country, for the developing model, for every country, for the developing countries, and for the sample of Latin American countries, and for the sample of Latin American Countries.Countries.

We use the same control variables: Debt, Trade, We use the same control variables: Debt, Trade, Pop>65, and Pop<15, (+ debt service); and the Pop>65, and Pop<15, (+ debt service); and the same dependent variable: general government same dependent variable: general government primary fiscal balances, (+ central) primary fiscal balances, (+ central)

As it can be deduced from the following graphs, the As it can be deduced from the following graphs, the fitness of the regressions is better for the fitness of the regressions is better for the developing and Latin American countries than for developing and Latin American countries than for the world sample (Maastricht, Monetary Union, etc). the world sample (Maastricht, Monetary Union, etc).


United States

United Kingdom

Sweden

Spain

Portugal

Norway

New Zealand

Netherlands

Japan

Italy

Ireland

Iceland

Greece

GermanyFrance

Finland

DenmarkCanada

Belgium

Austria

Australia

-0.08

-0.06

-0.04

-0.02

0

0.02

0.04

0.06

0.08

0.1

0.12

0 1 2 3 4 5 6 7 8 9

Index Score

Gen

eral

Gov

ern

men

t P

rim

ary

Res

ult

/ GD

P


Paraguay

Suriname El Salvador

Brasil

Peru

Uruguay

South Africa

Slovenia

Morocco

JordanIsrael

Indonesia

ColombiaChile

Bolivia

Argentina

Turkey

Slovak Republic

Mexico

Hungary

Czech Republic

-0.08

-0.06

-0.04

-0.02

0

0.02

0.04

0.06

0.08

0.1

0.12

0 1 2 3 4 5 6 7 8 9

Index Score

Gen

eral

Gov

ern

men

t P

rim

ary

Res

ult

/ GD

P


Paraguay

SurinameEl Salvador

Brasil

Peru

Uruguay

ColombiaChile

Bolivia

ArgentinaMexico

-0.08

-0.06

-0.04

-0.02

0

0.02

0.04

0.06

0.08

0.1

0.12

0 1 2 3 4 5 6 7 8 9

Index Score

Gen

eral

Gov

ern

men

t P

rim

ary

Res

ult

/ GD

P


Paraguay

Suriname

El Salvador

Brasil

Peru

Uruguay

ColombiaChile

Bolivia

ArgentinaMexico

-0.05

-0.04

-0.03

-0.02

-0.01

0

0.01

0.02

0.03

0.04

0.05

0 1 2 3 4 5 6 7 8 9 10

Index Score

Gen

eral

Gov

ern

men

t P

rim

ary

Res

ult

/ G

DP


Paraguay

Suriname

El Salvador

Brasil

Peru

Uruguay

Colombia

Chile

Bolivia

ArgentinaMexico

-0.05

-0.04

-0.03

-0.02

-0.01

0

0.01

0.02

0.03

0.04

0 1 2 3 4 5 6 7 8 9 10

Fiscal Rules Index Score

Gen

eral

Gov

ern

men

t P

rim

ary

Res

ult

/ GD

P


Paraguay

Suriname

El Salvador

Brasil

Peru

Uruguay

ColombiaChile

Bolivia

ArgentinaMexico

-0.05

-0.04

-0.03

-0.02

-0.01

0

0.01

0.02

0.03

0.04

0.05

0 1 2 3 4 5 6 7 8 9 10

Hierarchical Index Score

Gen

eral

Gov

ern

men

t P

rim

ary

Res

ult

/ G

DP


Summary Table of Regression Results

Developing countries Latin American countries “Results” Increase of

1 point From

“Low” to “High”

“Results” Increase of 1 point

From “Low” to “High”

INDEX +++ +1% +1.4% +++ +1% +1.5% FISCRULES ++0 +0.6 +1.5% ++0 +1% +3.6% FISCLIMITS 000 MTFF ++0 +0.2% +2% * BORRCONST 000 RES ERVFUND 000 HIERARCHICAL +++ +1% +1.9% ++0 +1% +2.7% RES TMINS +00 +0.2% +0.8% RES TLEGS +00 +0.1% +3.5% CAS HMANAG +++ +1% +1.9% TRANSPARENCY 000 000 Note: 1. A ll changes are in terms of percentage of GDP. 2. The combination of + and 0 tries to provide a quick overview of the degree of significance of the variables under different specifications. +++ implies that the variable has been highly statistically significant in every regression, its coefficient had the right sign, and it was economically significant.


Even though recommendations have not been Even though recommendations have not been implemented exactly as devised, some budget reforms implemented exactly as devised, some budget reforms that took place in the ‘90s did not achieve the that took place in the ‘90s did not achieve the expected results.expected results.

The lack of success of some of these reforms could be The lack of success of some of these reforms could be blamed on the policies themselves, but in other cases, blamed on the policies themselves, but in other cases, the recommendations have not taken into account the the recommendations have not taken into account the specific characteristics of the countries.specific characteristics of the countries.

Studies aiming to understand the budget process and Studies aiming to understand the budget process and to render successful recommendations should not only to render successful recommendations should not only consider the existence or not of certain fiscal rules and consider the existence or not of certain fiscal rules and budget procedures but most importantly, to consider budget procedures but most importantly, to consider the incentives of managers of public monies to comply the incentives of managers of public monies to comply with budget rules and procedures, and the overall with budget rules and procedures, and the overall policymaking process in which the acceptance and policymaking process in which the acceptance and compliance with rules and procedures is embedded.compliance with rules and procedures is embedded.


The “lenses” provided by the “PMP methodology” The “lenses” provided by the “PMP methodology” (as explained by Spiller, Stein, and Tommasi (2003)) (as explained by Spiller, Stein, and Tommasi (2003)) and the “BMP” (its application to the analysis of the and the “BMP” (its application to the analysis of the budget process) forces the analyst to understand budget process) forces the analyst to understand the transaction environment behind the budget the transaction environment behind the budget process and to comprehend the actions of the process and to comprehend the actions of the agents in charge of budgetary decisions according agents in charge of budgetary decisions according to their incentives, incentives that are affected by to their incentives, incentives that are affected by the political institutions of each country.the political institutions of each country.

Under this methodology, public expenditures Under this methodology, public expenditures are the outcome of complex intertemporal are the outcome of complex intertemporal exchanges among political actors that exchanges among political actors that participate in the budget process.participate in the budget process.


Using these “lenses”, we could evaluate whether Using these “lenses”, we could evaluate whether traditional and generally pertinent recommendations are traditional and generally pertinent recommendations are useful to solve fiscal challenges when applied to countries useful to solve fiscal challenges when applied to countries with different features of the policymaking process.with different features of the policymaking process.

The paper presents some case studies, that show that very The paper presents some case studies, that show that very reasonable reforms like increasing transparency, reducing reasonable reforms like increasing transparency, reducing the discretionary funds of legislators, and reducing the the discretionary funds of legislators, and reducing the discretion of the executive branch for cash managing discretion of the executive branch for cash managing expenditures, recommendations usually proposed for Latin expenditures, recommendations usually proposed for Latin America, could have unintended effects, potentially America, could have unintended effects, potentially worsening the reality they are designed to improve worsening the reality they are designed to improve because of the policy environment in which they are because of the policy environment in which they are inserted. inserted.

Examples: Cash-management in Brazil, “auxilios parlamentarios” Examples: Cash-management in Brazil, “auxilios parlamentarios” in Colombia, transparency and roll call votes in Paraguay, and in Colombia, transparency and roll call votes in Paraguay, and the Copper Stabilization Fund in Chile.the Copper Stabilization Fund in Chile.


Reducing the discretionary power of the Executive. The Reducing the discretionary power of the Executive. The case ofcase of

cash-management in Brazil.*cash-management in Brazil.*POLIT. INSTIT. AND POLIT. TRANSACTIONS

PROPOSED REFORM OBJECTIVE UNINTENDED CONSEQUENCES (?)

POLIT. INSTITUTIONS: Presidential system.Open lists electoral system.Fragmented Party System.Low party powers of the President (lacks control of candidate selection). GAME OF POL. TRANS:The President has to negotiate key votes with legislators using the inclusion of “pet” projects in the budget as political currency.

To curtail the discretion of the president to selectively choose which projects to execute and when, and which projects to cut, allowing only cuts across the board.

To increase the predictability and the efficiency of government expenditures.

Increased difficulty to achieve political agreements. More expensive negotiations of the president with other political actors could affect fiscal balance.

* See Alston, et al (2004)


SummarySummary

Following previous work by RES, we constructed a new Following previous work by RES, we constructed a new index of fiscal rules and budget procedures and several index of fiscal rules and budget procedures and several subindexes.subindexes.

Empirical results indicate that countries with more Empirical results indicate that countries with more stringent fiscal rules, and especially with more stringent fiscal rules, and especially with more hierarchical budget procedures seem to present better hierarchical budget procedures seem to present better primary fiscal balances (lower primary deficits).primary fiscal balances (lower primary deficits).

Among the components of fiscal rules: the use of Among the components of fiscal rules: the use of medium term fiscal frameworks.medium term fiscal frameworks.

Among the components of hierarchical procedures: the Among the components of hierarchical procedures: the capacity of the executive to cash-manage expenditures, capacity of the executive to cash-manage expenditures, restrictions on the legislature, and restrictions on the restrictions on the legislature, and restrictions on the bargaining within the executive branch.bargaining within the executive branch.


SummarySummary

Reforms on budget procedures and the Reforms on budget procedures and the introduction of certain fiscal rules have not introduction of certain fiscal rules have not achieved the expected results.achieved the expected results.

Given the state of disenchantment of the Given the state of disenchantment of the population in Latin America, it is population in Latin America, it is peremptory that policy researchers suggest peremptory that policy researchers suggest those recommendations with the highest those recommendations with the highest probability of success. probability of success.


SummarySummary

Because the success of policy reforms Because the success of policy reforms depend on the characteristics of the policy depend on the characteristics of the policy environment in which they are inserted, in-environment in which they are inserted, in-depth knowledge of the policymaking depth knowledge of the policymaking process is needed.process is needed.

The “lenses” suggested in the PMP and the The “lenses” suggested in the PMP and the BMP methodology could help on this BMP methodology could help on this regard.regard.

gabriel filc carlos scartascini research fellow economist*

Documents

fiscal matters

fiscal discipline

fiscal outcomes res

stringent fiscal rules

new index of fiscal

stringent fiscal laws

hierarchical budget

real fiscal situation