Budget Institutions and Fiscal Outcomes Ten years of inquiry on fiscal matters at the Research Department

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Budget Institutions and Fiscal OutcomesTen
years of inquiry on fiscal matters at the
Research Department

• Gabriel Filc Carlos Scartascini
• Research Fellow Economist
• Office of Evaluation and Oversight
• Inter-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 Inter American Development Bank, or to any
individual acting on its behalf.
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Budget Institutions and Fiscal Outcomes.Ten
years of inquiry on fiscal matters at RES

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

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

• Method
• We construct a new index of fiscal rules and
  budget procedures following the methodology in
  Alesina, Haussman, Hommes and Stein (1996, 1998),
  and we test their hypotheses in a sample of Latin
  American and in a larger sample of developing
  countries
• We review the new lines of research RES is
  promoting and developing jointly with other
  researchers. Basically, the PMP methodology.

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

• The New Index
• Following Alesina, et al (1996, 1998) we
  construct a new index and several sub-indexes
  using the OECD/WB(/IDB) Budget Practices and
  Procedures Survey.
• The survey includes 359 questions on almost(?)
  every topic related to budget practices and
  procedures. Includes information on every stage
  of the budget process at each one of the branches
  of government.
• So far, 43 countries have answered the survey,
  including 11 (12) Latin American countries and 21
  developing countries.
• We selected 22 questions that provide information
  on fiscal rules, the degree of hierarchy and
  transparency of budget procedures.

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

• The New Index
• Composite index (INDEX)
• Fiscal rules (FISCRULES)
• Fiscal limits (FISCLIMITS)
• Medium Term Fiscal Frameworks (MTFF)
• Borrowing limits (BORRCONST)
• Reserve Funds (RESERVFUND)
• Hierarchical procedures (HIERARCHICAL)
• Within the Executive Branch (RESTMINS)
• Executive-Legislative relations (RESTLEGS)
• Cash management (CASHMANAG)
• Transparent procedures (TRANSPARENCY)

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

• Insights
• Fiscal rules laws and/or regulations which
  establish ex ante constraints on deficits and/or
  debt may be conducive to fiscal discipline.
• Hierarchical procedures (in contrast to more
  collegial procedures) tend to reduce the
  incidence of the commons problem and give primacy
  in the bargaining over the budget to those agents
  with political incentives to keep finances under
  control.
• Transparent procedures should lead to more
  fiscal discipline as they could increase the
  chances of enforcement. Even the most stringent
  fiscal laws can be circumvented if budget
  documents are unintelligible and unrelated to the
  real fiscal situation.

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

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

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

• Preliminary evidence seems to indicate that a
  country within the group with high scores would
  have a more positive primary fiscal balance than
  a country within the group with low scores.
• The following table shows the differences on
  primary fiscal balances as percentage of GDP
  between countries with the average high and low
  scores.

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

• For the econometric analysis, we run the
  regressions, based on the Alesina, et al (1998)
  model, for every country, for the developing
  countries, and for the sample of Latin American
  Countries.
• We use the same control variables Debt, Trade,
  Popgt65, and Poplt15, ( debt service) and the
  same dependent variable general government
  primary fiscal balances, ( central)
• As it can be deduced from the following graphs,
  the fitness of the regressions is better for the
  developing and Latin American countries than for
  the world sample (Maastricht, Monetary Union,
  etc).

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

• Even though recommendations have not been
  implemented exactly as devised, some budget
  reforms that took place in the 90s did not
  achieve the expected results.
• The lack of success of some of these reforms
  could be blamed on the policies themselves, but
  in other cases, the recommendations have not
  taken into account the specific characteristics
  of the countries.
• Studies aiming to understand the budget process
  and to render successful recommendations should
  not only consider the existence or not of certain
  fiscal rules and budget procedures but most
  importantly, to consider the incentives of
  managers of public monies to comply with budget
  rules and procedures, and the overall
  policymaking process in which the acceptance and
  compliance with rules and procedures is embedded.

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

• The lenses provided by the PMP methodology
  (as explained by Spiller, Stein, and Tommasi
  (2003)) and the BMP (its application to the
  analysis of the budget process) forces the
  analyst to understand the transaction environment
  behind the budget process and to comprehend the
  actions of the agents in charge of budgetary
  decisions according to their incentives,
  incentives that are affected by the political
  institutions of each country.
• Under this methodology, public expenditures are
  the outcome of complex intertemporal exchanges
  among political actors that participate in the
  budget process.

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

• Using these lenses, we could evaluate whether
  traditional and generally pertinent
  recommendations are useful to solve fiscal
  challenges when applied to countries with
  different features of the policymaking process.
• The paper presents some case studies, that show
  that very reasonable reforms like increasing
  transparency, reducing the discretionary funds of
  legislators, and reducing the discretion of the
  executive branch for cash managing expenditures,
  recommendations usually proposed for Latin
  America, could have unintended effects,
  potentially worsening the reality they are
  designed to improve because of the policy
  environment in which they are inserted.
• Examples Cash-management in Brazil, auxilios
  parlamentarios in Colombia, transparency and
  roll call votes in Paraguay, and the Copper
  Stabilization Fund in Chile.

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

• Reducing the discretionary power of the
  Executive. The case of
• cash-management in Brazil.

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

• Summary
• Following previous work by RES, we constructed a
  new index of fiscal rules and budget procedures
  and several subindexes.
• Empirical results indicate that countries with
  more stringent fiscal rules, and especially with
  more hierarchical budget procedures seem to
  present better primary fiscal balances (lower
  primary deficits).
• Among the components of fiscal rules the use of
  medium term fiscal frameworks.
• Among the components of hierarchical procedures
  the capacity of the executive to cash-manage
  expenditures, restrictions on the legislature,
  and restrictions on the bargaining within the
  executive branch.

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

• Summary
• Reforms on budget procedures and the introduction
  of certain fiscal rules have not achieved the
  expected results.
• Given the state of disenchantment of the
  population in Latin America, it is peremptory
  that policy researchers suggest those
  recommendations with the highest probability of
  success.

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

• Summary
• Because the success of policy reforms depend on
  the characteristics of the policy environment in
  which they are inserted, in-depth knowledge of
  the policymaking process is needed.
• The lenses suggested in the PMP and the BMP
  methodology could help on this regard.