Executive authority, the personal vote, and budget discipline in Latin American and Carribean countries

Recent scholarship on the impact of fiscal institutions on budgeting outcomes in Latin American and Caribbean (LAC) countries indicates that political institutions impact the level of budget discipline. BuiIding upon this previous research, we argue that the principle problem that must be addressed to insure strong fiscal discipline is the common pool resource (CPR) problem. The source of the problem, as well as its solution, differ in the government and in the legislature. At the cabinet level, the CPR problem arises because ministers consider the spending and tax implications of decisions on their ministries (only) instead of on the general population. As Hallerberg and von Hagen (1999) indicate, the appropriate solution at the cabinet level depends upon the coalition structure of the government. Given that all LAC countries have either presidential or oneparty parliamentary systems, a strong central player like the finance minister can reduce the CPR problem at the cabinet level. A similar strengthening of the executive vis-à-vis the legislature, in contrast, does not necessarily lead to tighter fiscal discipline. The level of the CPR problem in the legislature depends upon the type of electoral system. If states have open list proportional representation systems, then increases in district magnitude increase the problem, while under closed lists increases in district magnitude decrease the problem. Using a data set of LAC countries for the period 1988-97 and following Carey and Shugart (1995), we create an index for the incentives for the personal vote. We find that executive power in the budget process is most effective in reducing budget deficits when the personal vote is high in the legislature, while strengthening the president (or prime minister) in countries where the personal vote is low in the legislature has no statistically significant effect. This finding has practical implications for the design of fiscal institutions in LAC countries—granting the executive a privileged position vis-à-vis the legislature has beneficial effects on the budget balance only when the CPR problem in the legislature is large. Moreover, an alternative institutional change is to reform a country’s electoral system. The second option may be more feasible in countries where legislators are unlikely to give the president more power, or where dictatorial pasts make populations wary of granting the executive too much authority on any policy area. --

Economic Crisis and Fiscal Reforms in Latin America

The recent financial crisis has initiated pressures for not only policy reform but also fundamental institutional fiscal reforms. This paper explores the connection between economic crises and fiscal institutional reforms in a region that has experienced plenty of both in recent years, namely Latin America. For that purpose it reviews the literature and provides five hypotheses about why, and under what circumstances, crises would promote reforms. The empirical evidence shows that debt crises make reforms more likely but banking crises on their own, if anything, reduce the pressure for fiscal institutional reforms. Political institutions are also important. If the electoral system encourages the personal vote, the country is more likely to reform. This evidence may become useful for predicting the likelihood of reforms in the developed world.Information and communications technology, Education, Experimental design, Ecuador

The design of fiscal rules and forms of governance in European Union countries

This paper uses a new data set on budgetary institutions in Europe to examine the impact of fiscal rules and budget procedures in EU countries on public finances. It briefly describes the main pattern of budgetary institutions and their determinants across the EU 15 member states. Empirical evidence for the time period 1985-2004 suggests that the centralisation of budgeting procedures restrains public debt. In countries with one-party governments or coalition governments where parties are closely aligned and where political competition among them is low, this is achieved by the delegation of decision-making power to the minister of finance. Fiscal contracts that require countries to set multi-year targets and that reinforce those targets increase fiscal discipline in countries with ideologically dispersed coalitions and where parties regularly compete against each other

Democratically elected politicians tend to push the cost of financial crises to the future in order to avert unpopularity

Autocracies have traditionally been thought more spendthrift than democracies which manage money prudently in order to maintain favour with the public to whom they are accountable. But is this true? According to Christopher Gandrud and Mark Hallerberg, not necessarily, as politicians in democratic polities are more likely to push the costs to the future rather than take a hit in popularity

Budgetary Forecasts in Europe – The Track Record of Stability and Convergence Programmes

We analyse the performance of budgetary and growth forecasts of all stability and convergence programmes submitted by EU member states over the last decade. Differences emerge for the bias in budgetary projections across countries. As a second step we explore whether economic, political and institutional factors can explain this pattern. Our analysis indicates that the cyclical position and the form of fiscal governance are major determinants of forecast biases. Projected changes in the budgetary position are mainly affected by the cycle, the need of convergence before EMU and by electoral cycles.Fiscal forecasting; forecast evaluation; budget processes; Stability and Growth Pact

The importance of domestic political institutions: Why and how Belgium and Italy qualified for EMU

Why and how did the two European Union countries with the worst debt levels and with yearly deficit levels double the Maastricht target in 1993 manage to get their financial affairs in shape to qualify for Economic and Monetary Union? This paper presents an explicitly institutional approach to the political economy of budget deficits. It discusses the role of one external actor, the European Union, in promoting tighter fiscal discipline in the two countries. The European Union provided an important stick for any failure not to make needed changes, namely exclusion from EMU. This stick alone, however, was not sufficient to promote change in both countries. Indeed, each state made fundamental institutional changes that put the fulfillment of the Maastricht criteria within reach. Consistent with their respective electoral systems and coalition structures, Italy delegated significant power on the making and the enforcement of the budget to a strong finance minister, while Belgium strengthened its High Council of Finance and resorted to budgetary targets in the form of fiscal contracts. --

How effective and legitimate is the European semester? Increasing role of the European parliament

The European Semester is a new institutional process that provides EU member states with ex-ante guidance on fiscal and structural objectives. The Semesterâ??s goals are ambitious and it is still uncertain how it will fit into the new EU economic governance framework. We find that member states are only slowly internalising the new procedure. Furthermore, the Semester has so far lacked legitimacy due to the minor role assigned to the European Parliament, the marginal involvement of national parliaments and the lack of transparency of the process at some stages. Finally, there remains room to clarify the implications from a unified legal text. In fact, diluting the legal separation of recommendations on National Reform Programmes and Council opinions on Stability and Convergence Programmes may compromise effective surveillance and governance. The European Parliament has an important role to play. It needs hold the Commission and the Council accountable. This and the overall objective of enhancing the new procedureâ??s effectiveness and legitimacy can be done by means of a regular Economic Dialogue on the Semester.

How not to create zombie banks: lessons for Italy from Japan. Bruegel Policy Contribution Issue n˚6 | 2017

Japan serves as a cautionary tale for Italy on how to clean up banking-sector problems. A general lesson is the need for policies to forthrightly address non-performing loans (NPLs) in countries with widespread banking problems. This helps address zombie banks and sluggish economic growth

Financial regulatory transparency: new data and implications for EU policy. Bruegel Policy Brief 2015/20, December 2015

International financial institutions have promoted financial regulatory transparency, or the publication by supervisors of financial industry data. Financial regulatory transparency enhances market stability and increases democratic legitimacy. • We introduce a new index of financial regulatory data transparency: the FRT Index. It measures how countries report to international financial institutions basic macroprudential data about their financial systems.The Index covers 68 high-income and emerging-market economies over 22 years (1990-2011). • We find a number of striking trends over this period. European Union members are generally more opaque than other high-income countries.This finding is especially relevant given efforts to create an EU capital markets union. • Globally, financial regulatory data transparency has increased. However, there is considerable variation. Some countries have become significantlymore transparent, while others have become much more opaque. Reporting tends to decline during financial crises. • We propose that the EU institutions take on a greater role in coordinating and possibly enforcing reporting of bank and non-bank institution data. Similar to the United States, a reporting requirement should be part of any EU general deposit insurance scheme