Do budgetary institutions mitigate the common pool problem? New empirical evidence for the EU

Abstract

We analyze how budgetary institutions affect government budget deficits in member states of the European Union during 1984-2003 employing new indicators provided by Hallerberg et al. (2009). Using panel fixed effects models, we examine whether the impact of budgetary institutions on budget deficits is conditioned by political fragmentation (i.e., ideological differences among parties in government) and size fragmentation (i.e., the effective number of parties in government or the number of spending ministers). Our results suggest that strong budgetary institutions, no matter whether they are based on delegation to a strong minister of finance or on fiscal contracts, reduce the deficit bias in case of strong ideological fragmentation. In contrast, the impact of budgetary institutions is not conditioned by size fragmentation.

Commitment Problems in Coalitions: A New Look at the Fiscal Policies Of Multiparty Governments

“…Wehner (2010b) argues that the effect of party fragmentation on fiscal policy outcomes is conditional on the autonomy of legislators vis-a`-vis the executive. De Haan, Jong-A- Pin and Miearau (2013) show that ''budgetary institutions, no matter whether they are based on a strong minister of finance or fiscal contracts, become significant in case of strong ideological fragmentation, thereby mitigating the impact of political fragmentation.' ' Martin and Vanberg (2012) show that the presence of restrictive budgetary rules, such as restrictions on budget size, reduces the expansionary effect of an increase in the number of parties on spending.…”

Multiparty government and economic policy-making

“…Partisan Ministers of Finance thus would be suspected to benefit ministers from their own party or ideology and, hence, coalitions would not delegate this power or find political means to circumvent existing formal rules stating such rights. 4 Instead, coalitions are more likely to adopt a so-called ''contract approach'', particularly those cabinets characterized by large ideological distances and vigorous competition between the cabinet parties (Hallerberg et al 2007(Hallerberg et al , 2009de Haan et al 2013). This approach suggests that coalitions aim at negotiating overall spending targets and rules at the beginning of the term and each minister works under preset spending limits.…”

“…As discussed above, the simplest procedural remedy to the common pool problem-giving veto rights to offices not bound by the particular interests of any spending department-is unlikely to work in coalition cabinets. Rather, fiscal institutionalists suggest that coalitions, particularly those characterized by large ideological distances and a strong competition between the cabinet parties, would adopt a contract approach (Hallerberg et al 2007(Hallerberg et al , 2009de Haan et al 2013). 6 Accordingly, such coalitions would aim at negotiating overall spending targets and rules at the beginning of the term so that each minister would work thereafter under preset spending limits.…”

“…Quite simply, the more detailed the policy agreements, the smaller the probability should be that ministers pursue polices not acceptable to the coalition partners (Müller and Meyer 2010a, b). 7 By committing to such programs, 6 De Haan et al (2013) show that ''budgetary institutions, no matter whether they are based on a strong minister of finance or fiscal contracts, become significant in case of strong ideological fragmentation, thereby mitigating the impact of political fragmentation''. No such mitigating effect is found for the number of governing parties.…”

“…As described above, the ''fiscal institutionalist'' literature has identified two approaches to curbing government spending: (1) the ''delegation approach'', which suggests that the common pool problem may be reduced by delegating veto rights to offices, such as the Minister of Finance, or the PM, and (2) the ''contract approach'', which suggests that coalitions aim at negotiating overall spending targets and rules at the beginning of the term and that each minister works under preset spending limits. However, most scholars suggest that the delegation approach is a remedy only for single-party cabinets since in coalitions no single office holder enjoys the trust of all government parties (Hallerberg et al 2007(Hallerberg et al , 2009de Haan et al 2013). …”