Structural Budget Balance as a Fiscal Rule in the European Union—Good, Bad, or Ugly?

Abstract

The EU's Fiscal Compact requires member states to legislate structural budget balance rule(s) (SBR). We use elite interviews and government documents from Austria, Ireland, and Portugal to assess the extent to which SBRs are perceived to have resulted in improved accountability, coordination, and credible commitment on the part of elected officials. We find that establishing the SBRs in legislation has not resulted in domestic ownership on the part of the member states. Furthermore, SBRs do not appear to have improved accountability due to questions about their accuracy. There is some evidence that SBRs aid finance ministries' coordination efforts.

Austerity and budget execution: control versus flexibility

“…Our empirical findings reinforce the conclusions of several existing studies about the relevance of supra-national pressures and the relevance of EU-level fiscal rules (and external pressure from the EU toward fiscal discipline) in shaping budgeting practices in the member states (e.g. Ghin et al, 2018;Hardiman et al, 2019;Kristiansen, 2018;Raudla and Douglas, 2021). Furthermore, our cases demonstrate that governments' attempts to comply with supranational rules have led to budget execution practices that work against the goals of efficiency (like the return of the December fever in Austria) or the democratic legitimacy (like the re-introduction of frozen appropriations in Portugal).…”

“…Hood, 2002Hood, , 2011) for government's fiscal indiscipline. In the context of fiscal crisis and austerity, the finance ministry would be viewed as the key body responsible for complying with fiscal discipline rules and its reputation strongly depends on achieving that (Krause, 2009;Raudla et al, 2015a;Raudla and Douglas, 2021). Thus, when faced with higher scarcity of resources, the finance ministry is likely to reinforce a control-oriented approach to budget execution in order to protect its reputation as a guardian of the purse (Wildavsky, 1988).…”

“…Once the line ministries wanted to make more extensive use of the accumulated reserves, it became clear that this would lead to non-compliance with the EU fiscal rules, since the actual spending of reserves would have implied increased borrowing and hence a budget deficit. The EU fiscal rules require the annual budget deficit to be below 3% of GDP and the structural budget balance cannot exceed a country-specific medium-term target (see Raudla and Douglas, 2021). As one of the interviewees summarized it, It became clear that if the line ministries were to start using the reserves, it would jeopardize all our fiscal planning, our medium-term expenditure framework objectives, and so on.…”

Medium‐term expenditure frameworks: Credible instrument or mirage?

“…As 2009 was the first year of implementing the MTEF in Austria, it coincided with the peak of the GFC. As can be seen in Figure 2a-c, Austria was moderately affected by the crisis (see also Raudla & Douglas, 2021). GDP fell by 3.8 percent in 2009, but then quickly returned to growth, albeit at relatively low levels.…”

“…At the same time, since 2009, Austria repeatedly recorded public deficit levels in excess of the Maastricht criterion of percent of GDP and increased its public debt, peaking at 85 percent of GDP in 2015 (also in excess of the Maastricht debt criterion of 60 percent of GDP). As a consequence, Austria was subject to the excessive deficit procedure of the European Union, entailing close surveillance of its public finances (Raudla & Douglas, 2021). How would we expect Austria's MTEF to fare in such circumstances?…”