Front Matter Page

Research Department

Contents

• Summary

• I. Introduction

• II. The Political Economy of Budget Deficits

• III. Fiscal Rules

• IV. Budget Institutions

  • 1. The formulation of the budget

  • 2. The parliamentary stage

  • 3. The implementation stage

  • 4. Information content and transparency of the budget

  • 5. The empirical evidence

• V. Reform Proposals for Italy: A Synthesis

  • 1. The proposal of the commissione per la Riforma dei Bilanci Pubblici (CRBP)

  • 2. The proposal of the Commissione della Spesa Pubblica (CSP)

  • 3. The IMF report on expenditure control

  • 4. The proposals in Alesina, Mare and Perotti (1995)

  • 5. The proposal of von Hagen and Harden (1994)

  • 6. The Masera proposal

  • 7. The Monti proposal

• VI. Discussion

• VII. Concluding Remarks

• Text Tables:

• 1. Structure of Government Stage

• 2. Structure of Parliamentary Stage

• 3. Characteristics of the Implementation Stage

• Appendix

• References

Summary

The issue of fiscal deficit reduction is a central concern for policymakers. This concern is heightened by the perception that the conduct of fiscal policy may have an inherent bias toward budget deficits. This bias may have both an “institutional” and a “political” nature, the former reflecting imperfections in the “rules of the game” governing the decision-making process and the latter reflecting an inherent failure of the political system to internalize fully all future consequences of current policy decisions. These issues have shaped the policy debate on fiscal adjustment in both industrial and developing countries and have led to the consideration of legislative measures that would constrain government fiscal policy decisions. This interest, exemplified by the proposal for a balanced budget amendment in the United States and by the Maastricht criteria on the size of public sector deficits and debt in the European Union, assumes particular importance in a country like Italy, where existing fiscal imbalances pose a serious threat to its early participation in a European Monetary Union.

This paper discusses the theoretical and empirical literature on the political economy of budget deficits and fiscal rules and examines in light of this literature a number of proposals for budgetary reform that have been put forward in Italy. The paper highlights how two complementary strands of literature on fiscal rules have developed. The first has examined the consequences of numerical limits on fiscal variables, such as budget deficits or government spending. The second has focused instead on the rules and regulations governing the various stages of the budget process: the formation of the budget at the government level, its passage through parliament, and its implementation. These two approaches are reflected in different proposals for budgetary reforms, some suggesting constitutional limits on budget deficits and others emphasizing the need to change budget procedures.

The current problems plaguing the Italian budget process--lack of transparency at all its stages, excessive reliance on formal rules, regulations, and controls, and diffuse accountability--suggest that the simple reliance on a constitutional rule on budget deficit targets may have limited effectiveness; it would introduce an additional element of legal rigidity and create further incentives for creative accounting, unless it were accompanied by an overall reform of the budget process. Ensuring that the government’s budget proposal reflects prudent fiscal behavior is not particularly useful if parliament can modify the size of the budget with relative ease, or if at the implementation stage the discretionary margins are such that systematic divergences emerge between ex-ante budgeted expenditures and ex-post actual ones. The paper thus concludes that lack of transparency in the budget process reduces accountability, makes it more difficult to monitor and control spending and tax decisions, and reduces the significance of numerical rules.