“The budget should be balanced, the treasury should be refilled, public debt should be reduced (…) lest Rome become bankrupt.”
Marcus Tullius Cicero (64 B.C.)[1]

Could fiscal rules and performance budgeting have avoided some of the recent government budgeting disasters? This post will define the meaning of a budgeting disaster and argue a positive answer to this question: well enforced rules formalizing fiscal responsibility and performance budgeting could have avoided some of the disasters seen in the last decade.

A budgeting disaster: the perfect storm

A budgeting disaster is defined in this post as the confluence of three factors. The first factor is a persistently high government deficit: specifically, five-year average deficit greater than 2% of GDP. The second factor is a government expenditure persistently growing faster than government revenues: in particular, that the five year average of the difference between current revenue growth and current expenditure growth is greater than one percentage point. And the third factor is a debt steadily high. High debt is understood as a five-year average debt-to-GDP ratio greater than 50%.

Based on the described criteria, graph 1 depicts the fiscal position of twenty selected countries from Europe, Asia, North America, and Latin America.

Graph 1 – Fiscal position of selected countries

Source: IMF, World Bank, IHS Global Insight and author’s calculations.

Countries experiencing budgeting disasters are those in the lower-left area of the graph: Portugal, Ireland, Greece, Spain, US, UK, and France. These countries had a five-year average fiscal deficit greater than 2% of GDP, a five-year average revenue-expenditure growth gap greater than one percentage point, and a five-year average debt ranging between 46% and 117% of their respective GDPs.

Those countries are followed by Italy, Belgium, Mexico and the Netherlands who are in an area of medium-risk of budgeting disaster. These countries present either high deficit with revenue-expenditure growth gap close to 1 percentage point, or low deficit but with revenue-expenditure growth gap greater than 1 percentage point.

Finally, countries in a low-risk position are South Korea, Switzerland and Sweden, followed by Finland, Denmark, China, and Germany. They have a positive fiscal balance or small deficit, revenue-expenditure growth gap near or lower than one percentage point and reasonable debt levels.

What are the causes of government budgeting disasters and how can the risk of new ones be significantly reduced? The following sections will explore two potential solutions: fiscal rules and performance based budgeting.

Categorías:Economic Development, English, Macroeconomía y Finanzas Públicas