Stefania Fabrizio and Ashoka Mody
In a recent paper, we presented empirical evidence to show that strong
budget institutions (rules and procedures of the budget process) were associated
with more fiscal discipline even when the politics was unfavorable to such
discipline. What then are the conditions under which budget institutions themselves
may be improved (reformed)? We find, tentatively, that fiscal deficits do not focus
the attention of policymakers on undertaking reforms. To the contrary, the larger is
the deficit, the lower the likelihood of reforms. It is as if large deficits imply strong
claims on the budget and, hence, create unwillingness to compromise and impose
self-discipline. Countries will tend, therefore, to move to two outcomes: small fiscal
deficits and good institutions or large deficits and weak institutions. The findings do
suggest that economic shocks (if they are large enough) can help build a
constituency for improving budget institutions.
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