Committed to Deficit: The Reverse Side of Fiscal Governance
|Author(s):|| doc. PhDr. Martin Gregor Ph.D., |
|Type:||IES Working Papers|
|ISSN / ISBN:|
|Published in:||IES WP 2005/88|
|Keywords:||Fiscal Governance, Party Fragmentation|
|JEL codes:||D78, H61, H62|
|Grants:||GACR 402/05/H510 Ekonomická teorie politických trhů IES Research Framework Institutional task (2005-2011) Integration of the Czech economy into European union and its development|
|Abstract:||Common wisdom dictates that fiscal governance (i.e. procedural fiscal rules) improves fiscal discipline. We rather find that selected fiscal constraints protect the coalitional status quo from logrolling. In effect, fiscal governance may deteriorate fiscal position.
In political economy with heterogeneous agents, we examine four procedural fiscal rules: limits on amendments in legislative committees, timing of a vote on the budget size, deficit targets, and spending level targets. We find that fiscal governance protects the budgetary contract of governing coalition from attractive compromises with the opposition. When parties are evenly distributed across single policy dimension, and minimum winning connected coalitions are equiprobable, this protection is shown to magnify volatility in taxes and spending. Moreover, the volatility may increase in more fragmented party systems. We conclude fiscal governance not always and not necessarily reduces fiscal costs of fragmentation.