Formal Fiscal Restraints and Budget Processes as Solutions to a Deficit and Spending Bias in Public Finances: US Experience and Possible Lessons for EMU

Against the commonly accepted view that in the run-up to EMU the Maastricht fiscal restraints were quite effective in re-aligning public finances in Member States that were showing large excessive deficits, Strauch and von Hagen stress that there are some objections concerning this initial sign of institutional effectiveness. They note that the restraining effect is much less apparent in the early stages of the post-1992 period for some larger countries. Moreover, some countries might have consolidated their public finance position even without the Maastricht fiscal criteria, given their debt level and the macro-economic environment. The authors argue that formal fiscal restraints may be an effective instrument for avoiding excessive deficits, provided they incorporate certain institutional features: the fiscal target must be clear-cut and comprehensive, enforcement should rely on independent agents, and the formal restraints involved should be difficult to amend. They find that EMU fiscal rules show some weaknesses with respect to these guidelines. The authors also stress that the budget process can be an effective instrument for solving the problem posed by a “deficit and spending bias” in public finance. In their opinion this holds also if strict fiscal rules already exist.