The coverage of aggregate expenditure ceilings

Aggregate expenditure ceilings are today a feature of budgeting in many OECD countries. They are typically used either to enforce a trend-based expenditure policy, or to gradually reduce the size of government. With the increased popularity of expenditure rules, aggregate ceilings are also required to give effect to these rules. This article focuses on the key design issue of the coverage of aggregate expenditure ceilings – that is, should they cover the totality of government expenditure, or is it legitimate to exclude certain categories of expenditure? It is suggested that the distinction between “determinate” and “indeterminate” expenditure is crucial to properly answering this question. It is also argued that the appropriate coverage of aggregate expenditure ceilings is different during expenditure planning (budget preparation) and during budget execution. JEL classification: E620, H610 Keywords: Expenditure ceilings, top-down budgeting, determinate expenditure, indeterminate expenditure, automatic changes, trend-based expenditure policy, contingency reserve, forecasting margin, sequestration, compensation mechanism, welfare cap