Budgetary institutions with or without coalition government: political economy of parliamentary democracies

In comparative political economy, two elements likely to cause fiscal profligacy have received particular attention from researchers: weak budgetary institutions and governmental fragility, especially the fragility related to coalition government. A recent trend in political economy studies integrates both of these aspects, stating that strong budgetary institutions can overcome the tendency of fiscal mismanagement often seen in coalition governments. However, these recent studies have dismissed an important point. Namely, a more rigorous implementation of “interaction effect” analysis might have led to the conclusion that effects of budgetary institutions could weaken under a single party government. Such argument, if it is true, can be contradictory to the results of the pioneering studies in this area, which acknowledged the effectiveness of budgetary institutions in preserving fiscal sanity in the case of a single or nearly single-party government (Hallerberg and von Hagen, in Electoral institutions, cabinet negotiations, and budget deficits in the European union. NBER, pp 209–232, 1999). This paper refutes the hypothesis of ineffectiveness of budgetary institutions on fiscal discipline in the case of a single-party government, by using two additional empirical strategies. One is the adoption of Error Correction Model, used especially for the study of long-run (steady state) effects, taking into full account the particularity of “institutions”. The other strategy involves enlarging the sample. Traditional samples consist of 15 EU countries [e.g. the database of von Hagen and other researchers (Hallerberg et al. in J Polit Econ 23(2):338–359, 2007)]. In this paper the sample was enlarged using the database of Fabrizio and Mody (Econ Polit 22(3):362–391, 2010), which includes East European countries with further addition of 4 more countries (Japan, Australia, Canada and New Zealand). The resultant sample of 29 countries covers most of the parliamentary democracies among industrial nations. Using this new sample, we found that budgetary institutions are still effective in restraining fiscal mismanagement under a single-party government, but such effectiveness may be weak. However, dividing all the available indices of budgetary institutions into two categories, one being insensitive to the number of governmental parties, the other dependent on this number, enables us to find a clearer effect in the former group even under a single-party government, while the latter category is found to be effective under a coalition government. So far the only explanatory background of the fiscal effectiveness of budgetary institutions was provided by the theory of Common Pool Resources. To make a new classification, we introduced two additional aspects to the theoretical background: one being Time Consistency, and the other being a Multi-Principal Model. A new theoretical classification of budgetary institutions suggests that for single-party governments we should concentrate efforts of budgetary reform to assure Time Consistency. We must have a good numerical fiscal target, top-down budgeting in agenda setting, and only rare use of supplementary budgets. For coalition governments, incomplete contracts concerning the multiparty agreement makes fiscal planning less effective. To overcome this, parliamentary and administrative budgetary procedures should be carefully controlled according to the theory of Common Pool Resources and Multi-Principal Model.