Budget institutions and government effectiveness

Purpose - Do budget institutions play a role in explaining why government effectiveness is higher in some advanced countries than in others? Design/methodology/approach - Employing an original panel data set that covers four years (1991, 2003, 2007 and 2012), we find that budget centralization is associated with lower government effectiveness in OECD countries after accounting for a list of control variables, such as gross domestic product (GDP) per capita, government expenditure and country- and year-fixed effects. Findings - We show that less-centralized countries display significantly better performance in health and infrastructure and a similar effectiveness in tax collections. The negative relationship between budget centralization and government effectiveness seems to manifest, especially at the execution stage of the budgeting process, but it is not significant at the formulation and legislation stages. These results survive a list of sensitivity tests. Research limitations/implications - Our paper finds that centralization is associated with lower effectiveness in field areas like health and education. However, it has been previously shown that centralization improves fiscal responsibility. Thus, our findings point out to the need of achieving the right balance between fiscal responsibility and government effectiveness. Practical implications - Results suggest that when governments at the national level are aiming at achieving effectiveness in field areas like health and education, they shall avoid excessive centralization at the execution stage of the budget. Social implications - Effectiveness in the provision of public health, and education can be enhanced by giving more power to the field ministries at the execution stage of the budget preparation. Originality/value - While decentralized budget power was proved at the local government level, this paper belongs to the small group of contributions that deal with this issue at the central government level.