Budgetary choices and institutional rules: veto rules and budget volatility

Studies of the line item veto have traditionally focused on whether it leads to less spending than an all-or-nothing veto and have only produced modest results. However, other impacts that differences in rule choice might effectuate have not been investigated in detail. We examine the role of veto rules for budgetary volatility, the extent to which expenditures vary. Theoretically, we model budget choices given all-or-nothing, line item, and item-reduction vetoes and demonstrate that more encompassing veto authority does not necessarily decrease spending but should result in more political gridlock, implying less volatility. We then analyze the model’s prediction by examining American state budget expenditures from 1978 to 2007. Whether one looks at budget categories or total spending, volatility is greater with the all-or-nothing veto relative to more stringent alternatives. Hence, delegating greater authority to executives such as governors, perhaps unexpectedly, likely strengthens expectations about future budgets while reducing the responsiveness of spending to changing preferences or circumstances.