ISSN 1608-7143

OECD Journal on Budgeting – Volume 4 – No. 3 © OECD 2004

Executive Summary

EXECUTIVE SUMMARY

Sharp differences exist in the legal framework for budget systems

The legal basis for national budget systems varies enormously across OECD member countries. In some countries, the content of laws supporting annual budgeting processes is confined mainly to a brief elaboration of the main budget issues of concern to the legislature. Such laws incorporate well-known budget principles. The details of budget processes are delegated to lower-level regulations. In other countries, laws contain specific provisions for all of the main stages of the budget cycle. The constitutions of many countries specify the general roles of the legislature and executive, including a few essentials for budget processes. In a few countries, constitutions contain an entire chapter devoted to public finance. Some OECD member countries do not have a written constitution.

A few countries give special status to budget system laws. In these cases, constitutions require that an “organic” law be adopted to guide budget processes for the State. Although organic laws provide a coherent framework, the coverage of the budget is limited to what is exclusively under control of the State, and may exclude important central government functions, especially in the area of social security. Laws establishing extrabudgetary funds or governing budget processes for such funds have been adopted to complement budget system laws whose application and coverage is limited to a smaller set of central government budgetary entities. In federal countries, sub-national governments’ constitutions or laws* are generally adopted independently from those at the federal level. In contrast, in Germany, a federal law requires nation-wide coherence of budget and accounting systems. The budget principles incorporated in a federal law are also embodied in laws adopted by states (Länder). The resulting harmonisation of budget laws throughout the nation facilitates budget reporting for all government entities throughout the nation.

Most countries have just a few main statutes pertaining to the budget system

– perhaps one or two principal laws, possibly supplemented by a Parliament Act. The United States is an outlier: its legislature has adopted many budgetrelated laws, with considerable detail in most. At the other extreme, the parliaments of Denmark and Norway have never adopted a formal statute to

* It is beyond the scope of this book to examine the laws of sub-national governments.

EXECUTIVE SUMMARY

guide annual budget processes. Regulations of the executive or parliament substitute for budget-related statutes in these two countries.

Public finance and legal theories do not explain inter-country differences in budget system laws

Research comparing the legal framework of budget system laws is virtually non-existent. The public finance academic literature provides a limited number of insights. Public choice theorists stress that rules are needed as constraints on the potentially self-interested behaviour of “organisations” such as the legislative and executive branches of government. The main principle to which this theory has been applied is that of budget balance. One Nobel Prize laureate suggested that a balanced budget rule should be incorporated in the constitution. This viewpoint is debateable, given the rigidity that such a rule would impose and the difficulties of enforcing it.

Many studies have examined the relationship between fiscal rules and budgetary outcomes, notably the performance of the budget balance and public debt. The literature does not attempt to rank or weight the 20 or so “rules” chosen to form indices of performance. Nor are views taken as to whether particular rules should be formally embodied in law. Several of the rules are included in law, especially in countries with a strong tradition of embodying rules in law. However, the budget decision-making rules within the executive are generally excluded from statutes. Such rules are either stated in internal regulations (orders, decrees, etc.) of the executive or remain unwritten, notably in countries where convention or informality is widely accepted.

Studies in comparative law include those that categorise law into various “families”. The broad classification between “civil law” and “common law” countries is more useful for laws affecting the private sector. For budget system laws, this distinction is less useful, since judges are not called upon to make laws for national budget systems. The origin of budget-related laws in “common law” countries is not precedent. More relevant is a categorisation of countries according to whether they have a comprehensive written constitution.

In the Westminster countries – where constitutions are not (fully) specified in writing – in recent years legislatures have adopted new statutes for the budget system, especially with respect to the budget principles of accountability and transparency. As a consequence, the gap in the density of budget-related statutes between Westminster countries and continental Europe – whose countries all have written constitutions – is not as great as 25 years ago. Nonetheless, there is not yet a convergence in coverage of budget-related laws.

EXECUTIVE SUMMARY

Political variables and legal culture help explain the inter-country differences

Political variables have been postulated to be important for explaining differences in budget systems across countries. This study emphasises the influences of the historical and present form of government. The degree of separation of powers between the executive and the legislature appears to be particularly important for explaining differences in the extent to which law is used to underpin budget processes. Presidential forms of government, where the powers of the legislature and executive are strongly separate, have used law most for controlling the executive in budget matters. Parliamentary monarchies with essentially two-party political systems are at the other extreme. When combined with inherited powers that produce a strong executive, the formal budget powers of parliaments in such countries are particularly weak. The need for statute laws is less, since the executive dominates the legislature. Statutes in such countries tend to strengthen the budgetary powers of the executive. The balance of formal budgetary power in parliamentary republics and semipresidential forms of government appears to be between these two extremes.

Other political variables also appear to contribute to explaining why budgetrelated law varies across countries. In countries with proportional representation electoral systems that result in a multiplicity of political parties and coalition governments, the need for the legislature to establish “permanent” budgetary rules by way of statute is lessened if there is also a convention (or possibly a legal requirement) for the governing political parties to present their economic and budgetary programme to parliament. In such countries, budget objectives are often made clear in “coalition agreements”, which, although not legally binding, constrain the margin of manoeuvre of the government. These agreements may be compared with quantitative fiscal rules that are embedded in law in other countries. Such agreements also fulfil part of the accountability requirements that law may establish in other countries, as governments’ budgetary programmes are publicly available once finalised. However, unlike law, they are valid only for the life of parliament.

Legal culture also helps to explain why a few countries have not adopted budget system laws. Although there are three generic steps in law making – initiation (often by the executive), resolution (by the legislature), and “concluding activities” (including legal reviews) – countries differ on the importance and procedures for all three steps. In continental European countries, the United States and the Asian OECD member countries, high-level courts ensure that budget-related laws are consistent with written constitutions. In Westminster and Nordic countries, the legal formalities are lighter and the options for legal instruments other than formal statute are greater. The Westminster countries