Are budget norms relevant to the dynamics of government balance and fiscal indicators?

We analyse the evolution of budget norms in Italy since the Second World War in order to evaluate their impact, if any, on the main government fiscal indicators, such as public deficit and debt, public expenditures and tax burden.

The Virginian tradition about the constitutional rules for public debt and deficits developed after the book of J.M.Buchanan on the Principles of Public debt of 1958, whose importance dominated his subsequent studies, including the works by Buchanan-Tollison (1972), Buchanan-Wagner (1977); Buchanan-Brennan (1980), Buchanan-Vanberg (1986), Buchanan-Rowley-Tollison (1987). In the academic year 1960-61, at the Department of Economics of the University of Virginia, M.Friedman, J.M.Buchanan, J.Viner, B.Graham and M.Rothbard and others, debated on how to limit the monetary power of the central bank to prevent inflationary deficit financing and/or artificial monetary expansion to combat unemployment. The result of that debate was a book edited by L.Yeager, “In Search of Monetary Constitution,” supporting the view of the need of fiscal/monetary rules versusdiscretion.

Our paper illustrates the construction of an index aimed at evaluating the evolution of budget norms in Italy during the period 1948-2013, and the impact of these rules on budget balance and other government’s fiscal indicators. The index is broadly based on the work of Von Hagen(1992), with some differences. In this respect, Von Hagen refers to a single-period including 12 EU Countries, whereas we build an index aiming to capture the development of Italian budget norms over a quite long period of more than 60 years. The index is composed of four sections representing the budgeting process. The first helps to describe the structure of negotiations on budget among members of the government. The second considers the approval of the budget draft by Parliament, and its possibility of amending the text, focusing on the order under which expenditure chapters and documents are voted. The third points out the significant features of documents included in the budget law. Finally, the last part describes the flexibility in the implementation of the budget law, considering the practice of postponing the so called “Special Funds” and expenditure transfers among chapters during the execution of the budget norms.

The scores related to the evolution of budget norms in Italy, as obtained from the index are considered to study the impact of budget norms on budget balance in the period under consideration.