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Fiscal Responsibility Laws for Subnational Discipline: The Latino Experience
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Laws of Fiscal Responsibility for Subnational Discipline:
The Latino Experience
Since the 1990s many governments have intensified the search for mechanisms to
escape from fiscal populism as a strategy for winning elections and retaining public office. Economic liberalization and the international integration of national economies, popularly known as globalization, has increased both the rewards for adopting prudent fiscal policies and the penalties for reckless ones. The rising pay-offs and penalties associated with globalization have motivated governments to design and implement budgetary institutions to assure more transparency and consistency in fiscal discipline. These issues first gained prominence at the national level, where they remain problematic and, as we shall see, need to be resolved as a minimum condition for fiscal prudence in the rest of the public sector.
As subnational governments in developing countries have gained fiscal
autonomy,—spending responsibilities, tax bases, revenue transfers from the center, and the capacity to incur debt—their fiscal behavior has also caused concern. When subnational governments follow unsustainable fiscal policy, it can jeopardize the services they manage (but for which the central government may have ultimate political responsibility), the safety of the financial system and the international creditworthiness and overall macroeconomic stability of the country. Too often the central government then gets dragged in to provide bailouts, which can disrupt its own fiscal sustainability and reward the populist fiscal tactics of the recipient subnational governments.
National Governments have tried various ways to avert these problems. One way
has been to pass a Fiscal Responsibility Law (FRL) that prescribes proper fiscal behavior for subnational governments (SNGs) and sets incentives – rewards for success or sanctions for failure in following the rules. Argentina, Brazil, Colombia, New Zealand, Peru, Russia and South Africa have done so, and India and Nigeria are considering proposals for such laws. Some subnational governments, as in Argentina, Canada, India and the United States, have imposed legal constraints on their own fiscal behavior, to reduce the temptation of state administrations to leave fiscal messes and to improve their creditworthiness in the markets.
This paper aims to shed light on the circumstances and character of FRLs that
make a positive contribution to better SNG fiscal behavior, and to understand when these laws either add little or might actually distract and detract from other efforts to obtain prudent subnational fiscal behavior. It considers the context of other laws and rules, and investigates alternate arrangements aimed at obtaining good SNG (and national government) fiscal behavior.
The first section considers why some institution like the FRL could be of use and
from there refines the definition of the institution under consideration. In the context of federal societies, fiscal responsibility legislation imposed by national government or jointly agreed would intend to reduce moral hazard opportunities and the contagion effects on credit markets.
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Laws of Fiscal Responsibility for Subnational Discipline:
The Latino Experience
Since the 1990s many governments have intensified the search for mechanisms to
escape from fiscal populism as a strategy for winning elections and retaining public
office. Economic liberalization and the international integration of national economies,
popularly known as globalization, has increased both the rewards for adopting prudent
fiscal policies and the penalties for reckless ones. The rising pay-offs and penalties
associated with globalization have motivated governments to design and implement
budgetary institutions to assure more transparency and consistency in fiscal discipline.
These issues first gained prominence at the national level, where they remain problematic
and, as we shall see, need to be resolved as a minimum condition for fiscal prudence in
the rest of the public sector.
As subnational governments in developing countries have gained fiscal
autonomy,—spending responsibilities, tax bases, revenue transfers from the center, and
the capacity to incur debt—their fiscal behavior has also caused concern. When
subnational governments follow unsustainable fiscal policy, it can jeopardize the services
they manage (but for which the central government may have ultimate political
responsibility), the safety of the financial system and the international creditworthiness
and overall macroeconomic stability of the country. Too often the central government
then gets dragged in to provide bailouts, which can disrupt its own fiscal sustainability
and reward the populist fiscal tactics of the recipient subnational governments.
National Governments have tried various ways to avert these problems. One way
has been to pass a Fiscal Responsibility Law (FRL) that prescribes proper fiscal behavior
for subnational governments (SNGs) and sets incentives – rewards for success or
sanctions for failure in following the rules. Argentina, Brazil, Colombia, New Zealand,
Peru, Russia and South Africa have done so, and India and Nigeria are considering
proposals for such laws. Some subnational governments, as in Argentina, Canada, India
and the United States, have imposed legal constraints on their own fiscal behavior, to
reduce the temptation of state administrations to leave fiscal messes and to improve their
creditworthiness in the markets.
This paper aims to shed light on the circumstances and character of FRLs that
make a positive contribution to better SNG fiscal behavior, and to understand when these
laws either add little or might actually distract and detract from other efforts to obtain
prudent subnational fiscal behavior. It considers the context of other laws and rules, and
investigates alternate arrangements aimed at obtaining good SNG (and national
government) fiscal behavior.
The first section considers why some institution like the FRL could be of use and
from there refines the definition of the institution under consideration. In the context of
federal societies, fiscal responsibility legislation imposed by national government or
jointly agreed would intend to reduce moral hazard opportunities and the contagion
effects on credit markets.
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