The existing research in the area of institutional economics has produced comprehensive descriptions of the central government budget processes in different countries. It shows that the proper design of budget processes contributes significantly to aggregate fiscal discipline. Relatively little is known today, however, about the use and effectiveness of fiscal rules, i.e., what governments do to translate the budgetary norms into decisions during the draft stage of the budget process, and about what they do to assure compliance with these norms. All EU member states today formulate budget targets under their Stability or Convergence Programs, and they are expected to achieve budgets, which are “close to balance or in surplus.” How states get to this point, however, is left to their own discretion.
The purpose of this paper is to study the use and effectiveness of budgetary rules in the EU member states in more detail. Based on new empirical research, we pursue two broad research questions. (1) What are the rules (formal and informal) that guide the process of setting budgetary norms, and what is the link between these norms and the decisions about government spending and the deficit during the draft stage of the budget process. (2) How do governments assure that the norms are met once the fiscal year is under way and how do they cope with unforeseen shocks to revenues or spending.
The preliminary results of this research show a large degree of variation of fiscal rules across EU states. We show which kind of fiscal rules are conducive to meeting the fiscal targets formulated in the Stability and Growth Pacts of the individual countries.