Quality of Public Finances: Value Dimensions of Budget Policy

Abstract

Policymakers are starting to address the question from a new perspective of what actually constitutes good fiscal policy. This question has come about as a result of the evolution in mainstream thinking about the direction of fiscal policy and as a result of actual budgetary developments in major economies. I will argue that although there has been a regime switch in thinking about the direction of fiscal policy, we still have a long way to go:

• The quality of budgets has improved in the United States and in Europe in recent years, if measured in budget balances in relation to GDP.

• The relatively rapid change in underlying positions is to some extent due to tax increases; also, in continental Europe there is an increasing consensus that tax increases may pose problems in terms of allocation.

• In several instances, savings on the expenditure sides of budgets were made where it was politically easy but not necessarily economically sound; we are thus increasingly confronted with budget structures that focus on transfers, and in which public investments have been “saved out.” This situation poses problems in the future for competitiveness and growth.

• Policymakers are not yet fully aware that with regard to budgetary policies only the visible and easy part of mechanical budgetary savings has been achieved. In many economies the hard part — namely increasing the quality of budgets — still lies ahead.