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Abstract
This article aims to explain the difference between the expenditure reported in governmental end-of-the-year budgets and the amounts previously forecasted in the approved beginning-of-the-year budgets. We measure how political, financial, and institutional variables affect this spending drift. We focus on two much-debated factors, namely, tax revenue budgeting errors and the stringency of fiscal rules. Our econometric approach uses a panel based on the 26 Swiss cantons covering the period of 1980 to 2011. Results suggest that stringent fiscal rules discourage budget overruns, whereas underestimating tax revenue—i.e., a budgetary “pleasant surprise”—offers the opportunity for some overspending.
Notes
1 This requirement also exists at the Swiss cantonal level and has existed since at least the beginning of the 1980s. It is set out in the cantons’ financial management law.
2 An e-mail with four open-ended questions was forwarded to the head of the budget office in each of the 26 cantons in October 2013. The budget office is the administrative unit in charge of steering the budget process and of preparing the financial reports. Its head is the senior budget officer. We asked him (1) to list possible reasons for significant under- or overspending compared to the initial budget and (2) more, pertinently, if political, economical, financial, structural, and institutional factors have an impact. We also ask him to indicate (3) who is responsible for allowing possible overspending, and (4) if the practice regarding spending drifts has changed overtime. Seventeen cantons answered the questions. Unfortunately, the quality and the scope of the information provided were too heterogeneous and resulted, essentially, in anecdotal evidence. Nevertheless, some of these are reported in this article.
3 According to the authors, under- and overestimation have a symmetrical impact on fiscal balance. Overestimation increases the deficit, whereas underestimation lowers the deficit by the same magnitude.
4 Federal Finance Administration (FFA) (Citation2014), Switzerland’s financial statistics for 2012. Annual Report, Berne. FS Model SF: Cantons/Regular Table/Revenue/Cantons. Items 400 and 401.
5 The text in quotation marks is from the Swiss central government. English not being an official language of the Swiss Confederation, this “translation is provided for information purposes only and has no legal force.” Retrieved October 20, 2014, from http://www.admin.ch/ch/e/rs/1/101.en.pdf.
6 This embryonic cash flow statement is called the statement of capital expenditure.
7 Nine cantons out of 26 implemented the proposal as soon it was issued, 13 further cantons implemented it gradually over the 1980s, the last four cantons over the 1990s with the last one in 1996.
8 Admittedly, budgetary decisions are taken on nominal values. Overspending may be required just because an unexpected inflation episode occurs. However, this issue is not very relevant for the considered period. The inflation rate was less than 2% on average and no inflation surge happened during the fiscal year that would not have been anticipated during the budgetary process.
9 The expenditures included in the variable “Drift” are wages and salaries, materials, compensation payments to public authorities, and grants. Interest payments are not taken into account since they are fixed by contracts. Pure accounting charges, like depreciation charges, allocations to reserves, or internal service charges are excluded since they do not correspond to cash outflows. Admittedly, accrual-based measurements (like additional depreciations) may be used to circumvent fiscal rules in some circumstances. However, fiscal rules apply in Swiss cantons at the overall budget level and not at the individual department level. In this sense, there is no reason and no possibility for a spending department to have recourse to such creative accounting.
10 Tax revenue includes both personal and corporate taxes.
11 Admittedly, the categorization offers just a proxy for the stringency of the cantonal fiscal rules. More recently, Yerly (Citation2013) offers a more detailed index in which the degree of stringency varies between 100 (no canton achieves this) and 0 (achieved by one canton only, Appenzell-Innerrhoden). Unfortunately, the Yerly’s index is available for the years 1987 to 2011.
12 See in Appendix.
13 See and in Appendix.
14 See in Appendix.
15 The net debt corresponds to the gross debt after deduction from the non-administrative assets (i.e., the assets not dedicated to the provision of public services). Source: Switzerland’s financial statistics; Annual report; Federal Department of Finance.
16 Source: Financial statements of individual canton.
17 Source: Année politique suisse.
18 When budgeting for fiscal year T, the end-of-the year budget for year T–1 (accounts) is not yet available. Therefore, when incremental, the budgetary outputs for year T are by and large based on the budgetary output for year T–1, i.e., on the beginning-of-the year budget for year T–1.
19 To be able to detect this, we manually input a dummy variable for each individual canton and for each year into the model (cantonal and time-fixed effects). The result of this process is not reported here due to space constraints.
20 Ideally, we would have liked to include a variable capturing the specific effect of the variable Rule for Basel-Stadt. It was nevertheless impossible since the canton has no stringent fiscal rule (Rule = 0).
21 in the Appendix gives the result for this alternative specification.
22 Basel-Stadt is indeed both a canton and a city. Apart from the city of Basel, the canton has only two other tiny municipalities (whose budgets are not consolidated with the one of the canton).
23 in the Appendix gives the result after dropping the insignificant variables.