Legislative budgetary power and fiscal discipline in the euro area

Abstract

Purpose The objective of this study is to understand the budgetary role of national legislatures in euro area (EA) countries and to analyse implications for fiscal discipline.

Design/methodology/approach Building on the budget institutions literature, a legislative budgetary power index for all the 19 euro area (EA) countries is constructed using Organisation for Economic Co-operation and Development (OECD) and European Commission data as well as data generated from questionnaires to national authorities. A two-way fixed effects panel data model is then used to assess the effect of legislative budgetary power on the budget balance in the EA during 2006–2015.

Findings Overall, in the EA, formal legislative powers vis-à-vis the national budgetary process are weak, but there is more legislative involvement in Stability and Growth Pact (SGP) procedures, and legislative budgetary organisational capacity is generally quite good. In contrast to the traditional view in the budget institutions literature, this study’s empirical findings show that strong legislative budgetary power does not necessarily result in larger budget deficits.

Research limitations/implications Data on legislative budgeting were available from different sources, and time series data were very limited.

Practical implications There is scope to improve democratic legitimacy of the national budgetary process in the EA, without necessarily jeopardising fiscal discipline.

Originality/value The constructed legislative budgetary power index covers all the 19 EA countries and has a broad scope covering various novel institutional characteristics. The empirical analysis contributes to the scarce literature on the impact of legislative budgeting on fiscal discipline.