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October 20, 2007

Dr. Allen Schick on Budget Tools and Rules

Posted by Richard Allen

Professor Allen Schick led an FAD-seminar on "Analytic  Tools Versus Decision Rules for Fiscal Policy" on September 19, 2007.  Many analytic concepts can  be formulated into rules that guide or constrain decisions on the budget  or fiscal policy. Alternatively, analytic tools can be used  to inform decisions, but not to dictate how governments allocate resources.

Tools that have been cast into  decision rules include:
  • Baseline projections that estimate the future cost  of current policies.
  • Medium-term expenditure  frameworks that limit future spending.
  • Fiscal rules (e.g., the EU's  Stability and Growth Pact) that limit key fiscal aggregates, such as the fiscal  deficit.

Some tools could potentially be  transformed into rules, but have not been (at least not yet):

  • Herbert Stein's proposal to  allocate the budget as a share of GDP.
  • The Tax Expenditure Budget and  the Regulatory Budget.
  • Program Budgets.
  • Contingent liabilities and  other sources of fiscal risk.
  • Performance-based budgets.

The seminar gave rise to interesting questions such as:

What use should be made of fiscal/budget rules  in low-income countries?
Rules inevitably limit discretion over spending  and limit flexibility - so should governments be parsimonious is devising new  rules?
What kind of rules generate  efficient spending decisions?

Dr. Schick's presentation is available here: Download drshick091907.pps


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