Formal rules in budgeting are designed to address certain problems. This chapter classifies formal rules according to the problems some rules are meant to solve. It begins with a consideration of the common pool resource problem, which develops when spending is targeted to a specific group but the taxes used to pay for it come from general revenues. It then considers a related issue that can exist when there are multiple levels of government, namely the moral hazard problem. Lower levels of government are prone to spend more when they expect that higher levels of government are going to bail them out. The third topic is the ‘principal-agent’ problem. Budgets inevitably involve some form of delegation ...
Fiscal Rules and Fiscal Policy
Fiscal rules and fiscal policy