FOR THE CONTROL
Prepared by Marion G.
ARE RULES THOUGHT TO BE NEEDED?
A. The Public Choice View of Deficits, Debt
and Government Growth
Proposals in the Public Choice Spirit
AMERICAN FEDERAL FISCAL RULES
RESTRICTIONS FACED BY AMERICAN STATES
A. Balanced Budget Rules
The Role of Executive Discretion
Tax and Expenditure Limits (TELs)
THE SPENDING CONTROL ACT
PROVINCIAL GOVERNMENT RULES
THE MAASTRICHT RULES
A. How the Rules Work
B. Why Are the
Rules Thought to be Needed?
The Maastricht Rules and the Canadian Federation
FISCAL RULES FOR THE CONTROL
Fiscal restraint has become
the order of the day for governments around the world. Whatever their
political stripe, they are finding it virtually impossible to support
ever- expanding government through the use of deficit financing. This
new mood has become so entrenched that we have heard talk of fiscal restraint
in times of poor economic growth and even recession, something that would
have been unthinkable as recently as a decade ago.
The fact that government
rhetoric now promotes restraint does not mean that widespread success
has been achieved in this area. Indeed, many governments today face a
fiscal situation substantially worse than in the 1981-82 recession. The
difference today is that the public seems to have largely accepted that
continued increases in debt are undesirable and counterproductive, and
is demanding measures to curtail growing public sector debt. One way of
doing this is by the use of fiscal rules, defined here as any legislative
or constitutional constraints on governments with respect to deficits/debt,
aggregate spending or revenues, tax rates, etc. Such rules remove legislators'
discretion in making spending and taxation decisions and often include
provisions for monitoring compliance and a series of penalties for any
Governments have reacted
in different ways to the demands for such fiscal rules, the most famous
response being Proposition 13, which in 1978 placed limits on the extent
to which California municipalities could levy property taxes. There have
also been repeated calls from "conservative" groups in the United
States for a constitutional amendment requiring balanced federal budgets.
Of the required 34 states, 32 have passed resolutions calling for a constitutional
convention to force the federal government to achieve a balanced budget.(1) Just recently, the House of Representatives
failed by only nine votes to achieve the required two-thirds majority
to pass such a resolution.(2)
The American government
has also passed several bills attempting to set a schedule for balancing
the budget. The most famous of these was the Balanced Budget and Emergency
Deficit Control Act of 1985, better known as Gramm-Rudman-Hollings
(GRH), which was succeeded in 1990 by the Budget Enforcement Act.
Today, virtually every American
state has either a constitutional prohibition against deficits or a legislative
control over deficit spending. The Maastricht Treaty in Europe has established
a set of fiscal rules to govern member nations as those countries move
to greater economic and political union. In Canada, the federal government
has established legislation for the control of government program spending
and two provinces have passed legislation mandating balanced budgets.
Much in the news today is
the "Social Contract" imposed by the government of Ontario on
the public sector in that province. This does not constitute a set of
fiscal rules, however. It does not attempt to impose long-range fiscal
constraints to generate some predetermined fiscal result, and it does
not remove discretionary powers from legislators. Rather, it is a short-term
and temporary response to fiscal problems.
The use of true fiscal rules
to curtail the activities of government represents an attempt to tie the
hands of legislators in the belief that they have proven their incapacity
to curtail their appetite for spending. Some think that this has come
about because their constituents do not reward such fiscally prudent behaviour;
legislators have merely responded to pressures to provide ever more programs.
Others see the need for such controls as arising from legislators' failure
to deliver the prudent fiscal policy really desired by constituents.
The issue now is whether
such fiscal rules can curtail "excessive" spending and deficits
or whether they merely enable politicians to appear serious and responsible,
while allowing them to continue their profligate ways. Professor Aaron
Wildavsky notes that whereas such strategies have always been part of
the political process, the move to budget stringency in the United States
has led to a substantial increase in their use.(3)
This paper will examine
the conceptual rationale for the use of fiscal rules, describe certain
existing and proposed rules and draw conclusions that might be instructive
for Canadian fiscal policy.
ARE RULES THOUGHT TO BE NEEDED?
When the Spending Control
Act was being examined by the House of Commons Standing Committee
on Finance, two contrasting views were expressed by its supporters. One
view was that we have high levels of spending and large deficits because
this is what a very wide range of Canadians want; undesirable as this
situation might be, Parliament is responding to the wishes of its constituents
and giving them what they demand. The opposing view was that Canadians
do not collectively want such a degree of spending and such deficits,
but that these are the inevitable result of modern democratic governments,
which feel they are compelled to respond to the demands of various special
interest groups. Supporters of both views thought that legislated controls
could be of value in generating sound fiscal policy that would benefit
all Canadians in the long run.
Still others see high levels
of spending and deficit financing as a reflection of poor management by
government. Thus, fiscal rules would be merely administrative tools with
which politicians could better enact fiscally sound policies. Fiscal rules
would perform an administrative function similar to that of comprehensive
Establishing such rules
would be one of several management devices for the control of government
spending, such as sunset clauses, zero base or performance budgeting,
indexation of the income tax system, and the requirement for super majorities
in legislatures for the passage of tax-raising legislation. Others, however,
see a more serious problem.
The strongest proponents
of constitutional limits on the size of government and its use of deficit
financing, are adherents of the "Public Choice" subdiscipline
of economics. This approach assigns utility-maximizing behaviour to the
activities of individuals in public institutions, including their decision-making
on public issues. Rather than assuming that governments and legislatures
are impersonal and benign institutions, Public Choice theory assumes that
the individuals working in these institutions are generally no different
from those working in private institutions or those who engage in a wide
range of market activities.
In a democracy, politicians
must be elected. They purchase public support from voters through their
promises and actions, and voters sell that support in exchange for policies
they believe will increase their own utility. This is as much an economic
transaction as the buying and selling of an automobile, though it takes
place in a different environment with different rules. In this view, collective
actions of government are nothing more than the attempt by one group of
people to sell something to another group of people, just as is done in
A. The Public Choice View of Deficits,
Debt and Government Growth
Government is involved with
collective action. In such a market voters tend to spend little time and
effort to inform themselves about the issues at hand, especially as such
information is costly to acquire. Individuals have little impact on voting
outcomes, and each government policy tends to have only a minor impact
on individual voters. Where their interests are concentrated, however,
voters have a tendency to be more informed and to make their wishes better
known. The same is true of politicians. They are relatively ill informed
over a wide range of issues but are better informed over issues important
for their re-election, which are the issues about which voters feel strongly.
These features of the political
marketplace make it particularly prone to capture by special interest
groups. Professor Aaron Wildavsky offers the view that modern technological
changes have greatly lowered the cost of communication, making lobbying
less expensive and making the role of interest groups more prominent in
political life. The situation has completely changed from the time when
the Canadian and American constitutions were written.(4) These special interest groups have been
able to organize and communicate their wishes to politicians, who see
little to be gained in spurning these, especially when they are widely
publicized by the media. And as long as special interest groups are not
competitive in nature, politicians can gain votes (avoid losing votes)
by yielding to their wishes.(5)
Those voters who are not members of a favoured group lose little by this
governmental support; should they think such support is unfair, their
reaction might well be to undertake lobbying for their own benefit. Thus
the political process can be seen as a kind of logrolling exercise on
both the demand and supply side. A legislator may attempt to garner support
for a group he or she endorses by voting to support another group, which
is important to a different legislator. Similarly, interest groups could
form "umbrella group" coalitions of their own.
In a more general view,
Public Choice economists argue that the post-war history of persistent
deficits could not have happened without the complete reversal of citizens'
and policy makers' attitudes to public debt that resulted from the widespread
acceptance of Keynesian economics. Once the old notions against deficit
financing had been removed, the democratic political process inevitably
led to government growth fed by debt accumulation, as politicians, bureaucrats,
interest groups and ordinary voters engaged in their politico-economic
transactions. Prior to the Keynesian revolution, public debt had been
viewed as undesirable because it reduced the capital stock of society,
and ultimately made citizens poorer. Many now believe, however, that such
a debt can actually produce prosperity. Since this approach to public
policy allows increased spending without corresponding tax increases,
it removes a natural constraint on government growth.
The political process, and
the cost structure of information gathering, generates incentives on both
sides to promote special interests at the expense of the public good.
If politicians, bureaucrats and voters are maximizers of individual utility
rather than selfless individuals, politico-economic transactions can lead,
and some would argue that they inevitably do lead, to economic policies
with negative consequences for society, even though the participants in
transactions see them as mutually beneficial. This is the ultimate in
negative externalities. Hence, Public Choice economists see the need to
curtail these transactions and suggest fiscal rules as one way of doing
B. Proposals in the Public Choice Spirit
Prior to the enactment of
Gramm-Rudman-Hollings in the United States, some economists and politicians
had been calling for constitutional limits to federal spending and taxation.
They wanted a rule to constrain the ability of legislators to spend without
taxing and to prevent them from spending too much. The broad outlines
of such a proposal were presented by James Buchanan, who subsequently
received the Nobel Prize in economics, and Richard Wagner.(6)
In their view, such a rule
should be transparent, so that it could be understood by both politicians
and the public and so that voters could recognize when it had been breached.
It should apply to the net deficit position of the budget, not to the
level or composition of spending, decisions that would be left to the
political process. Nevertheless, since the use of debt financing is believed
to have led to high growth in government spending, such a rule would by
its very nature curb government's appetite for spending by removing the
ability to defer the tax consequences of doing so.
This proposal required both
the President and the Congress to present and to approve budgets that
projected zero deficits. Should the projections prove to be in error,
automatic spending cuts would return the budget to balance within three
months. Any surplus would have to be used to repurchase outstanding debt.
The proposal offered a five-year transition period to budget balance and
allowed for a one-year override if supported by two-thirds of Congress
and the President.
This version seems straightforward.
But so do others. The important feature is that it provided for after-the-fact
reconciliation and automatic across-the-board, spending cuts. Sequestration
[cuts] need not be initiated by some legislator, and thus legislative
collusion could not be used to override the spirit of the law. The authors
also saw an advantage in that the rule would not merely be another piece
of legislation, but a constitutional amendment.
Other forms of automatic
penalties could also be used. Non-compliance could result in automatic
tax increases, reductions in legislators' salaries or an election call,
with currently sitting legislators, or those voting for a non-complying
budget, prohibited from seeking re-election.
The following comprehensive
proposal has recently been suggested for the federal government in Canada:(7)
All program spending
would be fixed at some percentage of Gross Domestic Product (GDP).
(This provision is more comprehensive than the Buchanan and Wagner
version, as it would also curtail spending. This is vital, otherwise
balanced budget rules could simply lead to other forms of financing,
such as money creation.)
The federal government
would have to balance its budget over the course of a business cycle.
In practice this means that real tax revenues planned in a budget
would have to equal the average of the past five years. (This provision
is more flexible than the Buchanan Wagner version, which effectively
requires an annual balance.)
The government would
set up an economic stabilization or "rainy day" fund. In
years in which revenues exceeded outlays, the excess would be deposited
into the fund. When outlays exceeded revenues, withdrawals would be
made from the fund. Should the size of the fund grow to exceed 10%
of annual spending, the excess would have to be returned to taxpayers.
Should the level drop to precipitously low levels, taxes would have
to be raised or spending curtailed.
If spending exceeded
the specified amount, or the rainy day fund was depleted, an election
would be called within two months.
These rules would include
other provisions to ensure that compliance with the spirit of the
rules was maintained. Tax expenditures would have to be curbed. Spending
would include any increase in the present value of unfunded liabilities.
Mandating spending on to others, whether provinces or business, should
also be restricted.
The provisions of the
rules could be over-ridden for two years if this was supported by
a two-thirds majority of Parliament.
This represents a set of
rules that would govern a stationary state, once budget balance had been
achieved. It requires, in addition, a set of transition rules leading
to budget balance as well as a determination of the appropriate level
of federal spending. Because of the important role played by federal fiscal
transfers to the provinces, any determination of appropriate federal spending
should be undertaken with some degree of provincial consultation.
AMERICAN FEDERAL FISCAL RULES
In 1985 the American federal
government passed into law the Balanced Budget and Deficit Reduction
Act, better known as the Gramm-Rudman-Hollings bill (GRH). That law
presented a five-year schedule for reducing the deficit, with a balanced
budget set for the sixth year. It was hoped this would be accomplished
through a series of spending cuts. If the President of the United States
and the Congress could not agree on the cuts needed, a series of mandatory
cuts ("sequesters") would automatically take place. Thus in
the absence of Congressional and Executive agreement, an automatic mechanism
was to ensure that the schedule was in fact met.
In fiscal year 1986, the
federal deficit was $221,000 million U.S.,(8)
while the GRH target was set at $172,000 million. For 1991, the original
GRH target, labelled GRH1 in Table 1, was zero, whereas the deficit came
in at $270,000 million. But in 1987 the targets were revised upwards when
it became evident that they could not easily be met. Comparing the actual
budget deficit with this second round target of $64,000 million, labelled
GRH2, indicates a miss of only $206,000 million.
While deficits actually
grew during the years of GRH, some commentators have argued that they
could have been even higher in its absence. Nevertheless, the American
budgetary results failed to meet their targets and did not come close
to balancing the budget. On balance, it appears that GRH was a failure.
There are several reasons
for this failure. In the first place, the targets applied only to the
deficits projected in the budget they did not apply to the actual
deficits. By understating expenditures, by overstating revenues and by
forecasting excessively optimistic economic performance, budgetary figures
could easily meet targets yet without any real hope of actually fulfilling
these expectations at the end of the fiscal year. Moreover, legislators
became adept at budgetary "slights of hand," re-arranging fiscal
expenditure periods, moving items off budget, etc. In 1986, for example,
Congress advanced a payment of $680 million so that it would take place
prior to the coming into effect of GRH. This advance payment resulted
in extra borrowing costs, prompting one Representative to admit: "Isn't
it ironic that we are wasting half a million dollars trying to fool the
taxpayer into believing that we are getting the deficit down, when in
fact we are actually increasing it?"(9)
Since the GRH bill contained
no provision for after-the-fact reconciliation of deficits with the GRH
targets, it was the forecasts that were important in determining a possible
breach of the law, not the results. Indeed, once the GRH was put in place,
budgetary forecasts became extremely poor predictors of actual deficits,
something that had not been true prior to the law's introduction.(10)
In addition, the sequestration
process was extremely limited, with almost one-half of all expenditures
exempt from automatic cuts and another 24% of total spending subject to
only limited automatic cuts. In 1986, 48% of spending was exempt, of which
almost one-half comprised social security spending.(11) The next large chunk of
exempt spending, at 15% of the total, was interest on the public debt.
Consequently, all the automatic cuts had to come from items comprising
only 27% of the budget, and almost two-thirds of this was from defence
spending; this led to intense political pressures not to make extensive
use of the sequestration process.
According to Professor Aaron
Wildavsky, the primary reason for the failure of GRH was the fact that
it actually provided legislators with a strong disincentive to cut program
spending when they knew that a sequestration process would ignore the
very programs that were the sources of the deficit.(12)
GRH was replaced in 1990
by the Budget Enforcement Act (BEA). This new law shifted the focus
of fiscal rules away from the deficit and towards expenditure control.
While deficit reduction was expected to be a result of the BEA process,
and maximum deficit levels were set in the law (See Table 1), it was no
longer the primary goal.
The BEA established caps
on discretionary spending, which for the first three years was divided
into three categories: defence, international spending and domestic spending.
After the third year, the program places limits on total discretionary
spending. While the caps are meant to be permanent, certain circumstances,
such as revised inflation forecasts, exceptionally slow growth (defined
as growth for two successive quarters of less than 1% on an annual basis)
or some kind of natural emergency, could lead to their alteration. Table
1 shows the dramatic increase in the targets for 1994 and 1995 resulting
from these technical adjustments (labelled BEA2). They are twice as high
as the original GRH limits for 1986, the year that was to have seen the
deficit peak. Moreover the sequester provision with respect to the deficit
does not apply for the first three years and then applies to what has
effectively become a moving target.
There are several important
features of the caps on appropriations.(13)
Spending cannot exceed the cap, even if the additional expenditures are
self financing or if taxes are increased. During the first three years,
when three categories exist, spending cannot be transferred from one basket
The caps described above
apply to discretionary federal spending; they do not touch entitlement
programs. The BEA legislation also establishes rules for revenues and
mandatory spending programs, known as the pay-as-you-go rules. At the
time of the BEA's passage, the baseline projections for revenues and mandatory
spending were enacted in law. Any subsequent legislative effort to lower
taxes or increase mandatory spending must now be deficit-neutral. This
has enshrined the current entitlement shortfalls in the structure of the
The BEA, like the GRH, contains
sequester provisions which take effect if the pay-as-you-go provisions
are breached. But there are as many exemptions as in the GRH, so that
cuts can be made in only a small subset of areas.
The BEA, like the GRH and
any other piece of legislation, can be changed via the legislative process,
though so far there appears to have been no attempt to do this. If the
law remains in place, the legislative caps will shortly become binding,
as outlays are now close to their appropriations limits. To date, however,
the BEA has not been much more effective than the GRH in controlling the
deficit, nor has it been particularly effective at curtailing growth in
The American budgetary process
also contains a procedural rule that performs many of the functions of
a fiscal rule, although it is not automatic. Both Houses of Congress divide
spending appropriations among a vast number of Committees and Sub-Committees.
In the House of Representatives, a Sub-Committee may exceed its total
appropriations as long as its senior Committee does not; that is, aggregate
limits apply to spending appropriations for the various Committees. In
the Senate, on the other hand, a member may raise a point of order whenever
the appropriations for a particular sub-Committee exceed its limits; this
point of order can be overturned only by a three-fifths majority.
Such offset provisions provide
a strong notion of opportunity cost at the Senate level. Whenever a politician
or lobbyist wishes to enhance a program or create a new one, he or she
must find offsetting spending reductions elsewhere. And because this provision
can apply at the Sub-Committee level, it can force an offset, even though
overall spending caps might not be binding.(14)
(in billion $US)
Source: S.E. Collender,
The Guide to the Federal Budget, Fiscal 1993, The Urban Institute
Press, Washington, 1992;
Economic Report of the
President, Transmitted to the
Congress January 1993, Washington, 1993; and
Congressional Budget Office,
Sequestration Preview Report For Fiscal Year 1994, Washington,
April 2, 1993.
RESTRICTIONS FACED BY AMERICAN STATES
A. Balanced Budget Rules
Virtually every American
state has a provision requiring a balanced budget, although the specifics
are so complicated and varied that there appears to be some disagreement
as to the extent of these controls. In some cases the governor must present
a balanced budget, in others the legislature must pass a balanced budget,
while in still others the budget must actually balance at the end of the
According to the United
States General Accounting Office (GAO), Vermont and Wyoming are the only
two American states without a legislative or a constitutional requirement
for the state government to balance its budget, although in practice there
is such an expectation for the government of Wyoming. Of the states with
rules, 13 rely primarily on legislative controls while 35 use constitutional
restrictions. On the other hand, the U.S. Advisory Commission on Intergovernmental
Relations (ACIR), a body created by the United States Congress, reports
that the state of Wyoming is bound by its constitution to balance its
budget while the state of Ohio does not require the governor to submit
a balanced budget nor does it require the legislature to pass a balanced
budget. Instead it requires that "sufficient funds be made available
for expenditures," an expression that would appear to permit borrowing
as a means of providing sufficient funds.
According to the GAO, ten
states do not require that their budgets balance at the end of the year,
but, of the 40 that do, 11 allow for a carryover of a deficit if necessary,
usually through the issuance of short-term debt instruments. According
to the ACIR, only nine states may carry over a deficit, but most of these
nine are not the states cited by the GAO. Thus it appears that balanced
budget requirements may not always be what they seem and there is a difference
of opinion as to the rules in place at the state level.
In most states, the "budget"
to be balanced is not the consolidated budget of the government; it is
not, therefore, as comprehensive as the budget of the United States federal
government. Unlike the federal government, the states generally separate
their accounts into capital and current (operating) budgets. They generally
finance large-scale capital spending, accounting for about 9% of total
expenditures, through borrowing. Mandatory spending may also run a deficit
in some states. As a rule, the general budget consists of discretionary
spending on one side and general tax revenues on the other and it is only
this budget that needs to be balanced. Such "general fund" spending
accounts on average for 54% of total spending, ranging from a high of
74% to a low of 21%, according to the GAO. Where other parts of the budget
are required to balance, receipts from long-term borrowing are often treated
These rules do, nevertheless,
figure prominently in the fiscal actions taken by state governments to
balance their budgets. State governments have, in response to unforseen
budgetary difficulties, taken actions to curb potential deficits to the
tune of about $40 billion in the past couple of years. And figures from
the United States Department of Commerce indicate that the state government
sector is far healthier than the provincial government sector in Canada.
Nevertheless, states with balanced budget requirements still run deficits.
The GAO study indicates that in 1992 Illinois and Maryland ran deficits,
while in the past three years another six states had to carry over a deficit.
New York, a state with a long history of circumventing its balanced budget
rules, ran total deficits of $2,387 million in the past three years. Connecticut
issued short-term bonds of $965 million to cover two years of deficits
and Massachusetts borrowed $1,400 million to cover a deficit. All of these
states had balanced budget provisions.
Moreover, our own analysis
of U.S. Department of Commerce data indicates that 24 states had general
expenditure levels in excess of general revenue levels for fiscal year
1991,(16) where this is calculated by excluding
insurance and trust fund expenditures and revenues from the totals. This
does not mean that these same governments had a deficit under their particular
accounting and legislative regimes; however, it does indicate that they
suffered a revenue shortfall. The year 1991 was, however, an unusual one
for state governments; data for earlier years indicate that revenue shortfalls
were very much the exception rather than the rule.
American state governments
have much less access to tax revenue than the federal government and their
bond ratings are consequently very sensitive to the risk perceptions of
bond markets. It is this sensitivity that, on the one hand, controls deficit
financing but that, on the other, could lead to the use of fiscal rules
to restrain legislators. A recent study found that state governments with
more prudent fiscal policies (defined as low debt and low deficit trends
combined with strong fiscal rules) do pay lower borrowing costs than states
with less prudent fiscal policies, other things being equal.(17)
Evidence suggests that state
government spending is partly driven by forecasts of revenues, which tend
to be underestimated. Such practice has moderated the effects of unexpectedly
low revenues at the end of a fiscal year and has lowered the probability
that balanced budget rules need to be invoked.(18) Similar forecasting requirements
have been put in place in the Alberta Deficit Elimination Act.
In the past, some state
governments tried to circumvent their own rules by redefining some current
expenditures as capital spending and financing them via deficits. Financial
markets quickly saw through such measures leading to fiscal crises.(19)
State government bond ratings are very sensitive to their fiscal positions,
and their potential for change appears to provide strong motivation to
In the American federation,
the federal government plays a stronger economic role than its counterpart
in Canada. In the United States the federal government controls about
two-thirds of all public spending, whereas in this country the federal
and provincial governments are about equal. Comparisons between provinces
here and states in the U.S. should bear these jurisdictional differences
B. The Role of Executive Discretion
During the 1980s, when President
Reagan occupied the White House and the Democrats controlled the Congress,
conservative Republicans called repeatedly for a "line item veto"
power as a way of curtailing excessive expenditures and the deficit. At
present, though the President can veto a bill, he cannot veto parts of
a bill and it is common for a bill to have all sorts of unrelated spending
At the state level, governors
tend to have a great deal of discretion as to how they deal with a bill.
In 40 states, the governor may veto or alter a line item. In 32 states
he may veto funding for a program or agency. In other states he may veto
the language of a bill, which governs the way funds are to be spent.(21)
These gubernatorial powers, rather than formula-based cuts, are generally
how balanced budget rules are enforced.(22)
This particular feature,
while important in a Congressional form of government, has little relevance
to the parliamentary form of government in place in Canada.
C. State Tax and Expenditure Limits (TELs)
In addition to balanced
budget rules, several states also face legislative or constitutional limits
on the growth of expenditures and /or tax revenues. Since 1976, such limits
have come into force in a large number of states,(23)
with four states adding or amending such limits in 1991. As with the budget
balance rules, these limits can have either legislative or constitutional
authority, and they can be written in a wide variety of ways. The most
common way is to limit expenditure growth so as to keep it from growing
in real per capita terms, or to keep it constant in terms of state personal
income. In some cases, there is a numerical limit that can become outdated
with changing circumstances. Rhode Island, for example, restricts expenditure
growth to 6% per annum and Oklahoma restricts it to 12%, adjusted for
inflation, with the added proviso that appropriations be no more than
95% of certified revenue. In today's low inflation climate, the Rhode
Island restriction is not very limiting and the Oklahoma restriction can
provide no limit at all if revenues grow quickly enough.
Also, like the balanced
budget rules, these TELs apply to only a subset of revenues and expenditures,
usually those described above as general revenues and expenditures. While
these count for 60% of totals on average, they range from a low of 25%
to a high of 86% for the states covered by TELs. Moreover, as with all
sorts of rules, legislators can be creative in circumventing them through
creating "special funds," "tax relief funding" or
other such means. Thus one might suggest that the limits have really not
There are several possible
reasons for this. These limits have generally been crafted by the same
legislators that the voters had already deemed to be fiscally irresponsible.
As well, some limits include relatively painless escape clauses and thus
have been rather easy to change. The evidence suggests that revenue and
expenditure growth in states with TELs have grown at about the same rate
as in those without. This first-glance assessment may be wrong, however,
since it is also true that the real rate of growth of state governments
has declined substantially since TELs were introduced. The existing TELs,
and the current demand in some states for even tougher variants, could
in fact be effectively prompting all state governments to curtail their
STATE TAX AND EXPENDITURE
(% of revenue/spending subject to limits)
expressed as growth rate, unless specified otherwise
of state personal income
7%, changed in 1991
with 4 exceptions
of inflation or personal income
of state personal income
Revenue limited until 1991
of state personal income
+ inflation, but not more than 95% of revenues
of personal income growth or 9.5% of state personal income
of increase in personal income
Source: Table 2 is compiled
from information in the following publications: ACIR (1993);
D.G. Bails, "The Effectiveness
of Tax-Expenditure Limitations: A Re-Evaluation," American Journal
of Economics and Sociology, Vol. 49, No. 2, April 1990, p. 237; and
D.A. Kenyon and K.M. Benker,
"Fiscal Discipline: Lessons From the State Experience," National
Tax Journal, Vol. XXXVII, No. 3, September 1984, p. 437.
THE SPENDING CONTROL ACT
The 1991 budget of the Government
of Canada contained a number of items designed to control the extent of
government, limit the growth of the debt and better co-ordinate fiscal
and monetary policy. The budget also included a set of fiscal rules under
the auspices of Bill C-56, An Act Respecting the Control of Government
Expenditures, better known as the Spending Control Act, which were
designed to provide an upper limit to much, but not all, program spending.
In addition to its deficit
projections, the federal government established legislation controlling
the amount that it could spend on programs. The intent of the legislation
was not to control total spending, although the draft legislation had
contained "floating" targets for this. Ultimately, the government
aimed to limit "controlled program spending," amounting to on
average, 85% of baseline program spending and 62% of projected total spending.
(These are shown in Table 3 under the column C-56.) Uncontrolled program
spending consists essentially of Unemployment Insurance benefits, while
debt service charges, not being program spending, are uncontrolled.
When the draft legislation
was put out for comment, the House of Commons Standing Committee on Finance
held public hearings on the subject and made recommendations, some of
which the government accepted.
During the investigation,
the Canadian legislation was frequently compared with the American. The
Canadian legislation does not attempt to control the deficit directly;
it controls only spending, though it is part of a fiscal package containing
five-year deficit projections. It was felt at the time that spending is
inherently controllable, whereas the deficit is not. The legislation requires
that the limits be met on an ex post as well as on an ex ante
basis. Not only must the Minister of Finance place before Parliament budgets
that conform to the legislation, he must take corrective action if the
targets are not met in any year. Such ex post reconciliation does
not take place in the American legislation.
The law differs from its
American counterpart in two other respects as well. The American BEA sets
spending limits in three broad categories and thus limits flexibility
in spending. Moreover, the offset provisions of the US Senate rules, if
used to their full extent, make for even less flexibility. This is not
the case with the Spending Control Act. Within the category of
controlled program spending there is full flexibility to shift resources
from one program to another. In addition, the government may overspend
in one year if it underspends subsequently. Canadian fiscal policy therefore
lacks the inertia of its American counterpart. On the other hand, the
American law and practice make the trade-offs in proposed spending plans
The American deficit limits
can be altered during periods of recession whereas the Canadian limits
cannot. However, since uncontrolled program spending consists largely
of Unemployment Insurance payments, and these are the most cyclically
sensitive of program spending, the structure of the program itself effectively
responds to recessionary pressures. In addition, the yearly flexibility
in the limits set also accommodates recessionary pressures.
Another unique feature of
the federal program is its limited duration; the law expires at the end
of fiscal year 1995-96. Because of this, any breach of the law's provisions
in the last year would not be confirmed by the Auditor General until after
the law had expired and would thus generate no consequence other than
the public disapproval.
The government chose from
the start not to control total spending, leaving debt service charges
out of the law's reach. The reason for this was largely practical; the
Department of Finance has found it much more difficult to forecast debt
servicing costs than to forecast total program spending and set the program
to control what seemed inherently controllable; thus the exclusion of
debt servicing charges reduced the volatility in the target variable.
Nevertheless, as several witnesses pointed out, the control program aimed
to limit the impact of spending on deficit and debt growth, but these
are affected by spending on interest charges as much as by spending on
Another issue raised during
the public hearings was the size of the caps in relation to trends in
government spending. The proposal was popularly described as limiting
program spending growth to 3% per year. Controlled program spending had
a higher effective growth rate because the uncontrolled part was expected
to grow more slowly.
More importantly, though,
with inflation at unprecedented low levels, these spending limits represented
real growth higher than had taken place prior to their introduction. Moreover,
nowhere in the official discussion of these limits was there any rationale
for the numbers chosen; for example, there was no set target in terms
of percentage of GDP to be devoted to total, program, or controlled program
The spending limits amount
to a decline in the ratio of controlled program spending to Gross Domestic
Product (GDP) from 14.22% in 1991-92 to 12.5% in 1995-96, based on the
forecasts for GDP growth in the 1992 federal budget. Those estimates of
GDP growth have now proven to be overly optimistic.
The 1993 federal budget
announced that the limits would be further reduced and the program extended
for an additional two years. These changes were presented in Bill C-130,
An Act to amend the Spending Control Act, which did not go beyond first
reading in the House of Commons. Part of the reduction in the limits was
done for technical reasons. The restructuring of the child benefit system
amounts to a conversion of some program spending into a tax expenditure.
Such a change could have represented a loophole in the Act. In addition,
legislation has made public sector pension plans fully funded, with the
government no longer required to cover shortfalls through separate payments.
These reductions are expected to amount to approximately $1,700 million
in 1992-93 and $3,500 million thereafter.(25)
But the cuts go beyond such
technical changes required to keep within the spirit of the original controls.
For 1995-96, for example, the reduction in the cap is $6,450 million and
it is $5,600 million for the previous year. The proposed limits in Bill
C-130 represent an annual increase in controlled program spending of 2%,
down from the 3.4% increase inherent in the original law. Total program
spending is expected to grow by about 1.85% per annum. These relatively
low rates of growth are more consistent with a low inflation environment
than the amounts in the existing law.
But, despite the fact that
the growth of spending was reduced, the lowering of the economic growth
forecasts means that controlled program spending would represent a higher
portion of GDP than was originally hoped for under the existing law. Since
the forecasts in the 1993 budget are also likely to be overly optimistic,
this problem is even further compounded. Moreover, once we take into account
the structural changes in spending resulting from the revision of the
child benefits, we see that controlled program spending as a proportion
of GDP is higher every year under the C-130 proposals; this increase is
equivalent to 0.6% of GDP, a significant amount.
In the 1991 budget, spending
limits were promised as part of a comprehensive fiscal plan to reduce
the deficit. It was projected at that time that the deficit for 1993-94
would be about $16,600 million. It now looks as if the figure will be
more than twice as high, even though there has been no breach of the Spending
Control Act, in letter or in spirit.
PROVINCIAL GOVERNMENT RULES
In May 1993, the provinces
of New Brunswick and Alberta put in place legislation establishing a schedule
for balancing the budget and mandating zero deficits thereafter.
The Alberta Deficit Elimination
Act set a zero deficit target for fiscal year 1996-97 and every year
thereafter. During the transition to a zero deficit, target deficits are
$2,500 million for 1993-94, $1,800 million for 1994-95, and $800 million
for 1995-96. The deficit is measured on a consolidated basis; it includes
net spending on the capital account. The Act applies specifically to the
forecast deficit in any budget. The interim years leading up to 1996-97
can have deficits that exceed the target but the subsequent year's target
must be reduced by any such excess. There is no provision in the law to
allow an excessive deficit in 1995-96 or after. Should the deficit in
any year be less than allowed, future deficits cannot be increased. Similarly,
should revenues in any one year exceed expectations, the excess must go
to paying the debt.
GOVERNMENT OF CANADA
SPENDING CONTROL LIMITS
(in million dollars)
% of GDP*
% of GDP**
% of GDP***, adjusted
* Based on GDP projections
in 1991 budget.
** Based on GDP projections
in 1993 budget.
*** Based on GDP projections
in 1993 budget and accounting for structural changes in spending programs.
**** Based on information
in Annual Fiscal Monitor, November 1993.
Since the law applies to
projected deficits, it is important that revenue and spending forecasts
be reasonable. Alberta relies heavily upon revenues from non-renewable
resources, which can fluctuate widely. The law specifies that budgetary
forecasts for such revenues cannot exceed the average of the five most
recent years for which data are available.
The law also requires that
the provincial Treasurer provide quarterly reports on the government's
fiscal position, indicating whether its budgetary targets are on track.
If not, the government is to take corrective action. (Such action was
taken in October 1993.) In this way, a limit on forecast deficits can
almost become a limit on actual deficits.
The law contains no explicit
penalties for failure to meet the budgetary targets. An amendment was
proposed stating that legislators must take a pay cut and the Premier
resign should the target be missed by more than 4%. The proposal was defeated,
In meeting these targets,
the government of Alberta expects to see a dramatic decline in its operating
deficit, from $2,777 million in 1992-93 to a surplus of $510 million in
1996-97. Added to the operating deficit is an amount for net capital investment
as well as the deficit (surplus) for other funds. These other funds are
in an overall surplus position, largely as a result of the surplus in
Workers' Compensation Board. Also deducted is the amount of capital amortization,
which represents the amount of depreciation of physical capital and is
already accounted for in operating expenditures.(26)
The province of New Brunswick
put into law in 1993 An Act respecting the balancing of the ordinary
expenditures and ordinary revenues of the province, which requires
budgetary balances. The law establishes a series of fiscal periods, the
first being from 1993-94 to 1995-96, with subsequent periods of four years,
essentially the period between elections. The provincial "ordinary
account" must balance within each period. Consequently any deficits
must be matched by equivalent surpluses. This law applies to after-the-fact
fiscal performance as reported in the Public Accounts; it does not apply
only to budgetary forecasts.
The Public Accounts of the
province are to track the annual and cumulative record of the government
in complying with this law. Exempted from the provisions of the law are
fiscal consequences, taking place near the end of the fiscal period, of
changing entitlements resulting from revised estimates of the Government
of Canada with respect to fiscal transfers or tax collection agreements.
It is possible that, at
the end of a period, the law could be breached due to unforseen circumstances.
The final accounting does not take place until some time after the fiscal
period has ended. There are, however, no provisions for penalties in the
event of non-compliance. An excessive deficit is not carried over into
another period. The drafters of the legislation see public opinion as
the final arbiter of government performance.
What is this law attempting
to control? The statement of ordinary revenue and expenditure for 1991-92
showed total revenues of $3,689.1 million, expenditures of $3,906.6 million
and a deficit of $217.5 million. Revenues include essentially all tax
receipts, royalties, profits from the liquor corporation and other revenue,
including transfers from the federal government. Expenditures include
virtually all current expenditures, excluding net capital expenditures.
Thus the increase in the net debt is not equal to the ordinary deficit;
rather, it is two-thirds higher.
Net capital expenditures
in that year amounted to $293 million; the special purpose fund was $5
million in deficit and offsetting this was the $149 million in earnings
from the government's sinking fund. These amounts also affect the level
of the net debt, but are not regulated by the operating controls.
The design of the New Brunswick
legislation is quite different from its Alberta counterpart. The former
is designed to balance actual operating account deficits over a four-year
period while the latter is designed to balance projected comprehensive
budgets on an annual basis, with a mechanism for prompt action should
the projections get derailed. Unlike the Alberta legislation, the New
Brunswick law also contains some escape clauses related to changes in
Neither law contains any
kind of automatic formula to come into play if the law is breached, neither
contains any kind of penalty clause, and neither attempts to set any kind
of limit on the spending side. Since provincial governments do not have
the power to print money, deficit control might be sufficient for spending
control in the provinces.
THE MAASTRICHT RULES
The Maastricht Treaty of
the European monetary union contains several clauses dealing with the
fiscal policy of member states of the EC. These clauses set out some preconditions
for full monetary union and the creation of a single currency under the
auspices of a European central bank. These requirements are thought to
be necessary for the effective functioning of a single monetary regime.
There are four economic
convergence criteria for each member state: inflation cannot be substantially
higher than (i.e., no more than 1.5 percentage points above) the average
inflation rate of the three best performing member states; exchange rates
should be relatively stable prior to the state's joining the EMU; nominal
interest rates should converge with those of the three lowest inflation
countries (i.e., they should be no more than 2 percentage points above
those of the best performing member states); and public deficits should
be below 3% of GDP, with public debt no more than 60% of GDP.(28)
The last criterion will be the subject of this section.
As of 1992, the budget balance
conditions were met only by Luxembourg, Ireland, Denmark and France. Germany
just narrowly missed the mark, while Italy and Greece were not even close.
The public debt criteria were met by Luxembourg, Britain, Germany, Spain
and France, with Denmark just off the mark and Italy again not coming
close. The worst offender in this category was Belgium.(29) The estimates for 1993 are even worse,
with only Luxembourg meeting the deficit conditions.(30)
The status of Germany is
likely to create little problem. It is comfortably below the debt condition
and its deficit status is more the exception than the rule. The real problem
lies with countries like Belgium, Italy, Portugal and Greece, all of which
are well out of step with respect to both debt and deficit, indicating
loose fiscal policies at present as well as a history of such policies.
A. How the Rules Work
The fiscal rules apply to
the general government sector for each member nation; that is, they apply
to the sum of the central, regional and local governments as well as the
social security accounts. State-owned commercial enterprises are excluded
from this calculation. The deficit is defined on a National Accounts basis
and the debt rule refers to gross, not net, debt.
Article 104B specifies that
the European Commission is to monitor fiscal developments in member states.
These member states must regularly report both planned and actual deficits.
The Commission is to examine deficit and debt results to see if they comply
with the fiscal convergence requirements. If they do not, the Commission
is to determine whether the fiscal variables are moving away from the
required levels or whether the deviation appears to be only temporary.
If these two criteria are not met, the Commission is to prepare a report,
taking into account the economic circumstances in the member state and
the deficit in relation to government investment spending.
The Commission first writes
and presents a report to the Council of Ministers, which makes recommendations
to the non-compliant member state; these could be made public in the event
of further non-compliance. If this is deemed to be insufficient, the Council
can insist that a timetable for compliance be drafted. If this also fails,
the non-compliant nation can be obliged to issue warning statements when
issuing new debt.(31)
More severe sanctions can
also be applied. The European Investment Bank can restrict its lending
to the offending nation. The non-compliant state can be required to place
interest-free deposits with the EC until its fiscal position is improved,
and could eventually be fined an appropriate amount.(32)
B. Why Are the Rules Thought To Be Needed?
Article 104 and its sub-articles,
which contain the stipulation that member states avoid excessive deficits,
commences with provisions limiting the role of the European central bank
in financing the debt of member states and prohibiting a bailout of excessively
indebted states. The article also makes it clear that the indebtedness
of one member state is not the responsibility of another state, although
nothing prevents members from aiding others should they wish to do so.
These fiscal rules were
designed to enhance the monetary credibility of the EMU and the proposed
European central bank. A new central bank and a new currency without any
history lack the credibility that other currencies, especially the Deutschmark,
now enjoy. This is one reason why the treaty provides the new bank with
an explicit instruction to pursue a policy of price stability.
There are, then, several
reasons why excessive fiscal policies in any one member state are to be
avoided. The possibility of bailout by other members could put them in
a more precarious fiscal position and heighten pressures on the central
bank for monetary accommodation. It could also provide a perverse incentive
for members to allow their own irresponsible fiscal actions to lead to
transfers of resources from other countries.
Secondly, excessive fiscal
deficits and debt in one member state, if not bailed out, could spread
to other countries, again putting pressure on the central bank to resolve
the crisis via money creation. Finally, a deficit crisis and subsequent
higher interest rates in one part of the union might spread to the rest
of the community because of the monetary union. Such higher interest rates
lead to higher deficits both directly, given no offsetting spending or
revenue changes, and indirectly, because of their dampening effects on
On the other hand it is
instructive to recall that there is scope for some laxity the operation
of these rules, which are really more like guidelines. There are good
reasons for this. Temporary economic shocks do not hit all Europe equally.
That is why Europe as a whole does not constitute an optimal currency
area. Monetary adjustment is one way in which such shocks have been accommodated
in the past. The single currency arrangement takes away this option. Consequently,
fiscal policy is the only remaining tool for regional stabilization.(33) Without fiscal rules, it is feared that
member states might be tempted to export the costs of their own adjustment
to other states by means of lax fiscal policies.
C. The Maastricht Rules and the Canadian
If we think of Europe under
Maastricht as a federal state, with the member nations as its "provinces,"
it is easy to compare it with Canada. In the late 1980s many provinces
were concerned that the fiscal policies of Ontario were damaging their
own economies, both directly and indirectly as a result of the actions
of the Bank of Canada. In addition, early in 1993, there was short-lived
speculation that the Government of Canada was looking at ways to intervene
should a province be shut out of international capital markets and thus
find itself unable to refinance its debt. These are the kinds of difficulties
foreseen by the drafters of the Maastricht rules.
While the speculation about
the second issue proved to be incorrect, it did heighten public awareness
of debt problems and prompted the C.D. Howe Institute to publish a short
memo,(34) arguing that the federal government should
make it clear it would not bail out provinces in the event of default.
Such a strategy, while it might increase the borrowing costs of some provinces,
could also reduce the borrowing costs of the federal government and indeed
all Canadians. The provinces would have to take the steps necessary to
get their fiscal houses in order and fears that Canadian debts might eventually
be monetized would be alleviated. Such fears are important because the
Bank of Canada's balance sheet indicates that its holdings of government
debt represent only a small part of its overall asset holdings and the
amount held is small in relation to the annual amount of provincial net
borrowing. Thus any purchase of provincial issues would substantially
increase the size of the monetary base, unless offsetting actions were
undertaken. Moreover, such a bailout would penalize taxpayers in provinces
that had run more prudent fiscal policies.
These concerns are very
similar to those that have been used to justify the fiscal convergence
rules of the Maastricht Treaty. The need for such rules is less obvious
in Canada than it is in Europe. In the first place, Canada has a well
established and reputable currency and central banking system. Secondly,
the provinces are not the sole agents for engaging in regional stabilization
policies; the federal government, through its tax and spending policies,
also provides a large degree of regional stabilization. This is in sharp
contrast to the European monetary union, where virtually all fiscal stabilization
would take place at the regional (i.e. national) level. Finally, there
is likely to be a stronger sense of community in Canada than in Europe,
where the community is only now being built; consequently it is less likely
that one region would attempt to pass on its adjustment costs to others.
Recently, a senior official
of the Ontario government has suggested that the federal government take
over responsibility for virtually all provincial government debt, in exchange
for a constitutional requirement that the provinces balance their budgets
in the future.(35) This represents a very strict version
of the Maastricht rules, one that places virtually all fiscal responsibility
at the federal level.
The United States has now
had quite an extensive experience with fiscal rules at the federal, state
and local levels. This experience, especially at the federal level, makes
it clear that rules by themselves are not sufficient to ensure balanced
budgets. This might, however, simply reflect the quality of the rules
put in place. State governments, on the other hand, have experienced a
much better fiscal performance in recent years. They have much more extensive
fiscal rules, and, although these also leave room for avoiding the constraints,
the evidence suggests that these states have taken dramatic steps in recent
years to avoid breaches of the law. (At the federal level, on the other
hand, the response has been to change the law in the face of potential
violations.) When the state rules are coupled with the strong veto powers
of the executive branch (something that is lacking at the federal level),
they appear to be effective tools.
The American municipal experience
is also relevant. In the 1970s, New York and Cleveland defaulted on their
debt while Philadelphia came precariously close to doing so.(36)
All these cities were obliged by law to balance their books, yet their
respective fiscal crises show clearly that they violated the spirit, if
not the letter, of the law for quite some time. This was possible because
the relevant laws applied to budget proposals not budgetary results (much
like the GRH law), bookkeeping "innovations" masked the true
state of government finances, and local governments could draw upon other
sources of funds, for example by increasing the extent of unfunded pension
When judging the relevance
of the American experience to Canada there are two things to keep in mind.
First, there is a different division of powers between the federal and
state governments in the two countries. Second, the political pressures
in a Congressional system of government differ from those in a parliamentary
system, even though they both appear to give similar types of fiscal results.
The evidence indicates that
there are strong political pressures on governments to provide spending
programs without imposing taxes on the beneficiaries of those programs.
Fiscal rules do not remove those pressures, they merely constrain the
response. But there are many ways to achieve the same result and rules
that are not comprehensive are likely to fail.
What does experience teach
us about the proper design of fiscal rules? We know that in their absence
the federal government has not had great success in curtailing the growth
in its net debt. The apparent success of the Spending Control Act could
be as much due to its generous limits as to the government's ability to
control its own spending.
A fiscal rule must do more
than have legislators go through the motions of fiscal control. In the
United States, new management techniques such as zero base budgeting and
sunset laws are widely used, yet their performance has been very disappointing.
It is also apparent that
controls must be applied ex post, not just ex ante, and
that the results be monitored in some systematic and consistent fashion.
Constitutional amendments could be more effective because they would make
it more difficult to alter the rules; however, constitutional change is
difficult to achieve. A legislative rule with oversight by, for example,
the Auditor General could prevent some of the more blatant abuses.
Finally, to be effective
a rule must imply action in the event of non-compliance. The provincial
laws ultimately appeal to the "court of public opinion"; however,
public opinion did not prevent the financial problems that led to the
demand for fiscal rules. The GRH experience indicates that the non-compliance
sequesters should apply broadly, and should not exempt favoured programs.
While cuts need not be draconian, they would likely be more effective
if they generated results that politicians, bureaucrats and voters found
undersirable, for example an across-the-board reduction in government
salaries and personal transfers.
According to the Public
Choice view, existing political constraints are not sufficient to curtail
excess government and excess deficits and the court of public opinion
does not work. Fiscal rules of one sort or another are needed, but poorly
designed or insufficiently comprehensive rules might even be counterproductive,
leading to more subterfuge on the part of legislators and complacency
among the public.
United States General Accounting Office, Balanced Budget Requirements:
State Experiences and Implications for the Federal Government, Washington
D.C., March 1993, GAO/AFMD-93-58BR, p. 1 of letter of submission.
Congress of the United States, Congressional Budget Office, Reducing
the Deficit: Spending and Revenue Options, A Report to the Senate
and House Committees on the Budget, Washington, D.C., February 1993, p.
A. Wildavsky, The New Politics of the Budgetary Process, Second
Edition, Harper Collins Publishers, New York, 1992, p. 241-247.
A. Wildavsky, How to Limit Government Spending, University of California
Press, Berkeley Calif., 1979, p. 44-47.
H.G. Grubel, "Constitutional Limits on Government Spending Deficits
and Levels in Canada," in H.G. Grubel, D.D. Purvis, and W.M.
Scarth, Limits to Government Controlling Deficits and Debt in
Canada, The Canada Round: A Series on the Economics of Constitutional
Renewal No. 13, J. McCallum, Series Editor, C.D. Howe Institute,
Toronto, 1992, p. 25-27.
J.M. Buchanan and R.E. Wagner, DEMOCRACY IN DEFICIT The Political
Legacy of Lord Keynes, Academic Press, New York, 1977.
All references to American budgetary numbers are in U.S. dollars. The
fiscal year 1986 refers to the 12-month period ending 30 September 1986.
Representative Jack Brooks as quoted in Wildavsky (1992), p. 244.
(10) D. Altig, "Some Fiscal Advice for
the New Government: Don't Let the Sun Go Down on BEA," Economic
Commentary, Federal Reserve Bank of Cleveland, 1 February 1993.
(11) Wildavsky (1992), p. 250-51.
(12) Ibid., p. 263.
(13) S.E. Collender, The Guide to the Federal
Budget, Fiscal 1992, The Urban Institute Press, Washington, D.C.,
1991, p. 25.
(14) A. Wildavsky (1992), p. 265-271.
Much of the material in this section comes from the following publications:
United States General Accounting Office (GAO), Balanced Budget Requirements:
State Experiences and Implications for the Federal Government, Washington
D.C., March 1993, GAO/AFMD-93-58BR; and
Advisory Commission on Intergovernmental Relations (ACIR), Significant
Features of Fiscal Federalism: Volume 1, Budget Processes and Tax Systems,
Washington, D.C., February 1993.
(16) U.S. Department of Commerce, State
Government Finances, 1991, GF/91-3, September 1992.
(17) M. Goldstein and G. Woglom, "Market-Based
Fiscal Discipline in Monetary Unions: Evidence from the US Municipal Bond
Market," in: M.B. Canzoneri, V. Grilli, and P.R. Masson eds., Establishing
a Central Bank: Issues in Europe and Lessons from the US, Cambridge
University Press, Cambridge 1992, p. 228-260.
(18) J.G. Stotsky, "Coping with State
Budget Deficits," Federal Reserve Bank of Philadelphia Business
Review, January-February 1991, p. 16.
(19) R.P. Inman, "Anatomy of a Fiscal
Crisis," Federal Reserve Bank of Philadelphia Business Review,
September/October 1983, p. 15-22.
(20) J.G. Stotsky (1991) p. 23.
(21) ACIR (1993), p. 12-13.
(22) GAO (1993), p. 21-23.
(23) D.A. Kenyon and K.M. Benker, "Fiscal
Discipline: Lessons from the State Experience," National Tax Journal,
Vol. XXXVII, No. 3, September 1984, p. 433-446.
(24) D.G. Bails, "The Effectiveness of
Tax-Expenditure Limitations: A Re-Evaluation," American Journal
of Economics and Sociology, Vol.49, No. 2, April 1990, p. 223-238.
(25) Government of Canada, The Budget 1993,
Ottawa, 26 April 1993, p. 68-69.
(26) Government of Alberta, Budget '93
Update, Edmonton, 8 September, 1993, p. 39.
(27) The reported fiscal position of the government
has not been affected by the $273-million gain from sale of shares in
the Alberta Energy Company. This amount went directly to reducing the
net debt of the province.
(28) W. Buiter, G. Corsetti, and N. Roubini,
"Excessive Deficits: Sense and Nonsense in the Treaty of Maastrict,"
Economic Policy, Vol. 16, April 1993, p. 58-100; and Amendments
to the EEC Treaty Economic and Monetary Union as Agreed
in the European Council of Maastrict on 10 December 1991.
(29) M. Butler, "Europe's Currency Tangle,"
The Economist, 30 January 1993, p. 21-23.
(30) "A Rude Awakening," The Economist
Survey of the European Community, 3 July 1993, p. 14.
(31) M. Fratianni, J. von Hagen, and C. Waller,
The Maastricht Way to EMU, Essays in International Finance, No.
187, Princeton University, Princeton N.J. June 1992, p. 39-40.
(32) K. Habermeier and H. Ungerer, "A
Single Currency for the European Community," Finance & Development,
September 1992, p. 26-29; and
R. Owens and M. Dynes, Tuttle Guide to The Single European Market,
Charles E. Tuttle Company, Inc., Boston, 1992.
(33) M. Artis, "The Maastricht Road to
Monetary Union," Journal of Common Market Studies, Vol. XXX,
No. 3, September 1992, p. 299-309.
(34) T.E. Kierans, D.E.W. Laidler, and W.B.P.
Robson, The Hazards of a Federal-Provincial Debt Bailout, C.D.
Howe Institute Backgrounder, March 16, 1993.
(35) G. Yonk, "Bold Plan Would Give Provinces
Debt Relief," The Globe and Mail (Toronto), 29 November
1993, p. A1, A3.
(36) Inman (1983), p. 15-22.