Ever since the classical writings of David Hume, Adam Smith and David Ricardo, the role of public debt has been a divisive issue (Rowley, Shugart, and Tollison 2002). There are a variety of normative justifications for positive levels of government debt, one of them being the famous tax-smoothing argument by Barro (1979). On the other hand, there are strong political-economic forces operative in democracies that tend to push the volume of public debt beyond socially desirable levels. Political conflicts and the common fiscal problems1 caused by fragmented governments are driving factors behind public debt. Moreover, accumulating debt allows governments to shift their fiscal burdens to future generations. As these generations are underrepresented or not represented at all in collective decision-making, public debt will accumulate and thus impair the well-being of future generations (Song, Storesletten, and Zilibotti 2007).
A number of proposals have been made on how best to constrain excessive government debt accumulation. These include explicit budget-deficit and debt limits,2 as in the Maastricht Treaty, various debt brakes, or rainy-day funds.3 The two problems invariably besetting such fiscal rules are credibility and flexibility. If fiscal rules are tight, they will not be credible, as in the face of a recession or a banking crisis, governments will not honour the constraint, and sanctions will be weak at best. If fiscal rules are flexible, governments will consistently take advantage of the flexibility, and the rules will ultimately not constrain government debt accumulation.
I propose a new set of rules that strikes a balance between flexibility and the commitment to refrain from loading debt onto future generations.
The rules for achieving this objective would have two votes on the budget.
- In the initial vote, before making budget plans, the parliament decides on the maximum deficit to be incurred in a given calendar year.
- In a later vote, the parliament decides on a particular budget that must honour the outcome of the first vote.
Could voting twice be effective if the simple majority rule is applied in both voting rounds? This is possible. Voting twice assigns clear responsibilities for debt levels and separates them from actual fiscal planning and budget decisions. This may caution governments not to incur high deficit levels. Another reason is that it may become too costly to obtain twice the votes of parliamentary members who are in favour of lower budget deficits than those on the floor.4 Moreover, voting twice may increase the cost of lobbying.5 This in turn may have a restraining effect on the number of pork-barrel projects, thereby reducing government expenditures. However, it is unlikely that these effects alone will constitute an effective tax brake, especially if parliamentary parties expect their members to toe the line. Accordingly, it makes good sense to consider other voting rules for the first round.
First-round voting rules
There are various avenues we can explore. The essential idea is to make it harder to obtain parliament support for a high deficit level, while enabling actual budgets honouring the deficit level determined in the first vote to be passed with a simple majority.
Tighter majority rules
- Supermajority rule, e.g. 60%, if the budget deficit exceeds a particular threshold.6
- Flexible majority rule for which the majority required to support the proposal is 50% if there is no deficit, but increases with the size of the deficit. For instance, a deficit of 1% of GDP may need 55%, and a deficit of 2% may need 60% of supporting votes, etc.7
These voting rules can be combined with, or even replaced by, specific rules that affect voting rights.
Change of voting rights
One might envision a change of voting rights between the two voting stages. Potential options are:
- In bicameral parliamentary systems, one chamber could vote in the first round while the other chamber votes on the actual budget in the second round. In unicameral legislatures a second chamber could be formed for the sole purpose of voting on the deficit limit.8
- Every parliamentary member obtains two votes and can distribute and use them freely over the two voting stages.9 This allows people particularly concerned about debt accumulation to concentrate their voting power on the first round.
- All parliamentary members vote in the first stage, but only voting losers and a fraction of voting winners are allowed to vote in the second stage.10
A brief assessment
Voting twice has several advantages, which I discuss here in the context of supermajority or flexible majority rules in the first round. First, no external procedures and calculations by groups of experts are needed, as the timing of expansionary fiscal policy and fiscal consolidation is determined entirely by the parliament. Second, as long as there is a significant minority in favour of keeping government debt low, deficits and debt accumulation will be restricted, either because this minority’s altruism is sufficiently high, or because they fear an excessive tax burden at a later stage or a decline in public goods provision in the future. It is conceivable that a significant number of such people exist. If governments were allowed to use budget surpluses in one year to make up for deficits in another term, incentives would be high for governments to run temporary surpluses in order to avoid the risk of being dependent on the support of the political opposition for a specific deficit level in the future.
Third, if a government has a bare majority, it will not be forced into a grand coalition when it wants to pass a budget. Fourth, in downturns, or when natural disasters have occurred, there is scope for running a higher deficit if a sufficiently large majority supports it. A minority blocking higher spending and deficits would bear the responsibility for its actions.
Any proposal for the introduction of new democratic rules has to face up to the fact that present generations may not be willing to introduce them. One conceivable way of dealing with this eventuality is the delayed implementation procedure proposed in Gersbach (2009), in which new rules become effective at a later point in time when they no longer affect the current electorate. Moreover, there are several ways in which democracies differ. It is likely that both the ideal form of voting twice and its consequences will be different in different types of democracy.
Voting twice represents a new approach to the limitation of government debt accumulation. Numerous issues remain unexplored,11 and the determination of the optimal rule for the first round constitutes an entire research program in itself.
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1 Buchanan and Tullock (1962), and Weingast, Shepsle, and Johnsen (1981) have emphasised a spending bias, while Lane (2003) explains how the common-pool problem may lead to an increase in debt.
2 For a review of the US experience, see Auerbach (2008).
3 An alternative, promising rule for direct democracies are fiscal referenda (see Feld and Kirchgässner (2001) and Schaltegger and Feld (2009) for an assessment).
4 This argument is formalized in the vote-buying context by Gersbach and Mühe (2008). There might be instances when deficits become even higher.
5 Myerson (1999) has advanced similar arguments for the comparison between bicameralism and unicameralism.
6 A weaker form would be to allow any budget deficit to be passed by a 50% majority while restricting future parliaments’ full repayment commitment to debts incurred with the support of a supermajority.
7 Such rules have been suggested by Gersbach (2007) and are examined in Gersbach and Grimm (2009). A much tighter form of debt brake is to use the flexibility rule for the total debt level that materialises in a calendar year. When debt has been accumulated in the past, a government needs to run budget surpluses to decrease the vote share needed to pass a balanced budget in the future.
8 Such a system would be an effective check against spendthrift politicians in the other chamber.
9 This is called "hierarchical voting", as voters can concentrate all their voting power on the highest constraint (Gersbach (2005)). Such voting procedures have been proposed for a number of independent issues. They are called “qualitative voting” (Hortala-Vallve (2007)) or “storable voting” (Casella (2005)). We suggest splitting budget voting in two interrelated issues: (a) deficit level and (b) structure of expenditures and revenues, in which the first acts as a constraint for the latter.
10 Such voting procedures for sequences of infrastructure projects have been proposed by Fahrenberger and Gersbach (2007).
11 For example, governments may resort to creative accounting to meet a predetermined deficit level, so the effectiveness of fiscal rules will depend on the quality of fiscal plans and their implementation (Beetsma, Giuliodori, and Wierts 2009).