In the recent literature on the impact of inflation on government finance it has been argued that the time span that is needed to collect taxes tends to reduce, if not reverse, any gain in real revenue that a government could obtain from inflationary finance. Following initial work by Olivera, this effect has been studied more fully by Tanzi. 2 This discussion has focused on the revenue side of the budget. What matters in the budgetary context, however, is the real value of goods and services that the government can buy with the revenue collected. This chapter focuses on the question of whether the time needed in the expenditure process and in treasury operations also should be considered in assessing the effect of inflation on government finance and whether these lags tend to strengthen or lessen the Tanzi effect on the tax side.
Government spending is carried out through administrative processes that are more or less complex and time-consuming, depending on the type of expenditure and the administrative capabilities of the country concerned. In addition, the amount of cash in hand that treasury needs at any point in time to assure smooth operations depends upon the sophistication of its technical facilities. Not much published information is available on these issues. Their possible relevance for economic analysis has been largely ignored, except that in some of the high-inflation economies in Latin America economists and policymakers have begun to address these questions, at times with a view to produce an ‘anti-Tanzi effect’ on the expenditure side of the budget.
A brief overview of the institutional arrangements that govern the expenditure and cash management operations is given in the first section of this chapter, with the objective to identify the relevant delays in these processes. The impact of inflation on the expenditure lags is discussed in the