Rational Expectations Theory and Macro Budgetary Decision-Making: Comparative Analysis of Canada, Uk, and USA
Reddick, Christopher G., Journal of Public Budgeting, Accounting & Financial Management
In the late 1990s, many advanced industrial countries faced budgetary surpluses after years of persistent deficits. Notably Canada, the United Kingdom (UK) and the United States (US) had a difficult struggle with budgetary deficits from about the mid-1970s until the late 1990s. This paper compares budgetary reforms and the surplus (deficit) in Canada, the UK and the US during the post World War II period and demonstrates their relationship to the rational expectations theory. These countries were chosen because of their differences, most importantly, presidential and parliamentary institutional arrangements and their impact on the budget. In a parliamentary system, the legislative branch's power to alter the executive budget is quite limited.
Indeed, under parliamentary systems of Canada and the UK, the government budget is accepted (or rejected) as a whole without amendment or modifications. By contrast, in the US budget making practices, the President 'proposes' and Congress 'disposes' the budget. The US Congress is free to change the President's budget priorities or substitute one of its own.
One fundamental question that this paper poses is: What long-run theory can be used to explain the movement from budget surplus to deficit to surplus over the past thirty years in these countries? The budgetary process has not always been in turmoil, and on most occasions before World War II, the system was able to balance competing claims on resources and produce balanced budgets. The pre-World War II period was a time when many scholars would agree that incrementalism occurred in public budgeting when line-item budgeting took place. This was due to the process of how decisions were made in government. It was easier to produce incremental changes than plan ahead. Incremental changes require less information from decision-makers; therefore, they are easier to make in the political setting. Information has become more plentiful and easier to process with advances in information technology and this has made rational comprehensive decisions very plausible in contemporary public administration (Barrett & Greene, 2001; Danziger & Andersen, 2002). For example, in the late 1990s, the Y2K problem gave public managers the opportunity to become more proficient in information technology in order to recommend the replacement of legacy systems, updated to client/server models creating networked enterprises.1
Another question to be asked is: Why has there been a persistent attempt to reform the budget systems? Governments want to reform budgets to control public spending and institute priorities. More specifically, the executive wants to establish authority over budget allocations to implement its desired agenda. A large part of the literature on budgeting in the United States, Canada, and the UK is concerned with reform (Knott & Miller, 1987). The goals of the proposed reforms are couched in similar languages such as economy, efficiency, and most recently, results. Proposed reforms inevitably contain important implications for the political system. These governmental decisions can benefit some and be a detriment to others since there are many stakeholders involved in the process of reform.
This paper does not focus on micro level changes as the traditional work in this field has done. Rather, it focuses on the macro level and examines change over the long run. For our purposes, we define the long run as a sufficient period for the budget to adjust, either through increases in revenues, witnessed in the late 1990s, and/or reductions in expenditures. Institutional change over the long run can be achieved by changing established ways of conducting government business through changes in ideas, innovations, and culture. For example, the innovation of information technology in the 1990s was one factor that precipitated unprecedented growth in revenues for the United States (Joyce & Meyers, 2001). …