Marzo/Abril 2019



The Hidden Cost of Weak Budget Projections
Juan Pedro Schmid, Kimberly Waithe, and Kishmar Lorde

Cyclical vs Structural Effects on Health Care Expenditure Trends in OECD Countries OECD
Luca Lorenzoni, Jonathan Millar, Franco Sassi and Douglas Sutherland

Designing Sound Fiscal Relations Across Government Levels in Decentralized Countries
Robin Boadway and Luc Eyraud



The Public Budget International Journal includes in the present edition three articles, written by experts from different countries around the world, dealing with diverse topics, such as the underestimation of public spending, the cyclical factors that affect the financing of public policies, and the relations between central and local governments. The knowledge of these problems and the search of the matching solutions, constitute important tools for public officers, specialists or academics interested in the administration of public finances.

The article titled The Hidden Cost of Weak Budget Projection: Forecast Deviation and Debt Buildup in Barbados, was written by Juan Pedro Schmid, Kimberly Waithe and Kishmar Lorde to address the budgetary reasons that explain why the Barbados economy has been challenged over the last decade by elevated fiscal deficits and a rapid build-up in debt. While the country has made efforts to address this challenge through revenue and expenditure measures, budget targets have often been missed. This study indicates that budget underperformance has contributed to the debt accumulation in Barbados. When comparing actual to budgeted targets set out in the budget, the study indicates that there has been an underestimation of expenditure and lower-than-expected revenue in several years. Particularly, systematic underestimation of transfers without adequate compensation in revenues has increased debt, underscoring the need for institutional and fiscal reforms. At the same time, the under-execution of capital expenditure highlights the need for better allocation to this growth promoting spending, which has suffered from limited fiscal space.

In an important article titled Cyclical versus Structural Effects on Health Care Expenditure Trends in OECD Countries, Luca Lorenzoni, Jonathan Millar, Franco Sassi and Douglas Sutherland argue that health care expenditure per person, after accounting for changes in overall price levels, began to slow in many OECD countries in the early-to-mid 2000s, well before the economic and fiscal crisis. Using available estimates from the OECD’s System of Health Accounts (SHA) database, we explore common trends in health care expenditure since 1996 in a set of 22 OECD countries. We assess the extent to which the trends observed are the results of cyclical economic influences, and the respective contributions of changes in relative prices, health care volumes and coverage to the slowdown in health care expenditure growth. Our analysis suggests that cyclical factors may account for a little less than one half of the estimated slowdown in health care spending since the crisis, suggesting that structural changes have contributed to the trends. Before the crisis the slowdown in health care expenditure growth was accounted for by health care prices growing less than general prices and a reduction in care volumes, whereas the latter accounts for most of the steeper deceleration after the crisis. Although both privately and publically financed health care expenditure grew at a reduced pace during the study period, the sharp post-crisis deceleration happened mostly in the public component. When examined by function, the slowdown in publicly-financed expenditure has been largest in curative and rehabilitative care (particularly after the crisis) and in medical goods (especially pharmaceuticals), whereas the deceleration in the privately financed component is largely in medical goods (including pharmaceuticals). We conclude that structural changes in publicly financed health care have constrained the growth of care volumes (especially) and prices leading to a marked reduction in health care expenditure growth rates, beyond what could be expected based on cyclical economic fluctuations. We examine a range of government policies enacted in a selection of OECD countries that likely contributed to the structural changes observed in our analysis.

The paper prepared by Robin Boadway and Luc Eyraud, titled Designing Sound Fiscal Relations Across Government Levels in Decentralized Countries, discusses how decentralized countries can achieve sound fiscal relations between the central government and lower government levels. The concepts of “vertical gap” and “vertical balance” provide an analytical framework for identifying and addressing key challenges. These concepts can help policymakers ensure that the financing of subnational governments (composed of transfers received from the center, own revenues, and borrowing) is both efficient and adequate given the allocation of spending responsibilities. More generally, the paper offers some perspectives about the optimal design of decentralization systems by examining the sequencing and economic principles underlying revenue and expenditure assignments, the use of transfers, and borrowing.

Thus, the Public Budget International Association, through the International Journal of Public Budget, makes an important contribution to the divulgation and discussion of these important aspects of the public finances.