Multiyear Countercyclical Budget

In “Budgeting for Fiscal Stability” Yilin Hou defends a Multiyear Countercyclical Budget (MCB) to deal with uncertainty.

Rather than annual budgets aiming balanced budget requirements, MCB ensures stability during fluctuating economic conditions by creating stabilization funds (General Fund Surplus and Budget Stabilization Fund).

MCB encourages cutbacks during surplus years and overspending during lean years. Fiscal revenues accumulated during boom years create surplus funds to be available in lean years to maintain fiscal stability.

The other benefits of MCB is that it addresses cyclical deficit budget by requiring governments i) to prioritize and express policy goals explicitly and consistently, ii) to force current policies to fit the multiyear strategy, and iii) to help mitigate cyclical fiscal deficits (structural deficits has to do with mismatch between revenue and expenditure and managerial deficit is a result of poor management).

The challenges to adopt MCB are mainly political and technical. MCB supporters have to convince legislators that they can also benefit from this budgetary politics. The technical difficult of MCB is to estimate accurate future revenues and expenditures. “Fiscal Conservatism” tends to underestimate revenue and overestimate expenditure, hence putting at risk the maintenance of public services during recessions.

http://onlinelibrary.wiley.com/doi/10.1111/j.1540-6210.2006.00638.x/abstract