Overcoming incrementalism: budget reforms and budget allocations in Chile

Working and discussion papers
March 2015
Philipp Krause

Governments struggle to allocate funds towards ever-changing priorities, especially when spending increases are limited by austerity. Times of recession might be especially poor moments for reallocations of funds, as budget holders try to protect what they have. This pattern has not been investigated much in the literature. Some fiscal institutions are designed to increase the allocative efficiency of public spending by making it easier for policy-makers to allocate funds towards the most important priorities. Whether fiscal institutions have an effect on allocations is still unclear.

Chile provides an opportunity to investigate both ideas. Using an interactive model, the paper finds that budget allocations were more rigid the less additional money was available, and that institutional reforms designed to increase flexibility managed to break the link between spending and reallocations, as well as having a significant and positive effect on the size of annual reallocations.