Credibility and Reliability of Government Budgets: Does Fiscal Transparency Matter?

This paper explores the role of fiscal transparency in affecting budget credibility and reliability, paying particular attention to its effect on budget execution and on the quality of macroeconomic assumptions upon which the budget is based. Using a Principal-Agent approach we argue that fiscal transparency reduces the agent’s informational advantage and constrains the agent to execute the contract (Enacted Budget) on behalf of the principal (Voters/Parliament) as intended. An Ordered Logit model is used to test this hypothesis and our findings support that fiscal transparency increases the likelihood of having a credible and reliable budget: improved transparency is associated with higher budget execution rates in the health and the education sectors, and better projections of GDP growth and inflation. These results are robust to a range of econometric specifications, especially after controlling for the potential endogeneity of fiscal transparency.