Austerity and budget execution: control versus flexibility

Abstract

Purpose

How does the era of austerity affect flexibility and control in budget implementation? The execution phase of the budget has remained underexplored in the budgeting literature. Theoretically, a crisis and austerity period may trigger changes in budget execution in one of two key directions: either toward greater control or greater flexibility. This paper seeks to uncover which outcome is more likely.

Design/methodology/approach

The authors conducted elite interviews of key officials involved in the budget execution phases in two European countries: Portugal and Austria.

Findings

The cases demonstrate that the experience of a fiscal crisis and period of austerity tend to lead to greater control and constrained flexibility in budget execution.

Originality/value

The execution phase of the budget process has remained underexplored in the public budgeting literature, and there has been only limited discussion on how the experience of austerity affects it. This empirical study of Portugal and Austria helps to shed light on that question.

Citation

Raudla, R. and Douglas, J.W. (2022), "Austerity and budget execution: control versus flexibility", Journal of Public Budgeting, Accounting & Financial Management, Vol. 34 No. 2, pp. 292-309. https://doi.org/10.1108/JPBAFM-01-2021-0018

1. Introduction

A budget is one of the most important documents adopted by a government in any given year (Wildavsky, 1988). Yet, a budget is not a self-executing decision (Cain et al., 2004; Schick, 1988), and a plan is only as good as its realization. Thus, despite being “usually carried out far from the spotlight of public attention” (McCaffery and Mutty, 1999, p. 234), the execution phase constitutes a crucial element of the budget process (e.g. Anessi-Pessina et al., 2012, 2013; Cain et al., 2004; Schick, 1964). Indeed, as McCaffery and Mutty (1999, p. 234) put it,

While there is an assumption that the budget will be executed as planned once it is approved /…/ the reality is quite different. A substantial portion of budget execution is driven by the necessity of rescuing careful plans from unforeseen events and emergencies and unknowable contingencies.

Budgeting scholars have repeatedly complained about the lack of attention to the execution phase of budgeting. More than 50 years ago, Howard (1968, p. 20) noted that studies of budgeting give “far more attention to budget preparation than to execution.” Three decades later, McCaffery and Mutty (1999) and Hackbart and Ramsey (1999) still observed that most academic research on budgeting tends to focus on the preparation phase, while budget execution remains the “hidden” part of budgeting. Korac et al. (2019, p. 393) lament further that “Academia has paid far too little attention to budget execution.”

In the context of austerity, [1] which many European countries faced after the global financial crisis, budget execution becomes particularly relevant (Anessi-Pessina et al., 2013; Krause, 2009; Schick, 1988). It can play an important role in securing budget cuts and maintaining fiscal discipline (Barbera et al., 2020; Bracci et al., 2015; Schick, 1988). While scarcity is endemic to budgeting (Schick, 1980), considerably heightened scarcity of resources – which has characterized the fiscal situation of most European countries over the past decade – is likely to have given rise to changes in budget execution systems and practices (Barbera et al., 2017, 2020; Bracci et al., 2015; Raudla et al., 2015b). Theoretically, austerity can trigger either increased flexibility (in order to achieve savings through increased efficiency) or increased control (in order to secure more direct control over budget totals) (Barbera et al., 2020; Bracci et al., 2015; Ghin et al., 2018; Krause, 2009; Overmans, 2019; Schick, 1988). The existing empirical studies have demonstrated that, overall, fiscal crises and austerity tend to trigger increased centralization of budget processes (e.g. country chapters in Ghin et al., 2018; Krause, 2009; Kristiansen, 2018; Raudla et al., 2015a) although there has also been some evidence of increased decentralization (see Raudla et al., 2015b for an overview of the literature).

Increased centralization in the preparation or adoption phase of the budget process, however, may not necessarily lead to increased control in the execution phase (Kim and Park, 2006; Hallerberg, 2004; Hallerberg et al., 2009; Schick, 2001). Thus, in order to understand the effects of austerity on budget execution practices in a more nuanced fashion, it would be necessary to explicitly zoom in on that phase of the budget process. The existing empirical studies about the effects of austerity on budget processes have adopted a more broad-picture approach in mapping the changes in budget processes (Ghin et al., 2018; Kristiansen, 2018) or focus on the local government level and through the prism of accounting systems (e.g. Barbera et al., 2017, 2020). Given the relevance of the execution phase for the eventual fiscal outcomes it would be insightful to undertake a more detailed look at the shifts in the execution phase of the budget process at the central government level in response to austerity. This is what we seek to do in our study. Our research question is: How does the experience of austerity influence the budget execution phase? We are particularly interested in how austerity influences the balance of control and flexibility in budget execution. In order to shed light on this issue, we look at the experience of two countries (Portugal and Austria) over the past decade.

These two countries present interesting cases for comparison for the following reasons. First, they both represent the continental tradition in budgeting, according to which budgeting has traditionally been highly legalistic and based on detailed input controls (Curristine et al., 2009; Steger, 2010). Thus, they constitute useful cases for examining whether the experience of austerity has reinforced the traditional control orientation or brought about increased flexibility in budget execution. Second, they both experienced fiscal crisis and stress during the past decade, though to somewhat different degrees. Portugal went through a severe crisis, which necessitated a bailout and participation in the adjustment program led by the Troika. Austria's fiscal crisis was milder, though Austria was subjected to the excessive deficit procedure of the European Union until 2014. Thus, they can help shed light on the question of whether fiscal stress can induce changes and reforms to the budget execution phase.

The paper is structured as follows. Section 2 outlines the theoretical discussion, followed by the overview of our methods in Section 3 and empirical analysis in Section 4. Section 5 offers a concluding discussion.

2. Theoretical discussion

In developing our theoretical discussion, we first explain the key dilemma of budget execution – the tension between control and flexibility – by drawing on the existing budgeting literature that deals with the execution phase of the budget. The balancing act between control and flexibility has been regarded as the key question in designing a budget execution system (Anessi-Pessina et al., 2013; Cain et al., 2004; Di Francesco and Alford, 2016, 2017; Forrester and Mullins, 1992; Hackbart and Ramsey, 1999; Howard, 1968; McCaffery and Mutty, 1999; Pitsvada, 1983; Schick, 1964; Thompson and Zumeta, 1981). We will elaborate on what these two mechanisms entail and why they are considered to be important in budget execution. As a second step, we will synthesize the insights from the budget execution literature and the literature that deals with (fiscal) crisis and austerity management to develop two competing propositions about how austerity would affect the balance between control and flexibility.

2.1 Key dimensions of budget execution

A key dilemma in budget execution is how to solve the tension between control and flexibility (Anessi-Pessina et al., 2013; Cain et al., 2004; Di Francesco and Alford, 2016, 2017; Forrester and Mullins, 1992; Hackbart and Ramsey, 1999; Howard, 1968; McCaffery and Mutty, 1999; Pitsvada, 1983; Schick, 1964; Thompson and Zumeta, 1981). Control entails “the process of assuring that resources are spent for the purposes appropriated and do not exceed the amount authorized” (Forrester and Mullins, 1992, p. 472). Flexibility in budget execution refers to the “ability to make adjustments within the resources that have been allocated” (McCaffery and Mutty, 1999, p. 251).

On the one hand, budget execution has to preserve legislative intent and observe financial limitations (Cain et al., 2004; Hackbart and Ramsey, 1999; Howard, 1968; Forrester and Mullins, 1992; McCaffery and Mutty, 1999; Pitsvada, 1983; Thompson and Zumeta, 1981). As Di Francesco (2016, p. 236) puts it, “Budget systems are a key means of operationalizing accountability in democratic systems.” The approved budget is the key reference point – as the “standard against which actual operations are controlled” (Mikesell, 1995, p. 128) – in ensuring that the actual expenditures do not exceed the appropriations and that the aggregate expenditure ceilings are complied with (Hackbart and Ramsey, 1999). The control-oriented rules and arrangements governing the execution phase can constrain budget implementation by “prescribing or proscribing where, upon what, when, how, and how much public money can be allocated, spent, accumulated or transferred, and who has authority to permit or prohibit these actions” (Di Francesco and Alford, 2017, p. 977). Control-oriented rules can also entail procedures for preapproval of budget changes (Cain et al., 2004, p. 561).

On the other hand, budget execution should accommodate unforeseen contingencies and have sufficient space for flexibility in order to avoid waste, inefficient spending and underfunding of foreseen activities (Cain et al., 2004; Di Francesco and Alford, 2017; Hackbart and Ramsey, 1999; Howard, 1968; McCaffery and Mutty, 1999; Thompson and Zumeta, 1981). Flexibility in budget execution entails both horizontal and vertical dimensions (Di Francesco and Alford, 2016).

The horizontal dimension has two key rules: purpose of spending (i.e. what money can be spent on) and timeframe (i.e. when money has to be spent) (Di Francesco and Alford, 2016). In other words, the purpose aspect in horizontal flexibility depends on the “specificity with which it is authorized and appropriated” (McCaffery and Mutty, 1999, p. 251) and how easy it is to reallocate monies between these purposes (Di Francesco, 2016; Di Francesco and Alford, 2016). The more general the appropriation categories and the easier it is to reallocate monies between appropriations, the higher the flexibility for managers with regard to their spending decisions (Franklin and Douglas, 2003; Cain et al., 2004; Di Francesco and Alford, 2016, 2017). If organizations are given lump-sum budgets without constraints on specific types of spending, they have higher horizontal flexibility than in systems that prescribe specific amounts for salaries, equipment, transfers, professional services, maintenance, etc. (Cain et al., 2004; Di Francesco, 2016). The time-frame rules in the horizontal dimension refer to whether the appropriated funds have to be spent in a discrete time-period or can be carried over to the next one(s) (Douglas and Franklin, 2006; Di Francesco and Alford, 2016, 2017; Korac et al., 2019). An important constraint on flexibility is annuality, a widespread principle in budget execution which requires allocations to be spent during a specific fiscal year, with underspent funds lost to the line ministry (Di Francesco and Alford, 2016).

The vertical dimension of flexibility in budget execution is influenced by how devolved the decision-making authority is from the central to line organizations (e.g. from Ministry of Finance (MoF) to line ministries) when changes need to be made to when, how, and on what to spend (Di Francesco and Alford, 2016). The more devolved budgetary decision-making authority is, the higher the flexibility in budget execution (Di Francesco, 2016).

2.2 The effects of fiscal crisis experience and austerity on budget execution

Budget execution rules tend to be “so deeply ingrained in political and administrative traditions that irrespective of efforts at rule change they are quite simply taken for granted as ways of seeing and doing” (Di Francesco and Alford, 2016, p. 242). However, from the critical juncture perspective, crises open-up opportunities for reforms by loosening previously existing constraints (Soifer, 2012). After a crisis experience, policy actors can portray the existing processes as constituting problems and argue for changing them in order to avoid similar crises in the future (Barbera et al., 2020; Keeler, 1993; Pollitt, 2010). How is the experience of fiscal crisis and the subsequent period of austerity likely to affect control and flexibility in budget execution? What kinds of reforms and changes is it likely to trigger? By synthesizing the ideas from the budget execution literature with the insights from the literature on fiscal governance and fiscal crisis (and austerity) management, we can put forth two competing propositions. Proposition 1 conjectures that a crisis and austerity would trigger changes in budget execution toward greater control. Proposition 2 suggests that a crisis and austerity would lead to increased flexibility in budget implementation. Both propositions will be explained in turn below.

2.2.1 Proposition 1: Austerity leads to more control

According to the existing literature on fiscal governance and (fiscal) crisis and austerity management, the need to deal with austerity can lead to increased control in budget execution through the following mechanisms: (1) increased need to achieve coordination, (2) blame avoidance for fiscal indiscipline by the finance ministry and (3) path-dependency.

The Fiscal governance literature argues that having central entrepreneur(s) that can monitor the behavior of the other actors and impose sanctions can help secure coordination in budgetary decision-making, which is crucial for ensuring the achievement of fiscal targets (see, e.g. Hallerberg, 2004; Hallerberg et al., 2009). Crisis management literature suggests that in bureaucratic organizations, threatening situations like a crisis tend to induce pressures of centralization of authority and direct controls (Ghin et al., 2018; Khandwalla, 1978; Kristiansen, 2018; Peters et al., 2011; Raudla et al., 2015a, b). Thus, we would expect that in order to secure the monitoring of the achievement of cuts and fiscal targets and maintenance of fiscal discipline during austerity, the level control exerted by the finance ministry in budget execution is likely to increase.

Second, finance ministries may be motivated by the desire to avoid blame (e.g. Hood, 2002, 2011) for government's fiscal indiscipline. In the context of fiscal crisis and austerity, the finance ministry would be viewed as the key body responsible for complying with fiscal discipline rules and its reputation strongly depends on achieving that (Krause, 2009; Raudla et al., 2015a; Raudla and Douglas, 2021). Thus, when faced with higher scarcity of resources, the finance ministry is likely to reinforce a control-oriented approach to budget execution in order to protect its reputation as a guardian of the purse (Wildavsky, 1988).

Third, increased control may be fostered by path-dependency: after a certain path has been chosen, there is a tendency for those policy choices or practices to persist (Pierson, 2000). Antecedent institutional commitments influence subsequent decisions and practices via lock-in and feedback effects (Pierson, 2000; Thelen, 1999). Lock-in can occur because policy actors adjust their strategies and actions according to the prevalent arrangements and, through that, reinforce logic of the existing patterns of behavior (Thelen, 1999). Historically, finance ministries have tended to adopt an ex ante “command-and-control” approach to budget execution, whereby spending actions would have to be authorized by the MoF before they take place (Allen and Krause, 2013; Di Francesco and Alford, 2016, 2017; Krause, 2009; Schick, 2001). Thus, the need to deal with consolidation measures is likely to reinforce or bring back such previously used top-down controls over expenditure details by the MoF (Krause, 2009; Raudla et al., 2015a, b; Schick, 1964, 1988). The MoF is likely to resort to the known-and-tested approaches to budget control, at the expense of vertical and horizontal flexibility (Di Francesco and Alford, 2017; Krause, 2009). In addition to the routine ex ante controls over expenditures exercised by the MoF, the context of austerity may give rise to more interventionist approaches by the MoF – in the form of reducing the money available for the spending ministries during the fiscal year (Krause, 2009; Schick, 1988).

2.2.2 Proposition 2: Austerity leads to more flexibility

In contrast to Proposition 1, there are a number of mechanisms that may induce increased flexibility in budget execution in response to austerity: (1) efforts at agility, (2) quid pro quo for stricter caps on budget totals and (3) efficiency-seeking.

First, in the face of a crisis and more scarce resources, public sector organizations may seek to be more agile, increase their “resource fluidity” (Doz et al., 2018) and foster flexibility in order to increase resilience (Anessi-Pessina et al., 2020). In order to act in a more agile way in a complex context presented by austerity, decision-making over budget details would have to be taken by those who have the best information about them (Cothran, 1993; Di Francesco, 2016; Schick, 1988). The better the match between the decision-rights over specific spending decisions and the situation needing a response, the more informed the resource use decisions are likely to be (Cothran, 1993; Di Francesco and Alford, 2017; Krause, 2009; Schick, 2001). Conversely, the longer the distance between both the situation in which a concrete spending decision has to be made and the officials with decision-making authority over that spending, the less informed that decision is likely to be (Di Francesco and Alford, 2016). If the MoF has to approve re-allocations in appropriations, they are likely to have less information about the details of that decision than the line ministry, given that the MoF officials are further away from the policy field or services. These considerations can lead to increased vertical and horizontal flexibility in budget execution.

Second, as suggested by the discussions on top-down budgeting, tightening the caps on budget totals may entail offering the spending organizations more horizontal flexibility in budget execution (Kim and Park, 2006; Schick, 1988, 2001). Schick (1988) conjectures that giving the line agencies more horizontal flexibility in budget execution can constitute an (implicit) quid pro quo for stronger macro-fiscal controls and counteract the demoralizing effects of austerity. In other words, crisis and austerity might necessitate the relaxation of some of the detailed aspects of budget execution in order to meet the aggregates better (Krause, 2009; Raudla et al., 2015b; Schick, 1988, 2001; Tarschys, 1986). Making managers responsible for overall costs may entail giving them more say over how resources are used (Schick, 1988, 2001). Furthermore, in order to control the budget in the context of austerity, the finance ministry may need to focus their attention at macro-economic analysis and strategic prioritization of expenditures, rather than zooming in on spending minutiae (Schick, 2001).

Third, the increase in both vertical and horizontal flexibility in response to austerity may be driven by attempts to increase the efficiency of spending in face of heightened scarcity of resources. Devolving decision-making authority to those who are closer to the situations that need to be dealt with in the face of austerity can facilitate efficient deployment (and re-deployment) of resources (Di Francesco and Alford, 2017; Douglas and Franklin, 2006; Dunsire and Hood, 1989; Franklin and Douglas, 2003; Tarschys, 1986). A greater horizontal flexibility has the potential to enhance spending efficiency by enabling managers to avoid the end-of-year spending crunch (Di Francesco and Alford, 2016). In principle, giving the line ministries the authority to carryover unspent balances from one fiscal year to another can help to prevent the end-of-year surge in expenditures (Hyndman et al., 2007; Korac et al., 2019), which can be particularly desirable in the context of austerity. Such “December fevers” or “spending sprees” are driven by use-it-or-lose-it attitudes of the spenders and the fear that underspending may signal to the guardians that future budgets can be reduced (Di Francesco and Alford, 2016; Douglas and Franklin, 2006; Korac et al., 2019; Tarschys, 2002; Wildavsky, 1988). This, in turn, can lead to potentially wasteful spending: purchasing unnecessary or low-priority goods or services and paying higher prices (Di Francesco and Alford, 2016, 2017; Hyndman et al., 2007; Korac et al., 2019) which is particularly detrimental in the context of austerity.

3. Methods

In order to examine the changes in budget execution (especially with regard to control and flexibility) triggered by the fiscal crisis and experiences of austerity, we conducted semi-structured interviews and examined policy documents in each country. We interviewed non-elected public officials (10 in Portugal and 14 in Austria) who have been most directly connected with the budget process (current and former civil servants in the finance ministries, line ministries, government offices, parliamentary budget offices, and fiscal councils), and also experts who analyze the developments in fiscal governance. The Appendix provides the list of interviewees according to their positions and interview dates.

In compiling the purposive sample of interviewees for each country, we proceeded from the following considerations. First, our goal was to get an in-depth assessment from the point of view of the finance ministries; hence, we interviewed 4–7 civil servants from the MoF in both countries. Second, we wanted to triangulate the insights gathered from MoF civil servants via interviews with a broader range of civil servants who are involved in the budget process. Thus, we interviewed at least one civil servant from the budget office of a line ministry, fiscal council, parliamentary budget office, and government office in each country. Third, we sought to further validate the assessments by interviewing 2–3 neutral experts such as academics, who analyze policy and budget processes but are not directly involved in the budget process itself.

The interviews were conducted between November 2017 and April 2018 and lasted between 1–1.5 h each. The interviews were part of a broader project that examined the developments in fiscal governance in the post-crisis period. The interview questions concerning budget execution constituted one block in the interview protocol. Existing studies and policy documents were used to gain an initial overview of the developments in budget execution processes in both countries and helped to prepare more informed interview questions. For that purpose, the authors analyzed organic budget laws, annual budgets, medium-term expenditure frameworks, and communication documents with the EU (e.g. the Memorandum of Understanding signed with the Troika in the case of Portugal, and the reports on the Excessive Deficit Procedure in Austria).

The interviews were semi-structured with a set of pre-established questions derived from the theoretical framework, but with the possibility for the interviewer to ask follow-up questions and explore further the statements made by the interviewees. The interviewees were first asked a more general question about the recent budget reforms in their country and how the crisis and period of austerity had affected the budget process. This was followed by specific questions about the different phases of the budget process and how the crisis and the period of austerity (and also EU-level developments) had influenced them. Drawing on the theoretical framework, interviewees were explicitly asked about (1) which reforms had been introduced to the budget execution phase as a result of the crisis; (2) whether the crisis and austerity had made the execution phase more centralized or decentralized; (3) how the crisis had affected the power and role of the finance ministry in the budget process; and (4) whether the budget had become more or less detailed as a result of the crisis. If additional issues related to budget execution were raised by the interviewees, the interviewer also followed up on those. All the interviews were conducted in English and by the lead author.

The interviews were transcribed and independently coded by all authors in order to secure the validity of the interpretations. The manual coding combined deductive and inductive approaches. In the deductive part of coding, answers were compared with regard to the key aspects identified in the theoretical part: reforms of the execution phase (including the introduction of new instruments), centralization versus decentralization, shifts in the role of the finance ministry in budget execution, and the level of detail in the annual budget. In order to benefit from the richness of the data, the inductive approach was used to identify converging and diverging themes that went beyond the pre-set questions.

4. Results

4.1 Portugal

Traditionally, budget execution in Portugal has been characterized by a strong control orientation and limited flexibility (Curristine et al., 2009). The experience of fiscal crisis and the period of austerity over the past decade has reinforced such an approach and brought about further constraints to flexibility, both in horizontal and vertical dimensions.

Among the OECD countries, Portugal stands out for having the most detailed line-item budget, with about 40,000 lines in the annual budget law (Curristine et al., 2009). As one interviewee put it: “The budget document is about 3,000–4,000 pages long and you can see what each service in the public administration is going to spend on electricity, office supplies and consulting services” (Interview P4). All interviewees concurred that although prior to the crisis there had been discussions about increasing horizontal flexibility by introducing less detailed budgets, the onset of the crisis halted these reform considerations and the level of detail in the budget law has remained the same.

With regard to the vertical dimension of flexibility, the Portuguese system has been traditionally characterized by the strong power of the MoF vis-à-vis line ministries in budget execution (Curristine et al., 2009). All the interviewees observed that the crisis and austerity experience has increased the power of the MoF further and brought about additional restrictions in the vertical flexibility of the line ministries. In the words of one interviewee, “The Portuguese idea that the Ministry of Finance has to control everything increased even further during the Troika period” (Interview P4).

The interviewees pointed to major changes in budget execution that had been triggered by the crisis and austerity, combined with the reform demands from the Troika. The Troika [consisting of the European Commission, the European Central Bank (ECB), and the International Monetary Fund (IMF)] was in charge of the loan and adjustment programs offered to the European Union countries that needed a bailout due to the fiscal crisis. The adjustment program required countries that had received loans to undertake fiscal consolidation and structural reforms in order to restore fiscal sustainability (for more details, see, e.g. Hardiman et al., 2019). All of the reforms of the budget execution phase in Portugal entailed increased control of the MoF in the budget execution process.

First, the budget directorate of the MoF introduced IT systems that help to track the expenditures of the line ministries in a more comprehensive and timely manner. The interviewees noted that owing to the new IT systems, the MoF is able to collect budget execution data from all the line ministries on a monthly basis (Interviews P4, P5, P7). Real-time overviews of the incurred expenditures were further facilitated by the introduction of a single treasury account, which replaced a system where some of the line ministries had their own separate accounts. As one of the interviewees (Interview P7) explained, such a separate-accounts system had resulted in a situation where some entities had considerable reserves from their own revenues and past savings, but at the same time the Portuguese government had to borrow money at high interest rates.

Second, all interviewees concurred that an important change in the budget execution process – which had been triggered by the crisis experience and the adjustment program demands – was the adoption of the Law on Commitments and Arrears. All interviewees agreed that the IMF (as part of the Troika), had required this reform during the adjustment program. According to this law, line ministries are only allowed to enter commitments if they have money available for them in the next three months. It is up to the MoF to determine whether sufficient funds are available or not, giving the MoF an additional level of control in budget execution. The interviewees emphasized that the key goal of this reform was to reduce arrears and to prevent line ministries from taking on obligations for which they did not have sufficient funds available – and through that, keep the lid on expenditures (Interviews P3, P5, P7, P8). They stated that this was considered crucial during the period of austerity and in face of having to meet the fiscal consolidation demands imposed by the Troika. However, the use of such an approach continued once the adjustment program was over.

Third, all interviewees pointed out that after Portugal exited the adjustment program led by the Troika in 2014, the MoF resumed the practice of “frozen appropriations”. This means that at the beginning of the fiscal year, the MoF freezes a certain portion of the appropriations of the line ministries (usually around 10%). The frozen appropriations can be unfrozen at the request of the line ministries and it is up to the MoF to decide if it will do so. This practice had existed in Portugal already before the onset of the crisis (Curristine et al., 2009). All the interviewees indicated that it had been discontinued during the Troika years: the European Commission and the IMF disliked such an approach since they viewed it as ad hoc and unsystematic, not entailing structural reforms. As one of the interviewees put it, “It is not a rational way to manage public finances, but it helps to control the expenditures” (Interview P2). The interviewees explained that prior to the crisis, most of the frozen appropriations had usually been unfrozen by the MoF by the end of the fiscal year; in the post-program austerity period; however, the MoF had kept them frozen in order to curtail expenditures. As one of the interviewees put it,

Last year in December, there were expectations that some of the frozen appropriations would be unfrozen because in some bodies there was no money anymore but the finance minister did not unfreeze anything. This was very hard to do but it is a strong sign that there is a strict control of expenditure. (Interview P1)

The interviewees argued that the key reason why the practice of frozen appropriations was re-introduced was that this helped to ensure that Portugal would meet the budget deficit targets of the European Union. Compliance with the EU fiscal rules became more challenging in the context of a minority government after 2016, whereby the parliament became more active in amending the budget and increasing the expenditures after the executive had submitted the draft budget to the legislature. As the interviewees explained, the far left parties in particular, on whose support the minority government relied upon, added expenditure increases to the budget in the approval phase. They noted that complying with the EU fiscal targets was not a priority for these parties (as they viewed these rules to be excessively strict). The interviews indicated that because the MoF assumed the responsibility for ensuring compliance with EU fiscal rules, it resorted to frozen appropriations [2]. As one of the interviewees put it, “Since the parliament is critical of fiscal consolidation, it needs to be achieved in the execution phase” (Interview P9).

Several of the interviewees were highly critical of the use of frozen appropriations:

It is not a way to manage the budget. The fact that it is used shows that there are issues with other instruments in budget execution. (Interview P6)

The practice of frozen appropriations assumes that in such situations the MoF is perfectly able to assess whether the requests for unfreezing constitute emergencies or not. But it is a lot of work for the MoF and you cannot expect these decisions to be very informed. (Interview P5)

One of the interviewees also observed that this instrument can create perverse incentives for the line ministries: if the line ministries know that there is a possibility to ask for the unfreezing of some of the appropriations, they have an incentive to spend faster so that they can justify the need to unfreeze by pointing to a lack of funds (Interview P5). At the same time, however, it was noted that there is a fundamental uncertainty about whether some expenditures will be unfrozen or not because it is entirely up to the discretion of the MoF (Interview P5). Some of the interviewees argued that this practice further increases the discretion of the MoF and reduces transparency in budget execution, making it challenging for the legislature to foresee what is actually going to happen in the budget after the fiscal year begins (Interviews P5, P9).

Although the decreased flexibility in budget execution has been perceived to contribute to fiscal discipline, several interviewees (including current and former officials of the MoF) expressed criticisms with regard to increased vertical inflexibility in budget execution (Interviews P3, P4, P8). As two of the interviewee officials put it,

The Ministry of Finance wants to control everything. It wants to receive all information and control the process but it is, in fact, not capable of processing so much information. As a result, the decision-making can be quite poor. (Interview P8)

What we really need is for the ministry of finance to look at the forest and not each tree. Unfortunately, the experience of the fiscal emergency made us go in the opposite direction. …. I understand if you want to recruit 2,000 new medical doctors, the finance ministry should have a word on that but if you want to hire two doctors in a specific hospital, you also have to go to the finance ministry. It does not make sense. (Interview P4)

Some of the interviewees argued that it would be better to have the line ministries assume more responsibility for their budgets and fiscal discipline, otherwise the line ministries just shift that responsibility to the MoF:

Maintaining control over public finances should not only be the responsibility of MoF. Each line ministry should be its own MoF. At the moment, in the media discussions, for example, the line ministries shift all the blame for the implications of austerity measures to MoF. (Interview P2)

Achieving macro-control through giving the line ministries more flexibility would be better since they know better what is needed on the ground, in terms of spending. (Interview P8)

When asked about why it has been difficult to increase flexibility in budget execution, several interviewees pointed to deeply entrenched administrative traditions with regard to budgeting, going back to the previous political regime. As one of the interviewees explained it,

Salazar – who later became the dictator – was first the Minister of Finance and he wanted to control everything. So, he created a system where every time you wanted to spend some money you had to ask the Ministry of Finance to authorize it. Back then, the central administration had 20.000 employees, and now we have 500.000 or 600.000, so the scale of administration has changed but the mentality is still the same. (Interview P8)

4.2 Austria

In 2009, Austria embarked on a major overhaul of its budgeting system, which included the introduction of performance budgeting, accrual budgeting, a medium-term expenditure framework (MTEF), and increased flexibility in budget execution (Downes et al., 2018; Korac et al., 2019; Steger, 2012). The implementation of the reform was divided into two parts: the MTEF and unlimited carryovers were enacted in 2009 and the remaining changes in 2013 (Downes et al., 2018). Overall, the reforms constituted a considerable departure from the previous traditional budgeting system, characterized by a legalistic orientation and detailed input-control over the line ministries in the execution phase of the budget process (Blöndal and Bergvall, 2008; Downes et al., 2018; Steger, 2010).

With the comprehensive reform, both horizontal and vertical flexibility were increased. Line ministries were given more freedom both in terms of the purpose and timeframe of spending (Downes et al., 2018). As a result of the reform, from 2013 onwards, the level of detail in the budget law approved by the parliament decreased considerably: prior to the reform, the budget law contained about 1,200 appropriation line items and after the reform, there were 75 (Blöndal and Bergvall, 2008; Downes et al., 2018). A more detailed breakdown of the expenditures is compiled in the form of 387 “detailed budgets,” which are included in the supplementary budget documentation, but these are intended to be indicative rather than legally binding (Downes et al., 2018; Steger, 2010, 2012).

The global budgets meant that line ministries had more freedom in deciding over the inputs and more flexibility to reallocate spending without the need of legislative approval. Prior to the reform, the virement of funds between organizations, programs and types of appropriations needed the approval of the parliament, although the finance minister had been delegated the authority to authorize some of the changes (Blöndal and Bergvall, 2008; Steger, 2010). After the reform, the reallocation between the global budgets required the approval of the MoF. Reallocations within the global budget can now be done without the approval of the MoF, although the line ministries have to inform the MoF of those changes.

With the 2009 reform, the time-frame flexibility of budget execution was also increased considerably. Prior to the reform, the line ministries had the possibility to carryover some of the unspent funds but had to negotiate it with the MoF (Korac et al., 2019). With the 2009 reform, the line ministries were given unlimited freedom to carry over funds and build up reserves (Korac et al., 2019; Downes et al., 2018; Steger, 2012).

As all interviewees concurred, one of the core ideas behind the reform was to increase budget discipline while increasing flexibility. In exchange for stronger macro-controls (embodied in top-down budgeting and medium-term expenditure frameworks) and the efforts needed to engage in performance budgeting, the line ministries were given more freedom in the budget execution phase. It was also hoped that higher flexibility would lead to more efficient use of resources and, through that, to budget savings (see also Downes et al., 2018). As one of the interviewees put it, “The goal was to make each line ministry accountable for its own budget” (Interview A11).

In Austria, the fiscal crisis and ensuing austerity strongly influenced how the reform of the budget execution process – which had been designed and decided before the onset of the fiscal crisis – actually played out. All interviewees agreed that the crisis and austerity prevented the budget execution reform from operating in the way it was intended.

As mentioned above, the reform of the budget process entailed a considerable expansion of horizontal flexibility in terms of purposes of spending, but at the same time significant elements of vertical control (over line ministries by the MoF) were maintained. As the interviewees explained, since the appropriations in the budget law became considerably more general and the number of lines was drastically reduced, there was no longer a need for a parliamentary revision of the budget law to accommodate smaller changes (only changes to the global budgets have to be approved by the parliament). In addition to the budget law, there are more detailed breakdowns of the expenditures, but these are not binding at the level of the law, though the line ministries do need to inform the MoF of the changes. All interviewees concurred that the new budget system gave the line ministries considerably more freedom to reallocate funds. As a line ministry official described it,

As a line ministry, we appreciate the increased flexibility a lot. The old budget law had very small boxes in the form of detailed line items and if we wanted to take money from this box and put it into another box, it would sometimes take months. (Interview A2)

At the same time, the line ministries still need to report to the MoF about the changes they make and need to ask approval for larger changes. Furthermore, as Downes et al. (2018) argue is likely in such situations, the horizontal flexibility has become more limited by the introduction of additional checks of reallocation by the MoF, leading to delays in the authorization process.

Although the experience of crisis and austerity did not bring about a comprehensive reversal of increased flexibility in terms of purposes (though some fine-tuning was added to the process), some interviewees observed that the increased flexibility can pose challenges for fiscal discipline. As one of the MoF officials explained,

The line ministries have become very clever. During the fiscal year, they spend a lot of money on things not required by the law and then toward the end of the fiscal year they come and say: we need additional funds since we cannot pay our staff and then we have to allocate additional money since the staff has to get paid. (Interview A13)

Furthermore, it was noted that since the MoF has less information about the spending details in the line ministries, it has somewhat weakened its bargaining position vis-à-vis the line ministries, since the MoF is not so familiar with the substantive policy fields anymore (Interviews A7, A13).

All interviewees agreed that the austerity period did undermine the expansion of horizontal flexibility with regard to the timeframe of the budget. The budget execution reform of 2009 foresaw unlimited carryovers and build-up of unrestricted reserves. The MoF did, however, retain the authority over approving and authorizing the use of funds from the reserves (Steger, 2012). Initially, after the adoption of the 2009 reform, line ministries accumulated considerable reserves (up to 5% of GDP at its peak) and their end-of-year spending surges became smaller (see Korac et al., 2019 for the quantitative analysis of budget data). Once the line ministries wanted to make more extensive use of the accumulated reserves, it became clear that this would lead to non-compliance with the EU fiscal rules, since the actual spending of reserves would have implied increased borrowing and hence a budget deficit. The EU fiscal rules require the annual budget deficit to be below 3% of GDP and the structural budget balance cannot exceed a country-specific medium-term target (see Raudla and Douglas, 2021). As one of the interviewees summarized it,

It became clear that if the line ministries were to start using the reserves, it would jeopardize all our fiscal planning, our medium-term expenditure framework objectives, and so on. (Interview A5)

As a result, in 2014, an additional directive pertaining to the reserves was adopted by the government (Directive on restricted budget execution), restricting the purposes for which reserves could be used and stating that if the deficit target is in danger, the ministry of finance cannot approve the use of reserves (see also Downes et al., 2018; Korac et al., 2019). Thus, as the interviewees explained, in order to secure Austria's compliance with the budget deficit targets, the MoF has vetoed line ministries' access to the reserves they had accumulated. Austria was in the excessive deficit procedure of the EU, and that entailed close surveillance of budget discipline and consolidation efforts, incentivizing Austria to comply with the EU fiscal rules. In the words of one of the MoF officials,

When we had to cut the budget, line ministries said: ok, we can propose cuts in the budget planning phase, but in the budget execution phase, we do not actually need to cut but use the reserves instead. By the end of the year, we could not control the budget anymore. (Interview A4).

All the interviewees concurred that the decision of the MoF to constrain the line ministries' access to the accumulated reserves had considerable implications for the line ministries. In order to maintain macro-control and compliance with annual fiscal targets, the MoF collected line ministries' requests to use their reserves and made the decision close to the end of the fiscal year, in light of how the overall macro picture was. Such an approach created considerable uncertainty for the line ministries since they did not know whether they would be able to spend the reserve money or not (see also Downes et al., 2018). All interviewees also agreed that in response to losing access to their carry-overs, the line ministries resumed its previous budgetary behavior and the December fever returned (for a quantitative analysis of the budget data on that, see Korac et al., 2019). In the words of the interviewed officials:

There was a big wow among the line ministries: we built up the reserves and now we cannot use them. As a consequence, they went back to their old patterns of behaviour – spend everything foreseen, otherwise it is taken away. (Interview A14)

The MoF – by not giving line ministries access to the reserves – destroyed its own reform. (Interview A2)

The instrument of building reserves from carry-overs is dead by now. (Interview A9)

5. Concluding discussion

Our paper contributes to scholarly discussions on the underexplored topic of the execution phase of the budget process and especially to our understanding of how the era of austerity affects flexibility and control in budget implementation. In the theoretical discussion, by drawing on the insights from the literature on budget execution, fiscal governance, and austerity management, we developed two competing propositions about the effects of austerity on shifts with regard to flexibility and control in budget execution. Proposition 1 suggested that the experience of a crisis and austerity period would trigger changes in budget execution toward greater control (Hallerberg, 2004; Hallerberg et al., 2009; Krause, 2009; Raudla et al., 2015a; Schick, 1964, 1988). Proposition 2 conjectured that a crisis and austerity period would give rise to increased flexibility in budget implementation (Di Francesco and Alford, 2017; Douglas and Franklin, 2006; Dunsire and Hood, 1989; Franklin and Douglas, 2003; Raudla et al., 2015b; Schick, 2001; Tarschys, 1986).

Our empirical study of the developments in budget execution practices of two cases – Portugal and Austria since 2009 – provide more evidence for Proposition 1 rather than Proposition 2. This conclusion reinforces the findings of several existing empirical studies that have examined the effects of austerity on budgeting and have observed shifts toward increased centralization and control (Ghin et al., 2018; Krause, 2009; Kristiansen, 2018; Raudla et al., 2015a).

Table 1 gives a summary overview of our two cases, their key characteristics, and changes in budget execution. Although, in principle, increased flexibility could be helpful in achieving budget savings by devolving decision-making authority about spending details to those closer to the spending situations (Di Francesco and Alford, 2016, 2017; Douglas and Franklin, 2006; Dunsire and Hood, 1989; Franklin and Douglas, 2003), in our two cases austerity triggered the reinforcement of existing controls, adding further layers of controls, and (at least a partial) reversal of previously introduced flexibility instruments or reform directions. In both cases, the MoF resorted to more ad hoc interventionist approaches in budget execution to secure fiscal consolidation goals in the context of austerity.

All three mechanisms that we outlined in our theoretical discussion on Proposition 1 – the need to achieve coordination, blame-avoidance by MoF, and path-dependence – could be observed to be at play in our two cases. In the Portuguese case, we can see that an already highly legalistic and control-oriented budget execution system became even more control-oriented as a result of the fiscal crisis and the attempts by the Portuguese government to get the budget deficit under control. Additional instruments of control were added to the arsenal of the MoF by requiring the MoF to approve commitments by the line ministries. Furthermore, in order to avoid blame for violating deficit targets, the MoF considerably increased its discretion by freezing appropriations (which had been foreseen in the budget law), which in turn meant further reduced flexibility and uncertainty for the ministries. The Austrian case demonstrates that the extreme timeframe flexibility introduced as part of the comprehensive budget reform in 2009 clashed with the austerity needs. The overhang of unused reserves created considerable macro-economic uncertainties and clashed with the EU budget deficit targets. As a result, in order to achieve more coordinated fiscal policy and to avoid the blame for violating the fiscal rules, the use of the accumulated reserves was frozen by the MoF (see also Downes et al., 2018; Korac et al., 2019). This, in turn, led to the return of the end-of-year spending spree by the line ministries. Our study points to the role of path dependence and the importance of administrative traditions and culture in understanding developments in budget execution in response to austerity. In both countries, the administrative traditions and culture support the continuation of detailed expenditure controls by the MoF in the budget process. Certain rituals and practices of budgeting appear to be very strongly ingrained in their administrative cultures – and when crisis occurs, rather than shaking the systems, it tends to reinforce these tendencies.

Our empirical findings reinforce the conclusions of several existing studies about the relevance of supra-national pressures and the relevance of EU-level fiscal rules (and external pressure from the EU toward fiscal discipline) in shaping budgeting practices in the member states (e.g. Ghin et al., 2018; Hardiman et al., 2019; Kristiansen, 2018; Raudla and Douglas, 2021). Furthermore, our cases demonstrate that governments' attempts to comply with supranational rules have led to budget execution practices that work against the goals of efficiency (like the return of the December fever in Austria) or the democratic legitimacy (like the re-introduction of frozen appropriations in Portugal). Future studies should examine whether such unintended effects of EU fiscal rules have taken place in other member states as well. Such comparative studies could provide fruitful input for discussions on how to reform the EU fiscal governance framework.

The key limitation of our empirical study is that we only examined two European countries from similar administrative traditions. Hence, the external validity of our research is limited. Future studies should examine a broader range of countries in order to improve our understanding of budget execution in general and the effects of crisis on budget implementation in particular. In particular, it would be fruitful to study cases with different starting points than the two cases we have looked at in this paper. It may well be that our cases present an evidence of governments going back to management approaches that have been tried and tested (and proven to work) in the context of crisis (e.g. Dunsire and Hood, 1989; Overmans, 2019) [3]. It is plausible that those governments that have used more flexible budget execution practices (with beneficial results) prior to the crisis fall back on those approaches during crisis, even if centralizing instruments have been introduced in the interim. Future studies could examine these dynamics. Furthermore, a more systematic examination of any other factors (for example the ideological composition of the government, having a minority versus majority government, changes in international management fashions, the role of institutional entrepreneurs etc.) that might have contributed to changes in flexibility in budget execution, alongside or prior to austerity, would be needed in order to advance our understanding of shifts in budget execution practices.

Our paper has focused on the effects of crisis and austerity on budget execution. The causal arrow can, of course, go in the other direction – the existing practices of budget implementation can influence whether the government has to face a fiscal crisis in the first place and how it would be able to handle unexpected shocks (e.g. Barbera et al., 2020; Bracci et al., 2015). Governments' ability to handle unexpected shocks and to remain resilient in face of volatility has become a particularly crucial issue in light of the global COVID-19 pandemic (Anessi-Pessina et al., 2020). Thus, future studies should examine comparatively how different aspects of budget execution systems improve financial resilience and help governments to deal with various types of shocks.

Table 1

Summary of the case study findings

	Portugal	Austria
Administrative culture	Continental European (Napoleonic)	Continental European (Germanic)
Traditional features of budget execution	Historically high level of control and detailed budgets	Historically high level of control and detailed budgets
Budget execution reforms before the crisis	None	In 2009 horizontal and vertical flexibility increased: Global (less detailed) budgets, unlimited carryovers
Degree of fiscal crisis/Austerity	Severe	Moderate
Involvement of Troika	Yes	No
Reforms of budget execution during fiscal crisis	New control-increasing instruments adopted (single treasury account, limits on arrears, real-time monitoring)	Implementation of the previously adopted reform
Changes in budget execution after the acute phase of the crisis was over but austerity continued	Increased control: re-introduction of frozen appropriations in order to meet the EU fiscal targets	Increased control: Freezing of the carry-over system in order to meet the EU fiscal targets
Key implications of the austerity-era changes to budget execution	Concerns with democratic legitimacy due to frozen appropriations	Return of the December-fever by line ministries (with potentially wasteful spending)

Notes

1. For an insightful overview of the term and its implications, see Bracci et al. (2015).

2. In 2016, for example, the consolidation resulting from the frozen appropriations was ca 0.3% of GDP (Interview P7).

3. We are very grateful to an anonymous reviewer for drawing our attention to this issue.

Appendix

Interviews

Portugal

• P1: Official of Finance Ministry, 15.11.2017

• P2: Former official of Finance Ministry, 16.11.2017

• P3: Official of Finance Ministry, 16.11.2017

• P4: Country expert, 17.11.2017

• P5: Country expert, 17.11.2017

• P6: Country expert: 17.11.2017

• P7: Official of the Fiscal Council, 20.11.2017

• P8: Former official of Finance Ministry, 20.11.2017

• P9: Official of the Parliamentary Budget Office, 21.11.2017

• P10: Former budget official of a line ministry, 24.11.2017

Austria

• A1: Former official of Finance Ministry, 18.02.2018

• A2: Budget official of a line ministry, 04.04.2018

• A3: Official of the Fiscal Council, 05.04.2018

• A4: Official of Finance Ministry, 05.04.2018

• A5: Official of the Parliamentary Budget Office, 06.04.2018

• A6: Official of the prime minister's office, 06.04.2018

• A7: Official of the prime minister's office, 06.04.2018

• A8: Country expert, 09.04.2018

• A9: Official of the Finance Ministry, 10.04.2018

• A10: Official of the Finance Ministry, 10.04.2018

• A11: Official of the Finance Ministry, 10.04.2018

• A12: Official of the Finance Ministry, 10.04.2018

• A13: Official of the Finance Ministry, 12.04.2018

• A 14: Country expert, 30.04.2018