The influence of transparency on budget forecast deviations in municipal governments

• DOI: http://doi.org/10.1002/for.2513
• Published date: 01 July 2018
• Author: Francisco Bastida,Ana‐María Ríos,Bernardino Benito,María‐Dolores Guillamón
• Date: 01 July 2018

RESEARCH ARTICLE

The influence of transparency on budget forecast deviations

in municipal governments

Ana‐María Ríos | María‐Dolores Guillamón | Bernardino Benito | Francisco Bastida

Department of Accounting and Finance,

University of Murcia, Murcia, Spain

Correspondence

Bernardino Benito, Department of

Accounting and Finance, Faculty of

Economics and Business, University of

Murcia, Campus of Espinardo, Murcia

30100, Spain.

Email: benitobl@um.es

Abstract

This paper analyzes the impact of transparency on fiscal performance. Our sam-

ple considers the 100 largest Spanish municipalities for the years 2008, 2009,

2010, 2012, and 2014. The results show that the level of municipal transparency

influences budget forecast deviations in tax revenues and current expenditures.

On the one hand, less transparent municipalities overestimate their revenues,

allowing them to provide more public services without an immediate increase

in taxes. On the other, these local governments, which are aware of the overes-

timation of their revenues, may spend less than they budgeted. More transpar-

ent municipalities, meanwhile, seem to be more prudent in their revenue

estimations, since they underestimate their revenues, meaning they can spend

more than projected. Our results also show that the behavior of politicians is

influenced by the phase of the electoral cycle in which they find themselves,

with politicians overestimating expenditures in the year before election.

KEYWORDS

budget balance, budgetforecast deviations, electoral cycle, local government,transparency

1|INTRODUCTION

The importance of transparency is acknowledged by prac-

titioners in various policy fields. Public sector transpar-

ency stems from policies, institutions, and practices that

provide information in ways that improve understanding

of public policies, enhance the political effectiveness,

and reduce policy uncertainty.

The public sector is mainly funded by taxpayers, who

require transparent information to be able to monitor gov-

ernment activities. Budget is the tool governments use to

implement specific policy objectives during each fiscal

year. Politicians may not have an incentive to adopt the

most transparent practices in the budget process, and even

attempt to veil the real budget balance to manipulate the

electorate (Alesina & Perotti, 1996). In fact, the credibility

of policy decisions depends on budgets that are consis-

tently enforced. Forecast errors may sometimes not be sim-

ply the result of technical shortcomings but also reflect

political decisions, creating a systematic error. These sys-

tematic budget variances may indicate that the budgeting

process should be monitored by independent auditors or

other independent parties, particularly if budget variances

mislead budget users. Budget forecast deviations may also

imply that legislation stipulating a balanced budget ought

to be reassessed in light of the tools politicians use to

manipulate the budget (Mayper, Granof, & Giroux, 1991).

Two theoretical arguments predict that politicians will

generally opt to be ambiguous. First, fiscal illusion theory

shows that uninformed and naive voters underestimate

the costs of current and future public programs, particu-

larly when budgets are not transparent. Second, the

agency theory argues that politicians (agent) and voters

(principal) may not pursue identical objectives, since

incumbents sometimes have their own interests in mind,

which do not always maximize citizens'welfare.

In the same way, citizens cannot directly observe

incumbents'competence, which can be defined as the

Received: 26 May 2017 Revised: 25 October 2017 Accepted: 2 December 2017

DOI: 10.1002/for.2513

Journal of Forecasting. 2018;37:457–474. Copyright © 2018 John Wiley & Sons, Ltd.wileyonlinelibrary.com/journal/for 457

ability to provide certain levels of services at the lowest

taxes. Incumbents attempt to show their competence to

citizens, especially when elections are approaching, and

so increase their possibilities of reelection. Thus the lack

of transparency may create an advantage for policymakers

in achieving their goals and enables governments to

manipulate budget projections according to their own

preferences in order to signal their competence to voters

and so improve their chances of remaining in office.

According to the electoral cycle theories, governments

will attempt to introduce more popular measures immedi-

ately before an election. Similarly, more unpopular mea-

sures will be implemented immediately after an election.

Specifically, incumbents may make overoptimistic projec-

tions of budget variables, so that revenues are

overestimated and spending needs are underestimated

before elections, with the aim of increasing their chances

of victory (Drazen, 2008). Lago‐Peñas and Lago‐Peñas

(2008) and Serritzlew (2005) argue that the search for

political support leads ultimately to upward deviations

from budget forecast when: (1) budget procedures are soft;

(2) breaking the promises of high expenditures and low

taxes is costly in political terms, and (3) ex post control

by voters and political opposition is imperfect.

Given that transparency is an essential ingredient for

effective political control and public sector monitoring,

budget transparency may be a tool for fiscal discipline in

terms of budget forecast deviations during the electoral

cycle. The literature has analyzed the impact of transpar-

ency on some fiscal performance indicators, such as defi-

cit, debt, or expenditures (Alesina, Hausmann, Hommes,

& Stein, 1999; Alt & Lassen, 2006; Marcel & Tokman,

2002; Stein, Talvi, & Grisanti, 1998; Tanzi, 1994). How-

ever, as far as we know, the impact of the level of trans-

parency on budget forecast deviations has never been

empirically tested. To fill this gap, our paper aims to

answer the following question: Does the level of transpar-

ency affect budget forecast deviations in tax revenues and

current expenditures?

We use a sample of the 100 largest Spanish municipal-

ities for 5 years (2008, 2009, 2010, 2012, and 2014). We

consider that the study of the impact of transparency in

budget forecast in the case of the Spanish Local Govern-

ments is interesting since, according to the International

Budget Partnership (IBP, 2015), the Spanish government

does not provide sufficient budget information to citizens.

A lack of transparency may increase voters'confusion and

reduce politicians'commitment to be fiscally responsible,

which may promote budget manipulation and relevant

deviations. Moreover, all municipalities apply the same

legislation and their political processes are identical.

Our results show that less transparent municipalities

tend to overestimate their tax revenues and current

expenditures. First, revenues overestimation may allow

less transparent governments to provide enhanced ser-

vices without an immediate increase in taxes, which

may increase their popularity. Second, these governments

should spend less than they budgeted since they are aware

of the overestimation of their revenues.

In any case, the strategy adopted by these municipali-

ties would normally lead less deficit or even to a surplus.

In order to go more deeply into this issue, we carried

out an additional analysis to examine the influence of

the level of transparency on budget balance. Thus our

paper attempts to answer the following question: Does

the level of transparency affect budget balance? This analy-

sis shows that less transparent local governments spend

more than they collect, so incurring deficits. Our findings

also show that the behavior of politicians is influenced by

the phase of the electoral cycle. We find that expenditures

are overestimated in the year before election, especially in

less transparent municipalities, reducing the deficit (or

increasing the surplus) of that year.

The paper is structured as follows. Section 2 reviews

the literature on transparency, budget process, and fiscal

performance. Section 3 describes the Spanish municipal

sector. Section 4 provides details of the sample, economet-

ric model, and variables. Section 5 discusses the empirical

results. Section 6 presents the additional analysis relating

to the effect of transparency on budget balance. Section 7

concludes.

2|TRANSPARENCY, BUDGETARY

PROCESS AND FISCAL

PERFORMANCE

The way in which actors partake in the formulation of

policy can be understood as the policy cycle (Gholipour

& Rouzbehani, 2016). This cycle, as described by

Baumgartner and Jones (2010), includes agenda setting,

policy formulation, budgeting, implementation, evalua-

tion, and modification or termination of policy. Actors

participate at each stage of the policy cycle in order to

advocate for their own interests, which often results in

policy that is messy. Therefore, the quality of this process

may improve by increasing transparency at each stage.

The concept of transparency is defined by Premchand

(1993) as the public availability of information regarding

governments'decision‐making procedures and transac-

tions. Transparency helps societies to enhance their

governments'positive contributions while also helping

to resolve the problems inherent to government activity.

Information about policy is an input for ex ante political

control of the public sector, for day‐to‐day responses to

the citizenry, and for ex post monitoring and evaluation.

458 GUILLAMÓN ET AL.