find that countries with strong budget institutions have lower fiscal deficits and debt and therefore they have more scope for conducting counter-cyclical policies when facing shocks than those with weaker institutions.

The ideas contained in the sources cited here, as well as several others, are used to form a number of hypotheses in Section IV below where the literature review is deepened. The hypotheses put forth in this paper are also informed by an examination of the dependent variables used to measure the quality of budget execution. The distribution of the cross-country data is interesting on its own merits but it also inspires some interesting questions. Thus Section III presents an in-depth analysis of the quality of budget execution across countries.

# **III. The Quality of Budget Execution**

This section of the paper presents several measures of the quality of budget expenditure execution based on the fundamental idea that a well-executed budget should display minimal deviation from approved allocations, in aggregate and in composition.<sup>6</sup> Some care is needed in defining what deviation is to be measured. Many countries approve a budget at the start of a fiscal year and subsequently approve supplemental budgets to make within-year corrections to account for ad-hoc policy changes and various shocks. It would be admirable if all budgetary deviations were the consequence of such approved, within-year corrections. The fact that such corrections are necessary is, however, indicative of weaknesses in macroeconomic forecasting and in planning as well as the usual unanticipated shocks. This paper therefore follows the PEFA methodology which measures only the deviations between actual outcomes and the original budget at the start of each year rather than budgets that may have been subsequently modified.

These measures are derived from a new database of 159 observations from 45 central governments around the world. This is a larger number of countries than what has appeared in the literature todate. The core of the database is constructed from the raw budgetary data used to calculate scores for PEFA indicators PI-1 and PI-2 for expenditure deviations from approved budgetary allocations in level and composition and PI-3 for revenue deviations.<sup>7</sup> These data exclude project related expenditures financed by donors and debt service obligations.<sup>8</sup> The paper does not make use of the PI-1, 2, and 3 scores themselves.

Of the 45 governments represented in the database, 14 are from Sub-Saharan Africa, 9 are from Europe and Central Asia, 7 are from Latin America and the Caribbean, 6 are from South Asia, 5 are from East Asia and the Pacific, 3 are from the Middle East and North Africa, and 1 is from a European OECD government.<sup>9</sup> Eight of these countries were assessed twice, bringing the total number of country observations to 53. The PEFA assessments include data for three years per country, so that the total number of country observations is 159. The years measured depend upon the period of each PEFA assessment and vary from 2002 to 2010.

> 6 Those who are interested only in budget execution as a means of achieving public service delivery or public investment goals, without regard to macroeconomic objectives, might prefer a slightly different definition.  For this narrower focus, the goal would be on minimizing the gap between _real_ (inflation adjusted) allocations and expenditures.  This would help ensure that the intended physical volumes of inputs and outputs are obtained.

> 7 The PEFA website includes many more countries, allowing for future expansion of the database.  Some of the country cases included in the PEFA website were rejected due to lack of published budgetary data, exclusion of domestically funded capital expenditures, less than three years of data, and other problems.

> 8  These are outside the direct control of the client governments and are difficult for some governments to track.

> 9 The PEFA website is particularly lacking in reports on developing countries from the Middle East and upper income countries in general.

6