Emil Lobe Suenson, Peter Nedergaard and Peter Munk Christiansen
Why do you want to lash yourself to the mast? The case of the Danish “Budget Law”
Abstract: The article examines the conditions that led to the adoption of the Danish 2012 “Budget
Law”. The law added important new features to the institutional setup governing Danish public
expenditures, the most important being budget ceilings, economic sanctions, and the requirement of
structural budget balance.
By testing three hypotheses drawn from different branches of public choice theory, the analysis
seeks to isolate the drivers of institutional change which led to the adoption of the budget law.
Each hypothesis is tested separately, and three main conclusions are reached:

The Budget Law can be seen as an attempt to address two cost driving dynamics:
continuous problems related to cost control especially in Danish municipalities, and
asymmetrical preferences concerning public expenditures.

The Budget Law can be interpreted as a credible commitment initiative established to
ensure that public expenditures can be controlled even when economic conditions improve
and public expenditure preferences rise.

An empirical test of the median voter model reveals that Danish voters, due to the economic
crisis, preferred significantly lower public expenditures in 2011 than in 2007. This shift in
voter preferences most likely made it easier for the majority in the Danish Parliament to
pass the Budget Law without encountering massive resistance from voters and interest
groups.
Overall, the sudden and radical institutional change caused by the adoption of the Budget Law is a
result of the above factors coinciding.
Key words: Public expenditures, Public Choice, Denmark, Budget Law.
1
Introduction
In 2012, the Danish Parliament adopted probably the most seminal public spending act ever – the socalled Budget Law.1 Behind the enactment lies a complex story about the relationship between public
spending growth and cost overruns, the economic crisis and resulting crisis awareness, the desire to
minimize the expense policy scope, and implementation of expenditure policy management systems
across both national and international levels of government. The law was adopted to ensure that public
budgets are respected. Over the last 35 years, this has not been the case, and the public sector had
massive cost overruns, which resulted in comparatively high public spending growth (Jørgensen and
Mouritzen 2005: 19).
Denmark was hit hard by the economic crisis after 2008 (Goul Andersen 2013). This gave rise
to major crisis awareness among voters, interest groups and politicians, and to a political paradigm
shift in which cost overruns were no longer acceptable. From December 2011, the intergovernmental
agreement, the European Fiscal Compact, required signature countries to ensure public finances
balance. The Budget Law represents the Danish implementation of the Fiscal Compact.
Theories of public expenditures traditionally point in two important and conflicting directions:
They emphasize (1) that political institutions seldom change and (2) that concerning public
expenditures, politicians focus on the short term and therefore are reluctant to commit to long-term
objectives (Mueller 2003: 114-127). The Budget Law is an expression of the exact opposite. Flexible,
but dissolute economic management has been replaced by strict legislation limiting politicians’ current
and future spending policy options and flexibility. Yet, a large majority in the Danish Parliament
adopted the law. The article asks how it was possible to adopt the Budget Law.
The Budget Law contains the following elements:

A requirement that public expenditures must be in balance or surplus.2
1
What we term the “Budget Law” is in fact a number of new laws and changes of existing laws.
2
The annual structural deficit may not exceed 0.5 % of GDP. The balance requirement, the correction
mechanism, and their design represent the implementation of the requirements of the Fiscal Compact (Budget
Act § 2 and 3; Ministry of Finance 2012b: 6-7).
1

An automatic correction mechanism is triggered when public finances differ from the above
balance requirements.

Budget ceilings for the state, municipalities, and regions.

Financial penalties to ensure compliance with the ceilings in the state, municipalities, and
regions.

The Economic Council3 continually assesses whether fiscal and expenditure policies
comply with the above requirements.
These five main elements are designed to ensure long-term balance in public finances and that elected
politicians conduct fiscal policy within the requirement of structural budget balance. The Fiscal
Compact imposes identical requirements on Denmark. However, the Budget Law had already been
prepared when the Fiscal Compact was adopted (Ministry of Finance 2011a: 8-10).
By all accounts, Denmark has introduced an economic government institution that represents a
paradigm shift compared to previous expenditure management. This article asks under which
conditions such a significant institutional change can take place. In general, rationalist theoretical
foundation (see below) is suitable for answering why so few policy changes occur (why so much
stability? – as Dennis Mueller (2003:114) asked) and rationalist theories are less suitable for
explaining political paradigm shifts (Lynggaard and Nedergaard 2009). The article exposes the
theoretical foundation to a hard test and proceeds as follows: theoretical foundation; method; analysis;
and, finally, conclusion.
2
Theory
The article is based on rationalist theories of the political system and politicians’ behaviour, which
derive their assumptions about actors’ preferences from neoclassical economic theory. They assign the
actors exogenously determined preferences, and their actions are seen as the consequence of the
3
The Economic Council is headed by a chairmanship consisting of four independent economists and served by a
secretariat with app. 30 employees. The other 25 members of the Council are representatives of labour and
business, the Danish central bank and government organizations (www.dors.dk).
2
players’ cost-benefit analyses, where the alternative with the highest net benefits is chosen (Buchanan
and Tullock 1999: 17).
In the following we present the asymmetry theorem and classic game theory, the idea of
credible commitment, and finally the median voter model. After each theoretical section, a hypothesis
is presented.
2.1 The asymmetry theorem
James Buchanan uses the term “asymmetrical” in his seminal work, The Calculus of Consent (1962),
to describe how the institution of majority votes pushes the tax rate to rise to a suboptimal level
(Buchanan and Tullock 1999: 168). The asymmetry stems from a fundamental difference between the
economic and the political system. In an economic market, a buyer shows his willingness to pay for a
good or service. This implies a symmetric relation between supplier and demander. In the political
system, payment and consumption are separated due to the payment of taxes; consumption is
individualized, while payment is collectivized (Buchanan and Tullock 1999: 149-200). This makes the
political system vulnerable to organized groups, which are able to obtain benefits that far exceed the
cost of organizing. The losers are stakeholders with diffuse interests for whom it does not pay to lobby
– typically taxpayers and consumers (Nedergaard 2008: 301).
The asymmetry theorem predicts that interest groups might succeed in pushing government
expenditure upwards. Also civil servants will benefit from a bigger budget (Kristensen 1987: 55).
Likewise, several other (supply-side) theories of the public choice tradition point out that the
administrative system can grow larger than optimal (e.g. Niskanen 1971; 1973; Dunleavy 1991: 181209). This analysis tests implications of the asymmetry theorem in two ways, so that expenditure
growth generated by stakeholders both outside and inside the administrative system is taken into
account.
A general ceiling of total public expenditure (as is the case with the Budget Law) increases the
political costs of increased government spending in one area, because expansion of one type of activity
implies savings in other activities in order not to violate the overall expenditure ceiling. Initiatives
3
such as the Budget Law are likely to weaken the political asymmetry (Kristensen 1987: 53). Hence, it
becomes relevant to examine whether this was an objective of the Budget Law.
The asymmetry theorem predicts that government spending will increase, but it does not offer a
theoretical explanation of why public expenditure growth is often generated by cost overruns. Below,
two versions of the classic Prisoner’s Dilemma (PD) will be presented as cost overruns are typically
the result of a similar suboptimal logic (Jørgensen and Mouritzen 2005: 21-23).
Based on the classic budget policy literature, political and administrative actors are separated
into advocates of increased expenditures and guardians of the treasury (Wildavsky 1975: 7-10). The
first version of the PD assumes that all spending advocates are interested in exceeding the budget for
more funding. However, they are also interested in total budgets being adhered to in order to avoid
collective sanctions. This leads to a suboptimal result: The total budget is exceeded, as illustrated by
the PD below.
Figure 1: Individualistic Game
Expense advocate 2
Do not exceed
the budget
Expense
advocate 1
Do not exceed
the budget
Exceed the
budget
B
B
Exceed the
budget
D
D
A
A
C
C
(equilibrium)
As shown in Figure 1, both players exceed the budget. This is because it is most profitable for each
actor to do so, although it provides a suboptimal outcome at the macro level (Kuhn 2007: 1-2). For the
game to be properly characterized as an individualistic PD, at least three conditions must be met,
4
however: The following condition for the pay-off holds: A>B>C>D. The players should not be able to
get out of the dilemma by taking turns exploiting each other, i.e. B>(A+D)/2) (Axelrod 1990: 10, 206).
Players must be concerned only with their own pay-off and not the opponent’s (Sharpf 1998: 85).
The difference between the individualistic and competitive game is given by the players’
preferences (Sharpf 1998: 84). In the individualistic version, the players are concerned only with their
own outcome; in the competitive version one player loses what the other wins, i.e. a zero-sum game.
In both the competitive and the individualistic PD, the equilibrium is non-cooperative (Sharpf 1998:
87-88). The two games thus illustrate theoretically why public actors’ play concerning budgets can
provide sub-optimal performance in both zero-sum and plus-sum situations.
Figure 2: Competitive Game
Player 2
Cooperate
Player 1
Cooperate
Do not
cooperate
0
0
Do not
cooperate
A
-A
-A
A
0
0
(equilibrium)
The above theoretical presentation indicates that public spending will increase over time, and that
games concerning budgets will often lead to suboptimal results. Based on these theoretical
expectations the first hypothesis is formulated:
Hypothesis 1: The Budget Law was adopted in an attempt to rein in spending driving dynamics
contained in the Danish political and administrative system.
5
2.2 Credible commitment
The main point in the credible commitment literature is that efficient policy outcomes require political
actors to limit their ability to pursue their own short-term interests. There are many situations where
the benefits of commitment far exceed the benefits of discretion (North 1993; North and Weingast
1989).
The classic example of a credible commitment is the Odyssey’s account of Odysseus and the
Sirens. When Odysseus let himself be bound to the mast, he obtained the (Pareto) optimal situation
which allowed him to hear the Sirens’ enticing song and still make it home safely to Ithaca (Homer
1998: 144-148; Pierson 2004: 41-43). In other words, absolute freedom of decision-makers does not
always lead to optimal outcomes, because with freedom comes uncertainty and inconsistency
(Kydland and Prescott 1977: 473-474). There may be a need to restrict the operators of action, but this
presupposes that players’ actions are credible. A commitment can basically be credible in two ways.
First, it can be “motivationally credible”: An actor who is willing to be bound throughout the relevant
time period has no vested interest in more freedom, and there is no need for monitoring and
sanctioning. Second, a commitment can be “imperatively credible”, for instance if the actor in fear of
sanctions will not act differently (Shepsle 1991: 247).
Credible commitments are a classic way to overcome the problems, which in game theory are
often presented as a PD (Shepsle 1991: 248). The credible commitment approach considers the
formation of the political budgets as a series of PD games. According to the credible commitment
literature, this series of games will lead to increasing public spending because political actors are
assumed to be myopic: They have to be re-elected, and voters are more concerned with their own
needs than those of future generations (Shepsle 1991: 251; Buchanan 1999: 99-100).
The above-mentioned debt problems are, according to Buchanan, not only attributed to
individual incentives. He is critical of Keynesian economics where a correlation between government
spending and tax burden is not necessary because debt is considered unproblematic (Buchanan and
Wagner 2000: 55-120). Therefore, Buchanan spent much of his life arguing for a revision of the U.S.
6
Constitution to prohibit government budget deficit (see, e.g. Buchanan and Brennan 1985; Buchanan
and Wagner 2000: 187; cf. also Wildavsky 1980; 1985).
Based on the above review, the Budget Law is seen as an institutional credible commitment
mechanism. Hence, a second hypothesis is formulated:
Hypothesis 2: The Budget Law was adopted in an attempt to tie the political actors to pursue more
long-term spending.
2.3 Median voter theorem
The median voter theorem predicts that the spending decisions of the political parties correspond to
the median voter’s preferences. In Downs’ classic model, the political system is seen as an
“economic” market where voters demand and politicians supply political decisions. Voters are
assumed to be rationally informed and to have consistent preferences (Downs 1957; see also Mueller
2003: 231). When it comes to public budgets, Downs formulates the political parties’ decision rule as
follows: “... expenditures are increased until the vote-gain of the marginal dollar spent equals the voteloss of the marginal dollar financed” (Downs 1957: 52). Thus, according to the model, the total
expenditure is determined by the median voter.
The theorem’s assumptions are often not met and the main assumptions are discussed below.
First, the model is based on a two-party system where political parties can move as close to the middle
as they want without losing votes to other parties (Downs 1957: 54). This is not the case in Denmark
because of the proportional election system in which new fringe parties can emerge and gather votes.
Second, it is assumed that all voters vote, which is never the case (Mueller 2003: 232). When
the model is applied to Denmark, the problem is limited, however, because of the comparatively very
high turnout (Franklin 2004). Third, the model operates with only one political dimension, presumably
the left-right economic conflict line. Hence, the model is not useful to treat, for example, conflict lines
concerning values (Mueller 2003: 232).
Finally, it is typically assumed that voters’ preferences are static (Kurrild-Klitgaard 2011: 23).
That is not the case here because we include the effect of the economic crisis on voter preferences.
7
This does not compromise the model’s basic prediction: Politicians follow the median voter.
Nevertheless, the above-mentioned problems indicate that the model should be used with caution. The
third and final hypothesis states:
Hypothesis 3: The Budget Law was adopted because the median voter prefers tighter spending due to
the economic crisis.
3
Method
The article is a single case study of the adoption of the Danish Budget Law. In order to explain single
case outcomes, a number of causes, which together could lead to a given outcome, are considered. In
the following analysis, the perception of causality is based on Mackie’s (1980: 62) concepts, INUS
causality and INUS conditions. An INUS condition is neither necessary nor sufficient if it stands
alone. Instead, it constitutes one of several conditions which combined are sufficient to achieve a
given outcome; in Mackie’s (1980: 62) words: “... an insufficient but non-redundant part of an
unnecessary to sufficient condition.” This approach makes it possible to identify combinations of
conditions which combined are necessary for a given outcome to occur (Mahoney and Goertz 2006:
232-235). The above hypotheses are therefore neither competing nor mutually exclusive. Instead, it is
investigated how the interplay between theoretical explanations may have triggered the adoption of the
Budget Law.
Since the hypotheses refer to a wide range of empirical phenomena, the article draws on several
types of data: descriptive statistics, interviews, data from the Danish election survey as well as
secondary empirical data. Eight interviews with senior officials and representatives of the two major
political parties (Liberals and Social Democrats) have been conducted. The interviewees act as
informants.
Data from the Danish election survey is used to assess the voters’ attitudes towards the
government’s expenditure policy. The survey, which has asked voters about their opinion after each
general election since 1971, allows us to follow the evolution of public attitudes over the years of
investigation (Stubager, Holm et al. 2013: 7) and to make it plausible if and how the voters’ possible
8
crisis awareness has affected decision-makers’ political preferences regarding expenditure policy.
General elections were held in 2007 (before the crisis erupted) and in 2011 (when the crisis had lasted
a couple of years). The data is cross-sectional, but changes in voter preferences are presumed to equal
changes in the general population, due to the law of large numbers.
4
Analysis
The analysis contains four sections. A brief presentation of events preceding the adoption of the
Budget Law is followed by three sections in which each hypothesis is analysed. The conclusion
discusses how the factors considered in the analysis explain the institutional change represented by the
Budget Law.
Several national and international events influenced the adoption of the Law. The following
analysis focuses mainly on the Danish dynamics, because the informants indicated that these factors
were the most important. The international factors are briefly summarized below.
Both the OECD and the IMF have often recommended introduction of clearer fiscal rules,
independent fiscal “watchdogs”, and a top-down budgeting system (Davidsen and Jensen 2012: 19).
Danish decision-makers were probably also inspired by the Swedish Budget Law from 1996, which
established an expenditure ceiling for government expenditures at state level (Ministry of Finance
2010: 238). The seemingly successful ceiling was well known among Danish decision-makers, and the
Swedish model constituted a crucial inspiration, which is fully in line with the predictions of
rationalistic policy learning (Meseguer 2006).
It is often asserted that the Budget Law is a direct result of the Fiscal Compact. This is wrong.
The Fiscal Compact was adopted in December 2011, but the Danish Ministry of Finance’s budget
statement of May 2010 already referred to the Swedish Budget Law as a success story and an example
to follow in Denmark (Ministry of Finance 2010: 235). By then, the Liberal government (for quite
some time before the Fiscal Compact was adopted) planned to introduce a budget model that
resembled the model in the current Budget Law (Ministry of Finance 2011a: 8-10). Conversely, the
Fiscal Compact probably made it easier to get the Budget Law passed in the Parliament, cf. below.
9
The Budget Law was passed by a very large majority in Parliament on June 12 2012, consisting
of the governing parties (the Social Liberals, the Social Democratic Party, and the Socialist People’s
Party), the Liberals, and the Conservatives (Ministry of Finance 2012c).
4.1 Hypothesis 1: Asymmetry
The analysis of hypothesis 1 proceeds as follows: Growth in Danish public spending is documented,
and its relation to the asymmetry theorem and the Budget Law is established; the municipal and
regional overspending related to the adoption of the Budget Law is uncovered; and the asymmetry
theorem is tested empirically using data from the Danish election survey in 2007 and 2011.
The asymmetry theorem can be examined in two ways: by considering whether the public
expenditure growth can be explained as a response to asymmetric cost driving dynamics, or by
examining whether the players’ preferences are instrumental self-interest maximizing as prescribed by
the theory (Kristensen 1987: 56).
In 1960, public spending made up approximately 25 per cent of Danish GDP, which placed
Denmark well below other European countries and even below the United States. Over the next twenty
years, Denmark underwent a massive growth in public spending, and in 1980 the expenditure ratio had
increased to 56.9 per cent, only surpassed by Sweden. This massive growth in the expenditure ratio
even took place during a period of strong GDP growth. Since the 1980s, the expenditure ratio has
varied with the business cycle, and particularly the strong automatic stabilizers have made the pressure
fluctuate inversely of the business cycle (Christiansen 2008: 29-30).
Typically, about half of public spending consists of public consumption, and the rest is income
transfers, public investments, and other expenses. Income transfers and public investment rose sharply
until 2010. This was determined partly by the fact that GDP declined during the crisis, partly by fiscal
priorities in advance of investments. Government consumption also grew until 2010 (Ministry of
Finance 2010: 31). This is particularly relevant for the analysis because the “professional bureaucratic
complex”, according to the asymmetry theorem, has a vested interest in higher consumption, while, for
example, income transfers affect this group much less (Kristensen 1981: 98-99). Ceteris paribus, high
growth in public spending indicates that growth is driven by asymmetry.
10
In Denmark, municipalities in general account for 50 per cent of public consumption, the state
level accounts for 30 per cent, and the regions for 20 per cent (Nielsen and Rasmussen 2012: 78).
Government consumption is usually measured by government spending as a share of GDP (often
called “the public consumption pressure”). This number has increased from 25.7 per cent in 2001 to
29.4 per cent in 2009 with an expected consumption pressure in 2014 of 28.4 per cent (Ministry of
Finance 2010: 30; 2012e: 65). Note, however, that GDP also fell during the period until 2009.
Therefore real growth in public consumption must be taken into account. From 1993 to 2001 public
consumption was planned to rise 1 per cent per year, but real growth was 2.5 per cent. This pattern
repeated itself between 2002 and 2010, when the planned .9 per cent real growth in public
consumption ended up at 1.6 per cent. On average, public consumption growth has been more than
twice as high as planned between 1993 and 2010 (see Ministry of Finance 2012b: 4).
All interviewees mentioned the uncontrollable spending growth from the 1990s onwards as one
of the key causes of why the Budget Law was adopted. The above indicates that the growth in
government spending has been driven by asymmetry, particularly because government spending has
been increasing. Therefore, the adoption of the Budget Law can be interpreted as an attempt to reduce
this asymmetry. The informants emphasize in particular the municipal budget overruns as decisive in
this regard. Below, we conduct a game theoretical analysis of budget overruns in relation to the
adoption of the Budget Law.
4.1 Hypothesis 1: Before and after the Budget Law
The analysis in the remainder of this section consists of two parts. The first focuses on the dynamics
that enabled the municipal budget overruns before the Budget Law. The second part examines the
process that led to the Budget Law being adopted.
Over the last 30 years it has been the rule rather than the exception that municipalities have
exceeded their budgets (Serritzlew and Blom-Hansen 2008: 170). All informants mention municipal
budget overruns as one key reason for the adoption of the Budget Law. Therefore, focus is on the
municipalities, but the analysis could also be applied to the Danish regions, as they are subject to the
same bargaining system.
11
Three characteristics of agreements between central and local government are of particular
importance for the analysis. First, the agreements are not legally binding to municipalities and regions.
Second, the agreements apply to municipalities and regions as a whole. If, for example, a municipality
increases expenditure, and another municipality reduces spending by the same amount, the agreement
is respected. Third, the government (with a majority in parliament) has the power to adopt collective
economic sanctions against municipalities and regions if they exceed their budget. However,
successive governments have refrained from doing so on numerous occasions (Serritzlew and BlomHansen 2008: 168).
The Budget Law reverses the above as it introduces spending ceilings for service costs, which
include approximately 70 per cent of the municipal expenditure (Budget Law § 5). Contrary to the
situation before, municipalities are sanctioned individually if they exceed these spending limits.
From the perspective of public choice theory, the problem is that local politicians have
incentives to offer more public service, and the employees have incentive to obtain larger budgets
(Howlett and Ramesh 1995: 19-20; Buchanan 1984: 133). In addition, individual municipalities have
no incentives to save money due to the collective character of the annual economic agreements. Thus,
the “Tragedy of the Commons” arises because municipalities maximize their own spending, resulting
in a suboptimal outcome: The total budget is exceeded. “Tragedy of the Commons” is a special
version of the individualistic PD, but with more players (all municipalities, i.e. n>2) (Ostrom et al.
2006: 5; Ostrom 1990: 2-5). Figure 3 illustrates the municipalities’ play against each other.
As the figure shows, both municipalities exceed the budget, and the dynamic is empirically
supported: Between 1980 and 2010 the budget agreements were met by the municipalities in only nine
of 30 years (Serritzlew and Blom-Hansen 2008: 170; Nielsen and Rasmussen 2012: 78-79). The
dynamic is reinforced by the fact that budgets are exceeded more when a local election approaches.
This political business cycle is a well-known problem (Mouritzen 1989). Budget overruns are largest
on issues where voters and local government employees have the strongest preferences, i.e. especially
children, the elderly, and schools (Serritzlew and Blom-Hansen 2008: 152).
12
Figure 3: Individualistic game: Municipals budget exceeding
Municipality 2
Do not exceed
the budget
Municipality 1
Do not exceed
the budget
Exceed the
budget
B
B
Exceed the
budget
D
D
A
A
C
C
(equilibrium)
Why has the above dynamics among municipalities developed without sanctions from the incumbent
government? An answer might be found in the political game between the government and the
opposition. The game concerning economic sanctions can be considered as a competitive PD
(Suenson, 2013: 128). It follows logically from the asymmetry theorem that the political parties of
both government and opposition have no interest in sanctioning cost overruns, as this will reduce
public spending and could be interpreted as unacceptable reductions in citizen-related welfare
(Houlberg and Mouritzen 2011). The interviewees confirmed this: They emphasized that before the
economic crisis welfare-state services were politically important, making it difficult to control costs.
Therefore, successive governments did not sanction municipalities, which led to the competitive PD
game shown in Figure 4. The game is a zero-sum game, since there are only 179 seats in parliament at
all times.
The game’s simplified logic illustrates why it has historically been difficult for the
government to sanction municipalities when it has simultaneously played the eternal zero-sum game
of the votes in parliament against the opposition.
13
Figure 4. Competitive game: Municipals budget exceeding – BEFORE the Budget Law
Opposition
Incumbent
government
Sanctioning
No sanction
0
A
Sanctioning
0
No sanction
-A
-A
A
0
0
(equilibrium)
The games above illustrate two mutually reinforcing dynamics: The municipalities have an incentive
to exceed their budgets, which they have done; and the government has few incentives to sanction,
which probably has caused more cost overruns. This is confirmed empirically as cost overruns became
more frequent and larger towards 2009 (Holdt-Olesen and Panduro 2010: 1). The analysis illustrates
why it was possible for municipalities to exceed their budgets year after year without sanctioning by
the incumbent government. The next part examines how the Budget Law was probably adopted in an
attempt to stop this dynamic.
In 2009, the municipalities delivered the largest budget overrun ever. As pointed out by all
informants, the economic crisis fundamentally changed the political agenda on public expenditure
management. The Ministry of Finance played an active role in getting the Budget Law passed. By
pushing for adoption of the Budget Law, the ministry’s civil servants maximized their interests: first,
by subjecting the bulk of government spending to a governance system that was created and
continuously adjusted by the ministry itself; second, by achieving greater control over local
government spending, which the ministry had wished for a long time (Jensen 2003: 50, 300).
In game theory jargon, a new equilibrium in the competitive games was created after the crisis,
which means that government and some opposition parties worked together to adopt the Budget Law.
14
This could also be driven by the political parties’ self-interest, because financial accountability is
rewarded by voters in times of crisis (Goul Andersen and Hansen 2013: 148), cf. Figure 5.
Figure 5. Competitive game: Municipals budget exceeding – AFTER the Budget Law
Opposition
Cooperation
Incumbent
government
Cooperation
Noncooperation
0
0 (new
equilibrium )
Noncooperation
-A
A
A
-A
0
0
According to all informants, the equilibrium of the game was changed after the economic crisis
because politicians could adopt the Budget Law without being punished by the voters. In other words,
preferences for public expenditure policy had changed, and this cannot be captured by public choice
theory’s static preference understanding. In the following it is therefore examined whether voters’ and
interest groups’ preferences changed.
The asymmetry theorem claims that public spending will increase because groups with
concentrated interests will push decision-makers to provide private goods to that particular group. In
the election survey, voters were asked whether too little, adequate or too much money is spent on
selected expenditure items. It is possible to isolate the voters who receive the benefit in question for
four items: education, old age pensions, unemployment benefits, and welfare benefits. By using
multiple regression analysis (robust OLS and ordered logistic regression) it can be tested whether
recipients of one of these benefits prefer higher spending on the various items than non-recipients.
Further, we can control for relevant background variables such as gender, age, income, and left/right
15
self-location4 and thus test whether the beneficiaries have “self-interest maximizing” preferences in
2007 and 2011 as the asymmetry theorem prescribes.
The dependent variable in the regression analyses ranges from -1 (too much money) to 1 (too
little money) and the intermediate category 0 (adequate).5 A positive beta estimate/coefficient in the
regression analysis indicates that the beneficiaries prefer higher spending on these items, a negative
the opposite. As we will not comment on other control variables, they do not appear below.
Overall, the 2007 regression models confirm the assumptions of the asymmetry theorem about the
actors’ preferences. The beneficiaries of education, unemployment benefits, and welfare benefits all
prefer significantly higher spending on their “own” welfare benefits than the general population. Only
the 2007 models regarding old age pensions are insignificant. Furthermore, it appears from the
models’ R2 that none of the models can explain more than 16.2 per cent of the variation in the
dependent variable, indicating that voters’ expense policy preferences are more complex than the
asymmetry theorem prescribes. The figures show that it is plausible that the recipients’ preferences
constituted an upward pressure on spending levels in 2007, and as shown above especially public
consumption rose massively until the crisis erupted.
The Budget Law can be seen as an attempt to weaken this pressure. As the Budget Law is
introduced, it becomes harder to fulfil everyone’s spending preferences, as it will most certainly lead
to an overrun of budget ceilings (Kristensen 1987: 53-54). The adoption of the Budget Law can be
seen as an attempt to reduce the fragmentation of decision-making and thus the asymmetry in order to
stop growth in public spending.
4
It is not possible to control for education because of differences in the survey questions in 2007 and 2011. Age is not used
as control variable in the regression models regarding old age pensions since eligibility is dependent on age.
5
The dependent variable only has three categories and is therefore not interval scaled. Still, robust OLS results are reported
because they are easily interpretable (robust OLS models are used since the dependent variable with three categories results
in heteroscedasticity). The results are basically the same when the regression analysis is performed as ordered logistic
regressions. N is larger in 2007 than in 2011, which all else equal makes the 2007 models more significant than the 2011
models. However n is over 770 in every model, so this anti-conservative effect is considered relatively unproblematic.
16
Table 1. Users’/beneficiaries’ estimation of actual consumption of the selected items of expenditures,
2007 and 2011
Results
Constant
Education 2007
.886 (.076)***
Beta estimates
(robust OLS
regression)
R2
.083
Education 2011
.835 (.101)***
.231 (,057)***
.060 (,069)
Old age pensions 2007
.956 (.052)***
-.025 (.029)
.063
Old age pensions 2011
.460 (.071)***
.258 (.053)***
.030
.456 (.067)***
.292 (.104)***
.118
.318 (.091)***
.117 (.101)
.108
Welfare benefits 2007
.483 (.074)***
.426 (.270)*
.162
Welfare benefits 2011
.250 (.102)***
.176 (.188)
.143
s
Unemployment benefits
2007
Unemployment benefits
2011
.059
Ordered
logistic
regression
Coefficient
1.181
(.341)***
.336
(.339)
N
-.120
(.119)
.575
(.198)***
2362
1.303
(.484)***
.439
(.479)
2347
1.639
(1.031)*
.507
(.772)
2338
2374
834
820
818
770
Note: Standard errors in brackets, *significant at 0.1 level, **significant at 0.05 level, ***significant at 0.01 level. All models
showed weaknesses in terms of normally distributed errors and homoscedasticity.
Table 1 also shows the corresponding preferences measured in 2011 after the voters had
experienced a severe economic crisis over the past three years. The 2011 figures do not support the
asymmetry theorem’s assumptions about the actors’ preferences since the correlations of education,
unemployment, and social welfare are insignificant. Only recipients of old age pensions prefer
significantly more spending in this area. The assumptions of the asymmetry theorem can therefore not
be found in three of four models. This is interesting for three reasons.
First, this matches previous research which shows that self-interest maximizing preferences
decrease in times of crisis (Goul Andersen and Hansen 2013). In particular, the economic crisis of the
1980s clearly affected public attitudes (Christiansen 1990: 443). Second, it is theoretically interesting
that preferences vary. The regression models do not explain why recipients no longer prefer higher
spending. One explanation could be that the crisis invokes more sociotropic attitudes among voters
and recipients (Goul Andersen 1993: 173; Stubager, Botterill et al. 2013). Third, it was probably easier
17
to adopt the Budget Law because of this change in preference. The political problems associated with
implementing budgetary ceilings are invariably smaller when the pressure from users and interest
groups decreases.
In conclusion, the Budget Law was probably adopted to weaken the political asymmetry, which
makes public expenditure management more difficult. It was easier to adopt the law because of the
shift in preferences of involved citizens. Overall, hypothesis 1 therefore finds support.
4.2 Hypothesis 2: Credible commitment
This section analyses the motives behind the Budget Law on the basis of the credible commitment
literature. It examines whether the Budget Law was passed in an attempt to tie public expenditures; it
analyses whether the Law was adopted at a time when the expenditure objectives were met; and it
looks at the Law as a balancing of discretion and commitment.
Most informants mention the Budget Law as an initiative to deprive politicians of fiscal
discretion. All informants further notice that existing fiscal priorities have not been consistent enough.
The Budget Law is seen as an attempt to create a credible binding of expenditure policy to ensure that
the development of public expenditure remains within the planned framework when the business cycle
turns around and crisis awareness withers. The Budget Law can be seen as the politicians’ attempt to
lash themselves to the mast before the (asymmetric) siren song starts again and the growth in public
spending again becomes difficult to control.
The consumption objectives and economic agreements between the government and Local
Government Denmark were actually met after 2010 (Ministry of Economic Affairs and the Interior
2012). In the credible commitment terminology, public expenditure advocates’ “promise” to respect
the budgets is seen as “motivationally credible”, probably because crisis awareness has affected many
expenditure advocates.
At first glance, it is surprising that the Budget Law was introduced at a time when the
expenditure policy objectives were respected and when the pressure on spending was limited. For
example, 2011 was the first year since 1990 that government spending dropped, and we have to go
back to 1984 to find a larger decrease in government spending (Ministry of Finance 2012d: 48).
18
The Budget Law adopted in spring 2012 can be seen as the consequence of the government and
the opposition being tired of playing the ongoing competitive PD. As budget overruns grew until
2009, and because municipalities also exceeded their budgets in 2010, the Budget Law commencing in
2011 is seen as the result of the parties’ desire to stop overruns. With the Budget Law, penalties are no
longer adopted by discretion in Parliament. Instead, sanctioning mechanisms and budget ceilings are
automatized, which makes it much easier to adopt and adhere to strict budgetary ceilings. The Budget
Law can also be seen as an institutional blame avoidance mechanism that in particular the major
political parties in Parliament can refer to when the spending cut debate rages (Jensen et al. 2008:
117).
Overall, the Budget Law can be seen as a classic credible commitment initiative. The Law
removes fiscal discretion from political actors and thereby stops the competitive PD in Parliament.
The analysis has shown that budgetary ceilings and sanction mechanisms in the Budget Law were
enacted to bind political actors.
Evidence also suggests that the adoption of the Budget Law was the result of a desire to ensure
a balanced budget in the long term. The Ministry of Finance (2012a) states the desire to avoid the
problems created by a large, interest-bearing debt. Thus, for two reasons, the balance requirements of
the Budget Law can be seen as projecting from the idea of credible commitment.
First, the Budget Law is in compliance with Buchanan’s recommendation to enrol directly in the
U.S. Constitution that government budget deficit is not allowed (Buchanan and Wagner 2000: 187).
Second, the credible commitment literature underlines that actions are influenced by
expectations about the future. If investors fear that the public debt will increase, they require a higher
yield on Danish government bonds (see Breen and McMenamin 2013). The balance requirement of
both the Fiscal Compact and Budget Law may be interpreted as a signal to financial markets. The
credibility of this signal is significantly strengthened because the Budget Law was passed by a large
majority in Parliament, which reduces the likelihood that the Budget Law is abolished after a general
election.
All credible commitment initiatives include a trade-off between discretion and commitment.
Several informants expressed that the Budget Law’s binding also involves political costs. For
19
example, the four-year budget ceilings make it harder to both ease and tighten fiscal policy in the next
few years. Several informants see this binding of the fiscal policy as problematic.
The balance between discretion and binding is further addressed by not allowing the most
cyclical spending to be subject to budgetary ceilings. Thus, the cost of unemployment benefits, social
welfare, and the cost of employment activities are excluded from the budget ceiling. In this way, the
Budget Law has sought to achieve the positive gains by tying expenditure policy, while at the same
time avoiding the negative consequences by allowing automatic stabilizers to operate freely (Ministry
of Finance 2012b: 2).
Overall, hypothesis 2 finds support: The informants see the Budget Law as an attempt to limit
politicians’ room for fiscal manoeuvre, and the Budget Law is used to bind political actors into the
future when the economy turns.
4.3 Hypothesis 3: Median voter theorem
In this section, the median voter theorem is tested empirically using data from the Danish election
survey. The same data is then used to determine whether voters’ expense policy preferences have
changed between 2007 and 2011.
The adoption of the Budget Law is in this section seen as a consequence of the fact that voters
have moved on the political continuum, which is the inverse dynamics of what the median voter
theorem normally prescribes, namely that the political parties move. Before the median voter theorem
can be used in an analysis of the adoption of the Budget Law, we have to test whether expenditure
policies follow the median voter’s preferences. If this is not the case, it weakens the applicability of
the median voter theorem.
Kristensen (1982: 40) uses a simple and logically consistent test of the median voter theorem
which is based on voter preferences. The premise is that if the policy is similar to the median voter’s
preferences, exactly the same number of voters believe that the government is spending “too much”
20
and “too little”. This is possible to test with data from the Danish election survey, which asked voters
whether they believed that the money spent on 14 different items was too little, adequate or too much.6
The response category “too much money” is assigned the value -1, the response category
“appropriate” is assigned the value 0, and the response category “too little money” is assigned the
value 1. The three categories can be combined into an overall measure of voters’ expenditure
preference on each item, called PDI values (percentage difference index), which are obtained by
subtracting the share of respondents who answered “too much money” from those who answered “too
little money” (i.e. calculating the average around zero). The index can take values from -1 to 1; -1
indicates that all respondents believe that too much money is spent on that item, and 1 indicates that
too little money is spent on the item. PDI values are shown in Table 2 for each item of expenditure in
2007 and 2011.
The median voter theorem is rejected in both 2007 and 2011, as most PDI values are much higher or
lower than 0. Only five of the 28 PDI values are closer to 0 than +/-0.1 (corresponding to a variation of
0 to 10 per cent, as the range of distribution is 2). PDI values fall too far from 0, and only 8 of the 28
PDI values are negative. Thus, the deviations from 0 are probably not attributable to random errors in
variation.
6
The response categories refer to actual public expenditure on different items at the time the election survey is
undertaken. Since costs may change between elections, it is uncertain whether altered response submissions are
due to amended expenditure preferences or spending changes. It is assumed that voters are not aware of
variations in costs between elections, and changes in response submissions are interpreted as signs of changing
preferences.
21
Table 2: PDI values for the expenditure items
Expenditure item and year
yearearUdgiftspost
og år
Defence
PDI 2007
PDI 2011
Diff.
Sig.
N 2007
N 2011
-.373 (.010) -.492 (.019) -.119
(.000)***
3913
985
.735 (.007)
.562 (.018)
-.173
(.000)***
3994
1003
Education
.570 (.008)
.650 (.016)
.080
(.000)***
3957
1000
Old age pensions
.474 (.008)
.340 (.017)
-.134
(.000)***
3935
980
Environment
.501 (.009)
.405 (.020)
-.096
(.000)***
3918
974
Culture
-.174 (.010) -.333 (.020) -.159
(.000)***
3920
976
Kindergartens and nurseries
.517 (.009)
.603 (.017)
.086
(.000)***
3927
982
Unemployment benefits
.087 (.008)
.132 (.018)
.044
(.016)**
3888
972
benefitshedsunderstøttelse
til
den
Welfare benefits
.084 (.009)
.040 (.022)
-.044
(.046)**
3852
911
enkelte
Foreign aid
-.019 (.012) -.189 (.022) -.170
(.000)***
3927
967
Refugees and immigrants
.037 (.012)
-.127 (.022) -.163
(.000)***
3917
940
Home care
.701 (.008)
.682 (.016)
-.020
(.257)
3962
971
Motorways and bridges
.122 (.011)
-.101 (.020) -.222
(.000)***
3927
974
Police
.614 (.009)
.369 (.019)
-.245
(.000)***
3931
973
Note: Standard errors in brackets, *significant at 0.1 level, **significant at 0.05 level, ***significant at 0.01
level.
Healthcare
According to the median voter theorem, political parties could therefore reap more votes by increasing
government spending and approaching the median voter. The theorem can thus help explain the
growth in public spending until the crisis. The Budget Law however cannot be seen as a direct
consequence of the predictions of the median voter theorem, as it is evident from the above that
government spending does not follow the median voter’s preferences (Jørgensen and Mouritzen 2005:
73). That said, the formulation of the questions could lead to bias because the questions do not force
voters to take into account the tax consequences of higher government spending – the so-called fiscal
illusion (Courant et al. 1980; Kristensen 1987: 154). Furthermore, voters often have inconsistent
preferences for spending increases and at the same time lower taxes (Winter and Mouritzen 2001).
Nevertheless, the results are relevant for an analysis of the adoption of the Budget Law because some
of the PDI values decreased from 2007 to 2011, indicating that voters prefer lower public spending
after the crisis.
Based on the results above, it is possible to examine how voters’ preferences change. First, PDI
values from 2007 and 2011 are compared. Analytically it is assumed that the Budget Law – all else
being equal – will result in tighter public spending. Because tighter spending often attracts negative
attention from (media and) voters, we will examine whether voters prefer lower public spending in
22
2011 than in 2007. If this is the case, it can be seen as a facilitating cause of the adoption of the Budget
Law because the political parties’ costs of adopting the law were lower in 2011 than in 2007.
If voters prefer lower public expenditure, the PDI values from 2011 will be lower than those
from 2007. Table 2 shows, for each expenditure item, the difference between the PDI values and a test
of significance that indicates whether the PDI values for the two years differ significantly. On 10 of
the 14 items, voters prefer significantly lower spending in 2011 than in 2007.7 Only for three items
(Unemployment benefits, Education, and Kindergartens and nurseries) do voters prefer significantly
higher costs. In conclusion, voters’ preferences have changed significantly in 13 of the 14 expenditure
categories.
We cannot conclude unequivocally, based on the above, that voters prefer lower public
spending, as some responses may reflect attitudes on values rather than on expenditure policy. A
factor analysis is therefore conducted in order to assess whether there is an underlying value political
dimension. The factor analysis can be viewed online as an annex to this article
(http://www.xxxxxx.dk). The conclusion in the appendix is that the above result holds even when the
value political change in voter preferences is taken into account.
5
Conclusion
The analyses show that institutional change in this case was driven by a number of factors coinciding.
More than one institutional logic of change was at work. Nevertheless, the institutional approach can
help explain why the Budget Law was adopted. The Budget Law’s adoption should be seen as a
consequence of both endogenous and exogenous factors in relation to the institution itself.
The old public expenditure governance model led to increasingly larger budget overruns,
especially in the municipalities, and since possible sanctions had to be adopted discretionarily, they
often did not materialize. This signalled to the municipalities that cost overruns would not be
sanctioned. Hence, the institutional outcome created a need for automatic and individual sanctions. In
addition, the economic crisis after 2008 resulted in an exogenous shock. The crisis affected the two
7
Voters may also prefer lower spending on home care, but this result is insignificant.
23
main stakeholders: Groups of recipients of payments developed more sociotropic preferences, and
voters preferred significantly lower public expenditures at the time the Budget Law was adopted than
when the economic crisis started.
The Budget Law’s provisions establish a new and radically different framework for public
financial management, but it retains the traditional institutional features consisting of agreements with
local and regional authorities, the ministries’ possibility of being awarded additional funds, etc. The
Budget Law’s adoption may thus be characterized as a new layer on top of existing institutional
elements (i.e. radical layering).
Hypotheses 1 and 2 are supported, as the relevant INUS conditions were present. First, public
spending was increasing towards the adoption of the Budget Law and the objectives for growth in
public consumption were exceeded. This is consistent with the asymmetry theorem, and not least
public employees have their own interest in higher public consumption. Second, and importantly, the
municipalities had significant cost overruns. Supplementing the collective nature of economy
agreements with individual financial penalties on municipalities and regions ended the collective
action dilemma. Hence, the Budget Law can be seen as an attempt to prevent both expenditure growth
driven by asymmetry and cost overruns. This was further confirmed since the quantitative tests of the
asymmetry theorem showed that interest groups had individual utility-maximizing preferences in
2007. However, the asymmetry theorem’s assumptions about the actor’s preferences could not be
confirmed unequivocally in 2011 when the preferences were less expenditure expansive due to the
crisis.
In a better future economic situation, crisis awareness is expected to slow down, and the
preferences are expected to return to a more self-interest maximizing stage. Therefore, the Budget Law
was adopted – in line with hypothesis 2 – as a credible commitment initiative to prevent future
spending collapses. Overall, hypothesis 2 finds support because the Budget Law restricts both
politicians’ current and future fiscal manoeuvre.
Hypothesis 3 only received partial support, as two of the median voter theorem’s assumptions
could not be found empirically. More significantly, the analysis clarified that the voters’ expenditure
policy preferences changed towards significantly lower public spending in 2011 than in 2007, even
24
when value political changes in voter preferences are taken into account. The voters’ shift in
preferences probably made the fiscal tightening by the Budget Law possible.
In recent years, Denmark has implemented reforms in areas that previously would have been
very difficult to reform, e.g., the early retirement scheme, unemployment benefits, social welfare,
regulation of public benefits, and economic support for education. The economic crisis has made
otherwise very difficult reforms possible and has opened the way for reforms elsewhere in Europe;
many of them far more radical than the Danish reforms and several provoking pronounced political
unrest. If nothing else, these experiences show that it is possible to intervene radically in the otherwise
hard-to-change political and economic institutions. Time will reveal the long-term effects. It is too
early to tell whether crisis awareness or the Budget Law ultimately ensures budget compliance, since
we have not yet had one without the other.
25
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