Diffuse support and budget deficit: Evidence from Estonia and Hungary

Abstract

The current paper investigates why persistent differences exist among countries in their ability to pursue disciplined fiscal policy. It contributes to the literature that emphasizes the importance of multidisciplinary approach in understanding economic phenomena. An existing theory - that focuses primarily on old EU member states – is used as framework. In the first part of the paper the theory’s general applicability to the Central and Eastern European Region is tested. In line with the framework theory’s suggestion, evidence from 10 Central and Eastern European countries shows that in the absence of extreme external factors, that would push governments towards fiscal restraint, the key to persistent fiscal discipline is a favorable institutional setting (adequate fiscal rules). It primarily depends on certain domestic political and social factors whether this institutional setting is created in a country. The framework theory emphasizes the importance of consensus within the elite and diffuse support in the society towards the political system. In the second part the cases of Estonia and Hungary (the two extremes of fiscal performance in the region) are compared and the results support the validity of the above suggestions. Nevertheless the theory has major shortcomings in the operationalization of diffuse support, which is essential for general applicability. Based on the results of the case comparison the current paper suggests that focusing on attitudes regarding the previous political system is a promising direction for further research on the operationalization of diffuse support as far as post-communist transition countries are concerned.