Public Spending Allocation, Fiscal Performance and Corruption*

Abstract

This paper concentrates on the expenditure side of the budgetary process. It examines the impact of corruption on public spending decision‐making and budget execution, especially in the occurrence of fiscal slippages, also by assessing the characteristics of corrupt behaviours across the various phases of the budgetary process. The purpose of this paper is to briefly review the related literature and discuss the impact of corruption on the budget process, through the empirical investigation of fifteen EU countries,2 paying particular attention to Greece. Applying simple econometric techniques on a sample of fifteen old EU members and for the period 1995–2006, two main effects of corruption are considered: corruption influences the decisions on public spending allocation and, is positively correlated on the one hand, with the level of public expenditure allocated for general public services, defence, order and safety, economic affairs and culture, while on the other hand, is negatively correlated with the so‐called social expenditure. A secondary impact of corruption related to the execution phase of the budget, is that corruption affects the accuracy of expenditure, pushing public spending above the budgetary targets and leading to systematic budget expenditure overshooting and thus, to continuous fiscal slippages and poor budgetary performance.