Soft budget constraint

IT'S WELL into the budget season among local governments. By this time, budget departments of Philippine LGUs should be neckdeep in preparing their proposed spending program for 2007. Section 318 of the Local Government Code of 1991 (LGC 91) provides that local chief executives should submit this to their respective sanggunians no later than October 16.

Six days earlier, the country will mark the 15th anniversary of LGC 91. One of the many failings of Congress ever since is its inability to complete and effect a mandatory review of the code (at least once every 5 years, so that's a minimum of 3) as required under Section 521. This post by Peryodistang Pinay reminded me of it, as well as the concept of soft budget constraint (SBC).

Janos Kornai, a Hungarian economist, coined the term to describe the opportunistic behavior of state-owned enterprises in communist countries to continue operating on a loss because the state is expected anyway to bail them out of financial trouble. While more apparent in socialist systems, this phenomenon also appears in mixed economies, including the US where floundering public and private enterprises have been bailed out in the past.