The political science literature has long turned its attention to fiscal governance as a core site of political contestation. Typically conceived of as legislative bodies battling it out over the level and distribution of spending through annual, formalized budgetary processes, this view of fiscal governance places at its centre the core treasury balance sheet as the aggregation of the outcomes of these political compromises. However, fiscal policymakers (and other relevant political agents) face two main constraints to advancing their policy aims through traditional budgetary politics and, more specifically, the main treasury balance sheet. First, formal fiscal rules. Governments may self-inflict such rules in the name of fiscal discipline, aiming to tie not only their hands but also those of future generations of policymakers. Germany, the country on which we focus, has been particularly amenable to such restrictions, where fiscal rules play out both at the federal and European Union (EU) levels. Second, policymakers face political opposition, a core component of democratic policy processes, but one that can result in fiscal winners and losers and in more extreme forms, fiscal gridlock. These constraints have the impact of restricting the effective fiscal space that policymakers have available to pursue their objectives, incentivizing new forms of fiscal governance. These different forms of fiscal governance take place off the core treasury balance sheet, through vast and varied network of off-balance-sheet fiscal agencies (OBFAs). Despite their significance to fiscal governance, OBFAs have only gotten limited attention in the political science literature. In this article, we investigate the impact that OBFAs have on fiscal governance in the long run. Put differently, what effect does the proliferation and transformation of OBFAs have on not only current generations of fiscal policymakers but also future ones? To answer these questions, we turn to the historical institutionalist literature, which has long studied the ways in which political agents interact with the structures that constrain them over extended periods of time. Looking at the particular case of Germany, we argue that OBFAs offer a paradox for fiscal governance: on the one hand, they offer both short-term flexibility and crisis responsiveness, making them capacity-enhancing from the operational perspective of the fiscal ecosystem. However, on the other hand, these same innovations can be capacity-constraining from a system reform perspective, as escalating complexity leads to a new set of structural rigidities.
Presentation at the “Spring Meeting” at Hertie School of Governance in Berlin (04/2025).
Co-authors:
Monica DiLeo, Hertie School of Governance
Andrei Guter-Sandu, University of Bath
Armin Haas, Global Climate Forum
