Rational expectations theory and macro budgetary decision-making: comparative analysis of Canada, UK, and USA

An exciting opportunity that many advanced industrial democracies faced in the late 1990s was the movement from budgetary deficit to surplus. This came after years of persistent deficits. Traditional decision-making theories such as budgetary incrementalism failed to explain this long-run relationship, since it has been inherently a short-run theory. This paper uses rational expectations theory to demonstrate its relationship to budgetary decision-making reforms and the deficit (surplus) for Canada, the UK and the United States. The results demonstrated that there was an intertemporal budget constraint in operation in the three countries, and decision-makers at the macro level used rational expectations in the formulation of their annual budget. In the theory, budget actors strived to balance their budget, but did so over the long-run as opposed to the short-run incrementalist interpretation.