The paper analyzes the determinants of success of recent fiscal consolidations in the OECD countries as well as the short-run and long-run effects of fiscal adjustments on economic activity by looking at fourteen case studies, panel data for OECD countries, and the results of simulations using a non-Ricardian multi-country dynamic general equilibrium model. The study finds that while fiscal consolidations tend to have short-run contractionary effects, they can be expansionary in the long run, provided that they do not rely excessively on cuts in productive government expenditure. They can also create positive spillover effects for the rest of the world.
{"title":"Fiscal Adjustments: Determinants and Macroeconomic Consequences","authors":"Manmohan S. Kumar, D. Leigh, A. Plekhanov","doi":"10.2139/ssrn.2004331","DOIUrl":"https://doi.org/10.2139/ssrn.2004331","url":null,"abstract":"The paper analyzes the determinants of success of recent fiscal consolidations in the OECD countries as well as the short-run and long-run effects of fiscal adjustments on economic activity by looking at fourteen case studies, panel data for OECD countries, and the results of simulations using a non-Ricardian multi-country dynamic general equilibrium model. The study finds that while fiscal consolidations tend to have short-run contractionary effects, they can be expansionary in the long run, provided that they do not rely excessively on cuts in productive government expenditure. They can also create positive spillover effects for the rest of the world.","PeriodicalId":423887,"journal":{"name":"2007 Fiscal Policy: Current Issues & Challenges Conference (Archive)","volume":"80 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2007-07-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"133646598","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Each of the seven governments in Israel since the successful 1985 stabilization program stated a commitment to reducing the deficit, easing the public debt burden and curtailing the share of public expenditure in GDP. Beginning in 1992, formal multi-year declining deficit ceilings were also adopted. However, only two periods during the last 22 years, 1985-92 and 2003-06, can be characterized as episodes of sustainable consolidation, and one of them preceded the introduction of the ceilings. The formal targets were often missed, and they underwent frequent revisions, including each time there was a cabinet change. Furthermore, in the 10 years that followed the introduction of the ceilings, little progress, if any, was made toward fiscal consolidation. In light of these developments, this paper concludes that the contribution of fiscal rules to fiscal consolidation or policy credibility in Israel was minor, at most. We also find that the two successful consolidation episodes followed programs that included - at the outset - specific measures sufficient to cut expenditure substantially over the short and medium terms. This absolved future policymakers from the political responsibility for adopting the specific measures needed to meet the formal aggregate targets set by their predecessors. The key lesson, at least in the Israeli context, is that setting formal macro-fiscal targets for future governments is not an effective pre-commitment measure; credibility requires the current policymaker to take all the "heat" and implement the specific - even if gradual - measures that will lower expenditure over the medium term. The pessimistic finding is that such measures were adopted only at times of crisis and after less comprehensive policy changes failed. The optimistic observation is that once implemented, these measures appear to survive cabinet changes and economic fluctuations.
{"title":"If You Want to Cut, Cut, Don’t Talk: The Role of Formal Targets in Israel’s Fiscal Consolidation Efforts, 1985-2007","authors":"Adi Brender","doi":"10.2139/ssrn.2004374","DOIUrl":"https://doi.org/10.2139/ssrn.2004374","url":null,"abstract":"Each of the seven governments in Israel since the successful 1985 stabilization program stated a commitment to reducing the deficit, easing the public debt burden and curtailing the share of public expenditure in GDP. Beginning in 1992, formal multi-year declining deficit ceilings were also adopted. However, only two periods during the last 22 years, 1985-92 and 2003-06, can be characterized as episodes of sustainable consolidation, and one of them preceded the introduction of the ceilings. The formal targets were often missed, and they underwent frequent revisions, including each time there was a cabinet change. Furthermore, in the 10 years that followed the introduction of the ceilings, little progress, if any, was made toward fiscal consolidation. In light of these developments, this paper concludes that the contribution of fiscal rules to fiscal consolidation or policy credibility in Israel was minor, at most. We also find that the two successful consolidation episodes followed programs that included - at the outset - specific measures sufficient to cut expenditure substantially over the short and medium terms. This absolved future policymakers from the political responsibility for adopting the specific measures needed to meet the formal aggregate targets set by their predecessors. The key lesson, at least in the Israeli context, is that setting formal macro-fiscal targets for future governments is not an effective pre-commitment measure; credibility requires the current policymaker to take all the \"heat\" and implement the specific - even if gradual - measures that will lower expenditure over the medium term. The pessimistic finding is that such measures were adopted only at times of crisis and after less comprehensive policy changes failed. The optimistic observation is that once implemented, these measures appear to survive cabinet changes and economic fluctuations.","PeriodicalId":423887,"journal":{"name":"2007 Fiscal Policy: Current Issues & Challenges Conference (Archive)","volume":"1 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2007-03-29","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"114139589","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Stéphanie Guichard, M. Kennedy, E. Wurzel, C. André
Stephanie Guichard, Michael Kennedy, Eckhard Wurzel and Christophe Andre examine the circumstances most commonly related to successful fiscal consolidation. Data are drawn from a dataset covering twenty-four OECD countries since 1978. Based on improvement in the cyclically-adjusted primary balances (CAPB), they detect eighty-five consolidation episodes. First the paper presents descriptive evidence that initial conditions play a major role. In particular, the more negative the CAPB, the larger the ensuing consolidation. In the vast majority of cases, consolidations did not last long and involved only modest gains, and revenue increases accounted for a large fraction of the average improvement. In the second part of the paper, the authors deploy regression analysis to identify a number of macroeconomic conditions that were effective in triggering and sustaining consolidations. The initial budget balance is statistically significant in explaining the starting point, the size and the duration of the adjustment process, while the magnitude and the probability of success of the consolidation programme are affected by cuts in some expenditure items.
{"title":"What Affects Fiscal Consolidation? – Some Evidence from OECD Countries","authors":"Stéphanie Guichard, M. Kennedy, E. Wurzel, C. André","doi":"10.2139/ssrn.2004317","DOIUrl":"https://doi.org/10.2139/ssrn.2004317","url":null,"abstract":"Stephanie Guichard, Michael Kennedy, Eckhard Wurzel and Christophe Andre examine the circumstances most commonly related to successful fiscal consolidation. Data are drawn from a dataset covering twenty-four OECD countries since 1978. Based on improvement in the cyclically-adjusted primary balances (CAPB), they detect eighty-five consolidation episodes. First the paper presents descriptive evidence that initial conditions play a major role. In particular, the more negative the CAPB, the larger the ensuing consolidation. In the vast majority of cases, consolidations did not last long and involved only modest gains, and revenue increases accounted for a large fraction of the average improvement. In the second part of the paper, the authors deploy regression analysis to identify a number of macroeconomic conditions that were effective in triggering and sustaining consolidations. The initial budget balance is statistically significant in explaining the starting point, the size and the duration of the adjustment process, while the magnitude and the probability of success of the consolidation programme are affected by cuts in some expenditure items.","PeriodicalId":423887,"journal":{"name":"2007 Fiscal Policy: Current Issues & Challenges Conference (Archive)","volume":"18 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2007-03-29","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"124649624","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Shocks to monetary and fiscal policy have played a major role in public debt developments since the mid 1970s. According to the applied VAR approach, together these shocks explained, on average, about half of the forecast error variation in the debt to GDP ratio while the share of shocks to GDP growth was close to 30 percent. Instead, shocks to inflation and the debt ratio itself played in most cases a minor role. However, the inflation shocks were vital in initiating the public debt problems as the increase in actual inflation and particularly the persistence of high inflation expectations in the 1980s led to a prolonged period of high real interest rates. This gave rise to ‘some unpleasant fiscal arithmetic’ which aggravated debt problems. In most countries fiscal policy has aimed at correcting the deterioration of fiscal balances, but the progress has in most cases been slow and delayed. Nevertheless, all individual country VARs are stable in the period under consideration. Finally, contrary to general beliefs, in the global financial markets of present day inflation makes debt problems worse through its adverse impact on interest rates.
{"title":"Public Debt Dynamics in Selected OECD Countries: The Role of Fiscal Stabilisation and Monetary Policy","authors":"Harri Hasko","doi":"10.2139/ssrn.2004300","DOIUrl":"https://doi.org/10.2139/ssrn.2004300","url":null,"abstract":"Shocks to monetary and fiscal policy have played a major role in public debt developments since the mid 1970s. According to the applied VAR approach, together these shocks explained, on average, about half of the forecast error variation in the debt to GDP ratio while the share of shocks to GDP growth was close to 30 percent. Instead, shocks to inflation and the debt ratio itself played in most cases a minor role. However, the inflation shocks were vital in initiating the public debt problems as the increase in actual inflation and particularly the persistence of high inflation expectations in the 1980s led to a prolonged period of high real interest rates. This gave rise to ‘some unpleasant fiscal arithmetic’ which aggravated debt problems. In most countries fiscal policy has aimed at correcting the deterioration of fiscal balances, but the progress has in most cases been slow and delayed. Nevertheless, all individual country VARs are stable in the period under consideration. Finally, contrary to general beliefs, in the global financial markets of present day inflation makes debt problems worse through its adverse impact on interest rates.","PeriodicalId":423887,"journal":{"name":"2007 Fiscal Policy: Current Issues & Challenges Conference (Archive)","volume":"21 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2007-03-29","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"134186134","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Xavier Debrun and Manmohan S. Kumar deal with the impact of institutions on fiscal discipline, first discussing the point in principle: (i) fiscal institutions can work as commitment devices (i.e. tie policymakers’ hands); (ii) they can work as signalling devices (i.e. reduce the information asymmetry between the electorate and policymakers); and (iii) they can be smokescreens. The second part of the paper develops an empirical analysis to test these three hypotheses, referring to descriptive evidence and estimating a multivariate panel model for a large sample of EU countries over the period 1990-2004. The authors use time-varying indices of fiscal rule restrictiveness and coverage. The analysis finds significant support for both commitment and signalling, little for the smokescreen hypothesis.
Xavier Debrun和Manmohan S. Kumar处理了制度对财政纪律的影响，首先从原则上讨论了这一点:(i)财政制度可以作为承诺工具(即束缚政策制定者的手);(ii)它们可以作为信号装置(即减少选民和决策者之间的信息不对称);(三)它们可能是烟幕。本文的第二部分发展了一个实证分析来检验这三个假设，参考描述性证据并估计了1990-2004年期间欧盟国家大样本的多变量面板模型。作者使用时变的财政规则限制和覆盖指数。分析发现，承诺和信号都得到了有力的支持，而烟幕假说几乎没有得到支持。
{"title":"Fiscal Rules, Fiscal Councils and All that: Commitment Devices, Signaling Tools or Smokescreens?","authors":"Xavier Debrun, Manmohan S. Kumar","doi":"10.2139/ssrn.2004371","DOIUrl":"https://doi.org/10.2139/ssrn.2004371","url":null,"abstract":"Xavier Debrun and Manmohan S. Kumar deal with the impact of institutions on fiscal discipline, first discussing the point in principle: (i) fiscal institutions can work as commitment devices (i.e. tie policymakers’ hands); (ii) they can work as signalling devices (i.e. reduce the information asymmetry between the electorate and policymakers); and (iii) they can be smokescreens. The second part of the paper develops an empirical analysis to test these three hypotheses, referring to descriptive evidence and estimating a multivariate panel model for a large sample of EU countries over the period 1990-2004. The authors use time-varying indices of fiscal rule restrictiveness and coverage. The analysis finds significant support for both commitment and signalling, little for the smokescreen hypothesis.","PeriodicalId":423887,"journal":{"name":"2007 Fiscal Policy: Current Issues & Challenges Conference (Archive)","volume":"6 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2007-03-29","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"132235094","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Different from the papers presented in this session, this one analyzes the lack of fiscal consolidation within a framework of tensions between the objectives of consolidation and price stability. By using a model of time inconsistency with fiscal objectives and a Government’s budget constraint similar to the Uruguayan one, it is shown that the existence of nominal debt in domestic currency and the possibility of reducing real expenditure generate incentives in addition to seignorage for the fiscal use of inflation, avoiding a more lasting consolidation process. By analyzing Uruguayan data between 1970 and 2006 it is evidenced how the real adjustment of Primary Expenditure through inflation has been the key in the fiscal stabilization episodes of the past 35 years. Through the analysis of episodes, correlations and OLS regressions, it is shown that inflation acceleration has played a major role in improving the fiscal balance owing to its effect on real expenditure. Nonetheless, such improvements have been transitory, while real expenditure has bounced back once the adjustment phase was over. This paper offers an institutional reading, since it suggests that the setting of inflation objectives by the Government together with a bias against fiscal consolidation may result in a relative high inflation level.
{"title":"The Lack of Fiscal Consolidation in an Inflationary Economy: Uruguay 1970-2006","authors":"L. Vicente, Gerardo Marcelo Licandro Ferrando","doi":"10.2139/ssrn.2004369","DOIUrl":"https://doi.org/10.2139/ssrn.2004369","url":null,"abstract":"Different from the papers presented in this session, this one analyzes the lack of fiscal consolidation within a framework of tensions between the objectives of consolidation and price stability. By using a model of time inconsistency with fiscal objectives and a Government’s budget constraint similar to the Uruguayan one, it is shown that the existence of nominal debt in domestic currency and the possibility of reducing real expenditure generate incentives in addition to seignorage for the fiscal use of inflation, avoiding a more lasting consolidation process. By analyzing Uruguayan data between 1970 and 2006 it is evidenced how the real adjustment of Primary Expenditure through inflation has been the key in the fiscal stabilization episodes of the past 35 years. Through the analysis of episodes, correlations and OLS regressions, it is shown that inflation acceleration has played a major role in improving the fiscal balance owing to its effect on real expenditure. Nonetheless, such improvements have been transitory, while real expenditure has bounced back once the adjustment phase was over. This paper offers an institutional reading, since it suggests that the setting of inflation objectives by the Government together with a bias against fiscal consolidation may result in a relative high inflation level.","PeriodicalId":423887,"journal":{"name":"2007 Fiscal Policy: Current Issues & Challenges Conference (Archive)","volume":"15 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2007-03-29","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"128166463","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This paper uses the method of measuring tax capacity and tax effort to analyze how well ECA countries are utilizing their tax capacities, relative to the average performance across countries. Among the variables that have been identified to be determinants of tax shares are: (i) tax evasion, and (ii) control of corruption, although they are found to be less important than conventional factors. The tax effort indices obtained show that generally the ECA countries are making better use of their tax bases to increase revenue than countries from Latin America or East Asia. However, there are substantial variations in tax effort among ECA countries and several countries have the potential to increase revenues via making better use of their tax bases (increased tax effort), and improving the quality of their institutions. Our results can be used to provide guidance on the proper mix of fiscal policy in the event of budgetary imbalance or growing debt burdens.
{"title":"Assessing Overall Fiscal Effort in Eca, 1995-2004","authors":"Emilia Skrok, Aristomène Varoudakis","doi":"10.2139/SSRN.2004333","DOIUrl":"https://doi.org/10.2139/SSRN.2004333","url":null,"abstract":"This paper uses the method of measuring tax capacity and tax effort to analyze how well ECA countries are utilizing their tax capacities, relative to the average performance across countries. Among the variables that have been identified to be determinants of tax shares are: (i) tax evasion, and (ii) control of corruption, although they are found to be less important than conventional factors. The tax effort indices obtained show that generally the ECA countries are making better use of their tax bases to increase revenue than countries from Latin America or East Asia. However, there are substantial variations in tax effort among ECA countries and several countries have the potential to increase revenues via making better use of their tax bases (increased tax effort), and improving the quality of their institutions. Our results can be used to provide guidance on the proper mix of fiscal policy in the event of budgetary imbalance or growing debt burdens.","PeriodicalId":423887,"journal":{"name":"2007 Fiscal Policy: Current Issues & Challenges Conference (Archive)","volume":"54 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2007-03-29","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"126948902","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Using alternative approaches to determine fiscal episodes, I assess expansionary fiscal consolidations in Europe, via panel models for private consumption. There is some concurring evidence for several budgetary spending items while the asymmetric effects of fiscal episodes do not seem to be corroborated by the results.
{"title":"Expansionary Fiscal Consolidations in Europe – New Evidence","authors":"António Afonso","doi":"10.2139/ssrn.2004360","DOIUrl":"https://doi.org/10.2139/ssrn.2004360","url":null,"abstract":"Using alternative approaches to determine fiscal episodes, I assess expansionary fiscal consolidations in Europe, via panel models for private consumption. There is some concurring evidence for several budgetary spending items while the asymmetric effects of fiscal episodes do not seem to be corroborated by the results.","PeriodicalId":423887,"journal":{"name":"2007 Fiscal Policy: Current Issues & Challenges Conference (Archive)","volume":"44 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2006-09-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"131844044","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
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