Abstract
Summary We examine whether Swiss federal fiscal policy was sustainable over the period from 1900 to 2002. We perform unit root and cointegration tests for federal revenues and expenditures, taking into account a structural shift in the budgetary process related to World War II. We find sustainability considering the entire period. However, splitting the sample into two sub-samples before and after World War II, the results do much less support sustainability.
Highlights
Recent deterioration of the fiscal position of governments in several European countries and the U.S has drawn attention to the long-run fiscal sustainability of public finance
Given that the unit root test results for the whole period indicate stationarity of deficit-GDP ratio, and difference-stationarity of the revenue- and expenditureratios with the same order of integration, the step is to test for co-integration between revenues and expenditures
The results for the whole period including and excluding the years of the two World Wars as well as the results for the two sub-periods are given in Table 3.16 The Augmented Dickey-Fuller (ADF)-test gives a t-statistic of –3.120, which is significant at the 10 percent level
Summary
Recent deterioration of the fiscal position of governments in several European countries and the U.S has drawn attention to the long-run fiscal sustainability of public finance. Kirchgässner / Prohl net debt of the government does not exceed the sum of the discounted net taxes, which should be paid by current and future generations.1 Another concept, which is more closely related to Domar (1944), defines fiscal policy as sustainable if the present value budget constraint of the government is valid: the discounted value of public debt should converge to zero at the limit. Trehan and Walsh (1988, 1989), Haug (1995), Ahmend and Rogers (1995), and Quintos (1995) test for sustainability by checking for the co-integration between government revenues and expenditures and show that the U.S federal budget deficit is not sustainable They find that recent changes in the structure of fiscal policy had a significant effect on the sustainability of U.S federal finance.
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