Taxation, government spending and economic growth: The case of Bulgaria

G. Ganchev,I. Todorov

doi:10.15826/jtr.2021.7.3.102

Abstract

The objective of this article is to estimate the impact of three fiscal instruments (direct taxes, indirect taxes, and government expenditure) on Bulgaria’s economic growth. The study employs an autoregressive distributed lag model (ARDL) and Eurostat quarterly seasonally adjusted data for the period 1999–2020. Four control variables (the shares of gross capital formation, household consumption, and exports in GDP as well as the economic growth in the euro area) are included in the model to account for the influence of non-fiscal factors on Bulgaria’s real GDP growth rate. The empirical results indicate a long-run equilibrium relationship between Bulgaria’s economic growth and the independent variables in the ARDL. In the short term, Bulgaria’s real GDP growth rate is affected by its own past values and the previous values of the shares of direct tax revenue, exports, government consumption, and indirect tax revenue in GDP. In the long term, Bulgaria’s economic growth is influenced by its own previous values and the past values of the share of household consumption in GDP and the euro area’s real GDP growth rate. Fiscal instruments can be used to stabilize Bulgaria’s growth in the short run but they are neutral in the long run. The direct tax revenue, government consumption, and indirect tax revenue are highly effective and can be used as tools for invigorating and stabilizing Bulgaria’s economic growth in the short run. However, in the long term, the real GDP growth rate can be hastened only by encouraging domestic demand (final consumption expenditure of households) and promoting exports. This research cannot answer the question of whether flat income taxation stabilizes the economy or not, since it does not separate the impact of tax rate changes from the influence of tax base modifications.

Highlights

What to choose: A fixed or a floating exchange rate regime? A main problem with staking too much of the argument in favor of a particular exchange rate regime on the two to three decades prior to the 2008 Global Financial Crisis (GFC) is that the different regimes have not really been tested in earnest
Simple Taylor-‐rule recommendations for the Eurozone as a whole have been broadly consistent with ECB monetary policy, but it is less clear whether this policy was appropriate for the individual Eurozone economies and for the countries that have a fixed exchange rate vis-‐à-‐vis the Euro
The argument made in this paper is that the Danish fixed exchange rate regime is likely to have aggravated the economic crisis in Denmark

Summary

Introduction

A main problem with staking too much of the argument in favor of a particular exchange rate regime on the two to three decades prior to the 2008 Global Financial Crisis (GFC) is that the different regimes have not really been tested in earnest It is exactly in the aftermath of a major shock that the fixed versus floating distinction should matter the most. At this juncture, the obvious policy response would have been an interest rate increase by the central bank—as clearly recommended by a simple Taylor rule for Denmark 1 The SEK currency move reflected tensions in global interbank markets, which affected Swedish banks with large dollar liabilities and thereby depressed the SEK by forcing USD buying and SEK selling; see, for example, Nomura Securities (2009)

Findings

Discussion

Conclusion