Abstract
We investigate the cyclicality of fiscal policy in Egypt during the period of 1976–2019 with a focus on how budgetary and political institutions affect fiscal performance during economic cycles. We define new variables for budgetary and political institutions and incorporate them in a vector error correction model (VECM) and impulse response functions (IRFs) analysis. While current and capital spending are proven to behave procyclically, revenues respond countercyclically during business cycles. Poor political and budgetary institutions have a negative impact on the primary deficit in a way that led to procyclical behaviour in fiscal policy in the long run. We recommend reinforcing the Golden Rule and changing the nature of the electoral system to a party-based to strengthen the role of parliament in keeping the government accountable
Highlights
While the Keynesian conventional wisdom stresses the importance of countercyclical fiscal policy in stabilizing the economy, evidence shows that in many developing countries and emerging economies, fiscal policies do not precisely follow this behaviour
The current paper examines the interactions between institutions and fiscal performance in Egypt during business cycles
We examine the cyclicality of fiscal policy in Egypt in a disaggregated manner
Summary
While the Keynesian conventional wisdom stresses the importance of countercyclical fiscal policy in stabilizing the economy, evidence shows that in many developing countries and emerging economies, fiscal policies do not precisely follow this behaviour. Underlying structural factors, such as poor access to finance and limited fiscal space, weak institutions, social and political instability, and structural inefficiencies in fiscal performance, all contribute to evident procyclical fiscal behaviour in many of those countries. Our paper’s novelty stems from defining new variables for budgetary and political institutions and measure the cyclicality of different components of government expenditure and public revenues in a disaggregated manner
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