Budget Surplus Research Articles

An Elementary Mathematical Model for MMT (Modern Monetary Theory)

In recent years, a school of economics called MMT (Modern Monetary Theory) has been attracting attention, but it has not been analyzed theoretically or mathematically. This study aims to provide a theoretical basis for the skeleton of the MMT argument, while maintaining the basics of the neoclassical microeconomic framework, such as utility maximization of consumers by means of utility functions and budget constraint, profit maximization of firms in monopolistic competition, and equilibrium of supply and demand of goods. Using a simple static model that includes economic growth due to technological progress, we will argue that: 1) a continuous budget deficit is necessary to maintain full employment when the economy is growing, and that this deficit does not have to be covered by future surpluses; 2) Inflation is caused when the actual budget deficit exceeds the level necessary and sufficient to maintain full employment. In order to avoid further inflation, it is necessary to maintain a certain level of budget deficit; 3) A shortfall in the budget deficit leads to recession and involuntary unemployment. To recover from this, a budget deficit that exceeds the level necessary to maintain full employment is required. However, since a continuous budget deficit is necessary after full employment is restored, the deficit created to overcome the recession does not need to be covered by future budget surpluses, nor should it be.

Modelling the Impact of Energy Subsidies Reform in the Republic of Moldova

This article presents the methodology and results of modelling for the analysis on energy affordability and assessing the impact of a possible value added tax increase on the affordability of households to consume adequate levels of natural gas, electricity and heat. The analysis of the reform impact of the subsidy schemes is based on a partial equilibrium model which measures the impact of reforms on energy affordability of different householder groups and budgetary revenue and expenditure, but also on greenhouse gas emissions. Using of targeted social policies generates a budget surplus that can be allocated to energy

Overcoming the consequences of financial crisis on the example of Island and Ireland


 Will Ireland share the fate of Iceland? Is this open, small economy with a debt-to-GDP ratio of above 130% on the verge of bankruptcy? Economists argue that if public debt is greater than national income, then smaller economies, heavily involved in the international division of labor are at risk of becoming insolvent. The bankruptcy of Ireland, whose prosperity is based on its reputation for being a good place to do business, could be a catastrophy. Contrary to the countries of southern Europe, the economy of the Green Island has never had problems with paying its liabilities and with solvency. While Greece has gone bankrupt five times since gaining independence in 1826 and Spain as many as thirteen in the past two centuries, Ireland's history in this area is impeccable (Reinhard, Rogoff, 2009, p. 3-6). Since the beginning of the 21st century Ireland's economic development has been based mainly on construction industry and not exports, as it used to be in the 1990s when the country was nicknamed the Celtic Tiger. The boom resulted in a budget surplus and a positive balance in current settlements. But it also resulted in higher prices - the Irish no longer had to accept slow wage growth to stay internationally competitive - which, combined with the low nominal interest rate of the European Central Bank, provided fertile ground for the build-up of the real estate bubble. The aim of the article is to identify the factors that led Ireland to the brink of bankruptcy and to try to answer the question whether the action of recapitalization of failing banks by the government and international financial institutions will bring the expected results in the form of healing the financial system and returning Green Island to the path of economic growth.

The Coronavirus Crisis versus Social and Market Economy of Germany

The coronavirus crisis caused by the COVID-19 pandemic has had a significant negative impact on all aspects of the German social market economy. For the first time in history, the crisis was caused by factors of a non-economic nature. They manifested themselves in all economies of the world, including Europe. Since March 2020, the federal and state executive authorities of Germany, along with the introduction of restrictive measures for the population and business, have adopted several large-scale economic and political programmes aimed at preventing bankruptcies of economic entities, preserving jobs and social stability in the country. Along with short-term instruments designed to stop the decline in GDP and give impetus to its growth, the German state pursued an active and coordinated with Brussels structural policy aimed at ensuring an energy and digital transition to a climate-neutral economy, including the overcoming the deficits and problems revealed by the pandemic in the country's economy. To this end, Berlin abandoned the budget surplus policy and switched to large-scale external borrowing to finance programmes to bring economy out of the crisis. The author analyzes the results of the impact of the coronavirus crisis on the economic space of Germany, including aspects of its stress resistance and competitiveness, explores the effectiveness of state policy to counter crisis and assesses the prospects for the development of Russia's leading foreign economic partner in the west of the Eurasian continent.

Analysis of Australia’s Fiscal Vulnerability to Crisis

Fiscal vulnerability, like a contagion, poses a threat to financial sector stability, which can lead towards sovereign default. This study aimed to assess fiscal vulnerability to crisis by investigating the Australian economy’s gross public debt, net public debt, and net financial liabilities. We used a threshold regression model and compared results with the baseline deficit–debt framework of analysis. The results of the base model suggested that the economy is fiscally sustainable, and that the primary surplus remains unaffected by increasing levels of public debt. In contrast, the threshold regression model indicated that the increasing level of debt has eroded primary surplus below the threshold level of 30.89% of public debt to GDP. These results need further investigation. Therefore, we modified our basic threshold model to capture budget deficit and surplus as a threshold in response to changes in public debt. The results from the sequential threshold regression model using the debt to GDP ratio and primary budget surplus identifying the periods of 1991, 1992, 2008, 2009, 2011 and 2019 as times of likely vulnerability to fiscal crisis. The overall results confirmed that the primary surplus remained sustainable over the estimated threshold level of public debt in all other sample periods and these findings persisted across alternative measures of public debt.

Budget deficit for full-employment under growth and inflation by excessive deficit: A theoretical basis for functional finance theory and MMT

Japanese Abstract: 最近MMT（Modern Monetary Theory，現代貨幣理論）と呼ばれる学派の主張が注目を集めているが，これまであまり理論的，あるいは数学的な分析がなされることはなかった。本稿では技術進歩による経済成長を含む世代重複モデルを用いてMMTの主張が理論的に成り立つのかどうかを検討し，それに概ね肯定的な評価を与える。基本となるのは経済が成長している場合に完全雇用を維持して行くためには継続的な財政赤字が必要であるということと，不況から回復させるためにはそれを超える財政赤字が求められ，その赤字は将来の財政黒字によって埋め合わされる必要はないということである。本稿のモデルは田中(2021)の3世代モデルを単純化したものであるが，経済成長を取り上げたり，規模に関する収穫逓増・逓減を仮定したり，インフレーションの分析をしたりなど，分析については拡張している。 English Abstract: Although the claims of the school of thought known as Modern Monetary Theory (MMT) have recently received much attention, they have not been subjected to much theoretical or mathematical analysis. This paper examines the theoretical validity of the MMT argument using an overlapping generations model that includes economic growth due to technological progress, and gives a generally positive evaluation of MMT claims. The basic idea is that sustaining full employment in a growing economy requires sustained budget deficits, while recovering from a recession requires budget deficits in excess of that. These budget deficits need not be offset by future budget surpluses. The model in this paper is a simplified version of the three-generation model of Tanaka (2021), but it has been extended to include economic growth, the assumption of decreasing or increasing returns to scale, and an analysis of inflation.

Deficit politics and surplus politics: a comparative study of Hong Kong and Singapore

Traditionally, budgetary scholars focus on deficit politics in Western democracies, emphasizing budgetary conflicts among budgetary actors over different strategies to balance budgets. While most countries are facing budget deficits, some countries and regions are experiencing budget surpluses. However, surplus politics, and its comparison with deficit politics, remains underexplored. This study is a pioneer attempt to compare the similarities and differences between deficit politics and surplus politics, using Hong Kong and Singapore as binary cases.

A Consistency Check of Concrete Compressive Strength using Pearson’s Correlation Coefficient

The efficiency of the concrete ready mix service provider is undoubtedly and has become a widespread trend among contractors in which facilitates and eliminated a large budget surplus in maintenance, operating costs and is preferred as it reflects more efficient asset utilization. However, the quality assurance of concrete supplied is always raised associated with the inconsistencies of concrete compressive strength at the age of 28 days. The objective(s) of this study are to determine the correlations between the compressive strength of ready mix concrete, to evaluate the consistencies of the results and to identify the irregular sources that lead to the inconsistencies. Based on the compressive strength values obtained from the existing experimental data using different concrete mixes from the batching plant, a statistical analysis was conducted. A total of 90 concrete cubes specimens were attained from 15 concrete batches. A correlation analysis was conducted using the Pearson Correlation calculation to check the consistency of concrete compressive strength. The calculation showed the Pearson correlation coefficient of this study is +0.990. This indicated that there are significant linear relationship exists between the concrete compressive strength and the density of concrete batches which is positively high. In conclusion, the analysis reveals that the design of ready mix concrete compressive strength is in high consistencies and acceptable in practices for the proposed mix design to the contractor. Doi: 10.28991/cej-2021-03091672 Full Text: PDF

Making decisions on issuing sub-federal bonds in Russia: key factors modeling

Recently, Russian regions have been more active in using sub-federal bonds to finance regional debt. However, the Russian sub-federal bonds market’s liquidity is still low while regional authorities often use commercial bank loans to finance the regional budget deficits. The purpose of this study is to identify the key factors influencing the regional authorities’ decisions to issue sub-federal bonds. The impacts of the following factors were assessed: the regional budget deficit volume, the Central Bank key rate, the budget loan proportion of the regional debt, the regional debt burden, average per capita cash income in the region, the employed in the region. We used monthly data for 85 regions (constituent entities of the Russian Federation) for the period 2015–2019.Various regression models for panel data have been developed: those predicting probabilities of a non-zero value of regional bond volume, the volume itself, and combined generalized linear mixed hurdle model with a negative binomial distribution (estimated with glmmTMB contributed package of R). The latter showed non-significant dependence of regional bond volume on region budget surplus, prioritizing unobserved region-specific random factors.

Fiscal federalism in Russia: To be or not to be?

The ratio of the total volume of taxes coming from the territory to the budget system of the country and the expenses of the territorial budget illustrates the fundamental possibility or impossibility of forming intergovernmental relations in the spirit of fiscal federalism. The article tests its initial message: tax and non-tax revenues produced by the territory (given the administrative-territorial division of the country) should be, at minimum, sufficient to balance the budget and solve regional budget problems. It is shown that at present in 40% of Russian regions total revenues are enough to ensure budget surplus, the participation of these regions in solving national problems. In the remaining 60% of the regions, all revenues from the territory to the budget system are not able to balance budget revenues and expenses. The picture of intergovernmental relations was fundamentally changed, because in most regions that had deficit budgets in 2015, revenues in 2018 began to exceed expenses. The paper considers the opportunities to qualitatively change the state of regional budgets.

The Debt Capacity of a Government

In a deterministic overlapping-generations economy with production and physical capital, the price of debt can be positive without any budget surpluses being in the offing, because debt incorporates a rational bubble. Yet the dynamics of debt remain a function of the dynamics of the primary budget deficit. As a way to study their joint behavior, we endogenize a structural deficit in the form of an underfunded social-security scheme. We define debt capacity as the level of debt that can be just sustained without a change of policy all the way to an unstable steady state. When it starts below the capacity, the debt converges to a stable steady state, in which the bubble is sustained. Above capacity the bubble unravels and the deficit cannot be financed. In several realistic scenarios occurring in economies, we calculate the needed policy response, which is the true fiscal cost of exceeding debt capacity.

Prawo podatkowe w poglądach i polityce Andrew Mellona

Przedmiot badań: Jako autor oryginalnej doktryny podatkowej i inicjator wielu reform amerykań­skiego prawa podatkowego Andrew Mellon (1855−1937) był jedną z najważniejszych postaci w po­lityce amerykańskiej przed II wojną światową. Zapisał się w historii nie tylko jako magnat finansowy i przemysłowy, ale również jako jeden z najdłużej urzędujących sekretarzy skarbu i przewodniczących Rady Rezerwy Federalnej (w związku z tym sprawował on pieczę nad całością życia gospodarczego w USA zarówno w czasach silnego rozwoju „burzliwych lat 20.”, jak i na początku Wielkiego Kryzysu w latach 30. XX w.), a także jako prekursor neoliberalnej i propodażowej polityki finansowej.
 Cel badawczy: Tekst prezentuje finansowo-prawne założenia doktrynalne poszczególnych re­form podatkowych Andrew Mellona z lat 1921−1929, w których opowiadał się on m.in. za niskim opodatkowaniem, redukcją zadłużenia publicznego i zrównoważonymi budżetami.
 Metoda badawcza: historyczno-opisowa.
 Wyniki: W artykule ukazane są zarówno pierwotne sukcesy reform Andrew Mellona (owocujące m.in. nadwyżkami budżetowymi i wzrostem gospodarczym), jak też ich długofalowe konsekwen­cje na przełomie lat 20. i 30., gdy − u progu wieloletniego kryzysu finansowego − Mellon wycofał się z niemałej części swoich wcześniejszych postulatów i tuż przed odejściem ze sprawowanych funkcji – pomimo spadku aktywności gospodarczej w USA i wzrastającego bezrobocia – za­proponował liczne podwyżki podatków, krytykując m.in. efekty wynikające z automatycznych stabilizatorów opodatkowania dochodowego.

Debt-Stabilizing Properties of GDP-Linked Securities: A Macro-Finance Perspective

We study the debt-stabilizing properties of indexing debt to GDP using a consumption-based macrofinance model. Three results stand out. First, GDP-linked bond prices would embed sizeable and timevarying risk premiums of about 40 basis points. Second, for a fixed budget surplus, issuing GDPlinked securities does not necessarily imply more beneficial debt-to-GDP ratios in the medium- to long-run. Third, the debt-stabilizing budget surplus is more predictable under such issuances at the expense of being higher on average. Our findings call into question the view that GDP-linked securities tame debt.

The Federal Budget Execution for 3 months of 2021

At the period-end of January-March 2021, the federal budget surplus was less than in the pre-crisis Q1 2020. After 2020, the budget system recorded an increase in public debt servicing costs driven by a large-scale borrowing and the accumulation of losses by enterprises, which carry forward will limit the corporate income tax revenues.

Involuntary Unemployment Under Ongoing Nominal Wage Rate Decline in Overlapping Generations Model

We analyze involuntary unemployment based on consumers’ utility maximization and firms’ profit maximization behavior with ongoing nominal wage rate decline. We consider a three-periods overlapping generations (OLG) model with a childhood period as well as younger and older periods under monopolistic competition with increasing, decreasing or constant returns to scale technology. We examine the existenbce of involuntary unemployment in that model with ongoing mominal wage rate decline (or deflation). Even if the nominal wage rate declines, we have a steady state with involuntary unemployment and constant output and employment. We need budget deficit or budget surplus to maintain the steady state depending on whether real balance effect is positive or negative. Also we examine the possibility to achieve full-employment by fiscal policy

Very simple mathematical model of MMT (Modern Monetary Theory)

In recent years, a school of economics called MMT (Modern Monetary Theory) has been attracting attention, but it has not been analyzed theoretically or mathematically. This study aims to provide a simple theoretical basis for the skeleton of the MMT argument, while maintaining the basics of the neoclassical microeconomic framework, such as utility maximization of consumers by means of utility function and budget constraint, and equilibrium of supply and demand of goods, under perfect competiton with constant returns to scale technology. Using a simple overlapping generations (OLG) model that includes economic growth due to technological progress, we will argue that: 1) a continuous budget deficit is necessary to maintain full employment when the economy is growing, and that this deficit does not have to be covered by future surpluses; 2) Inflation is caused when the actual budget deficit exceeds the level necessary and sufficient to maintain full employment. In order to avoid further inflation, it is necessary to maintain a certain level of budget deficit; 3) A shortfall in the budget deficit leads to recession and involuntary unemployment. To recover from this, a budget deficit that exceeds the level necessary to maintain full employment is required. However, since a continuous budget deficit is necessary after full employment is restored, the deficit created to overcome the recession does not need to be covered by future budget surpluses, nor should it be.

Economic Aspects of Public Debt

Public debt is one of the crucial forms of public revenue necessary to achieve some stabilization goals of fiscal policy, such as stable inflation, full employment, trade balance, economic growth, economic development, and primary securing finances for states public expenditures. It is defined as an extraordinary source for financing public expenditures, but above all it is considered for effective instrument of fiscal policy in accomplishing economic growth and development. Public debt is considered as accumulation of various forms of loans, which are normally realized by the state for the implementation of economic and fiscal policy. Continuity in emission of public debt is immanent in the determination of achieving high levels of investments in various areas of public sector, such as health care, infrastructure, education, etc. With the economic growth and higher demands for various public goods, the state is faced with the problem of securing additional sources of finance that would satisfy the peoples needs and boost the economy additionally. However, if the state decides to reduce the levels of public debt, then the government would discontinue the emissions of public debt and use the budget surplus to pay out the bond holders. Also, very important thing is the source of public debt, internal or external, which could leave the country without the needed capital to secure economic development. Therefore, the productive usage of the borrowed money is essential to have justification for continuing with policy of deficit finance. Contrary of that, the unproductive use of public debt would be risky and bring the state closer to over borrowing and finally bankruptcy.

Italian Advisors in Nationalist China: The Mission and Work of Alberto de’ Stefani, High Commissioner of Chiang Kai-Shek

In the 1930s, the fascist government sent high-profile military officers, politicians, and academics to Nationalist China to support the Chiang Kai-shek regime and consolidate relations. In 1937, Alberto de’ Stefani, well known as the minister who restored Italian public finance and achieved a budget surplus in 1924–1925, was personally chosen by Chiang Kai-shek to reform the fiscal and financial administration of the country. When de’ Stefani returned to Italy, he was appointed “lifetime advisor of the Chinese people” by Chiang, with the highest decoration that the government of China could bestow upon a foreign stateman. On several occasions, de’ Stefani was accused of being a Sinophile and traitor by the fascist government for his commitment to achieve peace between China and Japan. In this article, the author proposes a vivid testimony, using primary sources from historical and diplomatic archives, of de’ Stefani’s experience in China.

Individual Treatment Effects of Budget Balance Rules

This paper investigates the heterogenous effects of budget balance rules on fiscal policy in a large sample of countries. To derive country-specific treatment effects of fiscal rules and conduct inference, we use a Synthetic Difference-in-Differences Method. Our results indicate that countries with a budget balance rule improve their fiscal balance on average by around 3 percent after its introduction. However, our results also illustrate the importance of going beyond the average treatment effect, as it masks significant heterogeneity in the country-specific impact of the rule. We find that countries that would have had large deficits in the absence of the fiscal rule exhibit positive treatment effects, thus reducing their budget deficits. On the other hand, countries with budget surpluses respond to fiscal rules by reducing their budget surplus and moving closer to the numerical target of the rule. Our results also suggest that rules’ design matters: a small overall number of fiscal rules, and the presence of a monitoring process outside the government, especially at the supra-national level, improve significantly the effectiveness of the rules.

Political competition over property rights enforcement

Abstract I study what level of tax-financed property rights enforcement societies choose in elections when appropriators can steal from producers. Restrictions determine who can run for office. Candidates propose enforcement levels and tax rates. The election winner keeps the budget surplus. If the majority of voters are producers, then fewer restrictions on who can run for office are associated with more secure property rights. Lifting restrictions on who can run benefits producers, while lifting restrictions on who can vote does not. If the majority of voters are appropriators, then elections lead to adverse outcomes, irrespective of who can run for office.