Debt Rules Research Articles

Feature Article: How changing the debt rule could shape the Budget

Feature Article: How changing the debt rule could shape the Budget

On the side effects of fiscal policy: Fiscal rules and income inequality

Contributing to an important literature on the side effects of fiscal policy, this paper employs a treatment effect analysis to show that fiscal rules (FR) have significant side effects on income inequality (IQ). Economically meaningful, this favorable causal direct effect is robust to many alternative specifications. Nevertheless, not all FR are alike: balanced budget and debt rules decrease IQ, contrary to expenditure rules that increase it. Finally, the effect of FR on IQ is found to be subject to heterogeneity related to various factors. Given the current upward global IQ trends, our results provide insightful evidence for governments of countries aiming at reducing IQ.

Taxation of Treasury Inflation Protected Securities

Inflation is back, causing problems for taxpayers looking for safe, inflation-protected investments. This Article engages in an in-depth analysis of an understudied part of the Internal Revenue Code and associated Treasury Regulations section 1.1275-7, the inflation-indexed debt rules, asking whether Treasury Inflation Protected Securities (TIPS) can act as a suitable hedge against inflation for taxable investors. TIPS are often considered tax-disadvantaged instruments, and this Article questions the extent to which that is true. I examine TIPS relative to inflation, nominal Treasuries and I Bonds, and in doing so make three important contributions to tax scholarship. First, I present original empirical analysis on financial data from the 2003-22 period, finding that TIPS are taxed at least as favorably as nominal Treasuries on a buy-and-hold basis. Under certain assumptions, like interest withholding, the section 1.1275-7 regime imposes less onerous tax consequences on TIPS than on nominals. Second, my results confirm that the performance of TIPS relative to nominal Treasuries depends on how unanticipated inflation deviates from expected inflation. Analysis of the 2003-21 period shows that nominals outperformed TIPS on both a pre-and a post-tax basis, while analysis of the 2003-22 period shows that 10-year TIPS issued between 2012 and 2022 generally outperformed nominals precisely because of the rise in unanticipated inflation in 2021 caused by the response to COVID-19. Third, I find that since 2011 all riskless bonds have generally had negative real yields on an after-tax basis. These findings have important implications for current tax policy since they show that taxpayers cannot access positive real riskless returns on an after-tax basis. With the world in a period of rising interest rates and high inflation, this suggests that it may be time to reconsider the canonical emphasis on nominal rather than real taxation.

Stabilizing, neutral or destabilizing? The impact of fiscal rules on the GDP volatility in the EU countries

The goal of the present article is to estimate the impact of numerical fiscal rules on the volatility of GDP growth in the European Union countries in 1995–2019 to answer the question about their counter--cyclical and stabilizing properties. The obtained results show that the introduction and the wider use of fiscal rules in the EU countries reduced economic fluctuations – an increase in the Fiscal Rules Index of one standard deviation was associated with a decrease in the volatility of the GDP growth rate of approximately 20%. When analysing different types of fiscal rules existing in the EU countries, the biggest reduction in GDP volatility was obtained for countries where debt rules were in force. In the case of “operational” rules, the budget balance rules have a stronger impact on limiting GDP growth fluctuations, while the impact of expenditure rules in this matter turned out to be insignificant.

Comparative Fiscal Federalism and the Post‐Covid EU: Between Debt Rules and Borrowing Power

This thematic issue examines two main research questions: What are the features, the determinants, and the implications of fiscal integration in a system of multilevel governance like the EU? And, what can the post-pandemic EU learn from established federations when it comes to fiscal integration? We attempt to conceptualize the patterns of EU fiscal integration. In so doing, we identify eight instruments of fiscal integration in a federal or multilevel polity, equally divided between fiscal capacity and fiscal regulation, depending on the side of the budget and the mode of integration (autonomous or dependent). For instance, as part of the fiscal capacity instrument of integration, we propose to distinguish between revenue and expenditure capacity. Revenue capacity is then further divided into tax capacity, based on EU/federal taxes, and budgetary capacity, based on non-independent sources, for instance, contributions from the member states. Expenditure capacity is divided into autonomous spending capacity, meaning direct spending by the EU, and a dependent transfer capacity, where the EU merely distributes resources (both grants and loans) to the member states.

THE EFFECTIVENESS OF DEBT RULE ON FISCAL SUSTAINABILITY: DO MACROECONOMIC DATA MATTER?

The effectiveness of the debt rule to achieve a certain level of public debt and debt sustainability targets is one of the fiscal sustainability discussed in the literature. The current study attempts to estimate the impact of the debt rule on fiscal sustainability indicators for 77 countries during 1985 - 2018. There are two existing indicators are widely utilized cover primary gap and recursive algorithm. To deal with the potential of a random walk of the variables, the two-step system generalized method of moment (GMM) estimator is employed. Specifically, the current study constructs a new fiscal sustainability indicator by incorporating financial technology (FinTech) using principal component analysis (PCA) for 67 countries in 2014 and 2017. The new indicator is the main contribution on the existing literature of fiscal sustainability. The findings reveal that the debt rule has a positive and significant impact on the primary gap, either in the short- or medium-term, implying that the debt rule is effective in encouraging fiscal sustainability. Conversely, it has a negative and significant impact on the recursive algorithm. Similarly, this rule significantly contributes on the new indicator by incorporating FinTech. Therefore, policymakers are challenged to conduct this rule as a key fiscal rule in fiscal sustainability policy. The policymakers should also take more attention to increase the level of FinTech to guarantee fiscally sustainable level.

Do fiscal rules of local debt affect municipal off-budget activities? Analysis of various types of municipalities

PurposeThis paper aims to determine whether local governments (LGs) use non-consolidated municipally owned companies (MOCs), excluded from public sector entities and, consequently, from sub-national debt to avoid fiscal debt limits. This paper contributes to the literature by analysing the fiscal debt rule’s impact on the off-budget municipal activities in total and separate in different types of local government units.Design/methodology/approachThis paper uses difference-in-differences and the system general method of moments model with the Blundell–Bond estimator for dynamic panel data analysis of MOCs owned by 866 Polish municipalities in 2010–2018.FindingsThis paper shows that the MOCs’ revenues support limited local public debt capacity by indebtedness restrictions imposed on municipalities in 2014. As a result, less indebted municipalities have higher off-budget revenues. The tightening of fiscal rules related to sub-sovereign indebtedness increased off-budget activities, but that effect is much stronger in rural and rural–urban municipalities than in urban municipalities and big cities.Originality/valueThis paper contributes to the literature by exploring the fiscal debt rule’s impact on the off-budget municipal activities in total and separate in different types of local government units. In this paper, the authors combine theories relating to private and public finance; this is a novel approach and one that is also necessary – as, in fact, the worlds of public and private actors intersect – as exemplified by the existence of MOC.

Off-budget revenues and debt limit in municipalities in the Wielkopolska

The paper aims to assess whether the size of municipal off-budget activities carried out by municipally-owned companies (MOCs) depends on the municipality’s outstanding debt and unused debt capacity. The fiscal debt rule limits municipal debt capacity based on the individual debt ratio. In other words, the article attempts to establish whether and to what extent the size of off-budget financing through fees for local public services provided by MOCs depends on the municipality’s financial situation. We use panel data of 89 municipalities in Wielkopolska voivodeship (499 observations) retrieved from consolidated financial statements, reports on surplus/deficit of municipalities for 2010–2018, the Bank of Local Data and information on the MOC’s ownership structure and revenue volume obtained from the Orbis database. The models were estimated by the General Method of Moments (GMM) on a total sample of all municipal shareholders of MOCs in the Wielkopolska voivodeship. We show that municipalities shifted off-budget activities in response to fiscal debt limit restrictions valid since 2014 and election years. Furthermore, the structure and size of budgeted activity are linked to municipal activities’ relative opportunity costs. It is because increasing municipal fees generates lower political costs than raising taxes or local fees. Thus, we show that the fiscal debt constraint introduced in 2014 raises the scale of shifting expenditure off-budget using MOCs in the Wielkopolska voivodeship.

재정준칙과 정부 부패

A fiscal rule is a long-lasting constraint on fiscal policy through numerical limits on budgetary aggregates. Several empirical studies have shown that countries with fiscal rules tend to have better fiscal outcomes. This paper estimates the causal effect of fiscal rules on government corruption in a panel of 36 OECD countries over the period 1994-2015. This paper finds that Expenditure Rules, Debt Rules correlate with lower government corruption. However, Budget Balance Rules with higher government corruption. This paper contributes to the empirical literature on the effectiveness of fiscal rules by developing a new instrumental variables strategy. Above all, an independent financial institutions have a positive effect on the adoption of fiscal rules. This study suggest that independent financial institutions can enhance the adoption of fiscal rules and government transparency.

Proposals for the reform of EU fiscal rules

The aim of this paper is to contribute to the ongoing debate regarding the reform of the EU fiscal framework, with a special focus on fiscal sustainability for Greece. Our key policy proposals for the EU fiscal rules draw on lessons from past experience, the conclusions of relevant studies and the fiscal sustainability risks faced by Greece and other high-debt countries in the euro area. To this end, we use the European Fiscal Board’s Compliance Tracker Dataset to assess compliance with the existing SGP framework. Moreover, we employ the Bank of Greece’s Debt Sustainability Analysis (DSA) model to identify possible fiscal sustainability risks for Greece over the medium- to long-term horizon, taking into account alternative economic policy scenarios (including a debt rule scenario). Our main findings indicate that the revised fiscal framework should focus on the need to enhance sustainability of public debt as a key priority, by setting a debt anchor as a medium-term fiscal objective, with a single operational expenditure rule that promotes countercyclicality of fiscal policy. The current benchmark levels could be maintained and complemented with the appropriate flexibility in the rate of debt reduction to address cross-country heterogeneity and avoid self-defeating effects of fiscal policy. In the case of Greece, despite the favourable characteristics of public debt, fiscal policy in the short and medium term should focus on accelerating debt reduction. The exposure of Greece’s public debt dynamics to market and interest rate risks will gradually increase, as official sector debt is replaced by market financing, thereby changing the structure of public debt and highlighting the need to create fiscal buffers in order to increase its resilience to future adverse macroeconomic shocks.

An empirical study of public debt sustainability based on fiscal fatigue and fiscal space in CEMAC countries

AbstractThis paper seeks first to test whether there is evidence of fiscal fatigue in the Central Africa Economic and Monetary Community (CEMAC) countries. On the contrary, we want to investigate the impact of fiscal rules on fiscal space to see if the implementation of fiscal rules enhances fiscal space in the region. The findings show evidence of fiscal fatigue for the Republic of Congo, Equatorial Guinea, and Gabon while Cameroon, the Central African Republic, and Chad exhibit no fiscal fatigue behavior. For our second objective, while analyzing the determinants of fiscal space we found that the two fiscal rules (the balanced budget rule and debt rule) implemented in CEMAC Zone do not improve fiscal space. Therefore, there is a need for the fiscal policy stance to supervise the conduct of fiscal rules in the CEMAC region as fiscal rules themselves do not enhance the available fiscal space. Besides, we suggest CEMAC's fiscal policy authorities to integrate the expenditure rule in their fiscal policy framework to mitigate the government expenditure bias.

Editorial: Expansionary Monetary Policy and the Design of Debt Rules in the European Union

Editorial: Expansionary Monetary Policy and the Design of Debt Rules in the European Union

Debt restrictions and municipal indebtedness in American cities: evidence from the Roaring Twenties

AbstractWidespread municipal defaults in the late 19th century prompted U.S. states to pass laws restricting the amount of debt cities could incur. These restrictions generally did not bind until the 1920s, when suburban growth spurred local governments to invest in infrastructure, most of which was financed by bonds. We study the relationship between several major debt restrictions – debt limits, supermajority voting referenda, and debt exceptions – and municipal indebtedness in the Roaring Twenties. We find that cities that faced more restrictive debt rules were less indebted by 1929. We also find that debt limits reduced the amount of capital spending in cities during the 1920s and 1930s, while stricter voting rules reduced the likelihood of municipal default in the 1930s. These rules thus determined not only the degree of debt accumulation in early 20th century cities, but also their infrastructure investment and financial health.

International coordination of debt rules with time‐inconsistent voters

AbstractIn this study, we investigate the international coordination of debt rules in an economy consisting of several countries with varying degrees of present bias. A case wherein each country sets its own uncoordinated debt rules is compared with a case wherein all countries have common coordinated debt rules. Countries with weak present‐biased preferences increase their debt issuance and suffer from welfare losses by participating in coordination. In contrast, countries with strong present‐biased preferences reduce their debt issuance and can enjoy welfare improvement by participating in coordination. The contrasting results suggest the possibility that countries with weak present‐biased preferences have little incentive to follow the coordinated rule.

Debt policies in the aftermath of COVID-19 — The SGP’s debt benchmark revisited

The post-COVID-19 period is likely to be characterised by an intensified stabilisation-sustainability trade-off. This paper revisits the design of the Stability and Growth Pact’s debt rule in the context of two debates on fiscal policies: first, the implications of the low interest environment for debt sustainability and the appropriate interaction of fiscal and monetary policies and, second, the reform of the EU fiscal governance framework. In both debates the choice of government debt anchor and the speed of adjustment take centre stage. The debt rule appears predestined to fulfil the role of debt anchor. However, our analysis shows that its existing design gives rise to a pro-cyclical bias that has hampered its implementation in a low-growth and inflation environment. We propose two parametric changes to better balance the objectives of macroeconomic stabilisation and debt sustainability: first, accounting for persistent deviations of inflation from the central bank’s target; and, second, a reduced speed of adjustment. Putting a reformed debt rule at the centre of the EU fiscal governance framework would allow reducing the latter’s complexity without the need to revise the EU Treaties.

Debt strategies of European countries and vectors of implementation of best experience in the practice of external public debt management of Ukraine

The policy of external and domestic public debt management in different countries has its own specifics, and its results are not always unambiguous. Thus, the existing recommendations of the International Monetary Fund and the Maastricht criteria prove that the maximum value of public debt to GDP should be no more than 60 %. Exceeding this limit can lead to a deterioration in financial stability, debt sustainability, and ultimately to a technical default of the state. However, the practice of public debt management in many developed countries shows quite opposite trends, as a significant excess of the Maastricht criterion not only does not lead to default, but on the contrary allows countries to accumulate the necessary financial resources to ensure stable economic growth.
 Therefore, the study of European debt strategies and their effectiveness is a very important issue, especially given the consequences of the COVID-19 pandemic for developing countries. Given the growing external debt dependence of Ukraine as a result of both the war with the Russian Federation and the COVID-19 pandemic, the search for a better experience of European debt policy and consideration of ways to adapt it to domestic realities are discussed in our article.
 Based on the analysis of the debt policy of European countries, the expediency of using debt rules, aimed at regulating both the country's debt security and the effectiveness of the use of public borrowing to stimulate economic growth has been proved.
 Cluster analysis of debt strategies of some European countries has shown that the high level of dependence on external public debt has a negative impact on economic security in general, because in the event of deteriorating macroeconomic situation, the likelihood of foreign investors selling government securities increases, and in the case of external loans from international financial and credit organizations – the risks of negative impact of burdensome non-financial obligations on the national economy grow.

Twin deficits revisited: A role for fiscal institutions?

We revisit the twin-deficits relationship for a sample of 65 countries with fiscal rules over the period 1985–2015, using a panel data estimation methods. Our analysis accounts for the role of various types of fiscal rules and institutions: expenditure rules, revenue rules, budget balance rules, debt rules, fiscal councils, and supporting procedures. We find that the twin-deficits hypothesis is confirmed. The impact of the budget balance on the current account balance is increased when fiscal rules are considered, except with revenue rules and debt rules. Well-designed fiscal rules, fiscal councils and features that reinforce compliance with rules improve the current account balance. Our findings highlight the role of fiscal factors in explaining sustained global current account imbalances. They also contribute to the ongoing discussion about the improvement of macroeconomic and budgetary surveillance in the European context.

Fiscal rules, fiscal performance and economic growth in Sub‐Saharan Africa

AbstractOver the past four decades, many economies have striven to find permanent solutions to persistent increases in public deficits and deterioration of growth. For most economies, the solution to this problem was the adoption of fiscal rules. This paper presents empirical evidence on the effects of fiscal rules on fiscal performance and economic growth using a dataset of 43 countries in Sub‐Saharan Africa over 27 years. The study applies simultaneous equation models to determine the relationship between performance and growth in the public sector and also to avoid structural equation and endogeneity biases. The results show that fiscal rules significantly foster fiscal performance and decelerate growth. The study further finds the expenditure rules to be most effective in influencing fiscal balance and economic growth. The robust estimates further confirm that expenditure rules and government spending efficiency are necessary for promoting fiscal outcomes and economic growth. The study recommends the implementation of more revenue rules, debt rules and balance budget rules to ameliorate the negative effects of government spending on economic growth. In addition, Sub‐Saharan African economies should carefully consider the rules applied to government spending since fiscal rules on productive spending will impede economic growth.

Peculiarities of public debt management policy in the United States of America: experience for Ukraine

The object of research is the policy of public debt management of the United States of America and Ukraine.
 The problem solved is the low level of efficiency of the policy of public external and internal debt management of Ukraine in the context of financing economic growth.
 The main scientific results: based on the analysis of the policy of public debt management of the United States of America, it has been proved, that the public debt and the US budget deficit should be perceived not as a problem or threat to macroeconomic stability, but as a tool to stimulate economic growth. It is substantiated, that in order to optimize the policy of internal and external public debt management of Ukraine it is expedient to introduce a debt rule, which is based on the program-targeted method of attracting public debt and provides for the use of public borrowing exclusively to finance economic development programs. In this case, Ukraine, following the example of the United States, will be able to achieve sustainable economic growth, because changing the priorities from debt financing of current state budget expenditures to financing capital expenditures will allow the Ukrainian government to develop economic infrastructure, create conditions for high value-added goods and to develop small and medium business, which will ultimately ensure macroeconomic stability and progressive economic development of the state.
 The scope of practical use of research results. The results of the study can be used by the Cabinet of Ministers of Ukraine, and in particular by the Ministry of Finance during the formation of the Medium-Term public debt management strategy of Ukraine.
 Innovative technological product: The debt rule is based on the program-target method of attraction and use of the state internal and external debt that allows to use effectively the state borrowings for financing of economic growth.
 Scope of application of an innovative technological product: Policy of management of the state internal and external debt of Ukraine

Gross Capital Inflows in Indonesia: Exploring Bonanzas and Sudden Stops

This paper examines episodes of capital bonanzas and sudden stops in Indonesia by utilising binary response models and several episode-identification approaches. Our identification suggests that whenever bonanza episodes occurred, capital sudden stop episodes followed in a more extended period. The estimations demonstrate that domestic factors are relatively dominant in determining the capital bonanzas, and the federal funds rate has a more significant impact on inducing the probability of capital sudden stops in Indonesia. We also found that Turkey and South Africa are the most contagious economies for Indonesia. This paper proposes some policy reforms to enhance the stability of capital inflows in Indonesia, including financial regulation and public finance policies such as a reverse Tobin tax and market-driven public debt rules.