Fiscal Adjustment Research Articles

Fiscal sustainability challenges in the new normal of low oil prices

PurposeGiven the persistence of low oil prices and the continued shrinking of government revenues, Gulf Cooperation Council (GCC) countries continue to adapt to the new normal of the oil price environment, with a focus on pressing ahead with subsidies’ reforms and measures to increase non-oil revenues, as well as accelerating debt issuance, which raise concerns about fiscal sustainability and the implications on macroeconomic stability.Design/methodology/approachThe purpose of this paper is to examine the sustainability of fiscal policy in GCC by exploring governments’ reaction to rising public debt accumulation via the estimation of a fiscal reaction function to higher debt. Subsequently, the paper compares the obtained results with other similar and non-similar groups, in terms of economic structures and oil dependency, to understand how some macroeconomic factors affect differently the fiscal policy responses, in a context of oil price shocks and high price volatility.FindingsThe results show that the coefficient of the lagged debt stock was significant and positive, which means that GCC are increasing the pace of reforms and the fiscal primary balance as they issue more debt to ensure a sustainable fiscal policy. The evidence is consistent with the theory that higher levels of debt warrant greater fiscal effort, but at lower debt levels, countries still have the space to increase spending without jeopardizing debt sustainability as long as they remain committed to fiscal reforms to increase the primary balance. The evidence supports the notion that the region’s public finances have improved in response to recent fiscal adjustments. However, national experiences differ considerably, especially given variation in the fiscal breakeven prices against the new normal of low oil prices. Moreover, the findings reveal that various measures of economic performance, as captured by economic growth, openness and the oil price, were also found to be important factors in explaining fiscal performance. The combined effects of low oil prices and high degree of openness warrant further efforts to reform the budget to increase the primary balance while safeguarding priority spending tomobilize non-energy growth and ensure debt sustainability in GCC.Originality/valueGiven recent experiences and the “low for long” oil price, policy priorities and reforms are necessary in oil-dependent economies, including GCC, to ensure macroeconomic sustainability. Sustaining the momentum of non-energy growth would reduce continued dependency of GCC economies on oil revenues and fiscal spending in the medium-term, creating a bigger scope for private sector participation in economic activity and increasing the prospects of further diversification away from long dependency on oil price volatility and their adverse implications on the fiscal budget and economic cycles.

Why do fiscal multipliers depend on fiscal Positions?

The fiscal position can affect fiscal multipliers through two channels. Through the Ricardian channel, households reduce consumption in anticipation of future fiscal adjustments when fiscal stimulus is implemented from a weak fiscal position. Through the interest rate channel, fiscal stimulus from a weak fiscal position heightens investors’ concerns about sovereign credit risk, raises economy-wide borrowing cost, and reduces private domestic demand. We document empirically the relevance of these two channels using an Interactive Panel Vector Auto Regression model. We find that fiscal multipliers tend to be smaller when fiscal positions are weak than strong.

Fiscal management on revenue-based or expenditure-based adjustments: an empirical evidence from EU-Countries

Abstract An objective for each developed state remains the improvement of a suitable fiscal management system that could generate an increased level of resources. Further on, planning, distributing, allocating those resources to the proper beneficiaries, could generate an economic stabilization, suitable economic growth, decreased level of the net lending variable. The study consisted in an empirical research throughout it was developed the analysis of the impact of fiscal strategies and public expenses adjustments on economic growth and budgetary balance. Time series data from 1998 to 2018 were used on the empirical evidence over the European countries. The study developed an econometric model represented by an unbalanced panel data analysis having as independent variables: the variance of direct taxes, the dynamics of indirect taxes, the variance of budgetary balance, the variance of tax burden, the dynamics of change in net lending as percent of gross domestic product. The dependent variable was revealed throughout the variance of gross domestic product per capita. Over 588 time series observations and 28 cross-section data were taken into consideration in order to reveal if either revenue-adjustments or public-spending adjustments had a greater influence on the evolution of economic growth over the EU-Countries. The result of the econometric model exposed a positive correlation between total expenditure, budgetary balance and economic growth and a negative correlation between direct taxes, indirect taxes, tax burden and economic growth. Moreover, by generating dummy variables on the fixed effect model, it was revealed that large fiscal improvements had a less positive effect on the development of economic growth than fiscal adjustments based on medium-size consolidation.

Uruguay

This Article IV Consultation highlights that Uruguay has preserved macroeconomic stability in the wake of the turbulence in the region due to prudent policies and the accumulation of buffers over the years. With the worsening outlook and less friendly external environment, in the near term, policies should focus on maintaining resilience. In this context, additional efforts are needed to put debt on a firm downward trajectory and reduce inflation to within the target band. The IMF staff assesses that the external position is broadly consistent with fundamentals and desirable policy settings. The authorities and IMF staff have remained in broad agreement on the macroeconomic policy objectives, including maintaining public debt on a sustainable trajectory, keeping inflation low, and allowing exchange rate to adjust in line with fundamentals. Fiscal adjustment, however, has not proceeded as quickly as had been originally expected, and inflation has proven difficult to contain within the authorities’ target range.

Republic of Croatia

This Article IV Consultation highlights that the economic expansion continues, driven primarily by private consumption and exports of goods and services. Discussions primarily focused on increasing the economy’s flexibility and resilience. Fiscal performance has been strong, however, the materialization of contingent liabilities from government guarantees is likely to reduce the overall surplus. Low public and private investment, and continued emigration appear to weigh on medium-term growth prospects. Downside risks in the near-term stem could be due to possible changes in regional or global economic and financial conditions, and the further realization of contingent liabilities. The IMF staff advocated for a moderately faster fiscal adjustment. The report recommends accelerating the pace of debt reduction that would build fiscal space and help reduce downside risks. The Central Bank may need to address potentially tighter external conditions while continuing with strong bank supervision and macroprudential policies. Additional measures to prevent excessive household borrowing could be considered if needed.

The Rise of Right-Wing Populism in Brazil

In June 2013, under the administration of President Dilma Rousseff, students took to the streets in São Paulo. Within weeks the demonstrations took on unexpected proportions, involving thousands of people of diverse origin (low-income service workers, the unemployed, young people), which often developed into violent street conflicts. Students initially demanded free public transportation, but as the demonstrations spread to other major urban centres, the protesters’ demands grew. The fact that the State of São Paulo police violently repressed one of the first demonstrations contributed to the escalation; images of the clashes were published across the world. Both government and opposition hedged their bets that the mood on the streets would eventually cool off, as it in fact did the following year. At this point, in 2014, the Federal Public Prosecutor’s Office initiated an investigation into fraudulent corruption involving Petrobras – a majority state-owned company for exploration, refining and distribution of oil and gas. The ‘LavaJato ’ (car wash) investigations exposed illegal forms of financing of a wide range of political parties (not only those that supported the PT administration). By May 2019, judicial police operations totalled 61, with more than one hundred imprisoned, including executives of state-owned companies, parliamentarians and executives of large private companies. The whole political-ideological universe was shaken. The same year witnessed an electoral campaign for the Presidency of the Republic and National Congress and a sharp slowdown in the economy, the beginning of the deepest recession of the last seventy years. The President began the campaign for reelection in a tone of polarisation that has continued until today. Rousseff was re-elected, in the second round, (with 51,64 percent of the votes). Less than 30 days after the outcome, the President announced a drastic fiscal adjustment and a second term for the neoliberal Economy Minister. With drastic fiscal adjustment, rising unemployment and inflation, government approval ratings declined rapidly. Street demonstrations returned, to protest corruption and fiscal adjustment. Demonstrations against corruption increasingly acquired a moralising tone, demonising political activity and flirting with the agenda of the military right-wing. Demonstrations of explicit nostalgia for the era of the Civil-Military Dictatorship began to appear. At this point, the Generals of the reserve began to publicly defend the rupture with the Federal Constitution in 1964 and its repetition if necessary. Legal institutions remained silent on veiled threats to the democratic constitutional order. In May 2016, following political and legal proceedings in the Federal Senate, a vote was taken to remove Rousseff from office. Vice President Michel Temer was inaugurated as President. His government implemented a conservative economic and political agenda; fiscal adjustment was more drastic; more tax concessions were for businesses; labour inspection services virtually paralyzed; and the state oil company’s monopoly was broken. In August 2016, the National Congress approves the Rousseff’s definitive impeachment and the axis of governability changed with the formation of a centre-right parliamentary majority, which then began to promote conservative liberal political and economic reforms. From 2013 to 2016 unemployment rose from 6.4 to 12.6 percent. Major state-owned enterprises such as public banks and oil exploration were privatised. In 2017, despite the efforts of business leaders and key media organisations the Temer government could not dissociate itself from the ethical crisis that had plagued Brazil’s institutions. Temer experienced a drastic fall in popularity. Brazil’s trade union context Since 1934, the State has provided an institutional framework for solving individual and collective conflicts, which became the Labour Court in 1943. Funding collected by the federal agency – until the recent Labour Reform – was a day of salary per year for each worker; unions also made compulsory contributions until a few years after the promulgation of the new federal Constitution (1988). Armed with public funding, providers of various legal assistance services bureaucratised themselves from the outset, in addition to providing a wide legal support service for workers, promoting a judicialisation of individual conflicts unprecedented in other union models. This scenario has been changing slowly since the adoption of the new constitutional text and the emergence of militant trade unionism and, originally, an opponent of the trade union structure, the Central Única dos...

A fiskális kiigazítás sikerességének megítélése – politikai gazdaságtani megközelítés

Over the past few years, the world economy was characterised by a period of liquidity, which allowed the financing of public debt under more favourable conditions. Nevertheless, the level of actual debt remains to be reduced in order not to limit the fiscal scope. However, fiscal adjustment may have significant macroeconomic, social and political economic costs. The study explores the success of fiscal consolidation in a political economy context, revealing its most important relationships. The success criterion(s) chosen for the analyses can considerably influence the judgment of success and may also induce the postponement/launch of a future consolidation. In the second half of the study, the success of the adjustment is briefl y examined through the European Union case study.

Fiscal sustainability under the conditions of emerging longevity economy

The article investigates the influence of the growing public expenditures on health caused by the demographic aging of the population, on the stability of public finances in the context of the establishment of the "longevity economy". The author conducts a scenario based assessment of the sustainability of public finances in Ukraine in the medium and long term, based on the calculation of the fiscal gap indicator. In particular, investigated the "stress effect" of the changes in the indicators of macroeconomic development and the fiscal position on the sustainability of public finances under the condition of realization of the historical scenario. The author proves a significant influence of demographic aging of Ukraine's population on the sustainability of public finance. It is determined that in the long term there will be a fundamental transformation of the "spending profile" in the health care by sex-age groups, which, for example, is due to a shift in consumption of these expenditures by the population of older age groups and their increased share. The author substantiates the necessity to expand the fiscal space for fulfilling the normative requirements of the Ukrainian legislation on health financing based on the calculation of the necessary structural primary balance to overcome the fiscal gap, which is proposed to be used as one of the benchmarks for the implementation of fiscal policy in order to attain medium and long-term sustainability of public finances for a given period of .fiscal adjustment. It is proposed: to monitor and control the pace and the growth factors of health care expenditures in the medium and long-term; to develop indicators for assessing the fiscal space for healthcare with due regard to potential change in the demographic structure of the population; to assess the transformation of the fiscal space to finance the health care in the context of the establishment of the longevity economy while respecting the sustainability of the system of public finances.

Makroekonomske politike evrozone

In the modern history of market economy countries, one of the important sources of excessive monetary expansion (with inflationary effects) has been the need for states to finance their spending by borrowing money. High fiscal burdens lead to recession and strong inflationary pressures. Then there is a recession and hidden high inflation. The soft budget constraint policy is pro-inflationary and pro-cyclical. Fiscal policy with such a budget seems autonomously recessive. Fiscal adjustment is a basic prerequisite for stabilization and structural adjustment.

Local Fiscal Adjustments from Depopulation: Evidence from the Post-Cold War Defense Contraction

In this paper, we exploit a quasi-exogenous change that reduced the number of U.S. military personnel by 40% between 1988 and 2000 to estimate the long-term causal effect of population losses on local government revenue, expenditure, and debt. Aggregating across all governmental units within commuting zones, revenues and expenditures each fall by roughly $4,000 per person with personnel losses. Local governments also noticeably shifted the composition of spending by making disproportionately large cuts in capital spending, including in K-12 education, to limit reductions in current operating budgets. These shifts may hinder a region's relative competitiveness in the long-term.

Some Policy Lessons from Country Applications of the Dig and DIGNAR Models

Over the past seven years, the DIG and DIGNAR models have complemented the IMF and World Bank debt sustainability framework (DSF) analysis, over 65 country applications. They have provided useful insights in the context of program and surveillance work, based on qualitative and quantitative analysis of the macroeconomic effects of public investment scaling-ups. This paper takes stock of the model applications and extensions, and extract five common policy lessons from the universe of country cases. First, improving public investment efficiency and/or raising the rate of return of public projects raises growth and lowers the risks associated with debt sustainability. Second, prudent and gradual investment scaling-ups are preferable to aggressive front-loaded ones, in terms of private sector crowding-out effects, absorptive capacity constraints, and debt sustainability risks. Third, domestic revenue mobilization helps create fiscal space for investment scaling-ups, by effectively containing public debt surges and their later-on repayments. Fourth, aid smoothens fiscal adjustments associated with public investment increases and may lower the risks of unsustainable debt. Fifth, external savings mitigate Dutch disease macroeconomic effects and serve as fiscal buffers. The paper also discusses how these models were used to estimate the quantitative macro economic effects associated with these lessons.

How Do Fiscal Adjustments Work? An Empirical Investigation

How Do Fiscal Adjustments Work? An Empirical Investigation

Jordan: The Elements of a Growth Strategy

In the decade 1999-2009, Jordan experienced an impressive growth acceleration, tripling its exports and increasing income per capita by 38%. Since then, a number of external shocks that include the Global Financial Crisis (2008-2009), the Arab Spring (2011), the Syrian Civil War (2011), and the emergence of the Islamic State (2014) have affected Jordan in significant ways and thrown its economy out of balance. Jordan’s debt-to-GDP ratio has ballooned from 55% (2009) to 94% (2018). The economy has continued to grow amidst massive fiscal adjustment and balance of payments constraints, but the large increase in population – by 50% between 2008 and 2017 – driven by massive waves of refugees has resulted in a 12% cumulative loss in income per capita (2010-2017). Moving forward, debt sustainability will require not only continued fiscal consolidation but also faster growth and international support to keep interest payments on the debt contained. We have developed an innovative framework to align Jordan’s growth strategy with its changing factor endowments. The framework incorporates service industries into an Economic Complexity analysis, utilizing the Dun and Bradstreet database, together with an evaluation of the evolution of Jordan’s comparative advantages over time. Combining several tools to identify critical constraints faced by sectors with the greatest potential, we have produced a roadmap with key elements of a strategy for Jordan to return to faster, more sustainable and more inclusive growth that is consistent with its emerging comparative advantages.

Some Policy Lessons from Country Applications of the DIG and DIGNAR Models

Over the past seven years, the DIG and DIGNAR models have complemented the IMF and World Bank debt sustainability framework (DSF) analysis, over 65 country applications. They have provided useful insights in the context of program and surveillance work, based on qualitative and quantitative analysis of the macroeconomic effects of public investment scaling-ups. This paper takes stock of the model applications and extensions, and extract five common policy lessons from the universe of country cases. First, improving public investment efficiency and/or raising the rate of return of public projects raises growth and lowers the risks associated with debt sustainability. Second, prudent and gradual investment scaling-ups are preferable to aggressive front-loaded ones, in terms of private sector crowding-out effects, absorptive capacity constraints, and debt sustainability risks. Third, domestic revenue mobilization helps create fiscal space for investment scaling-ups, by effectively containing public debt surges and their later-on repayments. Fourth, aid smoothens fiscal adjustments associated with public investment increases and may lower the risks of unsustainable debt. Fifth, external savings mitigate Dutch disease macroeconomic effects and serve as fiscal buffers. The paper also discusses how these models were used to estimate the quantitative macro economic effects associated with these lessons.

What Explains Current Account Surplus in Korea?

Since the currency crisis in 1998, Korea has experienced continuous current account surpluses. Recently, the current account surplus increased more rapidly—amounting to 7.7 percent of GDP in 2015. ...

Saving, fertility and public policy in an overlapping generations small open economy

Motivated by the recent increase of public debt experienced by many developed countries, we develop an OLG model to provide the fiscal policies needed for any public debt level to be sustainable in steady state and the consequences that such policies produce on saving and fertility in a small open economy. Our main finding is that a reduction of public debt (an event currently publicly debated) needs tax adjustments that eventually will be detrimental for both fertility and saving under a low-interest-rate regime (possibly similar to the current world regime), with opposite transitional effects on fertility and saving. On the contrary, the needed fiscal adjustments will eventually increase saving and fertility under a high-interest-rate regime, with opposite transitional effects on fertility and saving. Besides providing clear-cut policy implications, our analysis offers possible testable implications concerning the pattern of fertility, taxes and public debt observed in many developed economies.

“QUEM NOS SALVARÁ DA MÍDIA?”: A REPRESENTAÇÃO DA PRIMAVERA SECUNDARISTA EM ARTIGO DA REVISTA ÉPOCA

Este artigo tem como objeto a representação construída pelo discurso da mídia sobre o movimento que ficou conhecido como Primavera Secundarista ocorrido no Brasil em 2016. Sendo um movimento de resistência dos estudantes de Ensino Médio contra as propostas de reforma e ajustes fiscais do governo brasileiro no âmbito da educação, a Primavera Secundarista envolveu jovens de várias partes do Brasil que ocuparam mais de 1000 escolas em todo o território nacional. Nosso objetivo, com este estudo, é analisar e compreender as estratégias usadas pela mídia para representar esse movimento. Utilizamos como corpus para a análise um artigo de opinião publicado na página on line da revista Época, assinado pelo colunista Fernando Schüler intitulado “E quem nos salvará de Ana Júlia?”. À luz do construto teórico-metodológico da Análise de Discurso Crítica (ADC), embasamo-nos, principalmente, nos escritos de Fairclough (2004) e Ramalho e Resende (2011), desenvolvendo assim, um estudo de caráter qualitativo, com foco no significado representacional. Compreendendo a linguagem como o lugar privilegiado de lutas e tensões sociais, discutimos as estratégias linguísticas e ideológicas utilizadas na produção do artigo e percebemos como resultado a construção, por parte da mídia, de uma imagem desqualificada do movimento Primavera Secundarista.

Crisis and austerity: the recent trajectory of capitalist development in Brazil

ABSTRACTIn the methodological framework of comparative capitalism (CC) of this special edition, the article analyzes theoretically and empirically, in the scope of economic globalisation, the recent trajectory of Brazilian capitalist development. The objective is to emphasise the crisis of the variety of coordinated and state-regulated capitalism (2003–2016) and its subsequent metamorphosis into a variety of ultraliberal and undemocratic capitalism (2016 in progress), which has been dissolving the social protection and public policy network. The central issue that this article proposes to answer is how this transition was carried out, in view of the government's successful response to the systemic financial crisis of exogenous origin that emerged in 2008, and the political inability to face the endogenous crisis that erupted in 2014. The meaning of this last liberal/radical modality of capitalism is the fact that it conducted by the Michel Temer's government, which came to power by means of a parliamentary coup disguised by democratic legality, and which was welcomed by the Judiciary, the Congress, the press and the wealthy classes. The conservative coalition of parliamentary government deepened the fiscal adjustment initiated by Dilma Rousseff at the 2015 threshold, deteriorated the living conditions of the poor and accentuated the scope of financial capitalism despite the pressures of a mass based democracy.

Lessons from the Greek tragedy

The Greek financial crisis that erupted in 2010 was possibly cured after 8 years in 2018. It has been extraordinary in its social cost and its cost to European taxpayers. The causes of this failure are multiple. The main burden lies with consecutive Greek governments that did not carry out the necessary fiscal adjustment and reforms. In their lack of urgency they were strongly supported by American economists, especially Paul Krugman, who opposed austerity and instead called for fiscal stimulus, ignoring the need for financial stability. Much of this discussion was devoted to the benefits or harm of the Eurozone, which eventually hardly mattered. The crisis resolution was complicated by the European Union wanting to play a big role but not knowing how and weakening the traditional role of the International Monetary Fund. The key lessons are back to basics: A government needs to act hard and fast to resolve a severe financial crisis. The IMF is the best leader for financial stabilization. Early and fast fiscal adjustment brings about early financial stabilization, more structural reforms and early and higher growth.

Austerity and gender inequalities in Europe in times of crisis

The post-2008 recession and the countercyclical responses by European governments that followed triggered an extensive wave of fiscal adjustments. Although underpinned by widespread consensus, the implementation of such measures has also been severely criticised. While their effect on output and employment has been extensively investigated, their impact on wage inequality has received less attention. In this paper, we focus on the consequences of fiscal consolidation measures for gender inequality. After describing the literature-based conceptual framework of our analysis, we provide empirical evidence of the effect of fiscal consolidation on: (i) the adjusted gender wage gap, and (ii) the patterns of gender horizontal segregation. The analysis covers EU-28 countries in the years 2010–13. Results show that austerity measures (both tax-based and expenditure-based) impacted significantly on various aspects of gender wage inequality, putting at risk the relatively little progress achieved in Europe so far.