Fiscal Adjustment Research Articles

Fiscal Stimuli and Consolidation in Emerging Market Economies

The Great Recession has imposed vital limitations on the policy maker’s ability to react to further economic challenges. In this article, the authors set a purpose to assess the expediency and the size of fiscal consolidation or expansionary measures for countries with emerging markets depending on economic dynamics. The data on the episodes of large changes in fiscal policy, representing both fiscal stimuli and consolidation in Ukraine and in the EU countries with emerging market economies from 2001 to 2017, were evaluated. The authors examined the main reasons of fiscal policy’s volatility and its impact on economic growth. The countries with low and medium level of institutional framework for fiscal policy formulation could face permanent deficit and public debt problem. Episodes of expansionary fiscal adjustments based on government revenues cuts and spending increases were more effective compared with those that were entirely based on spending increases. Empirical investigation showed that successful fiscal consolidation measures obligatory included the government primary spending reduction. In those cases, the budget deficit-to-GDP and public debt-to-GDP ratios were declined. Medium-term priorities to develop the methodical bases of fiscal policy design were justified.

Fiscal stimuli and consolidation in emerging market economies

The Great Recession has imposed vital limitations on the policy maker’s ability to react to further economic challenges. In this article, the authors set a purpose to assess the expediency and the size of fiscal consolidation or expansionary measures for countries with emerging markets depending on economic dynamics. The data on the episodes of large changes in fiscal policy, representing both fiscal stimuli and consolidation in Ukraine and in the EU countries with emerging market economies from 2001 to 2017, were evaluated. The authors examined the main reasons of fiscal policy’s volatility and its impact on economic growth. The countries with low and medium level of institutional framework for fiscal policy formulation could face permanent deficit and public debt problem. Episodes of expansionary fiscal adjustments based on government revenues cuts and spending increases were more effective compared with those that were entirely based on spending increases. Empirical investigation showed that successful fiscal consolidation measures obligatory included the government primary spending reduction. In those cases, the budget deficit-to-GDP and public debt-to-GDP ratios were declined. Medium-term priorities to develop the methodical bases of fiscal policy design were justified.

The long-run relationship between public consumption and output in developing countries: Evidence from panel data

This paper uses heterogeneous panel cointegration techniques to examine the long-run effect of public consumption on output for 33 low- and lower-middle-income developing countries from 1972 to 2014. We include total investment in the cointegration relation and explicitly deal with cross-sectional dependence in the data that arises due to unobserved common factors. We find that on average, government consumption has a negative impact on output in the long-run — a result driven by non-sub-Saharan African countries in our sample. In contrast, investment has a consistent positive effect on output. The results suggest that fiscal adjustments that cut government consumption while maintaining investment spending will have a potential expansionary effect on long-run output.

Severity and Persistence of Fiscal Deficits in Spanish Municipalities: Across-the-board or Targeted Adjustments?

This research analyzed the fiscal adjustment processes of an important segment of Spanish municipalities (Galicia), and verified procyclical fiscal policy adjustments. The severity of municipal fiscal deficits and their persistence led to a strategy of targeted cuts. Contradicting the literature, expenses in providing core services were most affected. These cuts were partially offset by increased resources from other public administrations. We have not been able to verify significant adjustments in administrative expenses, which could be explained by the hypothesis of the budgetary maximization of the bureaucrats.

On the Choice of Fiscal Adjustment to Financial Crises: Expansionary vs. Contractionary Policies

[full article and abstract in English]
 An everlasting debate over the economic policies to be implemented in the face of economic recessions tends to intensify every time such a crisis strikes. Two notably opposite schools have emerged: one that represent those who advocate for quantitative easing and increased government spending, and another that calls for austerity measures and disciplined public finance. The available empirical evidence cannot supply a definite solution to the spending vs. austerity debate if just one answer is to be provided, as there are numerous historical experiences when either strategy had worked or failed. The aim of this paper is to examine and assess the arguments of both schools of economic policies, to highlight the essential drawbacks and limitations of both and to identify the specific conditions under which each of the policy type can bring the desired impact. It is argued that both of the policy approaches rely on particular implicit assumptions and, if implemented recklessly, are liable to fail or create negative side-effects. A discussion of the relative merits and shortcomings of both types of recipes for curing economic recessions is illustrated by the references to the empirical historical cases. The main conclusion that stems out of the analysis is that a somewhat “medical approach” should be followed while attempting “to cure” ailing economies: regardless that the symptoms of a slump might be quite similar, one should start with an attempt to diagnose the underlying causes of the economic malady at hand, followed by the assessment of a “patient’s” health status, and only then proceed to the selection of an appropriate “cure” and treatment procedure.

Implications and challenges for social work education in Greece in the time of austerity

ABSTRACTFollowing a discussion of the implications of one of the largest fiscal adjustments in modern times the paper identifies current challenges to social work practice and social work education in Greece and discusses the future of social work with radicalism as one of the central themes emerging during the crisis. It is argued that while at the moment radical social work has barely found any support from Greek social work practitioners, the implications of the socioeconomic crisis have given a significant boost to radical and critical social work on the educational front. It is further argued that in order to enhance these developments future efforts should concentrate on providing an effective guide for everyday practices that acknowledge the particularities of the specific context and will also include humane and holistic value-based approaches as well as the promotion of emancipatory values such as authenticity. In a progressively depoliticized public sphere that fosters the spread of individualism the above elements might be a critical step toward a more politically engaged social work education.

Stabilization Policy, Infrastructure Investment, and Welfare in a Small Open Economy

This paper studies a joint monetary and fiscal policy response to an increase in public infrastructure investment in emerging market economies. I extend the neoclassical growth model to a two-sector open economy setting, and introduce heterogeneous agents to examine the distributional effects of public investment on welfare. My results show that the effects of public infrastructure investment hinge crucially on how the increases in government spending are ultimately financed. Monetary policy without fiscal adjustment for financing infrastructure expansion is inflationary, and has sizable crowding-out effects on private consumption and investment over shorter horizons. Fiscal stabilization policy is critical for the sustainability of rising government spending and price stability. With the joint effort of monetary and fiscal policy, infrastructure investment brings in significant welfare gains to the economy. Public investment has major distributional effects across agents, and the choice of fiscal instruments matters both quantitatively and qualitatively. Saving households accrue the highest welfare gains as a result of new bond issuance, while hand-to-mouth consumers are better off when non-distorting taxes are adjusted.

Fiscal Adjustment Programs versus Socially Sustainable Competitiveness in EU Countries

After implementing harsh austerity measures during 2008–2011, in the period 2012–2014 the fiscal adjustment programs also involved social equity measures, the quantitative fiscal consolidation being changed into a qualitative one—a reduction of the structural budget deficit accompanied by an improvement of social sustainability indicators. The 2015–2017 period shows mixed evolutions in terms of social progress brought by the recovery of the economic potential lost during the crisis. This research analyzes the sustainability of economic competitiveness dynamics from a social viewpoint during 2012–2014. In this paper, we analyze the way in which the economic and social components of fiscal adjustment programs are dynamically balanced in 24 EU member states. We identify four clusters of countries depending on the relationship between fiscal consolidation/fiscal stimulation and the social dynamics of the sustainability adjusted global competitiveness index. We found that under the pressure of “fiscal adjustment fatigue” caused by tough austerity programs in the period 2008–2011, most of the European countries completed the fiscal adjustment packages with measures to improve the social situation between 2012 and 2017. The fiscal consolidation programs have become more balanced from the perspective of the combination of budgetary austerity—social equity measures. Furthermore, we analyze how some countries on the EU periphery (Central and Eastern Europe, Baltic countries and Portugal, Ireland and Greece, countries that have joined the EU with a lower level of development) are experiencing or not an improvement in the social sustainability generated by the measures aimed at stimulating the economic growth implemented during 2012–2017. To conclude, we proposed a few pillars that could be integrated if an “ideal adjustment program” is to be achieved.

A Reforma do Estado e a política de descentralização da educação no contexto na década de 1990

O presente artigo visa problematizar a poltica de descentralizao da educao no contexto da Reforma do Estado, empreendida na dcada de 1990, tendo como expresso o Programa Dinheiro Direto na Escola. Como metodologia de pesquisa, adotamos uma abordagem qualitativa e bibliogrfica acerca do objeto analisado a partir de tericos como Rosanvallon (1997), Nogueira (1998), Casassus (1995), Melo (1997), Andrade (1998), Arretche (1997), dentre outros. Considerando a relevncia e atualidade da temtica, ressaltamos a importncia da problematizao das questes abordadas e da necessidade do amplo debate acerca das repercusses do ajuste fiscal e todas as estratgias delineadas no projeto da Reforma do Estado, uma vez que essas questes conseguem clarificar o contexto atual da poltica e do Estado brasileiro.

Impact of FDI in the Fiscal Adjustment Process

Economic history, particularly the history of the Eurozone, is full of cases of countries experiencing severe economic crises. These crises may have different causes and effects and may be transmitted differently among the affected countries. However, the type of crisis that has the most widely spread political, economic, and social impact is the recession crisis. As a rule of thumb, a recession crisis is the result of a separate crisis, such as a country’s debt crisis (e.g. Greece, Portugal and Spain), a financial and banking crisis, or a crisis due to various bubbles (e.g. the real estate crisis in the United States). The main purpose of this paper is to study the course of a series of countries, which were or currently are in a crisis and a supervised adjustment program, in terms of managing the exit from the crisis, the implementation of macroeconomic and reform policies, the policy applied for attracting foreign direct investments, and the impact of such policy on the countries that were affected by the crisis.

A Framework to Assess Fiscal Vulnerability: Empirical Evidence for European Union Countries

Following the financial crisis of 2007 and the sovereign debt crisis in 2010 that affected the soundness and reduced the strength of public finance in European countries, there has been a growing interest in developing methodologies to the help assess and signal the vulnerability of fiscal policy. Therefore, the aim of this study is to develop a new framework (V-L-D) to assess fiscal vulnerability. V-L-D represents a new methodology on the measurement of fiscal vulnerability that relies on the assumption that vulnerability can occur even during calm times. In comparison with previous methodologies that studied fiscal vulnerability around crisis and fiscal distress times, our framework investigates fiscal vulnerability near fiscal adjustments episodes. Our methodology relies on two distinct indicators: one showing the vulnerabilities indicated by the level of the cyclically adjusted budget balance and distance-to-stability, and one showing the vulnerabilities pointed out through the changes of the cyclically adjusted budget balance and public debt. V-L-D is able to classify fiscal vulnerability into five distinct categories having scores from 0 (no fiscal vulnerability) to 4 (extreme fiscal vulnerability). Using annual data ranging over 1990–2013 for 28 European Union countries, we evidenced 310 episodes of fiscal vulnerability, out of which 128 episodes of low vulnerability, 94 of moderate, 62 of strong, and 26 of extreme fiscal vulnerability. We also found that over 2004–2013, Greece, Portugal, Romania, United Kingdom, Ireland, Spain, and Slovenia were the most fiscally vulnerable countries in the Union. United Kingdom and Greece went through the longest episodes of fiscal vulnerability, counting 12 and 11 consecutive years, respectively. We tested our framework’s effectiveness against the Excessive Deficit Procedure. We found that the overall performance is good: V-L-D assessed moderate fiscal vulnerability during the procedure, strong fiscal vulnerability in the first year when procedure was initiated, and extreme vulnerability one year before the initiation.

Integrated simulation for national development planning

PurposeThe purpose of this papers is to highlight the applicability of integrated simulation models for national development planning to different issues and contexts. Specifically, the authors describe one such model, the Millennium Institute’s T21 model, which is used to support planning in various countries, and explore in detail the case of Swaziland to demonstrate the model’s usefulness at different levels in the planning process.Design/methodology/approachIntegrated sustainable development planning models using the system dynamics (SD) modeling method have been designed to help overcome these obstacles and support decision-makers in the assessment of alternative policies. Such models are laboratory replicas of the critical mechanisms driving development in a country while being grounded in the historical data available. They can be used to perform simulation-based policy experiments that are otherwise impossible in the real world.FindingsThe proposed approach has facilitated the reporting on the Millennium Development Goals (MDGs), as well as on the cross-sector long-term ex ante evaluation of the country’s “Economic Recovery Strategy” and a proposed “Fiscal Adjustment” policy. These assessments provided essential information for improving the quality of the decisions made. Such information cannot be obtained by the application of purely economic models or sectoral tools, that are not including the fundamental feedback structures that shape development in the long run and determine its sustainability.Research limitations/implicationsThe new generation of global long-term Sustainable Development Goals (SDGs) covers a far broader range of issues and indicators than the MDGs. The T21-Swaziland model only offers a limited subset of such issues, and future research will focus on achievements and challenges in expanding its scope to encompass the SDGs.Practical implicationsThe T21 model has become one of the fundamental planning instruments of the country, and it has been used to evaluate national planning documents and other suggested strategies with respect to whether they are sufficient for reaching the long-term goals. Such information is then used as a basis for revision of development plans and adoption or rejection of suggested policy packages.Originality/valueThe MDGs (and their expanded follow-up, the SDGs) have been important step toward better governance, as they quantify key indicators of development and thereby allow for an evaluation of the degree to which these quantified aspirations are actually achieved. In addition to such hind-sight evaluations, ex ante evaluations are equally important for improvement of the quality of the decisions made. The authors propose and test a tool to support such type of evaluation, supporting integrated planning and model-based governance.

Public capital in the 21st century: as productive as ever?

ABSTRACTThe global financial crisis and the euro area sovereign debt crisis that followed induced a rapid deterioration in the fiscal positions of countries across the globe. In the ensuing fiscal adjustment process, public investments were severely reduced in many countries. How harmful is this for growth perspectives? Our main objective is to find out whether the importance of public capital for long run output growth has changed in recent years. To this end, we expand time series on public capital stocks for 20 OECD countries and estimate country-specific recursive vector autoregressive (VAR) models. Results show that the effect of public capital shocks on economic growth has not increased in general, although results differ widely between countries. This suggests that the current level of public investments generally does not pose an immediate threat to potential output. Of course, this could change if low investment levels are sustained for a long time.

Ecuador del boom a la crisis: política fiscal para postergar el ajuste

La emisión de deuda se convirtió en una importante fuente de ingresos del Ecuador a partir de 2016. El país venía experimentado una complicada situación fiscal desde el 2013 la cual se agravó cuando el precio del petróleo se desplomó y un terremoto de 7,8 grados golpeó el litoral. En este trabajo, mediante un análisis correlacional de las variables se emiten explicaciones e hipótesis acerca de la sostenibilidad fiscal, la calidad del gasto, y algunos instrumentos de financiamiento no convencionales. Se concluye que, a pesar del uso de estos instrumentos con el fin de postergar el ajuste, la situación fiscal es ya insostenible. Palabras clave: Fiscal, sostenibilidad, blanchard, ajuste, devaluación. URL: http://revistas.uta.edu.ec/erevista/index.php/bcoyu/article/view/665

The Greek Debt Crisis: Like the Enigma of Sphinx. An Estimation of the Probability of Default

The present study deals with the Greek debt crisis and tries to shed light on its determinants, going back to its origins, while examining its negative effects following the burst of the global financial crisis that still plagues the country. This paper also examines the efforts taken to deal with it, a combination of Greek austerity measures and strong financial aid from foreign institutions. Moreover, a probability of default assessment is performed in order to emphasize the fact that, even if the macroeconomic assumptions underpinning the fiscal adjustment program prove realistic and effective, Greek sovereign debt is far from viable and the financial situation of the public sector will remain fragile, having a long and difficult road to follow. Finally, it is pointed out that long term and permanent measures have to be taken in order to address the long-standing weaknesses of the economy and get rid of the vice of default for good, as well as the establishment of a stable political and economic environment.

Public expenditure in time of crisis: are Italian policymakers choosing the right mix?

In the ‘austerity debate’ a crucial issue is the composition of fiscal adjustment. This article provides empirical evidence on the relationship between economic crisis episodes and composition of public expenditure by examining the impact of economic crises on the share of different types of public spending in total public expenditure in the Italian regions. Our results suggest that fiscal consolidation strategies have not had growth-friendly expenditure composition. The crisis aggravated budgetary trade-offs by reducing the share of discretionary spending such as public investments.

Planned fiscal adjustments: Do governments fulfil their commitments?

This article analyzes the causes and consequences of fiscal consolidation promise gaps, defined as the distance between planned fiscal adjustments and actual consolidations. Using 74 consolidation episodes derived from the narrative approach in 17 advanced economies during 1978–2015, the paper shows that promise gaps were sizeable (about 0.3% of gross domestic product per year or 1.1% of gross domestic product during an average fiscal adjustment episode). Both economic and political factors explain the gaps: for example, greater electoral proximity, stronger political cohesion and higher accountability were all associated with smaller promise gaps. Finally, governments that delivered on their fiscal consolidation plans were rewarded by financial markets and not penalized by voters.

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. In this paper, we investigate the underlying reasons for the widening of Korea's current account surpluses. We find that the upward trend in Korea's current account surpluses is largely explained by its demographical changes. Other economic variables are only helpful when explaining short run fluctuations in current account balances. Moreover, we show that Korea's current account surplus is expected to disappear by 2042 as it becomes one of the most aged economies in the world. Demographic changes are so powerful that they explain, quite successfully, the current account balance trends of other economies with highly aged populations such as Japan, Germany, Italy, Finland, and Greece. When we add the real exchange rate as an additional explanatory variable, it is statistically significant with the right sign, but the magnitude explained by it is quite limited. For example, to reduce the current account surplus by 1 percentage point, a 12 percent depreciation is needed. If Korea's current exchange rate is undervalued 4 to 12 percent less than the level consistent with fundamentals, it is impossible to reduce Korea's current account surplus to a reasonable level by adjusting the exchange rate alone. Another way to reduce current account surplus is to expand fiscal policies. We find, however, that the impact of fiscal adjustments in reducing current account surplus is even more limited. According to our estimates, reducing the current account surplus by 1 percentage point requires an increase in budget deficits (as a ratio to GDP) of 5 to 6 percentage points. If we allow endogenous movements of exchange rate and fiscal policy, the impact of exchange rate adjustment increases by 1.6 times but that of fiscal policy decreases that it is no longer statistically significant.

What's different about monetary policy transmission in remittance-dependent countries?

Despite welfare and poverty-reducing benefits for recipient households, remittance inflows have been shown to entail macroeconomic challenges; producing Dutch Disease-type effects, reducing the quality of institutions, delaying fiscal adjustment, and having an indeterminate effect on long-run growth. This paper explores an additional challenge, for monetary policy. Although remittances expand bank balance sheets, providing a stable flow of interest-insensitive funding, they tend to increase banks' holdings of liquid assets. This both reduces the need for an interbank market and severs the link between policy rate and banks’ marginal cost of funds, thus shutting down a major transmission channel. We develop a stylized model based on asymmetric information and a lack of transparent borrowers and undertake econometric analysis providing evidence that increased remittance inflows are associated with weaker transmission. As independent monetary policy becomes impaired, this result is consistent with earlier findings that recipient countries tend to favor fixed exchange rate regimes.

Fiscal Commitment and Sovereign Default Risk

This paper studies the interaction between fiscal commitment and sovereign default risk in a model with optimal taxation and government spending. A time-inconsistency problem arises in our framework as the government cannot credibly commit to its future tax policies. As a result, it chooses suboptimally low fiscal adjustments and defaults too frequently. Introducing a commitment device to future tax policies can mitigate this time-inconsistency problem and improve the government's borrowing opportunities. However, such a commitment device also entails a loss of tax contingency that might be costly. Our quantitative analysis shows that committing to an inflexible tax plan is counterproductive: the lack of contingency hurts the government's debt sustainability and reduces welfare. In contrast, committing to a flexible tax plan that is contingent on future economic conditions can improve debt sustainability by 53.3% and result in a significant welfare gain.