Fiscal Adjustment Research Articles

Assessment of the Effectiveness of Adjustment Programs at the Core of the Greek Economy

Despite the seven-year implementation of three adjustment programs to address the sovereign debt crisis, the Greek economy is still in a prolonged recession and faces problems of competitiveness, political stability and social cohesion. At the same time, the fiscal adjustment policy did not solve the original problem of public debt. On the contrary, as recent evidence shows, the country’s ability to service its debt has deteriorated. The causes of the crisis and the failure of the selected economic stabilization policies are a multidimensional and interrelated complex. The Greek economy has supported its growth in recent decades mainly in domestic consumption, with little presence in areas with high added value and extrovert features, focusing mainly on traditional business sectors with limited innovation characteristics. Ιn this study we will try on reasonable arguments but also with a series of statistical data and indicators from sources such as the Organization for Economic Cooperation and Development (OECD), the World Bank, the World Economic Forum (WEF) and the Greek authorities to analyze the course of the Greek economy, evaluate the results of the selected policies and to formulate appropriate policy proposals.

How Public Investment Could Help Strengthen Iran's Growth Potential: Issues and Options

Public investment is key to growth in developing oil-exporting countries and oil revenue is an important source of finance for public investment. Assessing the growth impact of public investment in Iran under various investment scaling-up (gradual, aggressive, and conservative) and oil price (baseline and adverse) scenarios, this paper shows that because of absorptive capacity constraint and investment inefficiency the growth outcome of an aggressive investment scaling-up is not significantly different from a conservative or a gradual scenario while its costs, in terms of fiscal adjustment, are significantly higher, especially during low oil price periods. An improvement in investment efficiency has a significant positive impact on growth outcome and leads to higher private consumption and investment. Using an oil fund, on the other hand, can help contain the size of fiscal adjustments, although it would result in a larger appreciation of real exchange rate and deterioration in the current account balance.

Austerity as Violence: Measuring the Effects of Economic Austerity on Pro-Sociality

How does economic hardship affect social preferences? Do people feel more solidarity with one another, as often happens after natural disasters? Or does it reduce pro-sociality by making social divisions more salient? We address these questions by analysing the social effects of economic austerity in Greece, where the population experienced several phases of fiscal adjustment during a period of near-constant economic decline between 2010 and 2015. We focus on the effects of joblessness, the most severe outcome of the economic downturn, and find a strong relationship between job loss and a decreased sense of solidarity.

Assessing Austerity: Monitoring the Human Rights Impacts of Fiscal Consolidation

In the decade since the 2008 global economic crisis, fiscal austerity has become the new normal. In the name of fiscal discipline, governments in more than two-thirds of countries throughout the world have enacted drastic austerity measures like severe public expenditure cuts, regressive tax changes, and labor market and pension reforms, effectively disinvesting in human rights. Draconian fiscal adjustments have undermined human rights of all types — from the rights to education, food, health and housing to the rights to decent work, fair wages and social security; and from freedom of expression to the rights to life and personal security. In the process, these unnecessary and unjustified policies have also aggravated disparities such as those of income, gender, race, age, disability and migration status. This paper argues that another lost decade for human rights is impermissible. Drawing on lessons learned from monitoring austerity over the past ten years, this paper outlines practical guidance for policymakers, oversight bodies, civil society actors and others seeking to assess and address the foreseeable human rights consequences of austerity. It offers an adaptable methodological framework to inform the content and process of conducting effective Human Rights Impact Assessments (HRIAs) of fiscal consolidation measures. Further, the briefing demonstrates why a human rights assessment of austerity is at once necessary, feasible and ultimately quite valuable in advancing a suite of alternative policies that would prevent harmful forms of fiscal consolidation in the future.

Total Factor Productivity (TFP) and Fiscal Consolidation: How Harmful is Austerity?

Departing from the expansionary austerity literature, this study assesses empirically whether fiscal consolidation propagates changes in the supply side of the economy that can potentially influence total factor productivity. Using a panel dataset of 26 OECD countries over the period 1980-2016 and employing panel vector autoregressive and error correction model specifications, we present evidence of both short-run and long-run negative effects of fiscal consolidation on TFP. The short-run impact is disproportionately more damaging for the TFP of low debt countries, while, contrary to the expansionary austerity thesis, our empirical results would advise against spending-driven fiscal consolidation, since such consolidation undermines capacity due to the importance of government spending in shaping productive capital. Our results have serious policy implications for the implementation and design of fiscal adjustment programmes.

How Public Investment Could Help Strengthen Iran's Growth Potential: Issues and Options

Public investment is key to growth in developing oil-exporting countries and oil revenue is an important source of finance for public investment. Assessing the growth impact of public investment in Iran under various investment scaling-up (gradual, aggressive, and conservative) and oil price (baseline and adverse) scenarios, this paper shows that because of absorptive capacity constraint and investment inefficiency the growth outcome of an aggressive investment scaling-up is not significantly different from a conservative or a gradual scenario while its costs, in terms of fiscal adjustment, are significantly higher, especially during low oil price periods. An improvement in investment efficiency has a significant positive impact on growth outcome and leads to higher private consumption and investment. Using an oil fund, on the other hand, can help contain the size of fiscal adjustments, although it would result in a larger appreciation of real exchange rate and deterioration in the current account balance.

Designing a fiscal union for the euro area

Motivation: Fiscal integration constitutes an important adjustment mechanism to cope with asymmetric shocks within a monetary union which does not fulfil many criteria of an optimal currency area. As is currently the case in the euro area, national governments implement discretionary fiscal policy to try to cope with the adverse economic shocks themselves and to try to stabilise income which leads to high budget deficits and public indebtedness in many euro area countries. While conducting fiscal policy at supranational level and fiscal transfers within EMU would allow for sufficient cross-country risk sharing and contribute to macroeconomic stability of the whole euro area. Aim: The aim of the paper is to give economic rationale and explain the significance of fiscal union for the effective functioning of a common currency area, and especially its macroeconomic stability as well as to present various forms of fiscal integration and to assess the possibility of their introduction within the euro area taking into account the current degree of economic integration, principles of conducting macroeconomic policy and its outcomes, the actual situation in the field of public finances and political circumstances in EMU and its member countries. Results: The greatest potential for macroeconomic stability — both in terms of asymmetric shocks, as well as these affecting the entire euro area — ensures the establishment of a large federal Eurozone budget. However, in a situation of a lack of political will to move forward into a political union, the approach to ensure fiscal stabilisation should include: creating even a small euro area-wide budget and the common Ministry of Finance, introducing a European unemployment (re-)insurance scheme with further harmonization of labour markets, equipping the banking union with a fiscal backstop as well as making national fiscal policies more stabilising and avoiding to impose self-defeating fiscal adjustments on crisis countries.

Gulf Cooperation Council

growth in expenditure, GCC governments have started to implement significant fiscal consolidation measures, but more needs to be done. Rapid population growth and booming oil revenues led to large increases in government spending in the GCC in the decade to 2014, which now stands high by international standards. This expenditure is dominated by compensation of employees and other current spending which are large in percent of GDP compared to Emerging Market (EM) countries and other oil exporters. This keeps overall spending above levels consistent with long-term fiscal sustainability and intergenerational equity. The international experience with large fiscal adjustments provides some key lessons for GCC countries. This experience suggests that growth outcomes improve when fiscal adjustments are sustained as part of credible multi-year fiscal plans, rely on expenditure more than revenue adjustment, and lead to improvements in expenditure composition (away from current outlays to more productive spending) and the structure of revenue (away from direct to indirect taxation). Successful fiscal adjustments also tend to be part of wider structural reforms that support growth.

Gulf Cooperation Council

Global economic activity is gaining momentum. Global growth is forecast at 3.6 percent this year, and 3.7 percent in 2018, compared to 3.2 percent in 2016. Risks around this forecast are broadly balanced in the near term, but are skewed to the downside over the medium term. The more positive global growth environment should support somewhat stronger oil demand. With inflation in advanced countries remaining subdued, monetary policy is expected to remain accommodative. GCC countries are continuing to adjust to lower oil prices. Substantial fiscal consolidation has taken place in most countries, mainly focused on expenditure reduction. This is necessary, but it has weakened non-oil growth. With the pace of fiscal consolidation set to slow, non-oil growth is expected to increase to 2.6 percent this year, from 1.8 percent last year. However, because of lower oil output, overall real GDP growth is projected to slow to 0.5 percent in 2017 from 2.2 percent in 2016. Growth prospects in the medium-term remain subdued amid relatively low oil prices and geopolitical risks. Policymakers have made a strong start in adjusting fiscal policy. While the needed pace of fiscal adjustment varies across countries depending on the fiscal space available, in general countries should continue to focus on recurrent expenditure rationalization, further energy price reforms, increased non-oil revenues, and improved efficiency of capital spending. Fiscal consolidation should be accompanied by a further improvement in fiscal frameworks and institutions. The direction of fiscal policy in the GCC is broadly consistent with these recommendations. Policies should continue to be geared toward managing evolving liquidity situations in the banking system and supporting the private sector’s access to funding. While countries have made progress in enhancing their financial policy frameworks, strengthening liquidity forecasting and developing liquidity management instruments will help banks adjust to a tighter liquidity environment. Banks generally remain profitable, well capitalized, and liquid, but with growth expected to remain relatively weak, the monitoring of financial sector vulnerabilities should continue to be enhanced. Diversification and private sector development will be needed to offset lower government spending and ensure stronger, sustainable, and inclusive growth. This will require stepped-up reforms to improve the business climate and reduce the role of the public sector in the economy through privatization and PPPs. Reforms are needed to increase the incentives for nationals to work in the private sector and for private sector firms to hire them. Increasing female participation in the labor market and employment would benefit productivity and growth across the region. Where fiscal space is available, fiscal policy can be used to support the structural reforms needed to boost private sector growth and employment.

O desmonte do financiamento da seguridade social em contexto de ajuste fiscal

Resumo: O Orçamento da Seguridade Social (OSS) é a peça-chave para a compreensão do ajuste fiscal em curso no Brasil. Este artigo analisa o desmonte do financiamento da seguridade social, a partir dos instrumentos de política fiscal como a Desvinculação de Recursos da União e as renúncias tributárias. A apropriação das contribuições sociais do OSS tem sido determinante para a política de pagamento dos juros da dívida. Ao mesmo tempo em que o OSS está inflado por despesas que são do orçamento fiscal.

Financial Market Development and Government Debt Risk in China: Discussion on the Linkage of Fiscal Policy

On the basis of sorting out the influence of financial market development on government debt risk in China, this paper explores the specific function mechanism of these two based on the framework of the integration of the economy, public finance and finance, and analyzes the linkage between this mechanism and the adjustment to fiscal policy through sensitivity analysis and fiscal response function. It comes to the results that at present financial market development affects the sustainability of government debt risk mainly through funding capability, and both long-term equilibrium and short-term dynamic adjustment show the active effects of improving government financing environment and are not vulnerable to fiscal policy shocks, alleviating long-term equilibrium volatility of government debt risk resulting from changes in economic climate and realizing active prevention against cyclical risk volatility. Meanwhile, combining with the reality of tentative appearance of financial fatigue in China, financial market development is beneficial to the realization of sound cycle of fiscal adjustment, the expansion of policy maneuver space and the alleviation of potential risk volatility. In addition, after big crises in the history, different fiscal prevention measures result in significant differences in short-term volatility of government debt risks.

The electoral advantage of the left in times of fiscal adjustment

Despite widely held views on fiscal adjustment as a political minefield for government parties, the empirical literature on the issue has been surprisingly inconclusive. A crucial variable that has been often overlooked in the debate is partisan politics. Building on the micro-logic of Albert Hirschman’s ‘exit, voice, and loyalty’ framework, this article offers a novel theoretical perspective on the conditioning impact of partisan government in the electoral arena. Due to their more limited exit options at their disposal, left-wing voters are less likely to inflict electoral punishment on their parties, offering the latter an electoral advantage over their right-wing rivals. Relying on the largest cross-national data set to date on the evolution of close to 100 parties’ popularity ratings in 21 democracies, time-series–cross-section results confirm this electoral advantage. Somewhat paradoxically, while center-right government parties systematically lose popularity in years of fiscal adjustment, no such regularity is found for left-leaning incumbents.

Local Government and Citizen in the Period of Crisis in Greece

Greece has been under fiscal surveillance since 2010, due to the economic recession and the fiscal adjustment program agreed between Greece, the European Commission, the European Central Bank and the International Monetary Fund. The economic recession and the measures taken as a result of this adjustment had a serious impact on Greek society, a large part of which is at risk of poverty or below the poverty line. Local government has suffered the consequences of the economic crisis, yet it has taken initiatives to coordinate actions of volunteer groups, that were activated during this period, to address social problems.

Adjustments in municipal fiscal crises. Are they different according to the gender of the mayor?

ABSTRACTThe literature on gender has attempted to explain the differences between the public outcome depending on whether the ruler is male or female, on the basis that men and women have different preferences. This scientific research has not yet examined issues related to fiscal crises, and our research aims to fill this gap. In a context of generalised economic crisis, our research examines if the gender of the mayor affected the fiscal adjustment policies carried out by municipalities with fiscal deficits in the Spanish region of Galicia. Our paper suggests that although gender of the mayor does not seem to have affected the level of adjustment in total current expenditure, it does seem to have influenced the way in which social and non-social spending were adjusted. Our study also highlights that female mayors are associated with lower levels of tax revenues and this could slow the adjustment processes of fiscal imbalances.

Why Has Brazil Stopped Growing? Reverberation about the Brazilian Crisis

This short paper briefs about the influence of the Brazilian exports to China in the economy and also points out, according to some experts in the subject, some ways to get out of the economic recession. The data were collected from secondary sources. The results show not only a dependence on Brazilian exports to China, mainly commodities, but also a general dependence on Brazilian commodities export worldwide. The research identifies that political stability and fiscal adjustment are the first steps to start getting out of the present crisis.

ADMINISTRATIVE REFORMS AND THE EUROZONE CRISIS: A COMPARATIVE STUDY OF GREECE AND PORTUGAL

The Eurozone crisis that erupted in late 2009 had a strong impact on the countries of the EU periphery, triggering a range of fiscal and structural adjustments at all levels of government. Greece and Portugal were most affected by the crisis and embarked on fiscal consolidation programmes in exchange for the external financial assistance packages. Public administration was a key reform area where large-scale adjustments needed to be made in a relatively short period of time. This paper seeks to assess the impact of the fiscal adjustment programmes on the Greek and Portuguese public administrations. Drawing on empirical evidence from the period 2009-2016, the effect of the initiated policies is analyzed with reference to quantitative and qualitative indicators. The findings of the comparative study highlight certain similarities and differences in the way that austerity policies affected the domestic administrative systems. The paper also offers some possible explanations for the observed variations in the outcomes and the prospects of the reform programmes.

Dívida pública estadual e contradições federativas: Análises do Pará, Amazonas e Mato Grosso no período de 2000-2012

O artigo trata do padrão de endividamento e das condições de investimento dos três maiores estados da Amazônia Legal: Pará-PA, Amazonas-AM e Mato Grosso-MT, verificando-se os indicadores da Lei de Responsabilidade Fiscal (LRF), como dívida e investimentos, no período de 2000 a 2012. A indagação proposta é como os governos estaduais do PA, AM e MT se adequaram aos ajustes da LRF e das Resoluções nº 40 e 43/2001 e quais influências puderam ser observadas sobre o componente investimento do orçamento estadual na série histórica considerada (2000 a 2012). Os resultados apontam que os estados são dependentes dos recursos federais, mas de forma distinta. O Pará e o Mato Grosso foram mais afetados pelos termos de renegociação das dívidas, no entanto, o Pará apresentou maior volume de investimentos como proporção da dívida frente ao Mato Grosso e ao Amazonas, que se explica pelas diferenças das economias regionais e pela forma própria com que os estados se enquadraram no Programa de Ajuste Fiscal.

Counting the development costs of the conflict in North-Eastern Nigeria: the economic impact of the Boko Haram-led insurgency

Nigeria presents an important case for examining the interaction between economic emergence and (in)security on account of the Boko Haram-led insurgency. This paper interrogates long-standing theoretical assumptions about the economic consequences of violent conflict in such a complex space. It analyses the cost of North-East Nigeria’s conflict on development by considering its impact on the economy at the national and subnational levels. Generalised assumptions about the ways through which conflict affects development appear to hold in some regards but not in others. Evidence suggests some disruption in fiscal adjustments at the macro level, trade and investment as well as agricultural production and commerce within the North-East but less so with regard to economic growth and foreign direct investment flows at the national level. The paper finds evidence of a dichotomy in terms of the impact of the conflict on the national and subnational economy. There is a high degree of containment of the repercussions of the conflict at the subnational level. However, there remains a degree of interconnectedness across these strata that are influenced by both domestic and international political economy dynamics.

The Impact of Fiscal Consolidation on Human Development

AbstractWe find that fiscal austerity is associated with a reduction of human development standards, with the negative effect being particularly severe in the case of spending‐driven consolidation episodes. Fiscal adjustments are especially damaging for human development in developing countries (namely, African and Latin American countries). Additionally, the empirical evidence shows that (i) government stability is a crucial institutional determinant of human development, and (ii) while investment in physical capital can boost human development, government consumption and inflation are detrimental to it. Copyright © 2017 John Wiley & Sons, Ltd.

Chad

This paper discusses Chad’s Request for a Three-Year Arrangement under the Extended Credit Facility (ECF) and Cancellation of the Current Arrangement. The main elements of the program are the reestablishment of debt sustainability through external debt restructuring, achieving gradual fiscal adjustment by maintaining a tight spending envelope, better mobilizing non-oil revenue, and creating space for domestic arrears clearance. The aim is to stabilize the fiscal position and help achieve a durable economic recovery while supporting regional stabilization efforts. Strengthening public financial management and diversifying the economy are expected to support the efforts to strengthen the fiscal position and boost the non-oil sector. The IMF staff supports the authorities’ request for a new ECF arrangement.