Fiscal Behavior Research Articles

Study on the fiscal behavior at an international level

Abstract Apparently, defining fiscal behavior is a relatively easy approach, but in essence, this concept requires the research of several elements, both economic and psychological. The taxpayer is the component of the tax system that reflects the fiscal policy and, implicitly, its changes. Thus, research in the field has shown that two types of behavior can be identified by combining several economic, psychological, religious or cultural factors: fiscal compliance or fiscal non-compliance. The research ideea may be motivated by the growing importance of tax behavior and compliance subject, especially in the current economic situation, when taxation has become a controversy at any time and in any society, regardless of the degree of democracy. Moreover, tax compliance does not refer only to the economic aspects, but also to the behavioral aspects that influence the process of raising public taxes. The econometric study analyzes the fiscal correlation between the public debt and tax variables such as tax revenues from direct and indirect taxes or social contributions, conected to the dynamics of the gross domestic product and the scale of payments balance. The study is conducted for two groups of countries: developed and emerging countries. The purpose of this research is to identify both the impact of tax revenues on direct, indirect taxes and social contributions, and that of the dynamics of gross domestic product and scale of payments balance on public debt, showing how fiscal behavior is influenced by the two groups of countries and what factors contribute to this.

Determinants of fiscal policy behavior in Nigeria

The study investigated the factors that determine fiscal behavior in Nigeria. The vulnerability of fiscal policy framework in Nigeria to different shocks and the attendant effects on the behavior of fiscal policy are parts of the reasons that prompted this research work. Annual data between 1980 and 2015 on core fiscal variables such as government revenue, government expenditure, fiscal balance, public debt, as well as other variables such as oil price, exchange rate, and inflation rate commodity price among others, are used. The Auto-Regressive Distributed Lag ARDL estimating technique is used to analyze both the long-run and short-run effects of these variables on fiscal behavior in Nigeria. Findings from the study show that fiscal policy in Nigeria is highly vulnerable to shocks from these variables mostly in the short run. Notwithstanding, variables like government revenue, government expenditure, regime of administration, oil price and commodity price volatilities all have sustained effects till the long-run periods. It was discovered that oil price movements is not the only external factor that has pronounced effects on fiscal behavior, but commodity prices volatility generally constitutes an important influential factor in determination of fiscal policy behavior in Nigeria.

Regional Competition, Labor Force Mobility, and the Fiscal Behaviour of Local Governments in China

At present, China is in a critical period of transition from labor-intensive industries to capital- and technology-intensive industries. Accordingly, the increasing labor force mobility among Chinese cities has promoted competition over production factors among regions, having a significant impact on local governments’ fiscal expenditure structure. A theoretical analysis shows that the competition of livelihood public good expenditures is playing an increasingly important role in the factor flow competition. Different labor forces’ demand for different public goods and local governments’ demand for different labor forces affect the structural preference of local government fiscal expenditures. Based on panel data on Chinese prefecture-level cities in 2010–2016, this paper empirically tests the impact of different labor mobilities on the structure of local government fiscal expenditures, finding that current decision making on labor mobility is increasingly sensitive to the supply of livelihood public goods, and strengthening labor mobility has reversed the expenditure bias historically caused by the government’s simple capital competition. After dividing the mobile labor force based on whether the labor is settled in the current year, the two labor force types’ demand for different livelihood public goods was found to be different. To attract different labor inflows, local governments should promote an increase in relevant livelihood public good expenditures, showing a strategic fiscal expenditure structural bias. Specifically, with increasing new added general labor mobility, local goverments will increase the proportion of fiscal expenditures on education and medical care, combined with the increase of newly added registered labor mobility, which will correspondingly increase the proportion of environmental protection expenditures.

Heterogeneous corruption and inflation

The article analyzes the simultaneous influence of different types of corruption on inflation in the absence of seignorage. Basing on the model of fiscal and monetary policymakers behavior, we analyze the joint impact of “grand” and “petty cash” corruption on economy in short and long term in discretionary policy and rational expectation assumptions. Research findings demonstrate that even in the absence of seignorage heterogeneous corruption relates to inflation differently in short and long term: in the first case, relationship is positive and straightforward, in the second, some indirect effects take place what reduces equilibrium inflation in the long run compared to the short run.

Fiscal Reaction Functions and Public Debt Sustainability in Nigeria: An Error Correction Mechanism Approach

The pervasiveness and persistent spiral of public debt in the country provide needed insights to determine the tendency for achieving sustainable debt. This, essentially, spurs the study to examine the responsiveness of Nigeria’s fiscal authorities to rising debt accumulation. As such, the study employs conventional unit root and cointegration approaches to estimate the fiscal reaction functions used in the study. Findings suggest that the existence of equilibrium relationship, in the models estimated, signals the fulfillment of the necessary condition for achieving debt sustainability. However, the sufficient condition for a sustainable public debt could not be met; this is evident in the negative response of government primary balances to changes in public debt in the long run. These findings readily affirm that government’s fiscal behaviour is not in tandem with the tenet of the intertemporal budget constraint as fiscal authorities could not generate enough surpluses in reaction to public debt increases. Therefore, there is threat to the feasibility of ensuring a sustainable public debt, importantly, as fiscal pressures and excesses still remain endemic issues. The study concludes that the fiscal operations of Nigerian government cannot sufficiently allow for a sustainable debt; hence, consistent running of this fiscal stance could either spur harsh adjustment measures in the long run or result to insolvency and default.

Tax vs. Debt Management Under Entitlement Spending: a Multicountry Study

In this paper we study the taxes vs. debt choice for public funding when spending is in large part predictable due to entitlement programs, but the necessary fiscal corrections may not be instantly and indefinitely elastic as usually assumed. We study fiscal behavior in a large sample of countries to determine what fiscal regimes have been used in practice, and what they reveal about the trade-off between raising taxes vs. issuing debt. Unsurprisingly, we find that fiscal discipline and the aims of fiscal rules have varied over the past 50 years. Discipline has generally weakened and there has been a greater tendency to use debt. But governments are no less forward looking than they were. Perhaps more surprising, the high debt countries were more disciplined than low debt economies—but with worse outcomes because of their poor starting positions and more persistent public spending. The low debt countries have exploited their stronger initial position to allow less discipline; a “resting on one’s laurels” approach.

Turning A Blind Eye to Policy Prescriptions: Exploring the Sources of Procyclical Fiscal Behavior at the Subnational Level

This paper analyses the fiscal behavior of subnational districts in Argentina over the business cycle. I address two questions. Is the fiscal policy of Argentine districts procyclical? If so, what is the theory that best explains procyclicality? the answers come from the estimation of an error correction model of a panel that spans 23 years and 24 districts. I found that all categories of public expenditures, except for capital expenditures, were procyclical. the main sources of procyclicality are the political networks, changes in the amount of oil, gas and mining grants, federal interventions, and discretionary intergovernmental transfers.

Public Finance Behavior of the Spanish Regions: An Analysis Based on Fiscal Reaction Functions

The need to be compliant with the fiscal frameworks of the European Union and Spain has generated asymmetric fiscal behavior across the Spanish government tiers regarding the distribution of the needed fiscal efforts to pursue public finance sustainability and macroeconomic stability in the medium-to-long term and to meet citizen needs in the short term. In this paper, we focus on the determining factors accounting for the budget deviations for the Spain’s Autonomous Communities (regions). For this purpose, we analyze the discretionary fiscal behavior of the Spanish regional administrations by estimating panel-data and time-series specifications of a dynamic fiscal reaction function a la Bohn (1998; 2005) for 17 Spanish regional governments over the period 2003–2015 within a Markov-switching methodology. According to our results, the discretionary fiscal behavior of the Spanish Autonomous Communities manifested switching properties throughout the last ten years or more, uncovering the existence of two fiscal regimes that shift in accordance with lagged budget balance and public debt levels, as well as business cycles. Except for some notable cases, the Spanish regional authorities did not commit to meeting the public deficit and debt limits (“active” fiscal behavior), and/or engaged in overheating the territorial economies (“procyclical” fiscal behavior) in at least one regime.

Tax Compliance at National Level

Abstract Throughout this study, we have shown the influence factors generating a significant impact on taxpayers’ tax behavior. We also analyzed the literature in the field, and the categories of factors that have a significant influence. Consequently, we have assigned a macroeconomic indicator in Romania, in an attempt to quantify the factors of influence. In this regard, we have built an econometric model of multifactorial regression and we have determined the impact of some elements such as: poverty, labor productivity, population confidence in state authorities, gross domestic product per capita on fiscal behavior, which was estimated through the proxy variable: tax rate. The empirical results obtained as a result of the multiple regression showed that there is a negative correlation between the fiscal behavior of the taxpayer, namely the tax compliance and the financial capacity, the labor productivity and the confidence the taxpayer has in the state authorities, while the behavior of the taxpayer the gross domestic product per capita we identify a positive correlation.

Has Fiscal Rules changed the Fiscal Behaviour of Union Government in India? Anatomy of Budgetary Forecast Errors in India

We analyse the fiscal marksmanship of the macro-fiscal variables of Union Government ex-ante and ex-post to the formulation of fiscal rules in India. The fiscal marksmanship is the accuracy of budgetary forecasting. The fiscal rules have been legally mandated in India in the form of fiscal responsibility and budget management Act (FRBM Act) in 2003, with a criteria of fiscal-deficit to GDP threshold ratio of 3 per cent and gradual phasing out of revenue deficit. Using Theil’s inequality coefficient (U) based on the mean square prediction error, the paper estimates the magnitude of errors in the budgetary forecasts in India during the period ex-ante and ex-post to fiscal rules, and also decomposed the errors into biasedness, unequal variation and random components. The decomposition of errors is to analyze the source of error in both the regimes. Our results found that in both regimes, the proportion of error due to random variation has been significantly higher, which is beyond the control of the forecaster. In other words, the error due to bias of the policy maker in preparing the Union Budget has been negligible in the period ex-ante and ex-post to fiscal responsibility and budget management (FRBM) Act in India. The estimates also showed that the errors due to policy maker’s bias has comparatively reduced in the regime ex-post to fiscal rules. The analysis related to efficiency of forecasts showed that no significant improvement in forecasts over time. This result has significant policy implications especially in the context of repeal of 2003 FRBM Act in India and the Union Government has announced clauses for a ‘New FRBM Act’ in India in the Finance Bill 2018.

Debunking the Relevance of the Debt-to-GDP Ratio

Debt-to-GDP ratios do not predict fiscal outcomes. As ratios of government debt rise, some societies manage to deliver more responsible fiscal behaviour. Low debt ratios often mask dangerous currency or maturity mismatches which can suddenly impair banks and governments. Contingent liabilities, especially arising from the banking system, have the power to undermine sovereign creditworthiness. The demand for government bonds can behave unpredictably, and governments can suddenly find themselves cut off from financing. Official institutions like the IMF, European Commission, and World Bank have done themselves and their member states a great disfavour by obsessing about debt ratios which do not have clear implications for debt sustainability.

Women and risk-taking behaviour in local public finance

ABSTRACTThis study examines how female representation in local elected (mayor and legislature) and administrative (mid-level manager) positions influences municipal financial decision-making in 764 Japanese city-level governments. Findings show that female representation in local councils is positively correlated with risk-averse behaviour in financial decisions, as female representation on the legislature is negatively associated with issuing municipal bonds and with local investment in public corporations. Female representation in executive (mayor and vice-mayor) and mid-level administrative managerial positions has no apparent effects on local financial decisions. This study tests existing explanations of relationships between female managerial representation and fiscal behaviour in an Asian developed setting characterized by considerable underrepresentation of women in politics.

A Gap of Chinese Education Finance and Transfer Payments Modes Based on Education Equalization

The majority of education expenditures are paid by local governments in China. On the one hand, owing to the performance evaluation system taking GDP as a standard, the education efforts of local governments are at a lower level; on the other hand, the differences in natural endowments and economic development among regions lead to the greater gap of education development level among regions. Firstly, this paper uses the 2012 data to estimate China's provincial education fiscal gap on the basis of the determination of the proportion of education resources in regions. The results show that, the gap of education finance concentrates in Central China and West China, but our present education transfer payments funds cannot make up for the gap of education finance in these regions. On the basis of this situation, it designs a set of conditional grant modes of education special transfer payments, and combines the constraints of local government fiscal decision-making behavior and the system of education special transfer payments together, in order to guarantee the education resources and make up for the local gap of education finance.

Natural disaster, fiscal pressure and tax avoidance: a typhoon-based study

Natural disasters affect not only local economic development and government fiscal behaviour at the macro level, but also corporate tax avoidance behaviour at the micro level. From the perspective of typhoons, we investigate the effect of natural disasters on corporate tax avoidance behaviour based on the sample of China’s A-share companies from 2008 to 2015. Results indicate that the greater the damage caused by typhoons, the lower the level of tax avoidance of local companies, and this relationship is more significant in state-owned companies, political affiliates, and local leading companies, which is joined with path testing to show that natural disaster affects tax avoidance through fiscal pressure. In addition, we investigate whether this relationship varies cross-sectionally from several perspectives: institutional and economic environment, fiscal pressure, market pressure, and tax avoidance margin. Furthermore, we find that companies paying more taxes post-disaster will obtain more government grants and credit resources in the future, achieving mutual benefits between local governments and companies. In summary, this paper tests the effect of disasters on corporate tax avoidance behaviour based on China’s unique government-company relationship.

Autocracy: Naked and Veiled

This paper establishes an analytical framework for understanding the structure of autocratic institutions. It distinguishes between two ideal types of autocratic state structures: naked and veiled. In one incarnation, the institutional structure of the state makes no pretense of the autocrat’s omnipotence. In the other, the state is structured so as to give the appearance of a division of powers. Assessed from the standpoint of rational choice institutionalism, each is understood to emerge as a product of the constraints which autocrats face at the moment of state formation. Using the examples of the Kingdom of Saudi Arabia and the Islamic Republic of Iran, the relative costs, benefits, and risks to autocrats of each model as well as differences in subsequent fiscal behavior are considered.

Compensating Changes to the Property Tax Levy? An Empirical Test of the Residual Rule

The residual view of the property tax assumes that local governments set their levies equal to the difference between budgeted expenditures and expected receipts from other revenues. This approach allows them to adjust the levy to achieve greater overall revenue stability potentially at the cost of tax predictability. This article presents a formal model of the residual rule and uses it to test whether this active approach to property tax administration describes observed fiscal behavior. This test is conducted using data from county governments in Georgia over a fifteen-year period. The results support the validity of the residual rule over an alternative model of passive tax administration.

Fiscal stabilization vs. passivity

Fiscal policies that stabilize debt may not provide the fiscal backing necessary for monetary policy to successfully target inflation. Appropriate backing is provided by passive fiscal behavior. Understanding the distinction between stabilizing and passive fiscal policies is central to the design of fiscal rules.

Tax Evasion in Europe: An Analysis Based on Spatial Dependence

ObjectiveThis article attempts to analyze tax evasion as a fundamental element of tax morale in the European countries from the perspective of spatial dependence. This research focuses on the contextual differences using country‐level and cross‐sectional European Value Survey data for the year 2008 to estimate the factors that affect the rejection of tax evasion.MethodThe application of a generalized linear model using spatial filtering allowed us to observe robust results on the role of contextual variables in explaining different patterns of the rejection of tax evasion in the European countries.ResultsThe results confirm the influence exerted by spatial dependence, economies of agglomeration, income inequality, economic imbalances, and perceived corruption on the variable “rejection of tax evasion.” A novel finding is the fact that income distribution is key in explaining the rejection of tax evasion.ConclusionThis study indicate that there is interaction of the rejection of tax evasion between neighboring countries, so that low/high levels of rejection of tax evasion at home are associated with low/high levels of rejection in a neighboring country. Therefore, policymakers should establish coordinated tax awareness measures in the supranational policies (e.g., European Union), since the rejection of tax evasion depends on internal factors of the country in which one lives and those of neighboring countries. Fiscal behavior (social norm) of individuals from neighboring countries affects the behavior of individuals in the country.

Institutional Constraints, Rule‐Following, and Circumvention: Tax and Expenditure Limits and the Choice of Fiscal Tools During a Budget Crisis

One of the critical questions in local public budgeting and finance is how the confluence of two major developments in the local public sector—the proliferation of tax and expenditure limits (TELs) and the widespread budget crisis precipitated by the Great Recession—has affected local governments across the country. This research examines how TELs shape the fiscal behavior of municipal governments, specifically the pattern of use of different fiscal tools to respond to a major budget crisis. The fiscal tools available to local governments to address fiscal shocks include personnel‐related budget cuts, service‐related cuts, revenue‐raising responses, efficiency reforms, fund balance and inter‐fund transfers, external borrowing, and inter‐governmental approaches. To what extent did cities rely on specific tools and how did TELs influence cities’ fiscal choices? Using the results of a 2015 national survey of municipal governments in the United States with a population of 50,000 or more, this study shows that TELs have shaped the fiscal choices of cities in ways that can potentially redefine the relationships among city governments, their workforce, and citizens.

Asymmetric effects of fiscal policy in EU and OECD countries

In this article, we take account of an evaluation of the short- and medium-term effects of the transmission mechanism of fiscal policy in EU and OECD countries and their dependence on the state of the economy and fiscal behaviour. Our findings indicate that (i) across EU member states the impact of government spending on economic performance is larger in the accession than in core member states, (ii) since the onset of the economic/financial crisis the government spending multipliers have become larger in both core and accession EU member states, and (iii) a comparison with fiscal responses in the OECD countries shows robustness of our estimates. The conclusion implies that the austerity measures present a substantial drag for economic activity in accession EU countries. Thus, we may state that not considering the fiscal behaviour and state of the economy gives misleading fiscal multiplier effects, which in turn lead to the adoption of inappropriate fiscal measures that even worsen a country's economic situation.