Fiscal Consolidation Programs Research Articles

Fiscal policy with an informal sector

On the eve of its sovereign debt crisis in 2010, Greece initiated a large fiscal consolidation program. By 2015, official GDP had fallen to 26% below its 2009 level. We feed the actual fiscal package in the DSGE model of the Bank of Greece, augmented to include an informal sector, to assess the contribution of the fiscal package as well as of its individual tax and spending components. The model explains the bulk of the cumulative reduction in economic activity, and attributes roughly half of the decline to government spending measures and the other half to tax increases. The interaction of a large fiscal adjustment with a large and elastic informal sector proved lethal. Our model predicts that had growth in shadow activities been contained, the vicious circle between fiscal adjustment, tax revenue and macroeconomic activity could have been significantly mitigated, resulting in a considerably milder downturn.

Guinea-Bissau

Guinea-Bissau is a fragile state with significant development challenges, including limited fiscal space, debt vulnerabilities and poor governance. After years of political turmoil and delayed reforms, in 2021 the authorities started the implementation of an ambitious fiscal consolidation program to ensure debt sustainability while creating fiscal space to address developmental needs. A Rapid Credit Facility (RCF) disbursement of SDR 14.2 million (50 percent of quota) was approved in January 2021 to provide urgent financing to support critical spending in health. A nine-month SMP with three quarterly reviews, approved in July 2021 ended with satisfactory performance building track record of policy implementation towards an Extended Credit Facility (ECF) arrangement. The August 2021 SDR 27.2 million allocation and the reforms underpinned by the SMP have helped address the adverse impact of the pandemic, while improving the transparency of government spending, and mitigating debt vulnerabilities.

To consolidate or not to consolidate? A multi-step analysis to assess needed fiscal sustainability

We assess the specific need (or its absence) of a country to implement a fiscal consolidation programme by focusing specifically on their degree of success, notably in terms of fiscal sustainability. The “need” to consolidate is based on having a primary balance above or below the debt-stabilizing primary balance (provided by the IMF's Debt Sustainability Analysis) for each country. We then link the need for and the actual (historical) existence of fiscal adjustments to their sustainability impact. Looking at a large sample of developed and developing economics over the period 1980–2018, we find that, on average, there is a higher need of consolidations in advanced economies than in developing economies. In addition, the implementation of a fiscal consolidation program implies an improvement in the degree of public finances' sustainability, for in advanced and developing economies. Finally, fiscal sustainability deteriorates when the need to implement a fiscal retrenchment arises.

Mali Konsolidasyon Programlarının Özel Tüketim Harcamaları Üzerindeki Etkisi: PIIGS Ülkelerine Yönelik Panel Veri Analizi

Bütçe dengesinin çeşitli nedenlerle bozulması sonucunda dengenin tekrar kurulması amacıyla mali konsolidasyon programları uygulanmaktadır. Mali konsolidasyon, kamu açıklarını ve borç stokunu azaltmaya yönelik uygulanan daraltıcı maliye politikaları olarak tanımlanmaktadır. Çalışmada, mali konsolidasyon programlarının özel tüketim harcamaları üzerindeki etkisi 1995-2020 yılı verilerine dayalı olarak PIIGS (Portekiz, İtalya, İrlanda, Yunanistan, İspanya) ülkelerini içeren panel veri analizi ile ortaya koyulmuştur. Elde edilen bulgular ışığında mali konsolidasyon programlarının ülkeler arasında farklı etkiler oluşturduğu görülmüştür. İrlanda ve İtalya’da genişletici mali daralma hipotezini destekleyici bulgular elde edilmiştir. Yunanistan’da ise Keynesyen etkileri destekleyen sonuçlara ulaşılmıştır. Örneklem yıllarından olan 2019-2020 yıllarında yaşanmış olan ve çalışmaya dahil edilen Covid-19 salgını nedeniyle uygulanan hükümet programlarının ise Portekiz, İtalya ve İrlanda’da özel tüketim harcamalarını olumlu etkilediği görülmüştür. Bu durum mali konsolidasyon dönemlerinde genişletici mali daralma hipotezinin; genişleme dönemlerinde ise Geleneksel Keynesyen modelin geçerli olabileceğini göstermektedir.

Fiscal Consolidation, Social Sector Expenditures and Twin Deficit Hypothesis: Evidence from Emerging and Middle-Income Countries.

Following the present scale of fiscal imbalances, governments often implement fiscal consolidation programs to restore macroeconomic stability. This paper empirically explores the connections between social expenditure, current account and fiscal consolidations using the system-GMM estimator, on a panel of 23 emerging and middle-income countries for the 2009–2018 period. Our results confirm that government social expenditure decreases once fiscal austerity measures are implemented, practically when they are spending-driven. Fiscal consolidation may hurt important social expenditure allocation mainly on education and health components. Furthermore, we find that fiscal consolidation improves the current account deficit, providing support for the twin deficits hypothesis. These findings indicate that fiscal consolidation will eventually contribute to medium- and long-term external debt stability through the current account improvement. However, the exclusion of key growth determinants such as human capital can lead to many inefficiencies such as weak competition in the provision of social services (Jafarov and Gunnarsson in Government spending on health care and education in Croatia: Efficiency and reform options, working paper 136, International Monetary Fund, 2008). We suggest rationalizing social spending and devoting the country’s revenue to necessary and economically productive projects. The efficient use of resources will thus ensure better quality of education and health care services. This calls for good governance, an adequate administration and effective delivery structures.

Chad: Request for a Three-Year Arrangement under the Extended Credit Facility-Press Release; Staff Report; and Statement by the Executive Director for Chad

The COVID-19 pandemic, the volatility in oil prices, heightened insecurity, and a looming food crisis due to climate change have severely stressed an already vulnerable Chadian economy. The two Rapid Credit Facility (RCF) disbursements in April and July 2020 allowed Chad to meet its immediate financing and urgent balance of payment needs in the early stages of the pandemic. The authorities have requested Fund assistance under the ECF to support their post-COVID recovery and their plan to reduce debt vulnerabilities through a combination of a debt workout and a multi-year fiscal consolidation program. However, due to the death of the president following a resurgence of fighting with rebel groups in April and the delayed delivery of donor support, the treasury situation has become extremely tight, threatening social stability.

Asset Liquidity and Fiscal Consolidation Programs

We argue that the relationship between wealth inequality and fiscal multipliers depends crucially on the type of fiscal experiment used, and on the measure of wealth distribution. We calibrate an overlapping generations model with incomplete markets for different European economies and use Household Finance and Consumption Survey (HFCS) data to compare fiscal multipliers when models are calibrated to match the distribution of gross vs. net wealth. We find a negative relationship between fiscal multipliers and wealth inequality when considering fiscal consolidation programs, in contrast to fiscal expansion experiments which are standard in the literature. The underlying mechanism relies on the relationship between the distribution of wealth and the share of credit‑ constrained agents. We examine the role of household balance sheet compositions regarding asset liquidity and find that when calibrating the model to match liquid wealth, the relationship between wealth inequality and fiscal multipliers is much stronger.

The Impact of Labor Income Tax Progressivity on the Fiscal Multipliers in the Context of the Fiscal Consolidation

Fiscal multipliers depend on several structural characteristics of each economy. In this study it is argued that labor income tax progressivity lowers the fiscal multipliers of fiscal consolidation programs. By calibrating an incomplete‑ markets, overlapping generations model for the United States for different values of the labor income tax progressivity, it is shown that as progressivity increases the recessionary impacts of fiscal consolidation are lower in the case of consolidation through decrease of government spending and are more recessionary in the case of consolidation financed with tax hikes.

FISCAL CONSOLIDATION PROGRAMS AND INCOME INEQUALITY

AbstractWe document a strong empirical relationship between higher income inequality and stronger recessive impacts of fiscal consolidation episodes across time and space. To explain this finding, we develop a life‐cycle economy with uninsurable income risk. We calibrate our model to match key characteristics of several European economies, including inequality and fiscal structures, and study the effects of fiscal consolidation programs. In our model, higher income risk induces precautionary savings behavior, which decreases the proportion of credit‐constrained agents in the economy. These agents have less elastic labor supply responses to fiscal consolidations, which explain the correlation with inequality in the data.

Fiscal Consolidation Programs and Income Inequality

Following the Great Recession, many European countries implemented fiscal consolidation policies aimed at reducing government debt. Using three independent data sources and three different empirical approaches, we document a strong positive relationship between higher income inequality and stronger recessive impacts of fiscal consolidation programs across time and place. To explain this finding, we develop a life-cycle, overlapping generations economy with uninsurable labor market risk. We calibrate our model to match key characteristics of a number of European economies, including the distribution of wages and wealth, social security, taxes and debt, and study the effects of fiscal consolidation programs. We find that higher income risk induces precautionary savings behavior, which decreases the proportion of credit-constrained agents in the economy. Credit-constrained agents have less elastic labor supply responses to fiscal consolidation achieved through either tax hikes or public spending cuts, and this explains the relationship between income inequality and the impact of fiscal consolidation programs. Combining micro- and macro data, we find evidence of the mechanism.

Fiscal consolidation and economic growth in India: Do policymakers need to shift focus from quantity to quality of fiscal adjustments?

This paper evaluates the impacts of fiscal consolidation programmes and their composition on the growth rate of national income for Indian economy. More specifically the study tries to address two questions that is, composition of consolidation and its resultant impact on growth rate of income and the relative desirability of alternative sources of deficit financing that is, internal versus external borrowing. The study employed time series data from 1990–1991 to 2017–2018 and used the technique of ordinary least square and generalized method of moments. The study finds that, in long run, fiscal consolidation need not be necessarily recessionary in nature. Moreover, the composition of consolidation was found to have a significant impact. The study could not extend empirical support in favour of back‐loaded (spending financed) consolidation design as has been established for advanced economies. Moreover the study could not establish the negative impacts of revenue funded (both tax and non‐tax) fiscal consolidation on the growth rate of economy. The study documented that it is desirable to target expenditures such as subsidies, transfers and interest payments to infuse more discipline. A judicious mixture of both spending cuts and revenue increase may be a better strategy to consolidate in order to have better returns. The study highlighted that the external source of deficit financing is always costlier against the internal borrowings. The study noted that it is imperative on part of policymakers to shift their focus from quantity to the quality of deficits and the resultant consolidation programmes.

Oblikovanje buduće privrede Srbije - novi model rasta i povezana platforma za vođenje ekonomskih politika

As Serbia's economy enters 2020, we see a high level of risk, fragile growth outlook, and increasing tensions over the evident polarization according to the future growth trajectory. Taking the pulse of Serbia's economy, we see that current challenges are significant. After the 2015-2017 fiscal consolidation program successfully ended, Serbia desperately needs a new platform for shaping the future of the economy and society. It is undeniable that the global economy is in transition. It simultaneously deals with the negative consequences of the last recession and a positive impact of Industry 4.0. Food, transport, energy production and the ways how people produce and consume industrial product/services need to undergo fundamental transformation. The aim of this paper is twofold. First, to present strategic audit of the current economic situation in Serbia. Second, based on the situation analysis, to identify desirable intervention areas and related intentional policies, in accordance to broad based trends of change and their impact on the emerging contours of the new economy. Key idea is to present a conceptual paper without calibration of concreate policy measures.

The effects of fiscal consolidations on the composition of government spending

ABSTRACTIn response to increasing debt paths, governments often implement fiscal consolidation programs. This paper studies the impact of these programs on the composition of government spending. System-GMM estimations performed on a sample of 53 developed and emerging countries over 1980–2011 reveal that fiscal consolidations significantly reduce the government investment-to-consumption ratio, i.e. a composition effect. Robust to a wide set of tests, including when using the narrative approach to identify fiscal consolidations, this significantly stronger contraction of government investment with respect to government consumption is at work particularly when debt is high and in the low phase of the economic cycle. Therefore, in such contexts, fiscal consolidations aimed at short-run stabilization may hurt the economy in the long-run through their detrimental effect on public investment, calling for a reflection upon how they could be re-designed to allow avoiding such undesirable consequences.

The effects of part-time employment and employment in rotating periods on occupational accidents. The case of Greece

During the last few years new forms of employment have been developed. Part-time employment and employment in rotating periods are on a rise especially in cases of economic slowdown and high unemployment rates, as part of the what is called precarious work. For the case of Greece, that was recently hit by resection and a number fiscal consolidation programs, the number of occupational accidents increased despite high unemployment rates. This paper attempts to investigate the effects that those new flexible employment forms may have on occupational safety and health for cases that when they are forced and violently introduced into the labour market. Analysis of data revealed that the rate of occupational accidents for the case of Greece did not follow the respective reduction of GDP but instead increased according to the significant increase of part-time and work in rotating periods contracts. Both organizational and social factors, such as lack of training, ineffective safety management systems, psychosocial factors and loose community properties that weakens collective bargaining could contribute to that.

Fiscal crisis in Brazil: causes and remedy

ABSTRACT From 2014 to 2017, Brazil experienced unprecedented fiscal deterioration caused by multidimensional factors. According to the economic literature, to cope with such a crisis, it is recommended to adopt a long-term spending cut-based fiscal consolidation program rather than a tax hike-based one. However, as the fiscal crisis evolved recently in Brazil, this article brings another perspective to the policy stance. It suggests a fiscal program that includes a combination of spending cuts and tax hikes. On one hand, the peculiarities of the Brazilian government expenditures demand fiscal reforms with long-lasting impacts but generally with low short-term fiscal effect. On the other hand, as short-term fiscal results anchor confidence, increases in taxes would be an important pillar of the economic policies to mitigate the fiscal deterioration in the short term. The GDP contraction is expected to more severe than a simple spending cut measure but is likely to be less prolonged.

Policy responses to the Eurozone crisis: A comparative analysis of southern European administrations

The Eurozone crisis has worked as a forceful external factor for activating a series of fiscal and structural adjustments in the countries of the EU periphery. Public administration was a key reform area and has undergone notable transformations under the fiscal consolidation programmes. This paper aims at identifying the impact of the crisis on public administration with a focus on southern Europe. It reviews and compares the goals and the outcomes of the administrative reform programmes that were implemented in Greece, Italy, Portugal and Spain during the crisis. This cluster forms a distinct administrative paradigm emanating from the Napoleonic state tradition. The relationship between administrative tradition and administrative change or persistence is explored in a historical institutionalist perspective. The findings identify similarities, divergences and variations across and within the Southern countries, also suggesting that while certain changes occurred, the Napoleonic features of the southern administrations remained largely untouched by the reform programmes.

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.

Investigating the public response to local government decisions to reduce or remove public library services

This paper presents new findings regarding the public response to public spending cuts as part of the UK Government fiscal consolidation programme, specifically to the perceived effects of reduced library opening hours on the public library user in a city in the North of England. An inductive approach was taken to the mixed methods study, using a self-completion, cross-sectional survey distributed to adults visiting one of three libraries in the city during a six-day period. Qualitative and quantitative data analyses indicate a shared level of dissatisfaction with the service reductions across the respondents, and a shared perception of having been adversely affected. Statistical analyses revealed a strong level of agreement that the changes had a significantly negative impact on different aspects of respondents’ lives. The research evidences the direct effects of service reductions on library users, as well as the wider social and economic implications.

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.

Budget Deficit Sustainability and Revenue Expenditure Linkages in Major South Asian Economies

The paper examines sustainability of budget deficits and dynamic linkages between government revenues and expenditures in five major South Asian economies, namely India, Pakistan, Bangladesh, Srilanka and Nepal for period 1985-2014. The study contributes to the literature by combining individual-country analysis with recent panel data approaches for robustness of results. Our results support existence of long-run relationship between government revenues and expenditures for the countries in a specification allowing for unknown structural break. The size of slope parameter obtained from Dynamic Ordinary Least Squares is however significantly less than one except for Bangladesh indicating incoherence with ‘strong’ sustainability of deficits. The long run causality analysis lends support to ‘spend-tax hypothesis’ for India, Bangladesh, Pakistan and Srilanka and ‘tax- spend hypothesis’ in case of Nepal. From perspective of design of fiscal consolidation programmes, this implies that adjustment of revenues would be optimal solution to control spending in Nepal while control of expenditure would be effective in case of India, Bangladesh, Pakistan and Srilanka. The results from Pedroni (1999) and Westerlund (2007) panel cointegration tests and block exogeniety and DumitrescuHurlin (2012) panel causality tests are broadly in conformity with the time series results.