Fiscal Deterioration Research Articles

Does membership of the EMU matter for economic and financial outcomes?

AbstractThis study examines the effects of joining the European Monetary Union (EMU) using propensity score matching to address self‐selection bias. Findings indicate that EMU membership leads to reduced volatility in inflation, output growth, and bond yields. However, it also reveals fiscal deterioration in member states during the pre‐financial crisis period, even excluding Greece, Ireland, Portugal, and Spain. These countries experienced favorable bond market conditions pre‐crisis. The study underscores varying EMU effectiveness across different periods and countries, emphasizing the importance for policymakers to consider these variations when adopting EMU strategies.

Is fiscal deficit ‘curse’ or ‘haven’ for environmental quality in India? Empirical investigation employing battery of distinct ARDL approaches

Undoubtedly, throughout the past half-century, environmental quality has emerged as a significant obstacle to both economic and social endeavors. Recent local and international policy debates have focused on environmental deterioration and global warming, but how governments balance economic growth and environmental sustainability is still enigmatic. For this reason, we have examined the determinants of environmental quality in India from 1972 to 2021. More specifically, we have investigated whether the fiscal deficit is ‘curse’ or ‘haven’ for environmental quality (CO2) in India. Moreover, this study deliberated four other predictors, comprising technological development (TIN), fossil fuel consumption (FFC), urbanization (Ub), and human capital index (HCI). In order to attain this objective, a range of econometric estimation techniques are employed to ensure the validity and reliability of the outcomes. For instance, we have employed a battery of ARDL approaches, such as standard ARDL, nonlinear ARDL, and multiple threshold NARDL approaches. In light of our research findings, we will be focusing directly on the examination of the NARDL and MTNARDL outcomes. This is due to the empirical evidence indicating the existence of asymmetric effects resulting from FD on CO2 emissions in India. The NARDL approach reveals that the consequence of fiscal deterioration is more pronounced, and the influence of fiscal progress is mild in terms of CO2 emission growth. Further, the outcomes of the MTNARDL approach revealed that the size of the extremely low changes in FD is much higher than the extremely high changes in FD in both models. This implies that as the FD rises, CO2 ascends more significantly, and when the FD lowers, CO2 declines progressively. In a nutshell, FD has a long-run positive and asymmetric impact on CO2 in India; thus, we may conclude that FD is considered the ‘curse’ for CO2 in India. Furthermore, TIN, HCI, and Ub have detrimental effects on CO2, whereas FFC stimulates CO2 in India. This research work provides some important policy implications for environmentalists, economists and macroeconomic policymakers to promote a green and healthy environment.

A Mountain of Debt: Navigating the Legacy of the Pandemic

Abstract The COVID-19 pandemic has triggered a massive increase in global debt levels and exacerbated the trade-offs between the benefits and costs of accumulating government debt. This paper examines these trade-offs by putting the recent debt boom into a historical context. It reports three major findings. First, during the 2020 global recession, both global government and private debt levels rose to record highs, and at their fastest single-year pace, in five decades. Second, the debt-financed, massive fiscal support programs implemented during the pandemic supported activity and illustrated the benefits of accumulating debt. However, as the recovery gains traction, the balance of benefits and costs of debt accumulation could increasingly tilt toward costs. Third, more than two-thirds of emerging market and developing economies are currently in government debt booms. On average, the current booms have already lasted three years longer, and are accompanied by a considerably larger fiscal deterioration, than earlier booms. About half of the earlier debt booms were associated with financial crises in emerging market and developing economies.

A mountain of debt: Navigating the legacy of the pandemic

The COVID-19 pandemic has triggered a massive increase in global debt levels and exacerbated the trade-offs between the benefits and costs of accumulating government debt. This paper examines these trade-offs by putting the recent debt boom into a historical context. It reports three major findings. First, during the 2020 global recession, both global government and private debt levels rose to record highs, and at their fastest single-year pace, in five decades. Second, the debt-financed, massive fiscal support programs implemented during the pandemic supported activity and illustrated the benefits of accumulating debt. However, as the recovery gains traction, the balance of benefits and costs of debt accumulation could increasingly tilt toward costs. Third, more than two-thirds of emerging market and developing economies are currently in government debt booms. On average, the current booms have already lasted three years longer, and are accompanied by a considerably larger fiscal deterioration, than earlier booms. About half of the earlier debt booms were associated with financial crises in emerging market and developing economies.

Descontrole ou inflexão? A política fiscal do governo Dilma e a crise econômica

Resumo O debate sobre a trajetória da economia brasileira na primeira metade da década de 2010 é marcado pelo protagonismo da condução da política fiscal para explicar a desaceleração econômica e posterior recessão, tanto no campo da ortodoxia como da heterodoxia. A ortodoxia aponta o descontrole dos gastos públicos como responsável pela deterioração fiscal, que teria conduzido à piora das expectativas dos agentes e à queda dos investimentos. A heterodoxia, numa interpretação quase que oposta, aponta para uma inflexão da política fiscal: a redução dos gastos, em especial dos investimentos, no início da década, teria afetado a capacidade de indução da política em um modelo de crescimento puxado pela demanda. Este artigo tem como objetivo avaliar empiricamente essas explicações. Além de uma análise descritiva dos dados, utilizamos um modelo de Vetores Auto-Regressivos (VAR) para examinar como os elementos da política fiscal apontados por cada uma das perspectivas discutidas afetaram o crescimento econômico e, em especial, se são capazes de explicar a desaceleração e a recessão no período analisado. Os resultados indicam, contrariando a visão ortodoxa, que não ocorreu uma disparada dos gastos em relação a governos anteriores, e que os movimentos no produto tendem a preceder alterações no resultado fiscal, não podendo ser por eles explicados. Também apontam o impacto relevante do investimento público na evolução do produto, confirmando um elemento central da abordagem heterodoxa. Todavia, ao revelar que até 2014 os gastos públicos continuavam a crescer, indica a insuficiência da tese heterodoxa para explicar a desaceleração nos anos anteriores e a profundidade da subsequente recessão. Diante disso, apresentam-se elementos explicativos adicionais para compreender o período.

Ideologia partidária e crise fiscal dos estados: o caso de Minas Gerais

Resumo O presente estudo investiga a relação entre ideologia partidária e os gastos públicos no estado de Minas Gerais. Em particular, avalia-se se a deterioração fiscal do estado no quadriênio 20152018 se relaciona, em alguma medida, à mudança de orientação partidária no governo mineiro. Compara-se, então, a dinâmica das receitas e dos gastos estaduais nos últimos dezesseis anos, destacando os resultados da última gestão, quando houve a mudança de governo e de ideologia partidária. Os resultados mostram que o governo do Partido dos Trabalhadores (PT), embora mais à esquerda do espectro político, se esforçou para ajustar as contas públicas, ainda que sem sucesso.

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.

Sustainability of fiscal policy in Poland in the period 2004–2017

Abstract The aim of this paper is to analyze fiscal sustainability in Poland after joining EU between 2004-2017. Unlike previous studies, which analyzed weak measures of fiscal sustainability, we analyze fiscal sustainability measures in the strong sense. Contrary to previous studies we estimate individual, not panel, fiscal reaction functions which allows us to provide possibly a more accurate picture of fiscal policy outcomes in Poland. Moreover, our empirical analysis takes a closer look at the series of structural breaks that occurred after the global crisis. Based on our analysis we may tentatively conclude that despite cyclical fiscal deterioration during the crisis fiscal policy in Poland has been sustainable in the strong sense up until 2017.

Social forces and the evolution of tourism: A historical framework of urban change

This paper focuses on the conditions that gave rise to tourism as a tool of urban economic development. By the 1960s and 1970s, an emerging economy of recreation and tourism was gaining steam as many manufacturing city centers were undergoing significant fiscal stress and social deterioration due to suburbanization and deindustrialization. In an effort to reverse the tide, American cities began to embrace a new strategy, most visible in the last three decades, focusing on urban reimaging through the utilization of cultural strategies to improve urban identity and translate that image into economic development opportunities and growth. Sport, entertainment and tourism proved central to this new, culturally based policy agenda. Museums, festivals, revamped public spaces, tourism hubs, sports stadiums, theatre districts, ethnic precincts, convention centers and even urban beautification programs are some of the infrastructural and related tools utilized to advance this new strategic direction.

(Un-)intended effects of fiscal rules

The paper investigates the fiscal effects of Swiss cantonal debt brakes by taking explicitly into account the rules’ coverage. An in-depth analysis provides unique evidence that suggests the following: First, fiscal rules reduce public deficits. The effect is stronger the better the analyzed budget position corresponds with the variable targeted by the rules. Second, cantonal debt brakes exhibit some unintended effects, i.e., an evasion into unconstrained accounts, emphasizing the importance of constraining all accounts. Third, the existence of political budget cycles depends on the institutional context, i.e., the timing of elections and the presence of debt brakes. Fifth, cantonal debt brakes dampen the fiscal deterioration during unexpected deficit shocks by more rapid fiscal adjustments.

The emergence of public‐private partnerships (P3s) in Alberta: Lessons from the Anthony Henday highway

AbstractThis article traces the emergence of public‐private partnerships (P3) in Alberta from 2003‐2016, using a case study of Edmonton's Anthony Henday highway projects. We describe how P3s emerged following dissatisfaction with the conventional delivery model, specifically with late project delivery and over‐budget performance, and the need to attract private financing arising from Alberta's fiscal deterioration beginning in 2001. We also highlight how political, policy, and organizational support were critical enablers of the emergence, acceptance and normalization of Alberta's P3 model.

Uruguay 2015: Los desafíos de gobernar por izquierda cuando la economía se contrae

This article analyzes the first year of Frente Amplio’s third government in Uruguay. The main political events during 2015 show the difficulties that leftist parties in government have when governing under negative economic perspectives. A decline in economic dynamism, combined with inflationary pressures and fiscal deterioration, boosted conflicts between the government and their social bases. Facing a worsening economic scenario, one of the most successful Latin American governments in the last ten years tries to navigate between the consolidation of its redistributive agenda and its political needs to secure economic growth

The Big Question: Fixing Roles

The Big Question: Fixing Roles

Is california broke or is its budgeting system broken? empirical examination of the budget affordability, the institutional arrangements, and the growth of deficits in California

Since the 1978 adoption of Proposition 13 California’s fiscal conditions have steadily deteriorated. This article questions whether this fiscal deterioration is due to a lack of budget affordability or of institutional ineffectiveness. In examining the institutional ineffectiveness of California’s budget system the article focuses on: (1) general revenue mobilization, (2) expenditure mandates in education, and (3) legislative party divisions in face of supermajority requirements. To this end, the article develops a pre-post regression model that analyzes the factors that influenced the state budget balances. The article finds that California’s deteriorating fiscal conditions are strongly influenced by the declining effective tax rate. The study also finds that increases in education spending are a statistically significant factor, but finds mixed support for the argument that political divisions drive California’s budget deficits.

How climate change impacted the collapse of the Ming dynasty

Based on the reconstructed temperatures, precipitation changes, and occurrences of extreme climate events, together with historical records on fiscal deterioration, food crises, and the frequencies of popular unrest, rebellions and wars, we identified three principal ways in which climate change contributed to the collapse in the Ming dynasty. Firstly, cooling, aridification, and desertification during a cold period destroyed the military farm system, which was the main supply system for the provisioning of government troops on the northern frontiers; these impacts increased the military expenditure from 64 % of total government expenditure in 1548–1569 to 76 % in 1570–1589 and thus aggravated the national fiscal crisis that occurred during the late Ming dynasty. Secondly, climate deterioration (e.g., cooling, aridification, and an increase in the frequencies of frost- and drought-related disasters, etc.) led to a 20–50 % reduction in the per capita production of raw grain in most areas of China, which resulted in widespread food crises and exacerbated the vulnerability of social structures during the last several decades of the Ming dynasty. Thirdly, the severe droughts occurring in 1627–1643 were a key trigger to the peasantry uprising. These droughts also played a significant role to promote the peasantry uprising, especially reviving the peasantry troops by recruitment of famine victims when they nearly perished in 1633 and 1638, and severely disrupting the food supply for the government troops, resulting in the final defeat of the government troops by the peasantry troops. This study contributes to an understanding of the climate-related mechanisms behind the collapse of the Ming dynasty, and provides a historical case study that enhances our understanding of the nature of interactions between climate change and social vulnerability.

Role of Fiscal Policy in Tackling the HIV/AIDS Epidemic in Southern Africa

Three countries in southern Africa have the highest adult HIV prevalence in the world: Swaziland (25.9 per cent), Botswana (24.8 per cent), and Lesotho (23.6 per cent). Fiscal policy is crucial for addressing this HIV/AIDS crisis. Utilizing a calibrated model, this paper investigates the impact of fiscal policy on reducing the HIV/AIDS incidence rates in these countries. In particular, we studied the welfare impact of different taxation and debt paths in these countries in reducing the HIV/AIDS prevalence rates. This is particularly important given the current concerns about dwindling foreign aid (especially the global AIDS fund), and the fiscal deterioration and sustainability in these countries. Our results show that, acting optimally has not only a positive societal welfare effect but also positive fiscal effects. For example, it will alleviate the debt burden by 5 per cent, 1 per cent and 13 per cent of the GDP, respectively for Botswana, Lesotho and Swaziland by the year 2020. Thus, at a time of fiscal crisis in developed countries and dwindling international HIV/AIDS resources, the future of effective and efficient HIV/AIDS intervention in Africa is clearly domestic.

Towards a Stable Monetary Union: What Role for Eurobonds?

This paper investigates the role that Eurobonds could play in making EMU stable in the long run. We establish that EMU's budgetary problems are not only caused by lack of budgetary discipline, but also by the large and sudden fiscal deterioration during the financial crisis. This type of shock can never be fully ruled out. EMU member states appear more vulnerable in this situation than countries with their own currency, and risk getting caught in a self-fulfilling spiral of increasing interest rates. This presents a strong case for some type of rescue mechanism. We establish that neither the EFSF/ ESM nor the ECB form the ideal backstop, and that Eurobonds potentially offer a more stable solution, but at the price of important moral hazard problems. All existing Eurobond proposals therefore seek a balance between stabilisation and moral hazard, typically through retaining some degree of market discipline. Our Eurobond proposal improves the trade-off between stabilisation and moral hazard by using Eurobonds themselves to further enforce budgetary discipline. Even then, however, EMU governance has to be strengthened substantially and debt levels have to converge before Eurobonds can be introduced. Therefore, our Eurobond proposal could only serve as the capstone of EMU.

Fiscal Reforms in India

Fiscal Policy assumes a central place in the overall macroeconomic framework. As government sector and private sector compete for resources and for consumption in the economy, fiscal policy needs to be designed in a framework where an increase in government activity would result in net gains to the economy even when it may negatively impact in private sector activity, or reduce foreign exchange reserves or increase the monetary base. The specific objectives of the research are as to addresses the vital area of reforms, viz. fiscal reforms, to evaluate the impact of fiscal reforms on the public finances of the Union and state governments to analyze the outcome of the different tax measures and public expenditure, .to form a view of the effectiveness of fiscal reforms. Fiscal reforms have initiated a right kind of approach to maintain fiscal discipline in the Indian economy and the Indian economy has met it successfully at the national level however there has been some problems at the state level. Fiscal reforms have brought a new vision and mission for the government both central and state towards competitiveness and efficient mode for managing the economy The research work has analyzed the work of specialized institutions/ organizations of the govt. of India and RBI. The data are mostly sourced from budget documents of govt. of India , articles on central govt. finance published by RBI, finance accounts of govt. of India, handbook of statistics on the Indian economy published by RBI Compared the performance of the fiscal variables in the post reform decade to the extent possible subject of availability of data & put them in simple tabular form The policy simulation results revealed that fiscal deficit, in general, resulted in widening the current account deficit if it is money- financed. In this case, the price and income effects reinforce each other, leading to the deterioration in the external balance both in the short-run and in the long-run. Thus, the recourse to deficit financing to promote public investment and growth involves a loss of control on inflation The study will have an important implication in development programmes and public policies Key -Words:- Fiscal reform, Critical study, Indian economy, Fiscal discipline,Govt. policies I. Introduction In the post-independence years, with the gradual abatement of political and economic uncertainty, stimulating and accelerating growth was one of the primary objectives of fiscal policy. In a nascent economy where the income levels and financial savings were low, the fiscal assumed the responsibility of creating the capital base in the form of infrastructure to stimulate growth. Thus, India embarked on a planning process since 1950 which assigned a large role to the public sector and taxation was made the mainstay of public finances. Early empirical literature on the operation of fiscal policy in India since independence was, thus, skewed more in favor of taxation reflecting its significance in the strategy of resource mobilization for planned development. With the public sector assuming the ‗commanding heights' of the economy during the plan era, studies on public expenditure were closely associated with the performance of the five-year plans. Fiscal policy focused on achieving greater equity and social justice during the 1970s and both taxation and expenditure policies were employed towards fulfilling this objective. High marginal tax rates did not yield the necessary revenue to support the envisaged public expenditure. The growth in receipts thus lagged behind the surge in disbursements despite substantial amount of resources mobilized through additional taxation and hike in the administered prices. Thus, during the 1980s Indian public finance was in a state of disarray with the fiscal pattern destabilizing the relationship between the economy and the budget. This resulted in persistently large deficits which were seemingly intractable. Therefore, the decade of 1980s could be called the decade of fiscal deterioration which, in turn, raised the question of sustainability of fiscal stance of the Government. Empirical research thus, took cognizance of alternative concepts of deficit to analyze its impact on the economy. The fiscal semblances of the 1980s spilled over to the external sector resulting in the macroeconomic crisis of 1991. Another disquieting feature of the fiscal system was the large size of monetized deficit which exerted inflationary pressures. The persistent and burgeoning revenue deficit which became endemic in the system pre-empted the borrowed resources, reducing the availability of resources for capital investment. The structural adjustment programme and the consequent economic reforms gave a fresh dimension to empirical analysis of fiscal policy which focused not only on the various instruments of fiscal policy and issues of debt but also on the overall fiscal sustainability in the context of an open economy framework. Although the first half of the 1990s witnessed some fiscal correction, its retraction

Ghana: Fiscal Policy Responsiveness, Persistence and Discretion

Fiscal policy involves the use of government spending and taxation to influence the level and direction of economic activity in an economy. Fiscal policy affects aggregate demand, the distribution of wealth, and the economy’s capacity to produce goods and services. The objective of the paper is to assess how fiscal policy is influenced by output conditions, past fiscal policy measures and the discretion of fiscal authorities. We therefore employ Two Stage Least Squares (2SLS) to decompose fiscal policy in the context of both revenue and spending into its principal components – responsiveness, persistence and discretion. The results show that while government revenue is more responsive to output conditions than government spending, government expenditure is more persistent than government revenue. We also found that fiscal authorities in Ghana have generally low discretion. We think that while an upward adjustment in rates, fees and user charges that raises nontax revenue above 20 percent of domestic revenue would help reduce the responsiveness of government revenue to output conditions, a downward revision of some statutory payments especially the District Assemblies Common Fund (DACF) and a thorough review of others such as GETFund and NHIL could help in introducing some dynamism in fiscal policy setting with the possibility of reducing the existence of fiscal deterioration in the long term

Assessing long-term fiscal developments: evidence from Portugal

We use a Three-Stage Least Square (TSLS) method and a system of equations to recursively estimate two components of fiscal policy – responsiveness and persistence – and to infer about the sources of fiscal deterioration (improvement). The results suggest that (i) government spending exhibits higher persistence than government revenue and (ii) government revenue is more responsive to the business cycle than government spending, pointing to fiscal deterioration issues.