Fiscal Deterioration Research Articles

Assessing long-term fiscal developments: A new approach

We use a new approach to assess long-term fiscal developments. By analyzing the time-varying behaviour of the two components of government spending and revenue – responsiveness and persistence –, a feature not captured by automatic stabilisers, we are able to infer about the sources of fiscal deterioration (improvement). Drawing on quarterly data, we estimate recursively these components within a system of government revenue and spending equations using a Three-Stage Least Square method for eight European Union countries plus the US. The results suggest that significant changes in the fiscal stance (including those related to the current crisis) are reflected in the estimates of persistence and responsiveness.

Decomposition of Fiscal Deterioration in the OECD

Government fiscal positions in all the advanced economies suffered severe deteriorations during the financial crisis. Figure 1 illustrates the cumulative deterioration of the government budget ratio as a per cent of GDP between 2007 and 2009 in a selection of OECD economies. The sharpest declines materialised in Ireland, Spain and Finland, while public finances in Austria, Germany and Italy have held up better. Budget deficits have worsened in part because of the cyclical downturn, in part because of the policy response to the crisis, including both fiscal stimulus packages and certain fiscal costs related to government support of financial institutions, and in part because of a change in the relationship between revenue and production, which may prove longer-term.

Fiscal Scenario of the State of Uttar Pradesh

Uttar Pradesh most populous State experienced almost the same pattern of fiscal deterioration as did the other States. In the beginning of the nineties all the fiscal parameters were showing the deficit of significant magnitude. As there was no effort on the part of the State such imbalances were enlarged further and reached the peak by 1998-99. Around this time fiscal discipline began to be focused resulting in the marked improvement in all the fiscal parameters. The improvement in fiscal situation realized in the new century may turn out to be instable. The area of concern could be the injudicious capital expenditure reflected in the abysmally low interest receipts which as per-cent of loans and advances, for most part since early nineties, has been less than one per-cent. Dividend on equity too was low till 1997-98 but thereafter it increased significantly. Of late State has succeeded in bringing about fiscal correction. Twelfth Finance Commission’s debt relief package played a key role in such corrections. Besides consolidating all its outstanding loans, contracted at higher interest rates, and swapping them with the low interest one Commission offered a debt write-off as well. Of these the former was subject to State enacting a Fiscal Responsibility Act which makes the State committed to achieving certain targets by the year 2008-09. However the latter was conditional upon State’s fiscal correction actually achieved every year. So the present comfortable fiscal situation of the State has been obtained through debt relief measures and the greater financial devolution. States own revenue structure no fundamental change could be observed. This generates apprehensions that present fiscal discipline can be short lived or alternatively it can continue at the cost of depriving the population the necessary social and economic services.

Assessing Long-Term Fiscal Developments: Evidence from Portugal

Drawing on quarterly data for Portugal, we use a Three-Stage Least Square 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.

India's Intergovernmental Transfer System and the Fiscal Condition of the States

India's fiscal deficit and steep deterioration in state finances is a source of concern. The literature abounds with references to the combined fiscal deficit of the center and the states currently at over 10 per cent of GDP. During no other eight year period has the debt-GDP ratio rose by more than 10 percentage points where the ratio of outstanding debt to GDP increased from 21 per cent in 1996-97 to 35 per cent in 2004-05 (Budget Estimate). In this paper, we contend that the lack of State fiscal discipline is due in large part to a flawed intergovernmental fiscal system that fosters fiscal profligacy at the state level. Specifically, the States are highly dependent on transfers from the Union Government, which breaks the Wicksellian link between costs and benefits. There is a lack of transparency and accountability in the system because of extensive use of inadequate revenue assignments, lack of sufficient decentralization to local bodies, and a poorly designed intergovernmental transfer system. Finally, the States are operating under soft budget constraints which encourage fiscal profligacy. In this paper, we concentrate our discussion on issues related to the intergovernmental fiscal transfer system. We contend that the high transfer dependency of the states has weakened accountability and fiscal discipline. The transfer system is also very complex and lacks transparency and coordination among the institutions in charge of implementing transfers, which together produce a cycle of distorting incentives. If the fiscal behavior of the States reflects the incentives created by the intergovernmental system, as we contend, then, absent structural reform of the intergovernmental fiscal system that addresses the perverse incentives of the current system, the fiscal trends described above are likely to persist. Although the Twelfth Finance Commission (TFC) has addressed some of the issues related to the intergovernmental fiscal system and soft budget constraint, there is still an urgent need to tackle other issues in the intergovernmental fiscal system that create perverse incentives and soften budget constraints. This emphasizes the need for the State and Union Governments of India to strengthen and accelerate the reform of India's intergovernmental system.

Brazilian fiscal institutions: The Cardoso reforms, 1995-2002

This paper looks at Brazil’s fiscal policy during the two administrations of President Fernando Henrique Cardoso: 1995-1998 and 1998-2002. It stresses that the authorities’ austere attitude was as important as institutional and structural reform for the fiscal adjustment that followed the 1998-1999 crisis. The principal cause of the fiscal deterioration in 1995-1998 was the reduction in the primary balance rather than the increase in the interest burden, while the fiscal adjustment in 1999-2002 was largely due to increased revenues, as primary public expenditure by the federal government continued to grow in real terms. We consider the outlook for fiscal sustainability and conclude that, to preserve the country’s hard-won fiscal discipline, the austere fiscal attitude shown recently by the authorities should be permanently embedded into fiscal institutions.

Fiscal Policy and Debt Sustainability: Cardoso's Brazil, 1995-2002

We look into Brazil`s public sector accounts during the two administrations of President Fernando Henrique Cardoso: 1995-98 and 1998-2002. We underline the fact that the authorities` attitude was as important as the pace of the structural reforms for understanding the dynamics of the public sector debt and deficit. The high deficit of the first administration (1995-98) resulted from an expansionary policy, while the adjustment of 1999 is seen as proof of a commitment to fiscal rigor and the need to finance public spending adequately. We present a detailed breakdown of the fiscal outcomes. Two important messages come out: (a) the principal cause of the fiscal deterioration in the first Cardoso administration was the deterioration in the primary balance rather than the increase in the interest payments on public debt; and (b) the fiscal adjustment was entirely on account of increased revenues, as the federal primary public expenditure grew in real terms during the eight years of the two administrations. We consider the outlook for fiscal sustainability, and conclude that, to preserve the hard-won fiscal discipline, the authorities` recent austere fiscal attitude should be permanently embedded into the fiscal institutions.

Economic Effects of Sustained Budget Deficits

The effects of fiscal policy on the economy have received substantial attention in academic and policy circles. We review this literature in light of recent policy debates and new research and obtain three results. First, other things equal, deficits reduce national saving and future national income, even if international capital inflows avert an increase in interest rates. Second, the recent fiscal deterioration implies significant declines in future national income. Third, studies incorporating the best available information about expected future deficits tend to find significant effects of expected deficits on current long—term bond yields, controlling for other factors.

The Diseased Body Politic, Athenian Public Finance, and the Massacre at Mykalessos (Thucydides 7.27–29)

The Diseased Body Politic, Athenian Public Finance, and the Massacre at Mykalessos (Thucydides 7.27–29) Lisa Kallet In the midst of his account of the Sicilian expedition Thucydides pauses to describe the economic and financial effects of the Spartan fortification of Dekeleia in Attica in 413 (7.27–28); one result of signal importance for the empire was Athens' decision to abolish tribute, and in its place to levy a harbor tax, the eikostē. Following this digression the historian relates an episode emblematic of the atrocity of war, the wholesale slaughter of the inhabitants of the defenseless Boiotian town of Mykalessos by 1,300 Thracian mercenaries. Most scholars would not adhere to Eduard Schwartz's view that the financial/economic digression has nothing to do with the representation of the Thracians' savagery;1 nevertheless, the two sections have tended to be examined separately, the former by historians of the Athenian empire and finance2 or by Thucydidean scholars looking at the passage historiographically but as distinct from 7.29,3 and the latter by Thucydidean scholars exploring its function in the History.4 There are, however, strong grounds for reading them together: in particular, a degree of detail in each not otherwise warranted by the narrative, a framing device, and the shared use of language common to the description of disease, all suggest that Thucydides was intentionally linking the two sections. By this linkage, I propose, Thucydides not only draws a connection between Athenian public finance and human suffering, but also develops themes central to the work as a whole, namely, those of moral responsibility, human nature, [End Page 223] the conflict between reason and passion, and the nexus of finances, leadership, and military power. First, the detail in both the fiscal digression and the episode at Mykalessos immediately stands out, given their placement within the Sicilian account, the most self–contained and focused part of the History.5 Much of the substance of 7.27–28 concerns a gradual process of fiscal and economic deterioration, yet Thucydides is prompted to embed a diachronic, thematic account in the context of an event utterly trivial to the expedition and the entire course of the war, namely, the tardy arrival of Thracian mercenaries in Athens and the decision to send them home. Moreover, shocking atrocity that the massacre at Mykalessos was, it was peripheral to the war, a minor event that could have been easily omitted, or relegated to a sentence. It is relevant to note in this connection the differing treatments of Skione and Melos. What happened in those places, in 422 and 416 respectively, was identical—a siege and subsequent massacre of the males and enslavement of the women and children—yet Thucydides relates the information about Skione as a passing mention in one sentence (5.32.1), whereas he devotes pages to Melos (5.84–116). The prominence given to the fiscal digression and to what happened at Mykalessos, through such detailed narrative and especially the juxtaposition of the two sections, is in itself a sign that Thucydides intended a larger significance—through their interrelation—to be accorded to these events. The comparative example of Melos is again relevant, for its significance lies partly in its juxtaposition to the Sicilian books (which would explain why Thucydides chose to highlight it, rather than the identical case of Skione's treatment), as is similarly the case with the juxtaposition of the Funeral Oration and the plague (and Perikles' last speech). Thucydides constructs a second link between the two sections by using the subject of the Thracian mercenaries as a framing device for his digression on the economic effects of Dekeleia: in 27.1–2, the Thracians arrive in Athens too late for the expedition for which they had been intended, that of reinforcing the army in Sicily. The Athenians, Thucydides continues, decided to send them home, because "to keep them for the Dekeleian War seemed very costly; for each received a drachma a day" ( [End Page 224] ).6 Yet rather than immediately return to Sicilian events, or continue with the Thracian narrative, he instead undertakes a lengthy analysis of what was a gradual process of fiscal deterioration that could have...

Welfare Entitlements: Addressing the New Realities

Over the past several decades, various interest groups, depending on their ideological views, have attempted to use the Internal Revenue Code to accomplish different social and economic objectives. Liberal reformers have opted for wealth redistribution to lower income groups, whereas more conservative reformers have tended to oppose these redistributive measures. As the Clinton administration grapples with the task of governing the nation, one of the most difficult dilemmas confronting the administration is the reform of the Internal Revenue Code so that it addresses the stagnating economy while maintaining some social welfare functions. This article proposes that social workers should advocate for changes in the Internal Revenue Code that promise to reduce poverty, the most fundamental social problem in the United States. The elimination of poverty has been a long-standing goal of the social work profession. The reduction of the incidence of poverty decreases the risk of other serious problems afflicting poor people including homelessness, child maltreatment, mental and physical illness, and IQ deficits among young children (Jencks & Mayer, 1990). After the publication of Titmuss's (1969) classic analysis of tax expenditures for the middle class, social workers have tended to focus on the Internal Revenue Code when attempting to justify welfare entitle-merits for poor people (Abramovitz, 1983). The new political realities reviewed in this article strongly suggest that social work should promote changes in the Internal Revenue Code that will reduce poverty through job growth and incentives that make work more rewarding for welfare recipients and low-income Americans. Welfare Entitlement Dilemma The political unpopularity of welfare entitlements is growing in spite of the decline in current spending per poor person. Although it is difficult to fully estimate spending for poor people because social security and Medicare assist poor people, current spending per poor person remains 20 percent below the 1978 level. When viewed in the context of the gross national product, the proportion of antipoverty spending declined in the 1980s from 3.9 percent to 3.5 percent (Levitan, 1990). Moreover, although the federal deficit was primarily caused by a significant increase in defense expenditures (Bowles, Gordon, & Weisskopf, 1990) and a significant reduction in taxes for high-income taxpayers, a large proportion of the general public perceives welfare entitlement programs as accounting for the bloated federal deficit and tax increases for the middle class. Opposition to welfare entitlement programs is not limited to the general public. Theorists of the so-called new paternalism and behavioral poverty have argued, with considerable forcefulness, that although welfare entitlements raise millions of Americans out of poverty, they do so at considerable financial and social costs to society (Mead, 1989, 1992). The availability of welfare entitlements, according to these critics, creates massive dependency and withdrawal from the labor force. Although it is true that dependency is a reality for some welfare recipients, empirical studies to date have provided little insight into the extent of dependency that is caused by Aid to Families with Dependent Children (AFDC) and similar programs. However, public opinion is not guided by factual evidence. In the public's view, welfare entitlement programs are both a waste of taxpayer monies and harmful to the recipients who receive welfare assistance. Entitlement programs are further burdened by the public perception that the majority of the nation's poor people live in inner cities where they take advantage of entitlement programs. This perception is made more negative by both the rising crime rate and the fiscal deterioration of inner cities. Some scholars support this point, noting that inner cities should be abandoned and people should be encouraged to migrate to the suburbs, where jobs are more plentiful (Kasarda, 1988). …

The fiscal effect of community composition on public services and welfare

I consider the changes in the public service level and in the utility of wealthy families when a community of wealthy families expands to include more poor families. Public expenditure is financed by a property tax and set by majority voting. Because adjustments in housing are sluggish, families vote treating house sizes as fixed, and utility is not maximized. The model structure suggests that the signs of the changes are a priori ambiguous—in particular, the fiscal deterioration may cause the public service level to rise and the utility of the wealthy resident to be increased. The changes are estimated in a model with typical parameter estimates.

Transmission of the Effects of the Fiscal Deficit in Industrial Countries to the Fiscal Deficit of the Developing Countries

The paper shows that an increase in the aggregate fiscal deficit of the industrial countries may worsen the economic growth and fiscal balance of the developing countries that are burdened with external debt and facing current account constraints. The discussion is based on theoretical analysis and simulation exercises highlighting the relevant transmission mechanisms involved. Simulations show that higher fiscal deficits and interest rates in the industrial countries can explain some of the fiscal deterioration in the developing countries during the early 1980s, and the medium-term costs to the developing countries may be partly mitigated through flexible domestic economic policies.

Intergovernmental redirection.

Intergovernmental reformers have long attempted to remedy the system's more apparent defects, especially the recent buildup in federal-state-local relations as Washington's involvement became broader and deeper. These remedies have included incremental and procedural changes, rationalization of federal aid and program delivery instruments, and total overhaul of the system through functional realignment. Efforts in the past have proved only marginally successful, essentially due to the fact that Congress had become the dominant architect and defender of the system. The world of intergovernmental relations changed dramatically from 1978 on, due to the poor performance of the economy, antitax and antispending sentiment, public-sector retrenchment, and fiscal deterioration at the federal level. Decentralization, competition, and fragmentation characterize the contemporary do-it-yourself federalism. President Reagan's proposed swap, turnback, and trust-fund package of New Federalism seeks to capture these changes in a system realignment. I examine these changes in light of whither intergovernmental relations go in the 1980s.