Fiscal Framework Research Articles

An empirical investigation of Bangladesh’s inflation dynamics: evaluating persistence and identifying structural breaks

We quantify two hypotheses: the “Friedman-Ball Hypothesis” and the “Cukierman-Meltzer Hypothesis,” in the context of Bangladesh. The first posits that an increase in inflation leads to greater inflation uncertainty, while the second asserts that inflation uncertainty causes an increase in inflation. Using monthly inflation data from June 1997 to July 2021, we find evidence supporting both hypotheses. Our analysis of inflation persistence and structural breaks reveals that inflation in Bangladesh exhibits high persistence throughout the entire sample period, but there is a decrease in persistence in two of the sub-samples after the breaks in March 2007 and April 2012. Moreover, Bangladesh’s inflation persistence is comparable to, and at times even lower than, that of its South and Southeast Asian neighboring countries. As policy implications of our findings, we emphasize the need for a more nuanced approach to monetary policy, including proactive interest rate management, implementation of a Medium-Term Fiscal Framework, and the development of a flexible monetary policy strategy tailored to Bangladesh’s unique economic circumstances.

Expenditure Rules: Limiting the Level or the Variation of Public Expenditure?

The main goal of the first-generation expenditure rules was to ensure fiscal discipline: preserving a sound fiscal framework and public debt sustainability. Regarding this goal, analytically as well as empirically, limiting the share of public expenditure in GDP would be more appropriate in case of weak potential economic growth or if the public expenditure-to-GDP ratio is high. On the contrary, limiting the variation of public expenditure would be more appropriate for countries with high potential economic growth or with a weak public expenditure-to-GDP ratio. The second goal of expenditure rules is to contribute to sustaining economic activity. Regarding this goal, limiting the level of public expenditure appears as more favorable than limiting the variation of public expenditure. Indeed, a rule in terms of variation could hamper economic growth, especially for countries with a high public expenditure-to-GDP ratio.

EU Economic Governance as a Supranational Determinant of Health Inequalities in the Eurozone

The COVID-19 pandemic raises the question of austerity's problematic social toll for health in the south of Europe. Has EU economic governance constrained health spending? If so, have these spending levels led to inequalities, which in turn shaped responses to the pandemic? EU economic governance is often dismissed as ineffective because of its poor track record of compliance. Yet austerity is blamed for negative health outcomes. This article shows that the EU fiscal rule is a determinant of health because it affects fiscal policies of European countries. First, the analysis of EU member states during 1995–2018 shows that austerity policies affect health spending and health inequalities. Euro-area countries under the EU Excessive Deficit Procedure significantly consolidated their health spending. The contractionary effect was concentrated in southern countries, contributing to rising health inequalities across the core and periphery. Finally, the analysis shows the pandemic implications of health inequalities, as periphery countries with a track record of high consolidation display more stringent (and costly) COVID-19 response models. This analysis contributes to understanding the supranational determinants of health in the EU, showing the pervasive spillover effects of the fiscal framework on national health policies.

Upgrading Fiscal Frameworks in Asia-Pacific

Upgrading Fiscal Frameworks in Asia-Pacific

Fiscal rules and economic cycles: Quality (always) Matters

This paper investigates the role of fiscal rules in managing public debt, particularly focusing on their efficacy during different phases of economic cycles. Analyzing Balance, Expenditure, and Debt Fiscal Rules, the study finds that their impact on debt reduction is significantly influenced by the quality of the fiscal framework and the economic cycle phase. Moreover, factors like legal basis, procedural framework, and political stability are identified as key to ensuring compliance with fiscal objectives. Our results suggest that fiscal rules are most effective in reducing debt during positive economic cycles, with the design and institutional support playing a crucial role. This has important policy implications, particularly in the context of the debt increase after the Covid-19 pandemic.

EFFECT OF SUBNATIONAL PUBLIC EXPENDITURE ON STATES’ FISCAL SUSTAINABILITY IN NIGERIA

Objectives: The study examined the effect of subnational public expenditure on states’ fiscal sustainability in Nigeria. Specifically, the study examined the effect of capital expenditure and recurrent expenditure on states’ fiscal sustainability in Nigeria. Methods Ex-post facto research design was adopted to carry out the research for the period 2016-2022. The panel data were collected and sourced from Audited Financial Statements of subnational, CBN statistical Bulletin, CBN Annual report and accounts, other CBN publications, publications of the National Bureau of Statistics (NBS), and Ministry of Finance (MOF) Medium Term Fiscal Framework and other publications of 36 states. Panel regression was used to analyse the hypothesis significant effect between subnational public expenditure and states’ fiscal sustainability in Nigeria with the aid of E-views 12. Results: The study found that capital expenditure has a significant effect on states’ fiscal sustainability in Nigeria. The study also found that recurrent expenditure negatively affects states’ fiscal sustainability in Nigeria. Conclusion: The study recommends that the state governments of Nigeria should adhere strictly to the implementation of capital expenditure so as to increase the level of infrastructural and productive base in Nigeria which will have the capacity to stimulate economic growth and create employment. Also, state governments should decrease spending, particularly regarding recurrent expenditure, to reduce the cost of governance in the country. This is because our results indicated that an increase in government recurrent expenditure reduces the level of the sustainability index.

A Suggested Medium-Term Fiscal Framework for Guyana

A Suggested Medium-Term Fiscal Framework for Guyana

Shifting Paradigms: Exploring the Tapestry of Global Assistance and Its Resonance within Nigeria's Fiscal Framework"

This study critically explores the Tapestry of Global Assistance and Its Resonance within Nigeria's Fiscal Framework from 1981 to 2021, the study objectively explored the degree to which various forms of foreign aid—such as official development assistance, foreign grants, and technical aid—impact public expenditure growth within a shifting economic paradigm. Employing statistical measures such as the Coefficient of Determination (R²), F-statistics, and the Durbin-Watson statistic. Incorporating variables such as foreign technical cooperation (FTECH), foreign grants (FGRANT), official development assistance (FODA), multilateral foreign aids (MFAID), and exchange rates (EXR), the study employs time-series data from the World Bank Development Indicators and a modified regression approach. The analysis seeks to delineate the complex dynamics between external financial inputs and internal fiscal outcomes over the period from 1981 to 2021. The findings reveal a nuanced landscape where foreign aid, though impactful, does not singularly dictate fiscal changes, suggesting a need for broader, more inclusive economic strategies that leverage both external and internal resources. Augmented Dickey-Fuller (ADF) tests confirm the stationarity of these variables, validating their reliability in modeling economic impacts. The ARDL bound test results indicate no long-term sustainable relationship between foreign aid components and public expenditure growth, pointing to a more nuanced interaction between foreign aid inflows and Nigeria’s fiscal strategies, whether expansive or restrictive.

The impact of floods and cyclones on fiscal arrangements in India: An empirical investigation at the sub-national level

Disasters can inflict severe devastation on communities and territories at all levels of authority. With regard to the connection between floods and cyclones and their financial impact, this study seeks to refocus national and subnational research efforts. The consequences of floods and cyclones on India's budget and economy at the subnational government level are examined in this study. The study creates a physical disaster intensity index to evaluate the impact on fiscal sustainability after disasters, as the estimated damages statistics are unreliable. Between 1995 and 2018, the study integrated disaster intensity index and budgetary data to produce a panel dataset of 25 Indian states. Using Panel Vector Autoregression, the study discovers that a state's overall government expenditure goes up, and its budget deficit worsens when floods and cyclones strike. By further breaking up the fiscal variables, we could pinpoint specific areas where disasters have exerted their influence, especially in terms of decreased own tax revenue, increased social sector expenditure and capital outlay, increased outstanding liability, increased primary deficit, and reduced transfers from the centre over time. It observed that after disasters, states more prone to disasters have higher volatility in revenue generation and expenditure patterns, and a sharp increase in outstanding liabilities. This suggests a greater reliance on borrowing for disaster recovery. Less-prone states, however, show higher utilization rates of disaster relief funds, indicating better resource allocation for disaster response and recovery. The study highlights that state governments rely highly on ex-post Disaster Risk Financing instruments, especially debt financing, as national relief and response funds couldn't manage the increased spending and budget deficit from disasters. This study thus helps policymakers and governments look for more proactive disaster financing instruments and make changes in India's fiscal framework to integrate climate change considerations.

Health disparity among older adults in urban China: The role of local fiscal conditions

This study explores the disparities in older adults' self-rated health within the urban landscape of China. Drawing on the 1% national population survey of China in 2015, it highlights how variations in city development contribute to geographical health disparities among older residents. In the era of the decentralized fiscal system, a crucial mechanism identified is the role of cities’ local fiscal revenue in connecting their socioeconomic development and the health status among older adults. Despite efforts by cities in lower socioeconomic positions to increase fiscal expenditure and address deficits through central transfer payments, they prove inadequate in effectively mitigating population health disparities. The prioritization of economic growth and neglect of public service provision responsibilities are fundamental causes within this fiscal framework. The findings underscore the urgent need for increased central transfer payments in public services to address the growing disparities in older adults' health.

Taxes and Entrepreneurship in Former Communist Countries

Abstract This paper analyzes the influence of the fiscal framework on entrepreneurship, seeking to quantify the magnitude of this influence. It starts by reviewing the main findings of the literature, showing that, while there is consensus that both tax levels and the bureaucracy that surrounds tax payments have a negative effect on entrepreneurship, there is no unanimity regarding which of the two have a stronger effect. It then continues with an empirical approach, which resides in estimating an OLS regression of two measures of entrepreneurship activity (the number of enterprises that are newly created during one year, and the total number of enterprises that exist in one year in a country) on three fiscal explanatory variables (profit tax levels, labor tax levels, and the time spent to pay taxes), using a panel sample of 27 post-communist countries across a period of 15 years. Empirical results suggest that both tax levels and the bureaucracy that surrounds tax compliance have a negative effect on entrepreneurial activity. The level of the profit tax exerts the strongest negative influence on both the number of newly created enterprises, and the total number of enterprises that exist in a country, while the level of the labor tax exerts a negative, albeit weaker influence, which is significant only for the total number of enterprises. The time spent to pay taxes (expressed as the number of hours per year) returns the lowest coefficient, yet it has a statistically significant negative effect on both the number of newly created and the total number of enterprises.

Fiscal Rules in the European Union: Less Is More

AbstractIn this article, we examine the non‐linear relationship between the number of fiscal rules in place and compliance with the European Union's (EU) numerical fiscal targets included in the Stability and Growth Pact (SGP). Using a sample composed of 27 EU Member States for a period spanning 2000 to 2021, we document that countries' compliance with fiscal rules is positively associated with the number of numerical fiscal targets. However, this association only holds up to a specific threshold. Once this threshold is achieved, the relationship becomes negative, implying that the multiplication of numerical fiscal rules may undermine compliance, thereby reducing their effectiveness. In addition, we find that general elections and frequent changes in government reduce compliance, whereas economic adjustment programmes contribute positively to countries' compliance with fiscal targets. The findings bear critical policy implications against the backdrop of the current review of the European fiscal framework.

УДОСКОНАЛЕННЯ КОНЦЕПТУАЛЬНИХ ЗАСАД ЄВРОІНТЕГРАЦІЇ ТА ФІНАНСОВО-ПРАВОВІ МЕХАНІЗМИ ПРИСКОРЕННЯ ВСТУПУ УКРАЇНИ В ЄС

Introduction. Since 2022, Ukraine has been following the path of “classical accession” to the EU, which involves the compliance with the Copenhagen criteria and adoption of the common EU legislation (acquis) in 33 policy areas/ chapters. But advancement withing this scenario is a long and resource-intensive process. Problem Statement. The urgent task is to find an optimal model of joining the EU with coherence to a reasonable time frame of this course, achieving high results of European integration and identification of the sources of funding for carrying out reforms and overcoming the consequences of the war after reducing the potential of the Ukraine Facility. Purpose - identification of the current financial and legal problems of the European integration process for Ukraine, generalization of the methodological pillars of the concept of staged accession to the EU as a more progressive version over the classic accession model, design of the policy proposals for updating monitoring tools and financial incentives for progressing across the subsequent stages towards the EU membership. Methods. General scientific and special methods are applied: reviews of theoretical sources, advisory and research papers, analysis of statistical data and legal documents, historical method, logical method, methods of comparison and synthesis. Results. The article summarizes the methodological pillars of the concept of staged accession to the EU, systematizes the legal mechanisms of negotiations and obtaining EU membership, shows the financial aspects of the European integration process, including access to the EU cohesion funds, and elaborates practically important proposals for the activity of the EU institutions and national bodies as to the operationalization of the model of staged accession. Conclusions. The staged accession model is the most holistic and logically structured concept that can evolve a predictable progress towards the EU membership. The model should be based on the European Commission's quantitative assessments of countries' preparedness for the membership within the framework of negotiating clusters and chapters. A system of performance indicators is also required that will record progress of the candidate countries across stages and will set the ground for disbursements from the EU funds in line with specified ratios. Since 2028, the new EU medium-term fiscal framework should provide for the formation of new funds to finance the recovery of Ukraine's economy and the application of the EU's cohesion policy towards Ukraine.

New Fiscal Framework: a tax regime that sustains capital and destroys labour

New Fiscal Framework: a tax regime that sustains capital and destroys labour

Explaining the Divergence in German and French Public Finances

Abstract In this contribution, I discuss the divergence of German and French public finances over the course of the last two decades. Major gaps in public deficit/debt levels and debt service costs have opened even under the presence of a common fiscal framework at the EU level. To explain these differences, I focus on three elements: the (non-)perception of budgetary and socio-economic crisis, differences in demographic conditions, and contrasting approaches towards the role of rules and expertise in fiscal policymaking. The contribution illustrates these points by providing two concise case studies on key developments in fiscal policymaking and institutions since the 1990s. I conclude with a brief reflection on German and French fiscal policymaking in the years to come.

Original sin: Fiscal rules and government debt in foreign currency in developing countries

Developing economies often borrow abroad in foreign currency, which exposes them to the problem of “original sin.” Although the literature on the issue is relatively extensive, there is limited discussion about the role of fiscal frameworks, such as fiscal rules, in addressing original sin. Using a panel of 59 developing countries from 1990-2020 and applying the entropy balancing method, this study reveals that fiscal rules play a crucial role in reducing government debt in foreign currency, and that the effects are statistically and economically significant and robust. Furthermore, we find that the effectiveness of fiscal rules in curbing original sin is enhanced by factors such as the strengthening of the rule itself, improved fiscal discipline before the reform’s adoption, financial development, financial openness, exchange rate flexibility, the level of economic development, and sound institutions. Finally, transmission channels analysis reveals that the effect of fiscal rules on original sin is driven by fiscal and monetary policy credibility.

Investing in European Public Goods While Maintaining Fiscal Discipline at Home

Abstract Putting the high public debt ratios on a downward path after the surge during the pandemic and allocating sufficient resources to deliver on the green and digital transition will be among the priorities confronting the EU institutions emerging from the June 2024 European elections. After a long and painful debate, EU institutions have agreed upon a new fiscal rulebook that aims to incentivise the reallocation of national public spending to the green and digital transition. However, the additional public investment is unlikely to suffice to comply with the goals of net zero that the EU has set for itself. In particular, investments of a transnational nature will remain undersupplied. This article proposes setting up a successor to NextGenerationEU – a new EU fund until 2030 for financing European public goods (EPGs) to address the double transition. Access to the facility would be conditional on adherence to the EU fiscal rules. By tying up the implementation of the new fiscal framework, the debate on the future of NextGenerationEU and the next multiannual EU budget post-2027, the credibility and internal consistency of these various instruments will be greatly enhanced.

The Law and Concept of Fiscal Devolution in the United Kingdom

Fiscal devolution is a multifaceted and evolving concept that plays a pivotal role in the governance of the United Kingdom, which is still under an ongoing development process. At the end of the 1990s the subnational governments achieved various stages of autonomy since the 1998 devolution acts, which ratified the administrative and fiscal devolution, provide the formal structure for revenue-raising and expenditure powers. The devolutionary process was facilitated after the Great Recession, assigning different income raising and welfare authorities to Scotland and Wales, while the same progress was dampened in Northern Ireland, because of the looming political instability. The system is complex, consisting of several essential elements that are closely linked to each other: devolution acts, fiscal frameworks, block grants, tax devolution, tax-varying powers, borrowing powers and the reserved matters. The results are not the same or uniform, each country has its own set of rules, negotiated with and enacted by the Westminster Parliament. It reflects the evolving nature of governance and the recognition that one-size-fits-all policies may not be suitable for a nation as diverse as the United Kingdom. It can be regarded as a testament to the adaptability of the constitutional and legal framework in response to changing political and social landscapes. The fiscal devolution experience in the UK underscores the need for a delicate balance between local autonomy and national cohesion. The legal and conceptual framework underpinning fiscal devolution has profound implications for economic policy, public finance, and intergovernmental relations and it is still subject of ongoing debates and reforms and not without complexities and challenges.

The national-level potential of Zakat and its integration into the fiscal framework: sector-specific insights from the economy of Bangladesh

PurposeZakat, one of the fundamental pillars of Islam, holds the potential to significantly contribute to fiscal consolidation, particularly in developing nations. However, the national-level potential of Zakat often remains unexplored. This study aims to explore the potential of national-level Zakat and the opportunity to integrate it into the fiscal framework.Design/methodology/approachThis study estimates Zakat’s potential on national financial and economic components. The components include bank deposits, shares and securities, pensions (provident fund), industrial production and trade services, mining resources, Ushr on agro-crops and forestry, Ushr on livestock, Ushr on fishery, gross domestic product (GDP), national budget and national revenue. The study gathers data, ranging from FY2000 to FY2018, on national economic sectors from reliable secondary sources. The net value (NV) of each indicator is calculated as NV = TV − LA, where NV is the wage-adjusted net value after deducting the living adjustment (LA) value from the sectoral total. The proposed LA value, approximately 20%, is suggested to be deducted from the total sectoral value of each sector (excluding specific industries with preadjusted wages), equating to the Nisab value.FindingsIt is estimated that the aggregate potential of Zakat in Bangladesh was US$9,749m in FY2018, compared to US$809m in FY2000, revealing the value is 3.77% of GDP and 21% of the national fiscal budget. In FY2018, the service sector was the largest contributor (30%), followed by bank deposits (23%). Pension funds made minimal contributions, whereas shares and bonds, as well as the manufacturing sector, each made a 10% contribution to the estimated Zakat potential. Zakat on agriculture output accounted for 15% of the total. The aggregate potential Zakat in FY2018 was 12% higher than that in FY2000.Originality/valueThe paper highlights a novel contribution through its nuanced analysis of sector-specific Zakat on macrolevel data and its implications within the fiscal framework. The results suggest that Zakat has substantial potential to impact fiscal dynamics, providing valuable insights for policymakers and stakeholders to recognize the national-level Zakat for development plans such as the five-year plan. The study suggests piloting a central and independent national body to study the feasibility of national-level Zakat collection and its utilization in the fiscal budget. It will help the government reduce the burden of external debt and deficit budget and, instead, will promote revenue collection in collaboration with the National Board of Revenue.

Choosing the European fiscal rule

ABSTRACT In order to quantitatively assess the potential effects from the ongoing transformation of the fiscal framework of the European Union, we evaluate the economic and public finance stabilization properties of two benchmark fiscal rules using a New Keynesian small open economy model. If these fiscal rules are implemented one at a time, having just an expenditure growth rule tends to yield more stable macroeconomic outcomes but more volatile public finances, as compared to having only a structural balance rule. Much of the quantitative differences in relative volatilities can be accounted for by using a modified public expenditure definition in the expenditure growth rule, in particular the removal of debt service payments. The expenditure growth rule with a strong-enough debt anchor strikes the balance between the short-term macroeconomic stability and the medium-term public debt convergence. There is a welfare gain for households from having only an expenditure growth rule.