Fiscal Prudence Research Articles

FISCAL SUSTAINABILITY AND ECONOMIC GROWTH: A CASE STUDY OF UTTAR PRADESH IN THE 21ST CENTURY

Fiscal sustainability refers to the maintenance of public finances within an affordable and serviceable limit by rationalising debt and deficits within tolerable limits. India, since the time of independence has been taking assistance of debt and deficits to meet its shortages in revenue for the purpose of development and growth. For quite a long time, the concept of fiscal prudence was not given due importance of its role in ensuring long-term sustainable growth. It was only after the major economic crisis of 1990s, that several reforms were initiated targeting at longer duration targets. As a part of series of these reforms, FRBM Act was implemented in 2003 to keep a check on the fiscal indicators of the country especially the revenue deficit, fiscal deficit and debt-GDP ratio to contain the situation of growing fiscal indiscipline. The act was implemented both at the Centre and State level. It has almost been a decade and a half since its implementation. In the course of this duration, some states focused more on the growth parameters while other states focused more on the fiscal sustainability which in turn will initiate growth according to the ideology behind it. The present study specifically makes an analysis of the policies adopted by the state of Uttar Pradesh to establish fiscal sustainability. An investigation has been done to evaluate whether fiscal sustainability measures have adversely affected the growth of the state? The study concludes that although Uttar Pradesh is the most populous and one of the largest state, area wise, it could not create an investment atmosphere for investors due to lack of infrastructure and other facilities because of its focus on fiscal sustainability. KEYWORDS: Fiscal Sustainability, FRBM Act, debt-GSDP ratio, fiscal deficit, interest payments.

Infrastructure Investment in India: Squaring Theory, Data and Common Sense

The study makes a novel attempt to estimate the quantum of funds channelised in the physical infrastructure sector, by the private–public split as well as per project parameters. The study finds a downward trend in the private investment in infrastructure post 2009–2010. This needs to be understood in correspondence with the rise in the number of stalled/shelved projects under private ownership post 2008–2009. This rise in the locked-in finances could explain the disincentive in making fresh investments by the private sector. However, what this data also reveals is that the average per stalled/shelved project cost is higher under public ownership even though the number of such projects isfound higher under private ownership. Lumpy project investments are locked in public projects that can be viewed as a real cost. Fiscal prudence leaves little scope for further extension of finances from the government’s kitty in this domain. Moreover, commercial banks cannot be relied on due to the staggering share of non-performing assets emanating from the over exposure to this sector. A market for long-term debt could be a panacea for the perils facing the sector as well as the stressed banking sector. JEL Codes: E01, E22, E69, G31

Family Wealth Accumulation and Fiscal Prudence among China’s Young Adults: Between the Privileged and the Common

Young adults in middle class Chinese families are seeing increased access to their family’s wealth. With the growing ubiquity of digital payments and consumer goods, they are spending at an ever increasing rate. But for young adults from less privileged financial backgrounds, high disposable incomes and glamorous shopping items may be out of reach. This paper is designed to analyze the development of financial literacy among all groups of young adults in China and assess the rationality of their financial behavior. I sought to determine the correlations between financial literacy, family income and fiscal prudence. I applied methods like OLS regression, entropy weight model and significance test to establish firm correlations. I hypothesized children of wealthier families would behave in a more financially reasonable way as they tend to have access to more education and general financial information. Thus, I would test using initial hypothesis that more privileged children will react and shop more prudently, which is further proved in the sections below.

Fiscal Prudence: It’s All in the Timing – Estimating Time-Varying Fiscal Policy Reaction Functions for Core EU Countries

When estimating fiscal policy reaction functions (FRF), the literature has well recognized the importance of non-linearities. However, there is yet very little attempt to formally test for the presence and potential sources of a non-linear fiscal responsiveness. In this paper we address this gap by formally adressing model specification of the FRF in a panel of five EU countries. Employing a Bayesian stochastic model specification search algorithm, we provide formal evidence for time-varying fiscal prudence over the last 50 years. The primary balance responsiveness exhibits smooth but significant variation over time and thus confirms the necessity of a non-linear model. Moreover, the extended results show that dynamics can be partially linked to the interest rate growth differential and the level of public debt itself. However, no clear evidence is found in favor of the fiscal fatigue proposition.

Command Agriculture and Food Security: An Interrogation of State Intervention in the Post-Fast Track Land Redistribution Era in Zimbabwe

Command agriculture is a contract farming scheme necessitated by land redistribution that ruptured Zimbabwe’s sources of resilience, distorted credit access, heightened tenure insecurity, and spiked vulnerability to droughts. Using qualitative analysis of extant literature, this article rationalizes the program’s nobility of cause but argues that the program alone cannot revamp agriculture. Notwithstanding how the program has evolved, revamping agriculture also encompasses policies that address fiscal prudence and macroeconomic resilience. Equally important is agricultural training that fosters skills and technologies that are not only climate-responsive but also meet the demands of the constantly evolving agrarian value chain.

Fiscal institutions: different classifications and their effectiveness

Fiscal institutions have been increasingly recognized as being useful for improving fiscal performance. These institutions are defined in different ways, but when a narrower definition is used, they correspond to independent fiscal institutions (IFIs), also called fiscal councils. In this paper, we employ three different classifications of fiscal institutions: from the European Commission, the International Monetary Fund, and one adapted from Calmfors and Wren-Lewis. Our main aim is to assess the impact of fiscal institutions on fiscal performance within a panel composed of the 28 countries of the European Union during the period of 1999–2016, using the bias-corrected least squares dummy variable dynamic panel estimator. We also explore the complementarity between fiscal institutions and the other elements of fiscal governance: numerical fiscal rules, medium-term budgetary frameworks, and the Stability and Growth Pact deficit and debt rules. The results confirm that fiscal institutions improve the discretionary implementation of fiscal policy: policy measures are less procyclical and more concerned with the sustainability of public debt. We also conclude that there is a complementary relationship between IFIs and the Stability and Growth Pact deficit rule, and that the performance of discretionary fiscal policy seems higher in countries with fiscal institutions than in countries with a predisposition for fiscal prudence.

Clinical and economic burden of postoperative nausea and vomiting: Analysis of existing cost data.

Postoperative nausea and vomiting (PONV) is an undesirable outcome that occurs in up to 30% of patients. Over the years, the cost of treating PONV has decreased due to the availability of cheaper yet effective antiemetics. Limiting PONV development benefits the hospital system as studies have shown that prevention is associated with shorter post-anesthesia care unit (PACU) stays as well as decreased supply costs and staffing burden. The financial burden for prophylaxis against PONV has been shown to be less than what patients are willing to pay to prevent the development of PONV. Studies have also shown that prevention of initial development of PONV limits readmission rates, which is beneficial to both the patient and the hospital. Owing to recent economic analysis and reductions in antiemetic prices, the patient's preference for comfort, the hospital's commitment to providing the best care, and the system's desire for fiscal prudence are aligned. This culminates in recommending PONV prophylaxis for all patients undergoing anesthesia.

An empirical analysis of sustainability of public debt among BRICS nations

The main objective of this paper is to verify the sustainability of public debt among Brazil, Russia, India, China and South Africa (BRICS) in a political economy framework. Annual panel data have been used for BRICS countries from World Development Indicators of World Bank for the period 1980–2017 for the analysis. Bohn's sustainability framework is used to examine the sustainability of public debt in BRICS nations and verify the influence of political economic variables such as election year, coalition dummy, ideology of the government and unemployment on public debt sustainability. The results suggest that public debt sustainability is weak for BRICS as a whole. China and India have a better public debt sustainability coefficients compared to the same for Brazil, Russia and South Africa. Structural change dummy included in the model suggests that debt sustainability is severely affected after the 2008 crisis period. Political factors have influence on debt sustainability in BRICS. Electoral cycle year and coalition dummy variables adversely affect public debt sustainability in BRICS. While centrist political ideology is found to be significant and negative, left and right ideologies are not significant for debt sustainability. Since debt sustainability is found to be weak in BRICS, countries in the region need to adopt necessary measures to improve their primary balance through appropriate fiscal and debt management. Besides, it is important for the governments to prioritize fiscal prudence irrespective of their ideologies and political compulsions.

Seeking Fiscal Prudence in Union Budget!

The ideas of John Maynard Keynes have dominated the 20th century macroeconomic theory and ushered fundamental changes in the economic policies pursued by the governments all over the world. He emphasized the significance of 'Fiscal Stimulus' to mitigate the adverse effects of economic slowdowns and downturns. Since then, the policy makers at large took the clue and have been adopting Deficit Financing as an effective instrument for the purposes of: (i) Stimulating Economic Development, and (ii) Overcoming Financial Stresses and Strains. A growing enterprise garners stakeholder credibility and is able to turn around its current assets very fast and service the current liabilities on dot. On the same analogy a credible deficit infused towards economic development has to be self gearing and servicing. Eliminating RD altogether, containing FD to 3% and limiting the liabilities to 40% of GDP - as has been targeted by the successive Finance Ministers over the decades - are commendable and if, and only if, achieved, can certainly lead to Ease of Indian Fiscal Deficit. Indian deficits, if contained to normative levels, can accelerate the economic development with astonishing pace and work wonders. What appears to be lacking is political will and administrative acumen. A scrupulous and onerous target that can be thought of in this respect is that 'Balancing the Budget over a period of Political Cycle of five years' as would be the case of 'Balancing Working Capital over one Business Cycle'. And, there lies Indian Fiscal Prudence which every Indian continues to seek for decades and decades!

Financial Globalization and Economic Growth in South Asia

The article examines relationship between financial globalization and economic growth in South Asian countries namely Bhutan, Bangladesh, India, Maldives, Nepal, Pakistan and Sri Lanka. Following the framework of Bekaert et al. (2005) and with the help of Panel VAR and Panel causality (in GMM framework) models the study concludes that the causation from financial globalization to growth in the region appears to be weak. There appears reverse causation running from growth to financial globalization. We found that domestic macroeconomic policies such as fiscal prudence act as pull factors for foreign capital. The article has some interesting results at individual country level.JEL: C33, F21, F36, F65

Estimated DSGE Model for Macroeconomic Analysis in a Small-Open Economy: A Ghanaian Perspective

The study develops a standard representative-agents’ New Keynesian model for macroeconomic analysis in a developing African economy. Using Bayesian estimation techniques and Ghanaian dataset, the core objective of the paper is to determine the best suited monetary policy rule for Ghana. After determining the most appropriate monetary policy rule for Ghana, the model is then used to ascertain the dominant macroeconomic shocks to inflation, output and interest rate. The basic finding is that a forward-looking Taylor rule - where authority reacts to one-period-ahead inflation deviation from target alongside current output gap - is the most appropriate monetary policy rule for Ghana. In addition, variations in output are mainly driven by price markup, labour supply, monetary policy and productivity shocks across the forecast horizons. This suggests that monetary policy still matters for output growth in Ghana in the short-to-long run. The dominant determinants of inflation are exchange rate risk premium and price mark-up shocks. The dominant drivers of domestic interest rate are price mark-up, domestic monetary policy and government spending shocks are across forest horizon. By implication, upholding exchange rate stability alongside fiscal prudence is very critical for achieving the broad macroeconomic objectivities in Ghana.

The Elasticity of Intertemporal Substitution: A Tool to Constrain Profligate Government Spending

We construct a theoretical model to explain profligate electoral fiscal behaviour and to provide a tool, namely the estimated elasticity of intertemporal substitution, for the fiscal authorities to detect and timely constrain such behaviour to promote fiscal prudence. The key is to obtain data on the incumbent party preferred sequence of public consumption levels over time. The model frames this case using a CES utility function and provides one possible mechanism to explain why there are so many examples in the empirical literature that find insignificant electoral biases in fiscal variables.

Populism: Root Causes, Power Grabbing and Counter Strategy

The economic agenda of bringing jobs back and improving dynamics can sometimes work in the short run, if past fiscal prudence has left some space for higher government expenditures for low incomes. However, in the long run, protection and redistribution without active components, innovation and new firms do not work.

Sustainability of Public Debt:An Analytical Framework

Sustainability is a term that has been used with increasing frequency in the academic literature and recent multilateral policy discussions. Taking note of the crises in different countries heading for a debt trap, it is necessary to look at the right combination of fiscal parameters and growth to achieve sustainability and stable development. Fiscal prudence involves exercise of good judgment, common sense and even caution in the conduct of fiscal policies, especially on the expenditure front. This paper deals with finding: (a) debt-GDP threshold which will support to find out at what threshold level there is nonlinear relationship between debt and GDP, (b) sustainability indicators which gives the overall depiction of the fiscal side which guides for fiscal prudence policies, and (c) Markov regime switching model which explains the relationship of debt and growth. The period of study is from 1980 to 2016 and it is with respect to the central government.

Honduras

This paper discusses Honduras’s 2019 Article IV Consultation and Request for a Stand-By Arrangement and an Arrangement Under the Standby Credit Facility. Supported by a Fund program that expired in December 2017, Honduras has reduced macroeconomic imbalances, institutionalized fiscal prudence, and laid the groundwork for a modern monetary policy framework. The authorities are committed to maintain prudent policies and to build on previous achievements to make progress in solving long-standing issues. The authorities’ economic program aims at maintaining macroeconomic stability, while enacting economic and institutional reforms to foster inclusive growth. Honduras needs to foster inclusive growth through reforms and better governance. Policy priorities include: reforms to increase the quality of fiscal policy, sustaining revenue mobilization efforts, protecting investment and social spending, and securing financial sustainability of the public electricity company; and reforms to enhance transparency and governance in the budget.

Fiscal Adjustments and Social Spending: An Analysis of the Indian Economy

The higher and unsustainable levels of debt have forced the economies to undergo consolidation policies to improve their fiscal position. However, such policies can impact both economic growth and welfare spending owing to their deficit dependence. The current study analyzed the debt dependence of welfare spending and tried to evaluate the impact of consolidation strategies on the long - term social and welfare spending in case of the Indian economy. The study employed the time - series data covering the time period from 1990 - 2018 concerning 13 variables broadly grouped under three headings, that is, spending on education, health, and welfare. The study utilized the technique of generalized method of moments technique (GMM). The study found that the deficit financing nature of the government is a significant determinant of social and welfare spending in the Indian economy. A 1% increase in the growth rate of deficit financing was found to augment the growth rate of spending on education by 0.13%, on health by 0.03%, on welfare by 0.15% with an overall impact of 0.11%. Such a debt dependence by the social and welfare spending raised doubts that a consolidation design may further endanger the already stagnating social and welfare spending. This is mainly if a consolidation programme pursued with an aim to infuse fiscal prudence heavily concentrates on the quantity rather than the quality of the design.

Assessing the Role of Governance in West African Fiscal Performance

The article analyzes the short-run and long-run dynamic relationship between the quality of institutions and fiscal performance in 12 West African countries over the period of 1984 to 2016 using Pooled Mean Group and Mean Group estimator. The results show that, in the long run as well as in the short run, improved governance appears to lead to decreasing deficits. In comparison with other measures, in the long run, democratic accountability dimension seems to have the most significant effect on West African fiscal performance. However, the empirical evidence further reveals that, in the short run, the institutional dimensions are found to be insignificant in explaining West African fiscal performance. Hence, given that increased public debt could harm the quality of sustainable fiscal measures, the study suggests that creating incentives for the building of sound institutions and securing enabling governance would enhance fiscal prudence and sustainability in West Africa. JEL Classifications: G, H

Is government borrowing crowding out long term debt resources

PurposeThe purpose of this paper is to empirically investigate the possibility of financial crowding out in the long-term debt market in India taking the corporate bond market as a proxy.Design/methodology/approachThe study follows a two-pronged approach. First, it tests the corporate bond market sensitivity to interest rate, along with other determinants like commercial bank credit and government securities size using the autoregressive distributed lag approach. These are considered instrumental in the development of a long-term debt market. Second, it tests if the interest rate changes are fiscal deficit (FD) induced using Granger causality framework.FindingsIt finds evidence of both the interest rate sensitivity of the corporate bond market and the interest rates to be FD induced, thereby empirically validating the possibility of financial crowding out in the Indian debt market segment.Research limitations/implicationsBased on the results, it seems that any deviation from the path of fiscal prudence can prove dear in the development of the corporate bond market. Also, the banking sector is overexposed to the risks it is not geared to handle, given by the serious asset-liability mismatches and contraction it leads in the market debt, like the corporate bond market. The government securities market could be further developed, which would provide a cue to corporate segment further and also a benchmark yield curve.Originality/valueThe study adds to the very limited literature on the corporate bond market in India, especially in the empirical domain and possibly is the first attempt to empirically explore the aspect of financial crowding out with reference to corporate bond market.

Solidarity and Responsibility in the Euro Area: Foes or Friends?

Abstract The recent debate on the reform of the economic governance in the euro area has been marred by a stark disagreement on the correct sequence between risk-reduction (responsibility) and risk-sharing (solidarity). In fact, the dichotomy between risk-reduction and risk-sharing may be fallacious as they reinforce each other, particularly in a monetary union with no lender of last resort for the public sector and no common macroeconomic stabilization mechanisms. The lack of risk-sharing mechanisms is per se a major source of redenomination and default risks and thus it makes the euro area prone to financial market segmentation along national borders and ultimately weaker. At the same time, greater structural convergence has to be achieved through structural reforms and fiscal prudence in order to reduce the likelihood of future negative idiosyncratic shocks in currently vulnerable countries. Notwithstanding some progress towards a politically viable solution encompassing both responsibility and solidarity, a number of important issues remain controversial. This short article summarizes the debate and introduces some of these controversial issues, ranging from the correct role of market discipline when markets are prone to self-fulfilling prophecies and multiple equilibria, to the (dis)advantages of sovereign debt restructuring mechanisms based on rules rather than discretion, from the pros and cons of new safe assets in the euro area to the primacy of coping with debt legacy problems, and the like.

Fiscal Evasion in State Budgeting

This paper establishes a basic definitional framework that can be used to assess long-running fiscal practices in the states against a standard of fiscal prudence. The aim is to further refine this framework to capture the drivers of the states’ long-running fiscal problems and to offer recommendations for reform.