Fiscal Surplus Research Articles

FX resilience around the world: Fighting volatile cross-border capital flows

The volatility of cross-border capital flow (CF) has become higher in the last two decades. We use a sample of advanced and emerging market economies in the last two decades, with a focus on portfolio fund flows (equities and bonds). We find that the impact of portfolio CF volatility on exchange rate (FX) volatility is diminished in the short-term if specific economic fundamentals of the country are stronger, especially when these fundamentals pass certain threshold levels. The finding is controlled for different exchange rate regimes and the level of capital control. We further introduce an intuitive FX resilience measure that can be used to assess the stability of exchange rates in the context of heightened CF volatility. The decomposed FX resilience measure shows that the major contributing fundamentals to FX resilience are from the finance channel, including short-term interest rate, fiscal surplus, and financial development.

The trees of occupation are flourishing: employment and substitution effects of regional economic complexity

PurposeCan regional economic complexity improve the employment effect, and is the employment structure also affected by heterogeneity? In order to solve these doubts, this paper plans to carry out systematic theoretical analysis and quantitative tests on these problems.Design/methodology/approachBased on the macroeconomic data of 129 countries from 1995 to 2022, this paper empirically studies the impact of economic complexity on the employment effect and its mechanism channel by building relevant models.FindingsThe results show that regional economic complexity can significantly improve the employment effect of society. At the same time, regional economic complexity has an indirect positive role in promoting employment from two aspects: accumulating fiscal surplus and increasing the working-age population. The former can stimulate employment policies by increasing the government’s tax sources, while the latter can increase production specialization and complexity by stimulating demand and increasing employment. In addition, regional economic complexity will lead to job market differentiation, making the boundary between the service sector and the labor market between industry and agriculture and between the informal employment market and the formal employment more obvious, thus triggering the substitution effect of employment.Originality/valueThe possible innovations and marginal contributions of this paper are as follows: First, there are many studies on the influencing factors of employment or unemployment, and this paper provides a new research direction for the literature on the influencing factors of employment effect by using the concept of regional economic complexity for the first time. Second, this paper broadens the research perspective of the employment effect of regional economic complexity, divides the employment substitution effect of various sectors from the perspective of industrial structure and further analyzes the employment promotion effect of regional economic complexity.

Debt Dynamics and Fiscal Sustainability in Nigeria

This study investigated the stabilizing effect of sustainable fiscal policy on public debt dynamics as well as the impact of debt dynamics on fiscal sustainability in Nigeria for the period (1980 – 2022). Using secondary data obtained from the Central Bank of Nigeria Statistical Bulletin (2023), World Development Indicators (WDI, 2023), Debt Management Office (DMO – various years), Penn World Table (PWT – multiple years), and World Economic Outlook (WEO – various years), the study used suitable cointegration and other econometrics techniques viz: Dynamic Ordinary Least Squares (DOLS), Markov-switching model and polynomial models. It was found, amongst other things, that (i) Automatic debt dynamics can influence debt dynamics, (ii) The robustness or otherwise of primary fiscal balance determines the direction of changes in the total debt stock, and (iii) positive debt dynamics vis-à-vis dwindling revenue flows and growing government expenditure, would result in fiscal unsustainability. It was recommended, amongst other things, that since automatic debt dynamics is one of the significant influences on debt dynamics and is being fuelled by the direction of adjustments in inflation and interest rate, there is a need for concerted efforts at stabilising inflation and interest rate to stabilise public debt dynamics. Also, the study revealed that the size of the primary balance influences the changes in public debt stock. It was recommended that the authorities should endeavour to maintain a robust primary fiscal surplus to stabilise growth in public debt, if not minimise it and grow the economy.

The impact of tax enforcement on corporate energy efficiency: Evidence from a tax collection reform in China

The central Chinese government has transferred some of the authority to collect local firms' income tax from local tax bureaus (LTBs) to state tax bureaus (STBs) to strengthen its control over local tax sources, resulting in a change in the intensity of tax enforcement of firms. Exploiting this quasi-natural event, we use a regression discontinuity design to examine the association between tax enforcement and energy efficiency. We find that firms whose taxes are collected by LTBs have significantly higher energy efficiency than firms whose taxes are collected by STBs. Further analysis shows that more lenient tax collection by LTBs eases firms' financial constraints and prompts firms to adopt cleaner energy structures and conduct more green innovation activities to improve energy efficiency. Heterogeneity analyses show that the main effects are more pronounced when the local government has a larger fiscal surplus or faces greater environmental pressure and when firms have no foreign business or a poor financial condition.

Impact of Public Debt Refinancing Techniques on Managing Public Budgeting in Iraq: An Analytical Study

The use of public debt by the state as a primary financial instrument is an essential strategy for directing economic activity, ensuring economic stability, and fostering economic growth. Despite this, as the levels of public debt continue to climb, governments are increasingly resorting to debt refinancing methods that are focused on either replacing or rescheduling current debt or converting to a new kind of creditor via investment and securitization investment vehicles to relieve the burden of their debt. Utilization of these instruments is essential for effective management of the overall budget. The discovery that debt scheduling and the debt sustainability index impact the accomplishment of fiscal surpluses and maximizing public revenues informed the study's results in Iraq, which inspired the conclusion that debt refinancing methods and general budget advice are connected. In order to reduce public debt with the possibility of eliminating it, to take advantage of the time it gives to initiate a strategy for investing in projects that contribute to increasing public revenues through which that debt can be repaid, to achieve sustainable economic growth, and to reduce the budgetary deficit, the author of the study recommended that the mechanism of scheduling public debt in its entirety and not just a part of its structure be implemented. Implementing the technique of scheduling public debt in its totality rather than simply a portion of its structure may help achieve these aims. .

Threshold Analysis of Fiscal Policy Variables and Private Investment in Nigeria

This paper investigates the relationship between fiscal policy variables and private investment in Nigeria for the period 1970 – 2019 with a view to establishing the threshold level of each of the key fiscal policy variables in relation to private investment. The study employed annual and quarterly time series data covering the period 1970:1 to 2019:4 which were sourced in part from the Central Bank of Nigeria’s Statistical Bulletin and National Bureau of Statistics (NBS). Data collected were analyzed using econometric techniques. The variables used were private domestic investment, budget deficit, recurrent and capital government expenditure, oil and non-oil government revenue and public debt. The main findings are: First, there is an evidence of a double threshold effects of the fiscal balance. When exceeding a budget deficit level of 3.98 per cent of GDP or a fiscal surplus level of 3.2 per cent of GDP, private investment is negatively affected. Also, increase in government total expenditure beyond the third regime made private investment to become less productive. As regards public debt, the results revealed that private investment had the most positive impact on economic growth in the first regime of public debt. A resort to public debt beyond this level will make private investment less productive thereby inhibiting growth. The study therefore, concludes that government should be cautious in resulting to debt instruments to finance its deficit. It should also make a concerted effort to increase its expenditure especially in the provision of infrastructural facilities as this directly influence private investment decision positively.

Income inequality in developing countries: fiscal policy’s role amid uncertainty

ABSTRACT This study investigates the impact of uncertainty on income inequality in developing countries. Unlike prior studies, we analyse the role that the fiscal policy could play in the relationship. Using a sample of 66 developing countries over the period 2000–2020, we find at several levels of robustness that, uncertainty increases income inequality in developing countries, especially those with fiscal deficits and less fiscally disciplined. Additionally, we find that fiscal surpluses mitigate the negative effects of uncertainty on wealth distribution which in turn reduces income inequality. This result reveals the socio-economic stabilizing role that fiscal policy management could play during periods of uncertainty. Fiscal policy can maintain and enhance economic stability when countries face certain uncertainty.

The impacts and instruments of energy transition regulations on environmental pollution

This study examines the influence of energy transition regulations on environmental pollution, exploring both the impact and instruments employed in regulatory frameworks. Focusing on the global shift towards cleaner energy sources, the research evaluates the effectiveness of regulations in reducing pollution levels. Through a concise analysis of literature and regulatory mechanisms, the study highlights the dual role of regulations as both mitigators of environmental harm and potential sources of unintended consequences. Over the past 17 years, there has been a notable and consistent reduction in average environmental pollution levels, indicating positive trends in environmental quality. The average environmental pollution decreased significantly from 0.0135 in 2005 to 0.0045 in 2021. The energy transition regulation (coal resource tax reform) proves to be effective in reducing environmental pollution. In detail, the energy transition regulation can effectively reduce environmental pollution in the western region, while it has no significant impact on environmental pollution in the eastern and central regions. The optimization of industrial structure, innovation level, and fiscal surplus are crucial pathways through which energy transition regulation inhibits environmental pollution. We provide a brief overview of the study's contribution to understanding the dynamic relationship between energy transition policies and environmental sustainability.

The U.S. Public Debt Valuation Puzzle

The government budget constraint ties the market value of government debt to the expected present discounted value of fiscal surpluses. We find evidence that U.S. Treasury investors fail to impose this no‐arbitrage restriction in the United States. Both cyclical and long‐run dynamics of tax revenues and government spending make the surplus claim risky. In a realistic asset pricing model, this risk in surpluses creates a large gap between the market value of debt and its fundamental value, the PDV of surpluses, suggesting that U.S. Treasuries may be overpriced.

Uganda’s Debt Sustainability: Testing The Efficacy of Debt Overhang Theory

The primary objective of this paper is to discern the impact of key economic variables, including primary balance, real interest rate, GDP growth rate, real effective exchange rate, and current account balance, on the long-term and short-term sustainability of the country's debt. Drawing on an array of econometric analyses within the Auto Regressive Distributed Lag framework, the study establishes that a fiscal surplus and sound management positively influence debt sustainability in the long run. However, it reveals that higher real interest rates pose challenges, leading to increased debt loads. While GDP growth's impact remains inconclusive, a fluctuating real effective exchange rate and the influence of the current account balance on debt dynamics emerge as crucial determinants. The study recommends a cautious fiscal approach, interest rate management, economic growth stimulation, exchange rate stability, and a focus on achieving and maintaining current account surpluses as pivotal strategies for ensuring Uganda's long-term debt sustainability. Nonetheless, the study acknowledges limitations related to sample size and endogeneity, encouraging further research to enhance generalizability and address potential omitted variables.

Determinants of Uganda’s Debt Sustainability: The Public Debt Dynamics Model in Perspective

To investigate Uganda's debt sustainability determinants. The fundamental framework for this study is the public debt dynamics model, which looks at connections between changes in public debt and important macroeconomic factors such as real GDP, primary balance, currency rate, real interest rate, and trade openness. While acknowledging the significance of the primary variables identified by Mupunga and Le Roux, our empirical analysis of a country's debt dynamics extends beyond these factors. Additional considerations include the incorporation of controls such as the production gap and the non-interest current account balance. Tailored to Uganda's economic context, our comprehensive empirical model aims to provide a nuanced understanding of the diverse determinants influencing debt dynamics in the region. The major conclusions indicate that the Primary Balance, Real Interest Rate, and Real Effective Exchange Rate all positively and significantly affect the debt ratio, suggesting that fiscal surplus, low-interest rates, and currency appreciation are favorable to debt reduction and sustainability. The paper also finds that the debt ratio is negatively and significantly influenced by the Current Account Balance, indicating that trade surplus is beneficial for debt management. The paper further finds that the debt ratio is not significantly influenced by GDP growth, suggesting that economic growth may not have a strong effect on debt dynamics in Uganda. Given the significant impact of the "Primary Balance" on the "Debt-to-GDP ratio in the long run, policymakers should prioritize maintaining a fiscal surplus and prudent fiscal management. Implementing measures to enhance revenue generation, control government expenditures, and reduce budget deficits can contribute to reducing the debt burden and ensuring long-term debt sustainability. To keep the debt-to-GDP ratio in good shape, fiscal policies and long-term restraint are crucial.

A fiscal theory of money and bank liquidity provision

Fiscal-backed money can provide additional liquidity to consumers and mitigate the liquidity shortage problem in an economy with banks where agents face idiosyncratic liquidity shocks without being fully insured. The government issues fiat money and creates real value for money by levying a tax and accepting money for tax payments. Tax reallocates the distribution of liquidity in the economy. An increase in tax, by increasing fiscal surplus and the real value of money, reduces the equilibrium investment. Additionally, imposing taxes influences the incentive of private information production, which may impose a constraint on optimal fiscal policy.

Estimating the Fiscal Impact of Stadium Developments: Evaluating a Pro Forma Model

Although researchers have demonstrated conclusively that sports stadiums are not economic development catalysts, stadium projects that include preplanned ancillary developments have been proposed as a salutary strategy to overcome the widely observed dismal economic performance of standalone stadiums. Using an objective rubric for evaluating economic impact studies, we review a commissioned pro forma model that claims to demonstrate net positive fiscal impacts of two prominent publicly-financed stadium-anchored developments. Using assumptions informed by existing research and established discipline standards, the model estimates substantial negative returns for both projects (−$40 to −$60 million in Worcester, Massachusetts and −$100 to −$200 million in Cobb County, Georgia). We find that the reported fiscal surpluses derive from chosen assumptions and not the stadiums’ complementary developments. We conclude that pro forma estimates do not provide credible forecasts of fiscal impacts, and ancillary developments do not improve the fiscal returns of stadium projects.

Analysis of the Relationship Between Fiscal Deficits and Debt Accumulation in Zambia

Zambia has experienced structural deficits for decades and these have been viewed as the main cause of debt accumulation. Despite heavy investment in infrastructure and other sectors, the country faces low revenue relative to rising cost of debt. Objective: to establish whether deficit financing is the cause of high debt in Zambia. Method: Using secondary data and an archival strategy, data was analyzed through a mixed research choice which required both qualitative and quantitative data to be presented together. This involved using descriptive and analytical approaches. Findings: It was found that Zambia cannot survive without borrowing and this is the main cause for debt accumulation. The reason is that investments do not adequately contribute towards covering debt servicing costs. The country’s reliance on copper exports is the main reason for continuous deficits as the country fails to diversify the economy in order to increase income streams. In addition, Zambia generates growth which is not sufficient to cover the debt servicing burden. Conclusions and Recommendations: The study concluded that Zambia needs to control it’s key resource, mining, to ensure that proceeds are maximized and invested into agriculture and in boosting the manufacturing sector. The country needs to focus on generating the fiscal surplus of 1.32 of GDP to make the debt ratio of 60 percent to be sustainable.

(Re)coordinating the German Political Economy: E-mobility and the Verkehrswende

ABSTRACT Germany has long been admired for its coordinated state-business relations, aligning domestic industry, particularly the automobile sector, with political and economic objectives. This article finds, however, that in the case of the automobile sector’s transition to electric vehicles, there is little evidence of coordination. Informed by 31 interviews and a document analysis, the data shows instead that the Diesel Scandal proved to be a pivotal moment in German politics, as the state has looked to distance itself from the automobile industry. To reflect the data, I adjust Meckling and Nahm’s analytical heuristic to argue that against the backdrop of e-mobility, auto-state-business relations have become un-coordinated. I subsequently contend that the consequences of un-coordination stand to have profound implications for Germany, as it cedes ground to Tesla and China in the global automobile market. As a result, a decline in the automobile industry threatens the export and fiscal surpluses exhibited in recent years and thus the German model. I conclude that (re)coordinating auto-state-business relations, and the German political economy more broadly, will require developing the Verkehrswende.

Do fiscal deficits influence private savings in South Africa? An empirical note

Orientation: The neoclassical loanable funds theory predicts that fiscal deficits reduce the pool of available savings in the economy, but heterodox scholarship disputes the claim.Research purpose: The paper sets out to test the relationship between fiscal deficits and private savings.Motivation for the study: Scholars are divided on whether corporate South Africa is building up excess savings, with some arguing that it is not and others arguing that it is because of mistrust of government and uncertainty largely. The trends of net private savings and fiscal deficits suggest that something contrary to the postulation of the neoclassical loanable funds theory could be happening in the South African context.Research approach/design and method: The paper used data for the period 1960–2021 within the Toda-Yamamoto vector autoregressive modelling framework.Main findings: The results show that fiscal deficits increase savings but reduce interest rates in line with the heterodox view that the financial asset creation effect of debt-financed deficits improves savings and reduces interests through the liquidity channel.Managerial/practical implications: The lesson for policy is that fiscal deficits are healthy for the economy. However, the government must manage them at some reasonable level to maintain a constant flow of net financial assets to the private sector, thus bolstering savings. An unhealthy pursuit of fiscal surpluses can shift deficits to households and firms, and breed systemic financial instability.Contribution/value-added: The paper contributed to a nuanced understanding of the role of fiscal deficits in expanding savings, which runs counter to the theoretical underpinnings of fiscal conduct that pursues budget surpluses.

An international empirical study on the fiscal surplus from the perspective of sectoral balances

The simultaneous recording of public surplus with current account deficit in a national economy could be related to strong private leverage that usually ends in financial crisis, what would make the public surplus unsustainable. The objective of this work is to check the extent to which this claim is bolstered by empirical support. The results reveal that, in effect, the concurrence of public surpluses and current account deficits is associated with private leverage processes and financial crises. These outcomes question the design of the current fiscal rules since they don’t pay attention to the current account balance.

The Determinants of Fiscal Transparency in Vietnamese Local Governments

There are few studies on the determinants of fiscal transparency in Vietnamese local governments, and most of them are qualitative studies of a few special cases and do not cover theoretically relevant factors changing over time. The main objective of this study was to examine the impacts of fiscal, demographic and political factors on fiscal transparency by using a fixed-effects model on panel data from 63 local governments in Vietnam from 2017 to 2020. The results indicate that local government expenditure, taxes and population size are positively associated with fiscal transparency, while fiscal surplus and intergovernmental grants negatively affect fiscal transparency. Our empirical findings emphasize the importance of citizens’ and policymakers’ roles in supervising Vietnamese local governments’ financial information, given the existence of fiscal illusions and agency problems.

Governments' accounts and pandemics

PurposeEarly evidence suggests that coronavirus disease 2019 (COVID-19) caused a sharp deterioration in fiscal accounts worldwide. This paper empirically assesses the fiscal impact of previous pandemics and epidemics.Design/methodology/approachUsing a large sample of 170 countries from 2000 to 2018, this study relies on Jordà's (2005) local projection method to trace pandemics' short- to medium-term dynamic impact on several fiscal aggregates.FindingsThis paper shows that (qualitatively) similar responses to those observed more recently with COVID-19 have characterized the effects of previous pandemics. While the fiscal effect has been economically and statistically significant and persistent, it varies; pandemics affect government expenditures more strongly than revenues in advanced economies, while the converse applies to developing countries. The author also finds that asymmetric responses depend on whether a country is characterized as a chronic fiscal surplus or deficit type. Another factor that generates an asymmetric fiscal response is the prevailing phase of the business cycle the economy was in when the pandemic shock hits.Research limitations/implicationsThis paper's findings provide a lower bound to what the current COVID-19 pandemic will inflict on countries’ fiscal situation. That said, the set of pandemics and epidemics used in this paper are geographically more concentrated and did not affect all countries in such a systemic and synchronized manner as did COVID-19 more recently.Originality/valueThis is the first paper to explore the fiscal side of this type of health-related shocks, as most of the literature has focused on the more traditional macroeconomic effects.

Debt redemption fund and fiscal incentives

We investigate a stochastic optimal control model for the management of public debt when part of the national debt is transferred to a Redemption Fund, which is allowed to finance itself in the market at a low interest rate, in exchange of the commitment to a fiscal consolidation plan by the national government both for the national debt and the Fund. The Fund is an interesting option for countries with high debt–GDP ratio and weak fundamentals. However, we show that it is not a free lunch in a sense that a country with a higher public debt should transfer a larger amount of resources to cut down the Fund. We calibrate the model to the experience of Euro zone countries with a high debt, showing that it is possible to design the mechanism allowing to pay back the Redemption Fund and stabilizing both the national debt and the fiscal surplus with a reduction of the fiscal effort.