High Public Deficits Research Articles

STABILITY OF FISCAL REVENUES IN EU: WHAT TO TAX?

Certain and predictable tax revenues are desirable by states to run fiscal policy smoothly and minimize any negative effects of business cycles. Over the last decades sizes of government budgets in most EU Member States have experienced rather small transformations. However, particular kinds of taxes contribute to that stability to different extent. Although, this matter is important from the perspective of state budget, it has not been analysed thoroughly before – especially in EU. Based on statistical analysis of macroeconomic data I calculated that revenues from payroll taxes feature especially low variability and positively influence the budget constancy. Changes over time are slightly bigger for taxes imposed on production. Inflows from taxation of income of corporations are particularly unstable. These findings may support policymakers in appropriate budget revenues design. Expansionary fiscal policy is believed to boost economic growth ( (Aschauer, 1989), (Munnell, 1990)). Public investments are traditionally believed to support long-term growth of economies (Barro, Government Spending in a Simple Model of Endogenous, 1990). On the other hand low taxes should support development of economy as well ((Engen & Skinner, 1992), (Daveri & Tabellini, 2000), (Karras & Furceri, 2009), (Padovano & Galli, 2001) or (Lee & Gordon, 2005) to mention only selected research). For example Romer and Romer estimated that a 1% increase in taxation relative to GDP induces reduced output of up to 3% over the following three years (Romer & Romer, 2007). Mountford and Uhling claimed that tax cuts - even if financed from budget deficit – are most effective from the perspective of economy growth (Mountford & Uhlig, 2008). Blanchard and Perotti found that tax shocks affect investment, consumption and output (Blanchard & Perotti, 2002). However, some empirical analysis failed to confirm significance of the relation between GDP and tax rates ((Easterly & Rebelo, 1993), (Mendoza, Milesi-Ferretti, & Asea, 1997)). The correlation between the level of the tax rate and output was found to be indeed negative but sometimes non-existing. These results are in line with common sense. However, in the long run high public spending cannot be combined with low taxes (assuming that low taxes transfer into smaller budget revenues). High public deficits, which may arise in consequence of expansionary fiscal policy, are eventually harmful for economic growth in the long-run. Therefore, satisfactory inflows from taxes are desirable. Maintaining balanced budgets is a typical objective of several world economies. Yet this requirement seems key for European Monetary Union states, which use single currency and hence lead common monetary policy [1]. To improve economic stability of those countries and to provide for at least impeded policy-mix tools, certain requirements related to fiscal policy were imposed on them. According to the so called Convergence Criteria (also known as Maastricht Criteria)(i) the ratio of the annual government deficit to GDP must not exceed 3 percent and (ii) the ratio of government debt to GDP must not exceed 60 percent. However, several Member States are struggling against high budget deficits which are followed by excessive public debts. Most EU Member States have been returning to balance over last years and in 2017 almost half of them recorded government surplus. However, the budget deficit for the EU as a whole is still substantial and in 2017 amounted to 81.6% of its GDP. This is far more than before the crisis in 2007 when a figure of 57.5% of GDP was recorded. Moreover, although from peak in 2014 general government debt decreased on average in a number of Member States, still in 2017 as much as 12 out of 19 eurozone countries bound by the Maastricht criteria recorded debt above required level of 60% of local GDP. Identification of reliable sources of state revenues may provide a useful tool to cope with that issues.

Efficiency and benchmarks of regional public service broadcasters in Spain

The current high public deficit situation of the Spanish economy lead us to analyse the management of public service companies, their allocation of resources and how well they are used. Within this article, we shall compare the efficiency of regional public service broadcasters (PSBs) in Spain using Data Envelopment Analysis (DEA) method and benchmarking. That will be done with two goals in mind. One, to evaluate and compare the performance of regional public television networks. And two, to propose policy measures to improve management efficiency. The results from the study indicate that more than a half of public television services in Spain are inefficient. It is recommended that the television services change some of their inputs/outputs to enhance efficiency and ensure future sustainability

On the Low-Frequency Relationship Between Public Deficits and Inflation

We estimate the low-frequency relationship between fiscal deficits and inflation and pay special attention to its potential time variation by estimating a time-varying vector autoregression model for US data from 1900 to 2011. We find the strongest relationship neither in times of crisis nor in times of high public deficits, but from the mid 1960s up to 1980. Employing a structural decomposition of the low-frequency relationship and further narrative evidence, we interpret our results such that the low-frequency relationship between fiscal deficits and inflation is strongly related to the conduct of monetary policy and its interaction with fiscal policy after World War II.Copyright © 2015 John Wiley & Sons, Ltd.

The non-linear impact of high and growing government external debt on economic growth: A Markov Regime-switching approach

Today, the major reason for external debt is to finance high public deficits. This study aims to examine the relationship between external indebtedness and growth variables. In this context, Markov-switching model is used because it allows the examination of unobservable variables in an observable model and provides steady algorithm to achieve robust optimization by iterations in a dynamic system, and is more flexible than prior models. This paper concentrates on the analysis of Turkey and utilizes the data set for the period of 1974 to 2009. Throughout the analyses, the relationship between growth and external borrowing is examined in terms of public and private external borrowing. Paper yields that, according to results of multivariate dynamic Markov-switching model, the main growth variables such as investment and human capital have positive impact on growth as expected. Findings can be summarized as follows; firstly, public and/or private external borrowing has negative impact on growth both in regime at zero and regime at one. Secondly, the negative impact of public borrowing on economic growth and development is higher than that of private borrowing on economic growth and development. Eventually, the conclusion reveals that the economic development and borrowing variables do not follow a linear path.

Insurance Corporations and Pension Funds in OECD Countries

Insurance companies and pension funds are part of complex systems of private insurance and public social protection created to reduce the cost of economic hazards. In the current phase of the business cycle, with many OECD countries struggling with low economic growth, high public deficits and debts, ageing populations and expensive welfare systems, private insurance is bound to play an increasing role. The aim of this paper is to provide an overview of the evolution of insurance companies and pension funds in OECD countries over the period 1995-2009. Secondly, it examines the impact of this evolution on households’ financial wealth. The paper finds that both insurance companies and private pensions still account for a small share of the financial sector as a whole and that the recent financial crisis has significantly reduced their asset value. These institutions nonetheless account for an increasing share of households’ financial assets. The paper also calls for further improvements in the consistency between supervisory and national accounting standards and in overall data quality to enhance cross-country data comparability and support the policy-making process.

Optimal growth theory: Challenging problems and suggested answers

We argue that optimal economic growth is confronting serious applicability problems, having nothing to offer in these days of high public deficits accompanied by high unemployment rates. In particular, the theory is not capable of indicating optimal savings rates; those are systematically in ranges that can be considered as unacceptable, or are accompanied by unrealistically high real growth rates. Faulty is the systematic use of arbitrary utility functions, which turn out to be contradictory to competitive equilibrium. We then show how relying on the hypothesis of competitive equilibrium yields reasonable, perfectly acceptable numbers for the optimal savings rate.

Is Fiscal Policy Procyclical in the Euro Area?

AbstractWe test the relationship between the cyclically adjusted primary balance and alternative indicators of cyclical conditions for the euro area and 18 OECD countries over the period 1970-2009. A countercyclical stance of discretionary fiscal policy is found during bad times after 1999 in the euro area as a whole and in a few member countries only (France, Ireland and The Netherlands). It is also associated with high public deficits or low public debts. There is no significant case of procyclical fiscal policy after 1999, neither in good times nor in bad times.

On the Low-Frequency Relationship between Public Deficits and Inflation

We estimate the low-frequency relationship between fiscal deficits and inflation and pay special attention to its potential time variation by estimating a time-varying VAR model for U.S. data from 1900 to 2011. We find the strongest relationship neither in times of crisis nor in times of high public deficits, but from the mid-1960s up to 1980. Our results suggest that the low-frequency relationship between fiscal deficits and inflation is strongly related to the conduct of monetary policy and its interaction with fiscal policy after World War II.

Belgium’s Public Debt: Profile, Dynamics, and Vulnerabilities

With the European sovereign debt crisis still unfolding, European countries with a high public deficit or debt are now more closely scrutinized by investors. This paper examines the profile and dynamics of the public debt of Belgium, and discusses the challenges of achieving public debt sustainability. Notwithstanding the effective debt management operations and investor relations management, the high debt burden, the maturity profile, and the reliance on short-term foreign funding expose the country to sudden shifts of market sentiment as well as credit and liquidity risk. It demonstrates the pressing challenge Belgium faces in restoring public finance soundness and underlies the urgent need to achieve credible and successful fiscal consolidation.

On a Hidden Aspect of the Credibility Crisis in the European Union

The financial and economic crisis after year 2007 had an asymmetric impact on the countries of the European Union. While some reasons for this asymmetries are identified, some others remain far from being clearly and openly expressed. In particular, it is not quite obvious why some countries experienced a sharp decline in their credibility in the financial markets. This credibility crisis is commonly explained with poor fiscal stance and high public deficits in the respective countries; Portugal, Ireland, Italy, Greece and Spain (PIIGS). The problem with this explanation is that high public debts and deficits are not specific only to these countries. Although fiscal stance and public debt are important these countries which were hit most experienced a broader problem of foreign debt crisis which mirrors the situation of the private sector, too. This characteristic of the crisis is blurred by the membership of the countries in the euro zone. When we accept the diagnosis a question about positive policy actions arises. Unfortunately, fiscal consolidation in the most problematic countries is neither an optimum solution nor a real possibility. Countries which are in the euro zone are unable to use individual monetary and exchange rate policy which seems otherwise a proper instrument in their situation. Moreover, the economic policy of the European Union in the face of the crisis is erratic, in breach of important rules which were supposed to govern economic life in the UE and the euro zone and it does not address in a perspective manner the specific problems encountered by these countries which experience most strain. The future looks misty and dark.

On a Hidden Aspect of the Credibility Crisis in the European Union

The financial and economic crisis after year 2007 had an asymmetric impact on the countries of the European Union. While some reasons for this asymmetries are identified, some others remain far from being clearly and openly expressed. In particular, it is not quite obvious why some countries experienced a sharp decline in their credibility in the financial markets. This credibility crisis is commonly explained with poor fiscal stance and high public deficits in the respective countries; Portugal, Ireland, Italy, Greece and Spain (PIIGS). The problem with this explanation is that high public debts and deficits are not specific only to these countries. Although fiscal stance and public debt are important these countries which were hit most experienced a broader problem of foreign debt crisis which mirrors the situation of the private sector, too. This characteristic of the crisis is blurred by the membership of the countries in the euro zone. When we accept the diagnosis a question about positive policy actions arises. Unfortunately, fiscal consolidation in the most problematic countries is neither an optimum solution nor a real possibility. Countries which are in the euro zone are unable to use individual monetary and exchange rate policy which seems otherwise a proper instrument in their situation. Moreover, the economic policy of the European Union in the face of the crisis is erratic, in breach of important rules which were supposed to govern economic life in the UE and the euro zone and it does not address in a perspective manner the specific problems encountered by these countries which experience most strain. The future looks misty and dark.

Return and Maturity Relationships for Treasury Auctions: Evidence from Turkey

AbstractThe relationship between the interest rate and the maturity of newly issued bonds provides information on the debt dynamics of an economy as well as on the sustainability of its debt. Such information is crucial especially for countries that have debt‐rollover concerns due to financial stress and/or macroeconomic instability. This study investigates the relationship between treasury auction maturity, which also dictates the debt maturity, and auction interest rates. When the Turkish treasury auction data from 1988 to 2004 are analysed, a reciprocal linkage between auction interest rates and maturities can be observed, especially for the 1995–2000 period, when there were chronic high inflation, high political uncertainty, high public deficits and unsuccessful attempts at stabilisation. This suggests that under an adverse shock, the Treasury decreases the auction maturity in order not to increase interest rates too much. A change in this reciprocal relationship is also reported for the post‐2001 era, which is characterised by decreasing inflation, higher political stability, lower public deficits and successful stabilisation attempts.

The net social wage in greece 1958-95

The object of this paper is to assess the net distributive impact of state expenditures and revenues on labour income in Greece for the 1958-95 period. This effect is measured by the net social wage defined as the difference between the total benefits received by labour from state spending and the labour taxes. We also discuss certain issues related to the empirical methodology employed in the present and similar studies and the way its inconsistent use has affected inter-country comparisons of the net social wage in the literature. Our empirical findings for Greece indicate that for the entire period no redistribution of income in favour of labour has taken place via the actions of the state. The average net social wage is very close to zero even though during the last decade we observe an increasing involvement of the state in the reproduction of labour. The positive net social wage of the few recent years coincided with high public deficits and appears to be a result of slow growth, high unemployment rates and compensation for the adverse developments for labour in the market distribution of income.

The german stability program: A quantitative assessment

In the Maastricht Treaty and the European Stability and Growth Pact, it was recognized that high public deficits and debt levels would endanger the success of the European Economic and Monetary Union. In its stability program, updated in December 2001, the German government published its objective to achieve a balanced general budget in the year 2004. The budget of the central government should be balanced in 2006 [Bundesfinanzministerium, 2001]. This paper analyzes the effects of strict budget consolidation policies on important macroeconomic variables like inflation, unemployment and GDP growth. It is shown that a balanced budget as early as 2004 would necessitate high public consumption and investment. These should be financed by higher indirect taxes, whereas social security contribution rates should be reduced to bring unemployment down.

The effects of public deficits on money growth in the European Union

The impact of government debt on the money supply has been studied for different countries, with an emphasis on developing countries and the U.S. This topic becomes especially interesting in European Union countries that have high public deficits and low inflation rates. It is also very relevant in the monetary union, with a European central bank controlling monetary policy and introducing monetary measures for all the member countries. The main goal of this paper is to analyze if there is any relationship between public deficits and monetary growth in the European Union. The conclusions presented in the previous literature are ambiguous. Some studies concluded that there is little evidence that government debt influences money in some of the member countries.

Indépendance des banques centrales, politiques monétaire et budgétaire : une approche stratégique

Central Bank independence, monetary and fiscal policies : a strategic approach Fabrice Capoen, Henri Sterdyniak, Pierre Villa Central Bank independence has recently received a great deal of attention, in both theoretical literature and the public debate. This independence is meant to prevent goverments from practizing over- expansionary economic policies, which, when integrated in private agents expectations, are unable to sustain activity and thus only result in increased inflation. Independence increases the credibility of the government commitment to maintain a low level of inflation. However the risks of independence have not yet been considered to a sufficient extent. While institutional considerations lead to dedicate respectively monetary policy to inflation control and fiscal policy to activity regulation, this separation can be dangerous at a macroeconomic level. Diverging orientations of monetary and fiscal policies may lead to situations featuring high interest rates, large public deficits and overvalued exchange rates, the costs of which, for the country as well as its partners, must be considered. The first part of the article studies the closed economy case. In a Keynesian model, in which fiscal and monetary policies are used in independent ways to manage the inflation/unemployement trade-off, the conflict beetwen them induces a sub-optimal equilibrium, where both interest rates and public deficit are to high. In the same way, in a Barro-Gordon model, an independent Central Bank does not insure private agents against an inflationary surprise due to fiscal expansion. Finally a dynamic model shows that the rise of interest rates increases the financial burden borne by the firms, reduces their profitability and investments, and consequently limits the development of the production capacity. A situation where fiscal policy controls the demand and where monetary policy is dedicated to controlling profitability of firms would be preferable. The second part of the article introduces a two-country model. The lack of internal coordination between monetary and budgetary policies worsens the lack of international coordination so as to lead, in an inflationary shock context, to an equilibrium with high interest rates and deep public deficits, whereas the opposite policy-mix would be better (low interest rate, restrictive fiscal policy). The point is that the monetary tool is relatively less efficient when a world wide inflationary shock occurs. Only, a concerted behavior of monetary and fiscal authorities can result in an efficient policy-mix. But, is it compatible with Central Bank indépendance ?

Efficiency and benchmarks of regional public service broadcasters in Spain

The current high public deficit situation of the Spanish economy lead us to analyse the management of public service companies, their allocation of resources and how well they are used. Within this article, we shall compare the efficiency of regional public service broadcasters (PSBs) in Spain using Data Envelopment Analysis (DEA) method and benchmarking. That will be done with two goals in mind. One, to evaluate and compare the performance of regional public television networks. And two, to propose policy measures to improve management efficiency. The results from the study indicate that more than a half of public television services in Spain are inefficient. It is recommended that the television services change some of their inputs/outputs to enhance efficiency and ensure future sustainability