Structural Budget Deficit Research Articles

Rising Income Inequality in OECD Countries: Does Fiscal Policy Sacrifice Economic Growth in Achieving Equity?

The impact of fiscal policy variables on economic growth and income inequality is estimated with data from a balanced panel of 19 high-income OECD countries for 1995–2015. A simultaneous equations model is estimated to test four hypotheses that link economic growth and income inequality to different components of fiscal policy under debt- and tax-financed fiscal strategies. The results do not provide statistically significant evidence for efficiency–equity trade-off. Regardless of the finance method, an increase in redistributive expenditures reduces income inequality but does not affect economic growth. The overall net impact of non-redistributive expenditures, direct taxation receipts and indirect taxation receipts is the increased income inequality. These results suggest increasing redistributive expenditures financed by direct taxes as a means of reducing income inequality. In addition, reducing non-redistributive expenditures promotes both efficiency and equity objectives, important for countries which are experiencing structural budget deficits.

Effects of fiscal consolidation in Western Balkan Countries

The global economic crisis has not spared the countries of the Western Balkans. The ensuing recession, characterized by a decline in economic activity, a decline in consumption and an increase in unemployment, went hand in hand with drops in public revenues. This in turn resulted in budget imbalances that manifested in structural budget deficits and higher public debt. Fiscal consolidation was deemed necessary across the board. In this process, certain fiscal policy elements varied among countries. The structure of public revenues and public expenditures changed. The question is whether the fiscal consolidation was successful and to what extent. Dynamic panel analysis using PMG estimator in six Western Balkan Countries for the period 2004-2016 has shown that fiscal consolidation has positive impact on economic growth in this region. So, Western Balkan Countries have to conduct responsible public finances in order to encourage economic growth.

The Fall in Potential Output due to the Financial Crisis: A Much Bigger Estimate for the UK

Conventional estimates suggest that the 2007–2009 financial crisis reduced UK potential output by 3.8–7.5% of GDP. This implied a need for fiscal tightening as the structural budget deficit had increased considerably. The austerity that followed led to the rise of UKIP, the EU referendum and the vote for Brexit. Brexit will reduce potential output by somewhere between 3.9 and 8.7% of GDP. Thus, it can be argued that the total fall in UK potential output due to the banking crisis is between 7.7 and 16.2% of GDP—approximately double the conventional estimate.

The European Union as a Trigger of Discursive Change: The Impact of the Structural Deficit Rule in Estonia and Latvia

Abstract Our paper explores how a rule prescribed by the European Union can bring about changes in the policy discourse of a member state. Drawing on the literatures of discursive institutionalism and Europeanization, the theoretical part discusses the factors that influence discursive shifts. The empirical part examines the discursive impacts of the introduction of the structural budget deficit rule, required by the Fiscal Compact, in Estonia and Latvia. It demonstrates how the discursive shifts have been shaped by the localized translations offered by civil servants, the entrance of additional actors to the policy-making arena, crisis experience, and the strategic interests of policy actors.

Fiscal Adjustment Programs versus Socially Sustainable Competitiveness in EU Countries

After implementing harsh austerity measures during 2008–2011, in the period 2012–2014 the fiscal adjustment programs also involved social equity measures, the quantitative fiscal consolidation being changed into a qualitative one—a reduction of the structural budget deficit accompanied by an improvement of social sustainability indicators. The 2015–2017 period shows mixed evolutions in terms of social progress brought by the recovery of the economic potential lost during the crisis. This research analyzes the sustainability of economic competitiveness dynamics from a social viewpoint during 2012–2014. In this paper, we analyze the way in which the economic and social components of fiscal adjustment programs are dynamically balanced in 24 EU member states. We identify four clusters of countries depending on the relationship between fiscal consolidation/fiscal stimulation and the social dynamics of the sustainability adjusted global competitiveness index. We found that under the pressure of “fiscal adjustment fatigue” caused by tough austerity programs in the period 2008–2011, most of the European countries completed the fiscal adjustment packages with measures to improve the social situation between 2012 and 2017. The fiscal consolidation programs have become more balanced from the perspective of the combination of budgetary austerity—social equity measures. Furthermore, we analyze how some countries on the EU periphery (Central and Eastern Europe, Baltic countries and Portugal, Ireland and Greece, countries that have joined the EU with a lower level of development) are experiencing or not an improvement in the social sustainability generated by the measures aimed at stimulating the economic growth implemented during 2012–2017. To conclude, we proposed a few pillars that could be integrated if an “ideal adjustment program” is to be achieved.

Influence Of Budget Deficit On Economic Growth: The Case Of The Republic Of Macedonia

Influence Of Budget Deficit On Economic Growth: The Case Of The Republic Of Macedonia

Economic Failure and Change in Sudan

By the end of last August 2016, Banks clients in Sudan were facing difficulties in withdrawing their checks. The ATMs were out of cash, and the available cash reserves were low. In the 9-10, most of the banks could not deliver services with the excuse that they had no liquidity. It was before the Great Eid (feast) and there were heavy rush by the public to have cash funds required for their expenditures during a long holiday. There were reports that they withdrew 2 Trillion Sudanese pounds before the holiday from ATMs and banks. That figure can be exaggerated. However, the accelerating inflation rates can justify the great needs for people to use for buying needs during that time. Greater emphasis on the accuracy for that amounts of money should be compared with rumors about intentions of the financial authorities to limit money supply in markets and curb inflation in addition to restrict hard currencies dealings in the black market. Those facts should be correlated with the increasing devaluations in the Sudanese currency and the tendencies of people to save the value in dollars or other available hard currencies in expectation of new governmental policies. In the following we investigate the role of fiscal and monetary policies on inflation in Sudan. The study assessed the impact of money supply, exchange rate, gross domestic product (GDP), budget deficit and government expenditure on inflation. It has adopted a descriptive and analytical method to achieve the goal. In particular, it has relied on empirical investigation based on descriptive statistic and econometric modeling. The results shows that several monetary, fiscal and structural factors, namely, money supply, budget deficit and shrinking of gross domestic product are simultaneously influencing inflation in Sudan. While exchange rate and government expenditure are found to be with effect on inflation rate, these findings may explain the fact that inflation depends on the way government expenditure is financed rather than the magnitude of the expenditure itself. As a role, it is recommended that the government should depend on real sources in financing budget deficit rather than monetizing deficit by and borrowing from the central Bank, which have significant impact on increasing money supply. That can be a reason for the continuous inability of banks to deliver services to clients to the edge of announcing that there is No liquidity and that the Central Bank had to be committed to print new banknotes, even with the knowledge that can accelerate in inflation rates which are already rapidly increasing. That is also related to the decreasing rates of real resources or inability to collect more taxes and tariffs to ensure effective role in curbing budget deficit and controlling inflation. Moreover, it is related with cash inflows combined with an appropriate environment for investment and best 4 utilization of Sudan’s national resources that stimulate gross domestic product (GDP) and reduce inflation rates.

When the Treasury and its Models Seize Power

This paper explains how short- and medium-term macroeconomic projections are undertaken within the Danish Ministry of Finance (DMF) by the use of an annual macroeconometric model, ADAM, together with a theoretical, structural general equilibrium model, DREAM. DREAM is used to calculate the structural public sector budget deficit, which by law is required never to exceed ½ percent of GDP. This legal restriction on fiscal policy gives the structural model (and the ‘model-operators’) a hitherto unseen political power. This ‘institutional’ status of DREAM causes a number of questions about democracy to be asked. First, why has an elected government accepted to surrender its legal right to undertake an active fiscal policy? Secondly, how can it be that DREAM – a neoliberal general equilibrium model without proper empirical tests and operated by anonymous civil servants – has been elevated to a position akin to a high court’s? The paper demonstrates how this model set-up within the DMF reproduces reality poorly. Therefore, these models should rather be seen as social constructs predetermined be neoclassical/neoliberal economic theory, which has to be acknowledged as a democratic challenge.

Monetary Policies and Inflation Rates in Sudan (197002014)

The current paper investigates the role of fiscal and monetary policies on inflation in Sudan for the period (1970-2014). The study assessed the impact of money supply, exchange rate, gross domestic product (GDP), budget deficit and government expenditure on inflation. It has adopted a descriptive and analytical method to achieve the goal. In particular, it has relied on empirical investigation based on descriptive statistic and econometric modeling.The results shows that several monetary, fiscal and structural factors, namely, money supply, budget deficit and shrinking of gross domestic product are simultaneously influencing inflation in Sudan. While exchange rate and government expenditure are found to be with no effect on inflation rate, these findings may explain the fact that inflation depends on the way government expenditure is financed rather than the magnitude of the expenditure itself.The study recommends that the government should depend on real sources in financing budget deficit rather than monetizing deficit by and borrowing from the central Bank, which have significant impact on increasing money supply. It has to ensure effective role in financing budget deficit and controlling inflation. Moreover, it is important to prepare an appropriate environment for investment and best utilization of Sudan’s national resources that stimulate gross domestic product (GDP) and reduce inflation rates.

Enhanced Fiscal Governance in the European Union: The Fiscal Compact

Abstract Several reforms aiming to strengthen budgetary discipline in the European Union have been implemented since the outbreak of the European debt crisis. Arguably the most important one is the Fiscal Compact, which stipulates that each signatory country must enshrine in domestic legislation an upper limit on the structural budget deficit, that is, the deficit after cyclical and other temporary factors have been excluded. This paper analyses the contents of the Fiscal Compact and discusses challenges for its implementation and efficacy. The conclusion is that the Fiscal Compact may be challenging to implement and enforce because the rules are very complex and require complicated calculations that are subject to very large forecasting uncertainty. The Fiscal Compact could, however, lead to a stronger national commitment to fiscal prudence.

A Dynamic Definition of the Structural Budget Deficit

The debate over legal requirements of a balanced federal budget has gained new life. A requirement would have strong implications for future fiscal policy. Done right, a requirement will allow Congress to combine a balanced budget with policy goals such as growth and full employment. Done wrong, the requirement can force Congress into a conflict between the balanced budget and other desirable policy goals. This paper explores the relation between a balanced-budget requirement and the structural budget deficit. A dynamic definition of the structural deficit is offered as an alternative to a traditional, static definition. The definition focuses on the performance of the economy, rather than its capacity utilization, a focus that ties the structure of the economy to the deficit via the ability of taxpayers to pay for long-term entitlement commitments.

Estimation and Analysis of the Structural Budget Deficit in Romania

Specialized analysts put a special emphasis on the significant role that fiscal policy lies within macroeconomic policies. Analytical assumption from which I started is that the room for maneuver available to operate fiscal policy as a macroeconomic stabilizer vector turns out to be limited by the threshold of budget deficit. Experts reiterates that, in recent decades, the budget deficit has become a feature of national economies, observing a worrying increase of this indicator. The point on which I intend to reflect in this paper is that the budget deficit taken itself, is not a sufficient and relevant indicator for assessing the sustainability of fiscal policy. It is increasingly clear that a way of separating the effects determined by the changes in discretionary economic policy from the effects of the business cycle is to determine the structural budget deficit. The importance of this indicator is derived from the fact that allows to obtain a clean view on the tax situation of an economy, undistorted by the influence of the economic cycle.

Austerity, inequality and politics

We analyze the effect of budget consolidation on income inequality in 17 OECD countries while controlling for political and ideological differences. We find that the impact of fiscal adjustments on the Gini coefficient does not depend on the political party in power, but on the type of government. Austerity measures by coalition governments significantly reduce income inequality when compared with single party and minority governments, even when they are successful or expenditure based. While coalition governments are less successful in reducing structural budget deficits, they perform much better in terms of addressing distributional concerns.

Governance, Institutional Quality and the Euro Area Crisis: What Lessons to East Asian Integration?

1. IntroductionEver since the euro area crisis began in 2009, various reforms of economic governance system have been in progress.1 Almost all proposals for the reform of EMU governance have been aiming for strengthening fiscal and budgetary austerity and implementing the 'monetarist' view that emphasized a strong institutional framework. In addition, a new governance system such as banking and fiscal union has been proposed, but not activated.However, there are several issues to be further explored in the process of triggering structural reforms of EMU governance. The first issue is to what extent the euro states and other members of the EU should deal with conflicts between the pro-Europeans and euro-sceptics, both at national and European levels. The pressure to reconcile these conflicts in reshaping the governance architecture in the euro area is intense, fuelled by the euro area crisis. Studies that investigate this issue will inevitably have to deal with political decision making process: how politics affect the choices of governance measures to yield certain economic performance, which could differ from ones that come out from other political choices on governance measures.The second issue is that structural economic reforms typically taken in a currency union may not be sufficient to narrow growing imbalances and diverging trends in competitiveness, and converge economic cycles within the euro area. For example, the latest revision of fiscal policy governance is simply strengthening fiscal rules of the Stability and Growth Pact (SGP). The new rule demands that the annual structural budget deficit should not exceed 0.5% of nominal GDP, and contains an automatic correction mechanism that is triggered in case of deviation. However, the rule cannot solve the fundamental problems unless the origin of large budget deficits is identified and corrected. More generally, we should explore why economic performance is so different among member states.In this paper, we explore the data of institutional quality for the second issue. We find that institutional qualities of individual member nations were highly and significantly correlated with their economic performance in the euro area. We conclude that it is important to upgrade institutional quality of individual member nations as well as to narrow its heterogeneity among them.We also compare the governance system and quality of the euro area members with those of East Asian countries and draw policy implications for a regional integration in East Asia. We find that East Asia is far behind the Eurozone not only in institutional elements of the governance system at a regional level but also in institutional quality at the level of individual nations.The next section briefly reviews the literature on institutional quality and its relationship with economic performance, and discusses why institutional quality matters for maintaining a single currency area. Section 3 illustrates the data for institutional quality of the euro area member states and explores its close relationship with economic performance. Section 4 examines the data of institutional quality for East Asian countries and discusses policy implications for regional integration in East Asia. The final section concludes.2. Why Does Institutional Quality Matter for a Currency Union?2.1 Institutions and economic performanceNorth (1990) defines institutions as the rules of the game in a society or more formally as the humanly devised constraints that shape human interactions. In consequence they structure incentives in human exchange, whether political, social, or economic. The major role of institutions in a society is to reduce uncertainty by establishing a stable structure of human interactions. Institutions affect the performance of the economy by their effect on the costs of exchange and production. (pp. 3-6)2When property rights are not well secured, incentives and opportunities to invest and innovate will be reduced. …

Fiscal institutions in Germany

Summary In 2009 Germany introduced a new fiscal rule in its Basic Law. It stipulates that the federal budget must be (structurally) close to balance from 2016 onwards and does not allow for (structural) budget deficits in the Laender (states’) budgets after 2019. While the already existing debt brakes at the Laender level have relatively wide loopholes, six states do not even seriously consider the introduction of new fiscal rules. In fact, only 9 of the 16 Laender as well as the federal level passed binding consolidation plans. Despite historically high revenues in 2011, most states ran deficits and increased public debt. In this paper, we analyze the German debt brakes at the federal and the Laender levels and assess the probability that the German jurisdictions manage to comply with the constitutional requirements of its debt brake.

The Politics of Forecast Bias: Forecaster Effect and Other Effects in New York City Revenue Forecasting

This paper examines the impact of forecasters, horizons, revenue categories, and forecast timing in relation to decision making on forecast bias or accuracy. The significant findings are: for the most part forecasters tend to report forecasts that are similar rather than competitive. Forecast bias (underforecasting) increases over longer horizons; consequently claims of structural budget deficit are suspect, as an assertion of structural deficit requires that a reliable forecast of revenue shows continuous shortfall compared with a reliable forecast of expenditures. There is an overforecasting bias in property tax, possibly reflecting demand for services. There is an underforecasting forecast bias in two revenue categories, all other taxes and federal categorical grants, resulting in a net total underforecasting bias for the city's revenue. There appears to be a period effect (forecasts in June are substantially biased), but this effect requires further study. The study suggests further examination of the bias associated with revenue categories, time within the budget cycle, and forecast horizon.

Financing US Debt: Is There Enough Money in the World – and at What Cost?

AbstractWith the outlook for continued US budget deficits and growing debt – and the uncertainties regarding their financing – we examine the role of foreign official holdings of US Treasury securities in determining Treasury security interest rates, and the resulting implications for international portfolio allocations, net international income flows and the US net international debt position. We update estimates of the relationship between Treasury interest rates and US structural budget deficits, and extend that empirical analysis to include foreign official and Federal Reserve holdings of US Treasury securities. Although relationships suggest that the world portfolio could potentially accommodate financing requirements over the intermediate horizon, substantial uncertainty surrounds the likelihood of that accommodation and the associated effects on interest rates and adjustments in international portfolios. Notably, unprecedented levels and growth of foreign official holdings of US Treasuries will be required to keep longer term Treasury security interest rates from rising substantially above current consensus projections.

Lehren aus der Krise

Abstract Three lessons have emerged from the experience of the recent crisis for future economic policy. First, when a crisis of this severity strikes, governments and central banks must be prepared to engage quickly and decisively into countervailing measures. Second, as the world economy has been stabilizing gradually, they now need to orchestrate a careful exit from the extraordinary monetary and fiscal policy stimuli taken, in a way that does not jeopardize the fragile process of recovery. In this difficult balancing act, governments must adamantly reduce their very high structural budget deficits. And third, governments are responsible for facilitating a steep growth path for the aggregate economy, preferably by safeguarding competition and investing into physical and human infrastructure. Above all, national policies need to be consistently embedded into an international perspective.

Financing U.S. Debt: Is There Enough Money in the World - and at What Cost?

This paper examines the potential role for foreign official holdings of U.S. Treasury securities and the associated implications for Treasury security interest rates, international portfolio allocations, net international income flows, and the U.S. net international debt position, using a baseline outlook of current and projected U.S. budget deficits and growing debt. The analysis applies empirical results regarding the role of U.S. structural budget deficits and foreign official holdings of U.S. Treasuries in determining Treasury security interest rates. Although initial review of information suggests that the world portfolio could potentially accommodate financing requirements over the intermediate horizon, substantial uncertainty remains about the relationships among foreign official holdings, exchange rates, and trade; the potential effects of “crowding out” in the international portfolio; and how and whether world portfolio allocations would adjust to accommodate higher shares of U.S. assets.

The Nation's Recession Caused California's Budget Crisis

THE CALIFORNIA Journal of Politics & Policy Commentary The Nation’s Recession Caused California’s Budget Crisis Stephen Levy* Center for Continuing Study of the California Economy I offer some ideas below for reaching a short-term solution to the state budget for 2009–2010. But for any civil budget discussion to take place, it would be helpful for all parties to acknowledge a few key facts. Key Facts The current budget challenge is 100% the result of the deepening national recession. Our current budget challenges are shared by many states and local governments www.bepress.com/cjpp Volume 1, Issue 2, 2009 throughout the nation. While California failed for many years to resolve our structural budget deficit and has no plan to close the gap for the future, we did our part for 2009–2010 back in February with more than $10 billion in spending cuts and more than $10 billion in temporary tax increases. When the 2009–2010 budget is adopted Californians will be spending the smallest share of our income on General Fund spending since the early 1990s and, perhaps, since the early 1970s. The 2009–2010 spending level does not even keep pace with caseload and inflation growth over the past 10 years. California ranks 2nd lowest among states in state employees relative to population and 4th lowest when local government employees are included. *Stephen Levy is director of the Center for Continuing Study of the California Economy in Palo Alto.