Sustainability Of Fiscal Policy Research Articles

Gaps and Fiscal Adjustment for Debt Stability in Climate-Vulnerable Developing Countries: How Large and by How Much?

Abstract We explore the extent of the fiscal resource gap described by climate-vulnerable developing countries which have called for debt flexibility. We compute indices of fiscal sustainability, defined as the difference between an economy’s current tax rate and the “sustainable” tax rate, or the rate which, if constant, would enable the debt-to-GDP ratio at time n to be equal to the debt-to-GDP ratio at time 0, given current policy rules. We estimate short- and medium-term gap indices for 2010 to 2020, and a “climate change gap” (CCG) which incorporates countries’ reported climate change needs for the period 2021–2030. Estimated short- and medium-term gaps capture the 2020 disruption to fiscal sustainability, while CCGs indicate a highly diverse picture: one-third of the sample have CCGs ranging from 10 to 99 % of GDP, another third have CCGs from −8.6 to −0.3 %. Negative CCGs, which imply that immediate adjustments in taxes or spending are not required for fiscal policy sustainability, are surprising but come with a crucial caveat: CCGs are likely to be significantly understated because of data gaps, especially regarding adaptation requirements. This highlights the urgent need for finance and technical assistance dedicated to building national capacities for determining and costing climate change needs.

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.

Fiscal Policy and Economic Stability: A Comprehensive Analysis

This piece outlines fiscal policy and how it helps in stabilizing the economy. It starts with explaining fiscal policy and emphasizing its role as an effective tool for economic management. Tax policies, government spending, and budget deficits/surpluses which make up fiscal policy are discussed in details. The article continues by discussing the influence of fiscal policy on the economy's stability, considering its ability to boost growth, curb inflation, and reduce unemployment. While the management of fiscal policy comprises of the challenges such as political concerns and coordination with monetary policy, is also examined. Case studies and examples demonstrate success and failure of those fiscal policy implementation, which have become an invaluable lesson for policy makers. The article concludes with a look into the future trends and some suggestions on sustainable fiscal policy procedures.

Deficit financing and consumption: a study of Indian private consumption expenditure

The study reinvestigates the 'Ricardian Equivalence hypothesis in India by taking private consumption as the dependent variable. The study aims to empirically study the impact of debt financing versus tax of fiscal deficit in the Indian context, as Indian policymakers primarily rely on fiscal policy as a tool for economic stability and growth. ARDL, FMOLS and DOLS approach was used by taking annual time series data from 1988 to 2023. The study reinvestigates the 'Ricardian Equivalence hypothesis in India by taking private consumption as the dependent variable. Government expenditure, public debt, tax, domestic income, and liquidity constrain as independent variables. The estimates confirm a significant symmetric as well as symmetric long-run and short-run relationship between the variables; the results reject the Ricardian Equivalence and propound the Keynesian approach that financing the fiscal deficit (debt vs tax) does matter to the private consumption expenditure. The positive and significant coefficient shows that the increase in liquidity will lead increase in private consumption expenditure. Over-reliance on debt financing strategies has a significant influence on domestic private consumption. The liquidity constraints, fiscal policies will be able to reallocate resources from the future to the present. Since debt financing of deficits and liquidity substantially influence India's consumer spending, expansionary fiscal policies should be carefully devised and supported. This study contributes to the existing literature on deficit financing and 'Ricardian Equivalence' by giving new evidence on designing sustainable fiscal policy by spending wisely without imperilling the country's consumption expenditure.

Framing Policy Reform in Europe. A Comparative Study of Frame Variation Across Countries, Newspapers, and Time

ABSTRACT Politicians must navigate the complexities of social policy reform to ensure sustainable fiscal policies while considering their impact on citizens. News media play a crucial role as a source of political information, influencing public attitudes towards policy changes through selective framing of issues. This study focuses on how European news media frame the controversial policy reform of raising the retirement age, and explores factors that potentially explain variations in framing across contexts. Using a manual content analysis of newspapers in Denmark, Spain, the Netherlands, and the United Kingdom over the period 2011–2020 (n = 1059 articles), we examine country-, newspaper-, and time-related factors to explain the relative presence of issue-specific diagnostic and prognostic frames in European news coverage of pension reform. While the results show that all three types of factors determine the coverage of the reform measure to some extent, in particular variations across newspapers and over time are prevalent. The most striking differences are that left-leaning newspapers emphasize frames related to inequality, and that over time, framing crystallizes into a more concentrated set of diagnostic and prognostic frames. This article sheds light on European news coverage of a much-debated policy issue and its contextual dependency.

Sustaining Prosperity: Exploring Fiscal and Financial Sustainability in the Context of Dynamic Fiscal Policy

Purpose: This study explores how fiscal policy and financial sustainability support sustainable economic prosperity amid global instability. It examines the impact of government taxation and spending decisions on economic outcomes, aggregate demand, employment, inflation, social welfare, infrastructure development, and income inequality. Financial sustainability is analyzed through prudent fiscal management and debt sustainability, focusing on long-term government finance viability and mitigating fiscal risks. Research Design and Methodology: The study employs a qualitative methodology, incorporating a comprehensive literature review of theoretical works, empirical studies, and policy analyses. Data is collected through systematic reviews of scholarly articles, books, policy reports, and official publications. Thematic analysis techniques, including coding and categorization, synthesize findings, with reflexivity to consider assumptions and biases. Findings and Discussion: The research underscores the importance of flexibility and adaptability in fiscal policy, highlighting automatic stabilizers and countercyclical policies for economic stabilization and sustainable growth. Prudent debt management, including debt restructuring and fiscal consolidation, is vital for mitigating fiscal risks and ensuring debt sustainability. The findings emphasize integrating fiscal sustainability with broader economic and social goals and the need for institutional reforms and international cooperation to enhance fiscal governance. Implications: The study provides insights for policymakers on the importance of fiscal prudence and sustainability. It advocates for a balanced approach that addresses short-term stabilization and long-term goals and calls for institutional reforms to improve fiscal discipline, transparency, and accountability. By integrating interdisciplinary perspectives, policymakers can develop resilient and sustainable fiscal policies that promote long-term prosperity and social equity.

재정건전성의 법적 함의와 규율

Ensuring fiscal sustainability for future generations and responding to structural fiscal burdens such as low birth rates and aging population are crucial national capabilities to address economic crises. Fiscal soundness generally refers to a state where there are no problems with the government's ability to pay for services, and there are no obstacles to fiscal sustainability. This can be understood as maintaining a national debt-to-GDP ratio within a limit specified by fiscal rules, ensuring that the rate of increase in national debt is lower than the interest rate, and being able to adjust current debt to future fiscal balances. Fiscal soundness, in essence, may be viewed as maintaining the principle of balanced budgets, emphasizing fiscal equilibrium. However, commonly cited criteria for assessing fiscal soundness are national debt, fiscal balance, and expenditure levels, with the national debt-to-GDP ratio being a prominent indicator. In the 2000s, various factors threatening fiscal sustainability in the Korean economy, such as rapid aging, unprecedentedly low birth rates, global economic downturns, and intensifying trade disputes between the US and China, have been raised. In particular, the unprecedented impact of the COVID-19 pandemic has made it difficult to predict the future in fiscal and economic policy. Against the backdrop of high global economic uncertainty, the growth rate of the Korean economy is forecasted to decline to an average of 2.0% during the period of 2020-2024, a 0.8%p decrease compared to the previous five years, with economic growth in 2023 at 1.4%. The “Integrated Fiscal Balance” recorded a deficit of 72.2 trillion won in 2020, and the “Management Fiscal Balance” recorded a deficit of 112 trillion won, the highest deficit since statistics were compiled in 2001. In 2023, the “Management Fiscal Balance” recorded a deficit of 117 trillion won, the highest ever. Various indicators are warning of “red lights” across the country, sparking heated debates about fiscal soundness or the sustainability of fiscal policy. The upcoming 22nd National Assembly, soon to begin its session, faces significant challenges in overcoming economic difficulties and adapting flexibly to changes in the global economy to find new drivers of growth and seize opportunities for a new leap forward. This paper examines the meaning of fiscal soundness, what criteria should be considered, and explores the legal implications of the principle of balanced budgets(principe d’équilibre budgétaire) in French fiscal law. Furthermore, it reviews institutional challenges for ensuring fiscal sustainability, such as fiscal rules, budgetary legalism, and the Paygo Rule.

Analisis Pengaruh Defisit Anggaran, Belanja Pemerintah Pusat, dan Utang Pemerintah Terhadap Pertumbuhan Ekonomi di Indonesia Tahun 1990-2019

In maintaining and increasing economic growth, it is necessary to have appropriate and effective policies so that the target of increasing economic growth every year can be achieved. This policy must be in line with various developments carried out to increase economic growth. However, high government spending will increase the budget deficit and also increase the need for financing through debt. This study uses the variable budget deficit, central government spending, government debt (SBN and ULN), and economic growth in Indonesia from 1990 to 2019. The analysis method used is time series data analysis with the Autoregressive Vector model (VAR) which aims to identify long-term relationships between variables and the Error Correction Model (ECM) which aims to analyze the longterm and short-term effects between variables. The results of research with the VAR model show that the variable deficit, government spending, government securities, and foreign debt have a one-way relationship with Gross Domestic Product.The results of the study with the ECM model show that the central government spending variable and Government Securities (SBN) have a positive and significant effect on gross domestic product (GDP) in the short and long term, and foreign debt has a negative and significant effect on GDP in the short and long term during the period 1990-2019. Based on this research, it can be concluded that the fiscal policy implemented in 2019 is a sustainable fiscal policy. Keywords: Economic Growth, Central Government Expenditure, Budget Deficit, Government Debt, Fiscal Sustainability

Budget Deficit Financing and Economic Well-Being in Benin: Testing the Ricardian Equivalence Theory

This article examines the validity of Ricardian equivalence theory in Benin over the period 1980 to 2020. The study uses a time series with the Autoregressive Long-Lived Regressions (ARDL) model. The results show that budget deficit financing has a positive effect on household consumption in the short term, and a negative effect in the long term. On the other hand, budget deficit financing has a positive effect on gross domestic product in the short term and no significant effect in the long term. These results suggest that budget deficit financing has different short- and long-term effects on economic well-being in Benin. Consequently, policymakers should consider complementary strategies to support long-term economic growth and ensure the sustainability of fiscal policies.

THE EFFECT OF FISCAL POLICY ON THE RELATIONSHIP BETWEEN MONETARY POLICY AND MACROECONOMIC VARIABLES IN NIGERIA

This study examined the effect of fiscal policy on the relationship between monetary policy and macroeconomic variables in Nigeria: An Empirical Investigation. The study employed a two-stage least square technique as estimation technique, where in the first step; the empirical models of fiscal and monetary policies were separately estimated. In the second step, the dependencies of each policy on the other are then included, to capture the effects of each on the other. Annual time series on the various monetary policy and fiscal policy variables from 1981 to 2020 were obtained from the Central Bank of Nigeria statistical bulletin. Augmented Dickey Fuller (ADF) test was used to examine the stochastic properties of the series. The findings revealed that Gross Domestic Product (GDP), inflation, and money supply are negatively related to monetary policy rate in Nigeria. Also, government expenditure limits the effectiveness of monetary policy in the management of both economic growth and inflation in Nigeria as the effect on inflation reduces from 0.06 to 0.02 and the effect on GDP changes from negative to positive. The study recommended that there should be an establishment of better consultation between both policies in order to secure high and sustainable fiscal and monetary policy mix and hence economic growth with price stability.

Measuring fiscal policy sustainability in developing Asia: what does the Markov Switching Augmented Dickey-Fuller Test tell us?

This paper measures fiscal sustainability in 22 developing Asian countries for the period 1999–2017. Previous literature generates conflicting results: one paper applies the usual stationarity and cointegration tests and finds that fiscal policy is sustainable but in weak form. Another paper employs a fiscal reaction function and finds that fiscal policy is unsustainable. This paper uses an expanded version of the Markov Switching Augmented Dickey-Fuller test (MS-ADF), which remedies the shortcomings of conventional stationarity tests to provide more statistical power in the presence of nonlinearities and structural breaks. The MS-ADF has never been applied to this set of countries. Results show that the majority of the countries have “uncertain” debt trajectories, not definitively sustainable or unsustainable but somewhere in-between. This is a more nuanced picture of the debt trajectories in the region relative to what is obtained using the established methods. A more nuanced assessment could lead to more suitable policy corrections.

Fiscal policy sustainability and public debt in Africa

Fiscal policy sustainability and public debt in Africa

Testing the Sustainability of Fiscal Policy during the Portuguese First Republic Using Stationary and Cointegration Tests

The Portuguese First Republic (1910–1926) was marked by significant instability at the most diverse levels. With a special focus on the financial dimension of this period, the objective of this paper is to test the sustainability of the Portuguese fiscal policy, also referred to as the sustainability of public finances itself. The methodology involves testing the stationarity of public debt and budget balance and also the cointegration between state revenue and expenditure. The results obtained shows that the state’s intertemporal budgetary constraint was violated during the First Republic regime, which denotes unsustainability. This conclusion is justified by the existence of a non-stationary budget balance and the absence of cointegration between state revenue and expenditure. These results are manifestly different from those that have already been obtained for other Portuguese regimes, namely for the Estado Novo (1933–1974) and democracy (1974–present), where sustainability existed. This paper is yet another demonstration of how important it is to maintain control of state’s accounts. We hope that this paper can be useful to stimulate new research on Portuguese public finances and also on the important issue of fiscal policy sustainability.

Sustainability of Fiscal and Monetary Policies under Fixed Exchange Rate Regime in Jordan

This study aims to analyze the sustainability of fiscal and monetary policies and the relationship between them under a fixed exchange regime that is characterized by high budget deficit and public debt in the past four decades. This study is critical for countries adopting a fixed exchange regime to achieve national priorities. Annual data from 1980 to 2020 were employed using Markov Switching Modelling to assess the sustainability of fiscal and monetary policies by identifying the main dimensions of fiscal and monetary policy that affect their sustainability. The findings show that fiscal policy is dominated by unsustainability, as the number of years of unsustainability was estimated to be more than four times the number of years in which it witnessed sustainability. Regarding monetary policy, sustainability was dominant, as it was found that the number of years of sustainability is about 1.3 times the number of years of unsustainability. Under a fixed exchange rate, there is no evidence confirming that there is sufficient coordination between fiscal and monetary policies. The study suggests that policymakers should follow complementary and balanced fiscal and monetary policies to achieve sustained economic growth.

Impact of fiscal deficit and trade openness on current account deficit in India: new evidence on twin deficits hypothesis

PurposeThis study aims to examine the impact of fiscal deficit, exchange rate and trade openness on current account deficit (CAD). The study tried to empirically investigate the ‘twin deficits hypothesis’ and ‘compensation hypothesis’ in the Indian context.Design/methodology/approachAutoregressive distributed lagARDL) bound test approach was used by taking annual time series data from 1978 to 2021. The estimates confirm a significant long-run and short-run relationship between dependent variables, i.e. CAD and independent variables such as the fiscal deficit, exchange rate and trade openness.FindingsThe results show that positive shocks of all explanatory variables significantly affect the CAD. CAD and fiscal deficit are significantly associated, as the coefficient of fiscal deficit is positive and significant. The study also found that exchange rate and trade openness significantly affect the CAD. The coefficients of exchange rate and trade openness are positive and significant. The findings show that an increase in CADs results from liberal trade policies that help domestic industries grow their trade and expansionary fiscal policy, leading to a higher fiscal deficit. The negative and significant error correction term suggests that short-run disequilibrium converges to long-run equilibrium at a speed of 19.2%. The findings validate the ‘twin deficits hypothesis’ and ‘compensation hypothesis’ in the Indian context.Practical implicationsIt can be inferred from the study that liberal policy to promote economic growth and trade openness should be designed and promoted judiciously. An excessive liberalised approach may impact other macroeconomic variables such as current account balances. Integrating the domestic market with global markets poses a big challenge for countries like India that aspire to penetrate global markets. Furthermore, the Indian policy makers should rigorously work and promote the policies such as Fiscal Responsibility and Budget Management (FRBM) as reduction in fiscal deficits, trade imbalances will also be reduced.Originality/valueThis study contributes to the existing literature on ‘twin deficit’ and trade openness by giving new evidence on the trilemma between designing sustainable fiscal policy by spending wisely without imperilling the country's global presence and CAD.

Corporate social responsibility: Insights from COVID‐19 and stakeholder theory

AbstractThe transition from primary sustainable goals to crisis management exemplifies a new era of corporate social responsibility, sustainable business models, corporate sustainability, and stakeholder theory. This study examines the varied dynamics of corporate social responsibilities (CSR) during COVID‐19, as well as its potential and limitations, in order to gain a better understanding of CSR. The results expand upon the instrumental version of CSR and the application of stakeholder theory during COVID‐19. It reflects on the necessity for a wider integration of societal issues in CSR's driving philosophy as well as the underlying need to study diverse sectors of governance across the globe due to the increased potential for exploitation of the weak, particularly during times of crisis. This study examines the theoretical foundations of the themes and the lines of divergence between CSR's past and present by reviewing the social, intellectual, and conceptual structure of the literature. It emphasizes the importance of post‐COVID‐19 policies that prioritize job creation by implementing stronger labor market standards. Governments should eliminate barriers and implement pro‐SME laws and programs. A sustainable fiscal policy takes future generations into account. Sustainable corporate finance incorporates long‐term financial goals and social values into stakeholder theory.

Stability and performance of monetary and fiscal policies in the euro area

This research article examines the sustainability of fiscal policy and the impact of monetary policy on public debt management in the euro area from 1980 to 2014. This study applies the Augmented Dickey-Fuller (ADF) and Phillips Perron (PP) unit root tests to verify the existence of stationarity and indicates that the relevant variables are integrated. The analysis is based on error correction models and cointegrated VAR-models. The empirical findings indicate that there is no evidence to support the existence of strong political coordination in the euro area. Additionally, the study supports the idea that monetary policy has a more stabilizing influence on economic activity than budget policy. An important policy implication resulting from this study is that the fiscal rule generates a divergent dynamic of the public debt. The results suggest the Keynesian effects of macroeconomic policies in the eurozone and conclude that there is a sort of complementarity between monetary and fiscal policies in some euro area countries. This means that a restrictive monetary policy (higher interest rates, interest) is always accompanied by a restrictive fiscal policy (higher taxes or lower public spending) and vice versa. Concerning the Vector Error Correction Model (VECM) techniques, the findings demonstrate that the debt has a positive effect on the budget deficit, which ultimately results in behavior that affects the debt's stability.

Assessing the sustainability of fiscal policy in Morocco: Insights into economic stability

This study explores the sustainability of fiscal policy in Morocco, a country with limited natural resources, by examining the factors that contribute to its long-term effectiveness. To assess fiscal policy sustainability, we used a quantitative approach, drawing on historical data and relevant macroeconomic indicators. Our analysis focused on the relationship between fiscal policy and economic growth, which is a crucial factor affecting public finance sustainability, among other key macroeconomic indicators. We utilized a combination of two models, cointegration strategy and Bohn's adapted specification method, to investigate the long-run properties of the intertemporal budget constraint. Our findings suggest that fiscal policy in Morocco may not be sustainable and effective in the long-term, indicating potential risks and threats to the country's economic stability. Unsustainable fiscal policies can lead to a lack of confidence in public finance, currency depreciation, and inflationary pressures. Therefore, it is essential to take action to address the sustainability of Morocco's fiscal policy to counteract potential crisis shocks on the economy. The research suggests policymakers the need to implement effective fiscal policy that can address the challenges facing Morocco's economy. The fiscal rules will confronting the economic structural problems; however, it will promoting fiscal transparency and long-term economic growth.

Chronological changes of government sectors’ fiscal policies and fiscal sustainability in Japan

Since the end of the 1990 s, the sluggish growth of Japan’s gross domestic product (GDP) and the mired fiscal state of its public sector have provoked consternation about its public sector’s fiscal sustainability. Therefore, I estimated the fiscal reaction functions (stemming from Bohn, 1998a, 2008) with time-varying parameters for all Japan’s government sectors (for 1976Q2–2020Q1), i.e., the general government (GG), the central government (CG), the whole of the local governments (WLG), and the whole of the social security funds (WSSF), to chronologically assess their fiscal sustainability using four different models, including a least-squares with breakpoints model and a state-space model with the Kalman filter. My results demonstrate that (1) the least-squares with breakpoints model outperformed the others, and (2) although CG, WLG, and WSSF often sustainably managed their finances during the analysis term, GG has failed to implement a sustainable fiscal policy from the mid-1990 s (3) CG and WSSF adjusted their fiscal postures according to Japan’s economic state. Fiscal severity caused WLG to change its fiscal posture.

Import Tariff Reduction and Fiscal Sustainability: A Macro-Econometric Modelling for Ethiopia

The main objective of this study is to examine the dynamic impact of import tariff reduction on major macroeconomic variables and its long-run implications for the fiscal sustainability of Ethiopia. In addition, it estimates the increase in the average consumption tax required to compensate for the possible tax revenue loss and fiscal sustainability. A Recursive Dynamic Computable General Equilibrium Model (RDCGEM) is used to assess the dynamic impact on macroeconomic variables of import tariff reduction and examine the increased consumption tax required. The study is novel as there are no studies in general, and for Ethiopia in particular in this regard. We use the available 2013/2014 base year macroeconomic data from national income accounts, fiscal accounts, and balance of payments accounts of Ethiopia. The RDCGEM is calibrated to the base year data, checked for correctness, and tested for robustness using sensitivity analysis. The model then is simulated for the import tariff reduction under the base case and under various tariff reduction scenarios based on which the macroeconomic impacts of tariff reduction are analyzed. Based on the RDCGM outputs, the fiscal sustainability impact of import tariff reduction is verified, and using a cointegration method, we examine the sustainability of fiscal policy. The results suggest a 95 percent import tariff reduction that negatively impacts the major macroeconomic variables. It also leads to long-term fiscal unsustainability. The joint reform of the country has relatively better impacts on major macroeconomic variables but slightly negative effects on household income and consumption.