Sustainability Of Public Finances Research Articles

Independent Fiscal Institutions as a Part of European Traditions

Fiscal councils are independent public institutions aiming to promote the sustainability of public finances through various functions, such as assessing budgetary plans and their implementation or preparing budgetary and macroeconomic forecasts. Thus, synthesising the attempts made in the literature to define the concept of independent fiscal institutions, it should be emphasised that by providing an independent, impartial and objective assessment of fiscal policy and performance, they promote sound fiscal decisions and sustainable public finances. Independent fiscal institutions also reduce information asymmetries and promote transparency in public finances, thereby raising the reputation and electoral costs for governments that pursue imprudent policies or breach key commitments. As such, they can support contemporary states in addressing the tendency to increase spending and deficits. To better understand the contemporary factual and normative state of the analysed dissertation topic, it is worth tracing, even in some summary, the process of emergence and the directions of development and evolution of independent fiscal institutions. Although independent fiscal institutions are relatively new bodies in the political architecture of the vast majority of the EU Member States, a small group of countries pioneered the creation of these institutions. It is necessary to trace the systemic solutions that have determined the legal and constitutional status of fiscal institutions in recent decades in order to understand the factors that have led to their reassessment.

The rising cost of servicing public debt: challenges for fiscal policy in a crisis environment

The study is devoted to the challenges for the fiscal policies of Central and Eastern European (CEE) countries, resulting from the strong growth of public debt and its servicing costs under the conditions of the pandemic and war shocks. The purpose of the study is to answer the questions: i) what factors caused the sharp increase in sovereign debt yields? ii) is there a correlation between the degree of implementation of sound economic governance (SEG) principles and the cost of servicing sovereign debt? ii) how strong was the response of the sovereign deficit and debt to the shocks caused by the pandemic and war in Ukraine? iii) does the rising cost of servicing debt threaten the sustainability of public finances? v) do the adopted SEG principles remain relevant during periods of shocks? The study covered the 6 largest economies in this part of Europe, i.e. Poland, Romania, the Czech Republic, Greece, Hungary, and Slovakia, but its results apply indirectly to many other countries. The results were confronted with a plan for reforming the EU’s economic governance system in order to identify the fundamental challenges facing the countries studied in this context. On the basis of the study, recommendations were put forward for shaping the assumptions of the state debt management strategy and multi-year financial plans.

Maintaining Sustainable Public Finances: The Role of Fiscal Consolidation

Maintaining Sustainable Public Finances: The Role of Fiscal Consolidation

Are fiscal rules efficient on public debt restraint in the presence of shadow economy?

This paper provides an analysis of the role played by fiscal rules and the shadow economy in the evolution of public debt. Thus, we investigate the effectiveness of fiscal rules in limiting the level of indebtedness in the presence of a shadow economy (SE) in 194 advanced, emerging, and developing countries over the period 1995–2021. The SE harms public revenue collection and leads to an increase in the budget deficit. Better management of public finances is difficult to achieve in the presence of a SE. We find that governments should try to limit the spread of SE to achieve sustainable public finance and maintain public indebtedness within reasonable limits. The results from the cointegration technique suggest that in the long run, the efficiency of fiscal rules is conditioned by the decrease of the SE, and only after this prerequisite is attained can a favorable evolution of public debt be expected. The empirical findings confirm the significant contribution of the SE to the public debt increase and the ineffectiveness of the fiscal rules applied.

SUSTAINABILITY OF LOCAL PUBLIC FINANCE AND REGIONAL DEVELOPMENT: CHALLENGES AND OPPORTUNITIES IN TIMES OF CRISIS IN UKRAINE

The socio-economic crisis in Ukraine, which has worsened over the past decade, has had a profound impact on all local communities. Local governments implementing decentralised mechanisms and anti-crisis financial measures are currently facing numerous theoretical and procedural constraints, which, although not homogeneous, have a cumulative effect. In the context of low economic potential and existing legislative constraints, local governments cannot actively manipulate consistent sources of local budget revenues (taxes) to support sustainable regional development, and therefore a coherent policy of credit and fiscal equalisation is an important aspect of ensuring the sustainability of local public finances. The purpose of the paper is to assess the correspondence between the fiscal sustainability of local budgets (with a focus on the borrowing component) and the economic sustainability of regions. Empirical studies of Ukraine's experience based on regression modelling have not found a clear direct link between the drivers of fiscal sustainability of local budgets (solvency, dependence on intergovernmental grants, stability of tax revenues) and the sustainability of socio-economic development of Ukrainian regions. In addition, in the context of the crisis and external shocks, strict adherence to the criteria of fiscal balance of local budgets undermines the ability to ensure a sustainable recovery of the regional economy, so it is important not to limit the fiscal capacity of communities by attracting local borrowings and intergovernmental grant during the crisis.

Construction of a Composite Indicator for Debt Sustainability Analysis


 
 
 
 The size of fiscal deficits and sustainability of public debt levels remain a key macroeconomic policy problem in all emerging economies following the global financial crisis of 2008-09. In addition, the COVID-19 pandemic poses a considerable challenge to fiscal sustainability in developed and developing countries. Although the sustainability of public finances has been discussed for more than a century and studies have proposed several methods to define and assess debt sustainability, it remains an imprecise concept. This study proposes a new framework for public debt sustainability analysis by constructing a composite indicator, that is, a debt sustainability index. We emphasise the need for an explicit conceptual framework for constructing a composite index and usefulness of multivariate statistical analysis prior to the aggregation of individual indicators. The proposed approach can be used to analyse the debt sustainability of state governments (sub-nationals) in India.
 
 
 

Fiscal sustainability, fiscal reactions, pitfalls and determinants

ABSTRACT We examine the sustainability of public finances and its determinants for 19 Eurozone countries from 1995 to 2020. We conclude for the existence of panel cointegration between government revenues and expenditures; primary government balance and lagged public debt-to-GDP ratio; and public debt-to-GDP ratio and lagged primary government balance. The estimated fiscal reaction functions suggest the existence of a Ricardian fiscal regime, although there is also evidence of a non-Ricardian fiscal behaviour. Finally, modelling via time-varying coefficients, we find that fiscal sustainability increases with the output gap, fiscal rules indices and current account balances. Inflation and sovereign ratings assigned by the main rating agencies produce mixed results.

Tax Instalment Plans: A Legal Instrument of Financial Sustainability in a Crisis

Abstract The Covid-19 pandemic as well as the war in Ukraine represent the biggest hit to the Czech economy since the Great Recession. In the Czech Republic, several tax measures are being used to help economic entities overcome the current crisis and keep their businesses running. One of them is the tax instalment plan. This article aims to identify why the tax instalment plan could be an appropriate fiscal measure in times of economic crisis. The author presents a classical legal instrument in the tax area – the tax instalment plan – and analyses it from an innovative point of view rather than the usual perspective, that is, from the macroeconomic point of view. The article analyses the legal conditions for the use of this instrument in the Czech Republic, points out the difficulties of interpretation in practice and evaluates it in the context of the theoretical background of desirable fiscal crisis measures. The conclusions of the research confirm the hypothesis that this legal instrument is an effective and used tool for facilitating the sustainability of private and public finances in times of crisis. It combines the desirable aspects of both automatic stabilisers and discretionary measures.

The Sustainability of Public Finance

The Sustainability of Public Finance

The Sustainability of Public Finance

The Sustainability of Public Finance

Slovakia's Public Debt - the Greek Path?

The article focuses on the analysis of public finances of Slovakia in the context of public debt. The article covers the overview of empirical literature on indebtedness and debt management framework of Slovakia and the EU. It describes the current status of public debt, deficit, and long-term sustainability of Slovakia. The views of different economists on whether public finances are evolving according to the "Greek" scenario are also discussed. The main objective is to provide an empirical basis for assessing the veracity of these narratives by comparing the evolution of indicators of the long-term sustainability of public finances in Slovakia and Greece.

Fee for Reducing Natural Field Retention as an Instrument of Sustainable Public Finance

Theoretical background: Active national fiscal policy is an important determinant of sustainable development. Poland falls below the water security level, which is why natural retention is a particularly important issue, as the poverty of societies begins with a lack of access to water. This also poses a challenge for public finance, which should encourage specific behaviors. As of 1 January 2018, a fee for the reduction of natural land retention is levied in Poland. Purpose of the article: The aim of the article is to analyze and evaluate the fee for reducing natural field retention as an instrument of sustainable public finance and to assess its fiscal efficiency in terms of its ability to raise public revenue, in particular the revenue of municipalities on the example of cities with county rights in the Silesian Voivodeship. Research methods: The paper draws on literature reviews and the conducted empirical research. Data were collected using the direct method via access to public information. First, an analysis was carried out on the amount of revenue generated from the fee for reducing natural field retention, constituting the income of the State Water Holding – Polish Waters. Subsequently, an analysis was made on the amount of revenue generated from the fee for reducing natural field retention in municipalities with county rights in the Silesian Voivodeship. The study covered the years 2018–2022, i.e. from the introduction of the fee until the last year for which the data are available. Main findings: The fee for reducing natural field retention is a sustainable public finance instrument designed to shape attitudes and influence behavior. Although levying a fee for reducing natural field retention does not solve the problem of insufficient retention, it encourages discussion and implementation of measures to improve it. The mandatory fee is intended to discourage the construction of impervious surfaces and, at the same time, encourage property owners to incorporate retention systems into their construction plans to counteract the lowering of groundwater levels. It is of great importance, not in an economic or fiscal sense (public revenue), but rather in a social sense, by raising public awareness of the problem of natural retention.

Communes’ Expenditure on Municipal Waste Management in Terms of Sustainable Development

Theoretical background: As we work towards achieving sustainable development under Goal 12, which entails promoting sustainable consumption and production patterns, one of our key tasks is to minimize waste generation through prevention, reduction, recycling, and reusing. Local government units (LGUs) have a significant role to play in implementing this task. By investing in municipal waste management, LGUs can influence the behavior of residents toward responsible waste collection and management, including hazardous waste. Purpose of the article: This article aims to evaluate how local government spending affects municipal waste management in different voivodeships. The hypothesis of this paper is that local government expenditure improve waste management effects. To achieve effective spending that supports sustainable development, public authorities at the regional level must coordinate their activities and adapt to EU standards. Research methods: This article used literature and statistical analysis to adopt dynamics indicators and correlation coefficients. Data on selected variables for the study came from the Local Data Bank of the Central Statistical Office and Eurostat. Main findings: According to the analyses conducted, there has been a positive development in municipal waste management in Polish communes. This suggests that the government’s policies are contributing towards achieving the sustainable development goal of responsible and sustainable waste management, especially when it comes to hazardous waste. These findings could be utilized to recommend to public authorities the necessary changes to fiscal instruments that would promote sustainable public finances.

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.

Analysis of the Impact of State-Owned Banks on the Sustainability of Public Finances

This paper aims to provide a retrospective assessment of Ukraine’s state policy concerning state-owned banks and evaluate their impact on the sustainability of Ukraine’s public finances. The research methodology employs an empirical study of the cash flow of public funds to state-owned banks and the reverse cash flow to determine the impact of the activity and stability of public finances. The cash flow to state-owned banks includes the expenditure of public funds for the creation of authorised capital during the establishment of state-owned banks, the acquisition of shares in operating commercial banks, additional capitalisation of state-owned banks, etc. The reverse cash flow comprises dividends paid based on the performance of state-owned banks, as well as revenue generated for public funds through the sale of shares (privatisation) of state-owned banks. This study highlights the costs associated with recapitalising state-owned banks. These costs disrupt the stability of public finances, create additional debt dependency for Ukraine, impose an additional burden on public finances, and lead to structural changes that reduce funding for social spending. As a result, Ukrainian taxpayers are financing the inefficient activities of state-owned banks while experiencing reduced investments in education, healthcare, social protection, environmental protection, and other essential areas.

El impacto del envejecimiento poblacional sobre la evolución de la tasa de actividad en España

RationalePopulation ageing is one of the greatest structural challenges facing the Spanish economy. Foremost among its multiple effects is its contractionary impact on labour supply, which will foreseeably have major implications on both the functioning of the labour market and the potential growth or sustainability of public finances.Takeaways•Population ageing over the past decade has had an estimated negative impact of around 3.4 percentage points (pp) on Spain’s participation rate in 2022. This impact has been uneven by regions, with a sharper fall in the Cantabrian regions (Asturias, Cantabria and the Basque Country).•According to the latest National Statistics Institute’s population projections, the participation rate is set to drop a further 2.8 pp by 2030 owing to the continuing ageing process. Excluding the support of net immigration flows, the drop would be 1.6 pp greater.•In addition, the impact of ageing may deepen regional divergences, since the regions that have an older population and lower GDP per capita may be expected to experience the sharpest falls in the participation rate.

Testing Fiscal Sustainability in Bosnia And Herzegovina

Considering contemporary economic trends and the importance of fiscal policy instruments for ensuring macroeconomic stability, the research focuses on fiscal sustainability. Accordingly, special attention is paid to the empirical approach to fiscal sustainability, where the central question in considering the long-term sustainability of public finances is the concept of intertemporal budget constraint. The potential cointegrating relationships between public revenues and public expenditures, which represent the basic condition for fiscal sustainability, were tested on the example of Bosnia and Herzegovina. Testing the cointegration of time series was performed using the Engle-Granger two-step procedure and then using the Johansen procedure based on the VAR model. Finally, based on the above, the results of the fiscal sustainability analysis of Bosnia and Herzegovina were summarized, which are relevant for defining macro-fiscal goals and development-oriented policies.

European Public Policies and Sovereign Risk in the Eurozone: How State-Contingent Governance Hampers Fiscal Discipline

Abstract The 30 years old Maastricht Treaty on European Union (EU) is based on the political vision that a stable euro requires sound budgetary policies and sustainable public finances in all the participating countries. This article reviews how the European framework for managing sovereign risk in the Economic and Monetary Union (EMU) has evolved in challenging times. The main finding is that over the years European policymakers have applied a range of special provisions contingent on the state of national economies, the demand for public investment, the need for a sound financial system, the effectiveness of monetary transmission, or on general concerns with the integrity of the eurozone, in a way which hampers fiscal discipline. The growing prominence of this state-contingent governance could mark the political transition from the Maastricht Treaty’s focus on public risk reduction to a ‘Next Generation EMU’ which favours public risk sharing. The challenge in designing the future EMU architecture will be to balance the need to preserve the integrity of eurozone with the need for fiscal discipline.

Tax Reforms, Structural Breaks, and Dynamics of Tax Revenue in Fiji

ABSTRACT: The changing dynamics of tax revenue and its responses to domestic and external shocks play a pivotal role in the discussion of the sustainability of public finance in small developing economies. However, the empirical literature on the response of tax revenue to various shocks in developing economies in the Pacific is sparse. Despite several tax reforms over the last decade, the spending plans of the Fijian government since the 2017/2018 budget announcements have stimulated frequent public discussions regarding the sustainability of public debt. Against this background, the main purpose of this paper is to investigate the response of tax revenue in Fiji - a small developing island economy, to external and domestic shocks using historical annual data covering more than five decades. This study uses unit root tests that account for single and multiple endogenous structural breaks and finds that tax revenue in Fiji is a non-stationary process, I (1) with break dates coinciding with tax reforms, general elections, and political coups. The findings reveal that tax reforms and political developments are possible important sources of shocks to tax revenue and have important policy implications. First, shocks to tax revenue will have persistent effects, with the effects of adverse shocks being transmitted to other related variables and sectors of the Fijian economy. Second, historical values of tax revenue cannot be used to formulate forecasts of tax revenue and policymakers should consider other determinants of tax revenue (for example, the share of the agriculture sector, trade volume, political stability, education, life expectancy, infant mortality rates, age composition of the population, urbanization, inflation rate, and corruption) for forecasting purposes. The evidence of non-stationarity indicates that future studies on tax revenue need to carefully reflect on the modeling technique to avoid spurious regressions. Furthermore, our findings reveal that temporary fiscal measures will not have a permanent effect on tax revenue and sustainable revenue growth requires focusing on long-term (rather than short-sighted) reforms. Thus, our findings underscore the importance of evidence-based policy reforms to improve the resilience, efficiency, and sustainability of the tax system in Fiji to shelter it from future adverse shocks.

Public Debt Expectations: The More You Know about Public Debt, the Less Optimistic You Are

Abstract Macroeconomic expectations influence long-term output, investment, and employment through households’ behavior. Policymakers and politicians attempt to predict the behavior of citizens and voters. How individuals form expectations and perceive sovereign indebtedness brings into question public finance sustainability and incumbents’ credibility. Based on a cross-country survey in Central and Eastern European countries, we estimate several probit regressions to uncover the effects of economic knowledge on sovereign debt expectations. Robustness tests and additional control confirm the initial results. We find that knowledge about public debt increases the chances of forming negative expectations, while higher financial literacy tends to have the opposite effect. More specifically, individuals with higher public debt knowledge are 5.4 percentage points less likely to show positive expectations, while individuals with higher levels of financial literacy (interest rate and inflation knowledge) are approximately 3.5 percentage points more likely to form positive expectations. The results indicate that public debt expectations are driven by negative biases resulting from the lack of economic knowledge together with insufficiency in understanding economic causal mechanisms. Financial literacy programs could benefit from including information about macroeconomics in curricula. Improving individual abilities to understand macroeconomic mechanisms, including public debt, has the potential to influence expectations and shift behaviors towards desired policy outcomes.