Anchor me: the benefits and challenges of fiscal responsibility

This paper discusses the benefits and challenges of implementing a rule‐based fiscal responsibility framework, using the Philippines as a case study. It estimates structural measures of the fiscal stance over the period 1980–2016 and applies a stochastic simulation model to determine the optimal set of fiscal rules. The empirical analysis indicates that discretionary fiscal policy has been procyclical, and the degree of procyclicality has increased in recent years. While the national government's nonbinding ceiling on the overall budget deficit is helpful, it does not constitute an appropriate operational target to guide fiscal policy over the economic cycle and necessarily ensure that the fiscal stance meets the government's intertemporal budget constraint. To this end, I use stochastic simulations and show the macroeconomic benefits of a well‐designed fiscal responsibility law that enshrines explicit fiscal rules designed for countercyclical policy and long‐term debt sustainability and an independent fiscal council that improves accountability and transparency.     

Government fiscal projection and debt sustainability

This paper reconsiders Japan’s fiscal sustainability. We investigate whether a simulation conducted under the political constraint imposed by a fiscal reaction function supports the official projection. First, we obtain Japan’s fiscal reaction function by estimating the response of the primary surpluses to the past debt for a panel data set of 23 OECD countries. Next, we investigate the political feasibility of the official projection using our estimated reaction function. When the Cabinet Office criterion is used for the debt-to-GDP ratio, the government can attain the policy target of nonnegative fiscal surpluses and realize fiscal sustainability. Notably, the negative growth-adjusted bond yield and the high growth rate contribute to this finding.     

Debt relief and fiscal sustainability

In this paper I analyze the relationship between fiscal policy,aggregate public sector debt sustainability, and debt relief. I develop a methodology to compute the fiscal policy path that is compatible with aggregate debt sustainability in the post-HIPC era. The model explicitly considers the role of domestic debt and quantifies the extent to which future debt sustainability depends on the availability of concessional loans at subsidized interest rates. The working of the model is illustrated for the case of Nicaragua, a country that in 2002 had one of the highest net present value of public external debt to GDP ratios. JEL no. F3, F34, F35.     

Twenty-year review of South African fiscal policy: A tale of two sustainabilities

In 2014 democracy in South Africa was 20 years old. The democratic government in 1994 inherited both a high and increasing public debt/gross domestic product ratio and significant development backlogs. The government had to establish fiscal sustainability, yet also pursue development in a sustainable way. This article explores the government's performance in reconciling fiscal sustainability with sustainable development. The article shows that fiscal policy has been sustainable over the 20 years, with some risks appearing towards the end, and that the government pursued sustainable development through reallocating resources within the budget and by spending more in real terms. Three phases can be identified: 1994–2000, 2001–08 and 2009–13. However, poor service delivery and low levels of government investment during the 20 years threaten to undermine economic growth. Lower growth consequently threatens the sustainability of both fiscal policy and development, which, in turn, again undermines growth prospects. Hence, the article also identifies key future challenges.     

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.     

Japanese fiscal reform: fiscal reconstruction and fiscal policy

This paper evaluates the recent movement of Japanese fiscal reform. We first summarize fiscal policy in 1990s. Then, we investigate several relevant topics of fiscal policy such as the macroeconomic impact of government debt and the sustainability problem. We then consider dynamic properties of fiscal reconstruction process by analyzing the dynamic game among various interest groups. This paper points out that the long-run structural reform is more important than the short-run Keynesian policy in Japan.     

Japanese government debt and sustainability of fiscal policy

We construct quarterly series of the revenues, expenditures, and debt outstanding for Japan from 1980 to 2010, and analyze the sustainability of the fiscal policy. We pursue three approaches to examine the sustainability. First, we calculate the minimum tax rate that stabilizes the debt to GDP ratio given the future government expenditures. Using 2010 as the base year, we find that the government revenue to GDP ratio must rise permanently to 40–47% (from the current 33%) to stabilize the debt to GDP ratio. Second, we estimate the response of the primary surplus when the debt to GDP ratio increases. We allow the relationship to fluctuate between two “regimes” using a Markov switching model. In both regimes, the primary surplus to GDP ratio fails to respond positively to debt, which suggests the process is explosive. Finally, we estimate a fiscal policy function and a monetary policy function with Markov switching. We find that the fiscal policy is “active” (the tax revenues do not rise when the debt increases) and the monetary policy is “passive” (the interest rate does not react to the inflation rate sufficiently) in both regimes. These results suggest that the current fiscal situation for the Japanese government is not sustainable.     

The real structural imbalance and fiscal stance in Australia during the interwar years

By using the concept of the constant employment budget balance and changes in real public debt it is possible to determine the size of the public sector's real structural budget imbalances during the interwar period. In doing so the budget deficit of the public sector during the depression is shown to have been much larger than indicated by previous estimates of the nominal budget imbalance, and indicates that the fiscal stance of the government was expansionary during the worst year of the Great Depression rather than contractionary.     

Sub-Saharan Africa's rising public debt stock: Is there a cause for concern?

The study investigated public debt sustainability in sub-Saharan Africa (SSA) by testing the reaction of the primary balance to positive and negative shocks in public debts in a panel of 45 SSA countries. The study adopts the innovative nonlinear fiscal reaction function and the dynamic panel threshold model to account for the potential asymmetric phenomenon in the public debt series. In line with extant studies, the study found that public debts in SSA are weakly sustainable and there is a highly procyclical fiscal policy bias in SSA countries, particularly in resource-rich countries, indicating that governments' fiscal policy responses are expansionary during economic upturns and contractionary during recessions, which may aggravate recessions and worsen debt situations across SSA. For robustness, the study compares the results with emerging and developed economies. The results indicate that in advanced economies, public debt is sustainable and that fiscal policy response is countercyclical. The research and policy implications are discussed.     

Fiscal sustainability in the wake of the economic crisis in Korea

The total amount of government debt was expected to rise sharply over the following several years in the wake of the Korean financial and economic crisis in 1997, raising concern about the sustainability of government deficits and fiscal consolidation. This paper provides an overview of Korea’s fiscal stance after the financial crisis and the policy implications for fiscal consolidation by assessing fiscal sustainability. Sustainability tests are carried out and show that Korean fiscal policy for the period 1970–1999 should be regarded as sustainable. Indicators of sustainability are also measured to that Korean fiscal policy for the period 1970–1996 is sustainable. However, both the primary and tax gap indicators with a sharp rise in the debt ratios are shown to be worsening since 1997 indicating increasingly possible unsustainable fiscal policies. It implies that the current primary deficit is too large and current taxes are too low to stabilize the debt ratio.     

Covid-19, Economic Growth and South African Fiscal Policy

Following years of fast-rising debt levels, we show that the Covid-19 crisis worsened an already deteriorating fiscal position in South Africa. To restore fiscal sustainability in the aftermath of the crisis some commentators argue that higher government expenditure will grow GDP sufficiently to stabilise the debt/GDP ratio. We reject this, showing that although a real increase in expenditure stimulates economic growth (a short-run, once-off effect), the public expenditure/GDP ratio exceeds the level at which an increase in the ratio positively impacts growth. We then explore the past efforts of government to maintain or restore fiscal sustainability by estimating a fiscal reaction function using a Markov-switching model. Following the impact of the Covid-19 crisis on the budget, we subsequently establish the deficit, expenditure and revenue adjustments that the government will have to make to restore fiscal sustainability. Finally, we consider the merits of introducing a debt ceiling.     

Foreign aid,government behaviour,and fiscal policy in Papua New Guinea

The paper explores a number of long standing questions surrounding how foreign aid has influenced the fiscal behaviour of the PNG Government. This includes whether grant aid has encouraged the PNG government to be less fiscally responsible and accumulate higher levels of foreign debt; whether grant aid has tended to lower the PNG government's domestic revenue raising efforts; whether grant aid has drawn government expenditures away from key service delivery sectors; and whether budget support and project and program aid have had differential effects with respect to any of the foregoing questions. The analysis reveals several important insights regarding the interplay between foreign aid and public sector fiscal behaviour including evidence that grant aid has been an important source of debt reduction during this period. However, grant aid has tended to erode the domestic tax base, which has limited the government's ability to increase aggregate expenditure levels. Evidence is also found that suggests a significant portion of budget support was spent on key development sectors, although it also undermined domestic revenue collection. A number of policy implications follow.     

Sustainability of public debt: evidence from Japan before the Second World War1

Japan defaulted on its public debt after the Second World War. This article addresses the question of how Japan lost its ability to sustain its public debt. We explore the sustainability of public debt in Japan before the War. We conduct statistical tests for the relationship between public debt and primary fiscal balance, and find that Japanese public debt was sustainable until 1931, and unsustainable in and after 1932. Narrative modes of analysis indicate that Japan lost its fiscal discipline because of the military's effective veto over budgetary processes and because of the absence of pressure for sound fiscal policy from international financial markets.     

Seigniorage,Dollarization and Public Debt: The Lebanese Civil War and Recovery Experience, 1982–97

The paper develops theoretical frameworks to explain the phenomena of seigniorage, dollarization, and public debt; and then applies them to the Lebanese macroeconomic situation over 1982–97. More specifically, it analyzes the implications of seigniorage and dollarization to see what extent they were responsible for the inflation and exchange rate depreciations during the civil war period. It also studies the sustainability of postwar debt. The conclusions that emerge from the analysis are that budget deficits were only one of the reasons behind the war inflation and depreciations, dollarization could still impose some problems for macroeconomic stability, and tax reforms are essential for fiscal balance.     

Stable and enforceable: a new fiscal framework for the Euro area

Since the great financial crash, the need for new fiscal rules to prevent unsustainable fiscal policies is universally recognised. In practice such rules, including those in the Stability and Growth Pact, have proved to be impossible to enforce. Thus, to avoid unsustainable fiscal policies reappearing, and to prevent monetary policy from being undermined by undisciplined governments, there is a need for a framework capable of imposing fiscal discipline. This paper considers an intertemporal assignment, where fiscal policy focuses on long-term objectives and monetary policy on short-term stabilisation. We argue for public sector debt targets as a practical way to achieve such a set up, and an excess debt protocol is constructed to give enforceable form to those targets. The ideas of “fiscal space” and optimal debt levels are used to provide a mechanism for identifying a stable region within which the debt targeting regime should operate. Making these factors explicit would both improve the credibility of planned fiscal policies and reduce risk premia on borrowing costs. We finally show how Europe’s competitiveness pact, and debt restructuring operations, can be used to maximise the available fiscal space.     

US fiscal policy in a (brief?) era of surpluses

This paper has several objectives. First, it reviews the recent improvement in the US fiscal picture and discusses the sources of this trend. It then considers the implications for the future, taking into account the past performance of budget forecasts as well as the changing composition of the federal budget. Next, it provides some estimates of the long-term fiscal imbalance still faced by the US. Finally, it briefly discusses the various policy options available to address this imbalance, and suggests how the budget measurement and forecasting procedures should be changed to accommodate the current budget situation, in which the long-term problems are not adequately conveyed by short-term measures.     

The European debt crisis and fiscal reactions in Europe 2000–2014

After the outbreak of the global financial crisis, some governments in the EU experienced serious fiscal problems, while others were less affected. This paper seeks to shed light on the divergent fiscal performance in the EU countries before and after the outbreak of the crisis. Fiscal reaction functions of the primary balance are estimated for different groups of EU countries using quarterly data for the pre-crisis period 2001–2008 and for the crisis period 2009–2014. The pre-crisis estimations reveal some differences in persistence and cyclical reaction between different groups of countries, but in most cases little feedback from the debt stock to the primary balance. The fiscal reaction functions of the countries that eventually developed fiscal problems do not stand out. The estimations on data from the crisis period show largely unchanged persistence and counter-cyclicality but much more feedback from the debt stock, and this applies both to the crisis countries and those less affected. In spite of large deficits and accumulation of debt, the underlying fiscal reaction has become more prudent after the outbreak of the European debt crisis.     

A Structural Break Analysis of Fiscal Deficit Process in Nigeria

The study examined the sustainability of fiscal policy process in Nigeria for the period 1961 to 2013, using ARDL cointegrating method between government revenue and government expenditure. The Bai-Perron multiple break point tests showed that there was structural shift in variables in 1981 which accounted for unsustainable fiscal deficit throughout the period. It was however, found that fiscal deficit before 1981(1961–1980) was weakly sustainable, while the estimation after 1981(1982–2013) indicated strong sustainability of fiscal policy in Nigeria. We therefore recommend that government should continue with the policies put in place by successive governments since 1982 to ensure stability of macroeconomics environment.     

Debt targets and fiscal sustainability in an era of monetary independence

This paper investigates how to achieve flexibility in fiscal policy without sacrificing credibility or independence in monetary policy. The idea is to create a framework that generates fewer conflicts between policies but greater discipline within them. We assume an independent central bank and restraints on national fiscal policies. Using a theoretical model, we examine the consequences of assigning leadership to fiscal policies in order to exploit the implicit (but rule based) coordination available under standard transmission mechanisms and to allow priorities and targets to differ between policy makers. This works best when leadership takes the form of a debt rule (with hard or soft targets) to precommit fiscal policies over the longer term; but monetary independence to guarantee the credibility and discipline in the short term policies. Compared to the uncoordinated policies operating in Europe, inflation biases and debt/deficit ratios are both lower for no loss in output volatility. That matches the experience of the UK, an economy whose empirical reaction functions show fiscal leadership. On a wider sample of Organization for Economic Cooperation and Development countries, the gains from debt targeting are estimated at 2–4% of gross domestic product.     

SOUTH AFRICA'S TRANSITION TO A CONSOLIDATED BUDGET

The size of South Africa's fiscal stimuli, whether intended or not, has helped to avert negative consequences of the global financial downturn. With the economic cycle turning again, consolidation of deficits and a reduction of the level of debt are again the focus of policymakers. These outcomes are generally achieved by either increasing tax rates or cutting spending (discretionary fiscal policy), whereas an alternative option is to allow automatic stabilisers to consolidate budgets. This study attempts to answer whether cyclical factors or discretionary policy minimise output volatility and which one of the two presents a better policy option regarding uncertainty in real economic recovery. For this purpose, a small open‐economy gap model is built using South African data, where the budget deficit is endogenised by way of a fiscal policy “rule.” Sensitivity analyses and robustness checks are carried out using a structural vector autoregression. Given the estimates of both the automatic stabilisers as well as the components of discretionary fiscal policy, we are able to obtain impact multipliers on output and conduct scenario testing for optimal fiscal policy response towards fiscal consolidation as well as debt sustainability.