Budgetary Consolidation in Europe: Quality, Economic Conditions, and Persistence

In this article we study the importance of the quality of fiscal adjustments and macroeconomic conditions for the persistence of budgetary consolidations. In contrast to previous work in this area, we do not arbitrarily predefine a measure of persistence to evaluate consolidation “success.” By employing duration analysis techniques, the length of a consolidation spell is rather determined endogenously. Our results based on a sample of industrialised OECD countries show that “consolidation fatigue” and the quality of fiscal consolidations are indeed important determinants of their longevity. Moreover, high debt–GDP ratio and fiscal tightening in other OECD countries raise the likelihood of consolidations to persist. Applying our results to European countries in the 1990s provides only weak evidence suggesting that the Maastricht process contributed much to the fiscal consolidations observed in Europe during the 1990s. J. Japan. Int. Econ., December 2002, 16(4), pp. 512–535. ZEI, University of Bonn, Bonn, Germany, Indiana University, Bloomington, Indiana; and CEPR; Strathclyde University, Glasgow, Scotland; and CEPR; and ECB, Kaiserstrasse 29, D-60311 Frankfurt a.M., Germany; and ZEI. © 2002 Elsevier Science (USA).Journal of Economic Literature Classification Numbers: E61, E62, E65.     

THE REVENUE-EXPENDITURE NEXUS: HISTORICAL EVIDENCE FOR SOUTH AFRICA

Results from unit root and cointegration tests suggest that, allowing for structural breaks, government revenue and expenditure in South Africa during 1895‐2005 were I(1) series and cointegrated. Results from Granger‐type causality tests suggest that a bidirectional Granger‐causal relation existed between revenue and expenditure for the full sample period and for sub‐periods up to the 1960s, consistent with the so‐called “fiscal synchronisation hypothesis”. However, in the 1960s the causal relation appears to have shifted to run from expenditure to taxation, consistent with Peacock and Wiseman's “displacement effect”. In the context of the recent fiscal consolidation literature, the South African fiscal experience would appear to be generally consistent with either revenue‐ or expenditure‐led fiscal consolidation efforts, but with the more recent evidence favoring expenditure‐led consolidations.     

The role of credibility in the cyclical properties of macroeconomic policies in emerging economies

Optimal stabilization policy is countercyclical, aiming at keeping output close to its potential. However it has been traditionally argued that emerging countries are unable to adopt countercyclical monetary and fiscal policies. Here we argue that the cyclical properties of macroeconomic policies depend critically on policy credibility. We test this proposition by making use of recent panel data for eleven emerging market economies and time series data for Chile. The evidence supports that countries with higher credibility, as reflected by lower country risk levels, are able to conduct countercyclical fiscal and monetary policies. Conversely, countries with less credible policies (and, therefore, with higher country risk spreads) contribute to larger cyclical fluctuations by applying procyclical policies. For Chile we find that both monetary and fiscal policies have been largely countercyclical after 1993. JEL no. E43, E52, E62     

Non-Keynesian Fiscal Adjustments? A Close Look at Expansionary Fiscal Consolidations in the EU

This paper analyses the characteristics of episodes of fiscal consolidation in the EU exhibiting non-Keynesian features, i.e., followed by an improved growth performance. Roughly half of the episodes of fiscal consolidations that have been undertaken in the EU in the last 30 years have been followed by higher growth. Probit regressions indicate that the consolidations that turned out to be expansionary were more likely started in periods with output below potential and based on expenditure cuts rather than on tax increases. These results appear quite robust with respect to the criteria used to identify the consolidation episodes and to classify such episodes as expansionary.

Foreign debt,global liquidity,and fiscal sustainability

We empirically investigate fiscal sustainability by comparing countries in the different economic groups with a dataset covering 180 countries during the period from 1980 to 2015. As the OECD countries have higher international debt ratio than other countries, they have higher probability to be exposed to global risk factors. Non-OECD countries turn out to be more fiscally solvent than OECD countries due to their limited access to international financial market. However, we also find that better access to international liquidity increases fiscal sustainability within the sample of OECD countries, while it does not improve the fiscal solvency in case of non-OECD countries.     

The limited role of the personal income tax in developing countries

In this paper we examine the re-distributive role played by personal income taxes in developing countries. We begin with some initial reflections on the re-distributive role of the tax system. We then consider the relative success of developed and developing countries in using tax systems to redistribute income. Finally, we examine some alternatives in reforming the personal income tax, as well as options available to developing countries in designing and implementing more progressive fiscal systems.     

US growth and budget consolidation in the 1990s: was there a non-Keynesian effect?

The 1990s were an extraordinary period for the US economy, both because of declining budget deficits and emerging budget surpluses, as well as high rates of economic growth. This paper challenges the conventional wisdom that high growth rates caused budget improvements, and claims that budget consolidations also contributed to fostering economic growth. We propose the existence of a non-Keynesian effect, where fiscal policy runs counter to Keynesian theory and fiscal consolidation can foster economic growth. We present empirical evidence that an increase in tax revenues reduces the distortionary bias of future taxation and therefore leads to an increase in consumer confidence and consumption. Two supply side effects are proposed: a reduction in transfers reduced labour market pressures and government savings provided liquidity for financial markets, both of which increased incentives to invest.     

Fiscal policies in Eastern Europe

We focus on the role of fiscal policies in macroeconomic stabilizationin eastern Europe and assess the sustainability of fiscal policiesfor the central and eastern European economies in transition.We show the main causes of fiscal imbalances experienced atthe beginning of the transition process. Countries that adoptedtight fiscal policies were more successful with their inflationstabilization programmes, have experienced a faster recoveryof growth, and did not experience a steeper decline in output.Countries with unsustainable fiscal policies all floated theirexchange rate, but there are both floating and peg arrangementsamong the successful stabilizers. In all the successful cases,however, current account convertibility was established. Wealso discuss the experience of Poland and Romania - two polarcases in terms of fiscal policies and present lessons and policyrecommendations for other economies in transition.     

Chile: The Unbearable Burden of Inequality

Chile has been cited as a successful case of development. Relatively fast economic growth over almost two decades has been accompanied by a significant reduction in absolute poverty. However, persistent economic growth and a mostly pro-poor structure of public expenditures have not been sufficient to reduce inequality in one of the most unequal countries in the world. We show that the key factors explaining this persistent inequality have been a low level of fiscal expenditures caused by low tax revenues that have not permitted enough public investment in human capital and knowledge generation and diffusion.     

Policy Effectiveness in the Post-ERM Era: Evidence from Six Countries

The objective of this paper is to determine whether ERM-participating countries have experienced a change in the effectiveness of monetary and fiscal policies since the establishment of the ERM. Countries which have come to rely more heavily on fiscal policy instruments as the means of output, price and exchange rate stabilization since the establishment of the ERM (and currently exceed the fiscal criteria) are expected to find the Maastricht fiscal criteria restrictive and perhaps destabilizing. We find that Belgium, Italy and Ireland are the countries that are likely to face the most difficulties.     

Nonlinear Effects of Fiscal Policy on Private Consumption： Evidence from China

In the present paper, we use the Markov‐switching model to test the nonlinear effects of government expenditure and taxes on private consumption in China. The results show that fiscal policy in China has a significantly nonlinear effect. In years 1978–1980 and 1984–1997, the effect of government consumption on private consumption is non‐Keynesian. During the same periods, the effect of taxes is also non‐Keynesian, but the effect is not significant. The effect of government investment is linear but asymmetric. After retesting the reasons for the existence of nonlinear effects, we find that in China initial fiscal conditions and the magnitude of fiscal consolidations are not related to the nonlinear effects of fiscal policy. The government should pay close attention to the characteristics of commodity and labor markets to identify the conditions and regimes associated with nonlinear effects.     

Monetary Union in West Africa: An Agency of Restraint for Fiscal Policies?

Could a monetary union in West Africa (either an informal monetaryunion of the non-CFA countries, or a possible future monetaryunion of all ECOWAS members) be an effective ‘agency ofrestraint’ (Collier, 1991) on fiscal policies? We discussthe ways, both positive and negative, that monetary union couldaffect fiscal discipline and the arguments for explicit fiscalrestraints considered in the literature about the European MonetaryUnion (EMU), and consider their applicability to West Africa.The empirical evidence, EMU literature and CFA experience allsuggest the possibility that monetary union could create thetemptation for fiscal profligacy through prospects of a bail-out,or costs that are diluted through the membership. We concludethat a monetary union in West Africa can be an effective agencyof restraint on fiscal policies only if the hands of the fiscalauthorities are also tied by a strong set of fiscal restraintcriteria, applicable not just for accession to monetary union,but throughout the life of the union.     

Are Manufacturing Exports the Key to Economic Success in Africa?

The poor performance of many African economies has been associatedwith low growth of exports in general and of manufacturing exportsin particular. The two most successful countries in Africa havebeen Botswana and Mauritius. In Botswana, rapid export growthfollowed the discovery of diamonds; in Mauritius, manufacturingexports played a major role. In this paper we draw on both macroand micro evidence from nine African countries to investigatewhether manufacturing exports are the key to success in Africa.We do this by posing three questions. First, how close is thelink between export and income growth? Second, is there evidencefrom these African countries that manufactured exports haveled to greater economic success? Third, what has limited thesuccess of firms in the manufacturing sector? We argue thatexport and income growth are very closely linked. However, thereis, for this sample of countries, no evidence that if theirexports are manufactures, growth rates are higher. We show thatthe factors that limit the success of African manufacturingfirms in exporting are their levels of efficiency and smallsize. We argue that the key to success in an area where Africahas a potential cost advantage — labour-intensive garments— is to enable large firms to use a more labour-intensivetechnology than is the case at present.     

Monetary Unions in Historical Perspective: What Future for the Euro in the International Financial System

This paper discusses the introduction of the euro in the present international monetary context. European Monetary Union is not only an economic concept but also primarily a political one. Based on past experience, two aspects of monetary union seem essential: the nature of the future European Central Bank and the necessity that monetary union is implemented with a fiscal union. The euro's success on world markets, as a dollar substitute, depends on monetary authorities' credibility in targeting low-inflation, and on fiscal authorities' reputation. A central bank that does not respond to a political authority can cause social difficulties, especially if social policies are left in the hands of single countries and fiscal transfers, to support these policies, are not allowed     

Will Bank Bailouts Bust Budgets? Fiscalisation of the East Asian financial crisis

East Asia has returned to a position of relative financial stability and modest economic growth seven years since the onset of the East Asian financial crisis, but the long-range impact of the crisis is still unclear, especially regarding fiscal ramifications. Thailand and Indonesia were two of the hardest hit economies and each had exemplary fiscal policies before the crisis. Since the crisis, both countries have maintained prudent fiscal policies, keeping budget deficits relatively small, managing debt burdens effectively and limiting exposure to contingent liabilities. Both countries have addressed the short-term triggers of the financial crisis admirably and continue to monitor vigilantly their external vulnerabilities. Thus, if either country experiences a fiscal crisis, it will be the result of other factors—bank bail-outs will bust budgets only if banks have to be bailed out once again due to incomplete or insufficient financial sector reform.     

The Precarious Fiscal Foundations of EMU

After a brief overview of the fiscal theory of the price level, we consider the insights it provides into monetary policy formation under certain kinds of deflationary and inflationary stress. Then we consider how the institutions of the EMU are equipped – or unequipped – to deal with such stress. The conclusion is that fiscal institutions as yet unspecified will have to arise or be invented in order for EMU to be a long-term success.     

Japan's fiscal policy and fiscal reconstruction

This paper investigates the macroeconomic effects of fiscal policy and the fiscal reconstruction movement in Japan. We first summarize Japan's fiscal policy in recent years and discuss advantages and disadvantages of government deficits. Next, we investigate the macroeconomic effects of Japanese fiscal policy and evaluate the plausibility of non-Keynesian effects. We also analyze the possibility of the crowding-in effect of fiscal policy and investigate the spillover effects of deregulation. Finally, we discuss political constraints in the fiscal reconstruction attempts and propose some measures for successful fiscal reforms in the near future.     

Fiscal policy in central and Eastern Europe: what happened in the run-up to EU accession?

This paper analyses the evolution of fiscal policy in central and eastern European countries during the EU accession process, testing for country and time specific effects. This is done by constructing Taylor-type policy rules and by calculating three measures of fiscal stance. A key finding is that the differences across countries are more significant than those across time. Baltic countries tended to have had tighter fiscal policy which responded to the output gap, larger central European countries had more lax (and increasingly lax) fiscal policies which were unresponsive to the output gap. These differences correlate closely with cross-country differences in exchange rate regimes and no link is found to either spending composition or political variables. Taken together the results suggest that the exchange rate regime is by far the most significant determinant of fiscal performance. These results suggest that the “soft power” of the prospect of EU entry did not act as a spur to greater fiscal discipline and that higher budget deficits in recent years cannot be blamed on costs of accession.

Has Fiscal Federalism Worked for Macroeconomic Purposes？ The Chinese Experience 1994-2003

China＇s central government undertook major tax regime reform in 1994 that was characterized by fiscal federalism. In hindsight, this reform might be viewed as being more emphatic towards the revenue side than the expenditure side. The reform has resulted in certain success both for revenue shifting and inflation fighting purposes. However, the reform and its subsequent follow-ups have not addressed some fundamental issues pertaining to China＇s government finance system, such as the overhauling of the function of government finance and redrawing lines between the central and regional governments with regard to their fiscal responsibilities and duties. Moreover, fiscal federalism might have actually increased fiscal burden on the economy, especially on domestic sectors of the economy. However, coupled with enhanced policy support for China＇ s external development, fiscal federalism might have helped to further accelerate resource shifts toward the external sector, thus resulting in an unprecedented rapid expansion in China＇ s exports since the mid1990s.     

Budget deficits and money creation: Exploring their relation before Bretton Woods

The sovereign debt crisis in the Eurozone has rekindled the use of the North–South (core-periphery) terminology to refer to the heterogeneity of countries belonging to the Economic and Monetary Union (EMU). In the gold standard literature, this geographical partition had already been employed to oppose the fiscal profligacy and subsequent problems of convertibility of southern countries against the fiscal probity and long convertibility records of their northern counterparts. We provide statistical evidence that the group of countries that, with available data for 1870–1938, exhibited convertibility problems during the classical gold standard, for this reason called the pre-WWI “sometimes-floaters”, shared a pattern of fiscal dominance. This finding for the sometimes-floaters (southern European and South American countries plus Japan) differs from the non-fiscal dominance pattern that we obtain for the pre-WWI “never-floaters” (northern Europe and North America countries) when the Great War and its aftermath years are omitted. We also show that the presence of fiscal dominance was partly due to the lower levels of tax efficiency and political stability in the South.