The impact of the European Union fiscal rules on economic growth

This paper analyses whether Maastricht and Stability and Growth Pact fiscal rules have affected growth in the European Union negatively. A growth equation is specified for a group of 15 European Union countries (and 8 OECD countries) over the period 1970-2005 to analyse this issue. Panel estimations using fixed-effects, pooled mean group and system-GMM estimators show that the institutional changes that occurred in the European Union after 1992 were not harmful to growth. Moreover, results show that growth is slightly higher in the period in which the fulfilment of the 3% criteria for the deficit started to be officially assessed, i.e. after 1997.     

Periodograms on fiscal illusion: discussing the cycle lengths of public finances in European countries

In this article, we study the duration of public finance cycles in 12 European countries since 1960. We applied periodogram techniques on the levels of fiscal illusion found for these established democracies and tested the statistical significance of the Fourier frequency peaks. Our empirical efforts revealed that most of the cycles in these countries could be characterized as long-term cycles (approximately 30 years), embodying subcycles of approximately 15 years. These findings show that in addition to the commonly studied electoral cycles or real business cycles, our democracies demonstrate extended public finance cycles that extend over various legislative tenures ruled by different political parties.     

The sustainability of fiscal policies in the European Union

This paper examines the stationarity of the inclusive-of-interest public deficit for five European Union economies, four of them being recently selected for entry into the European Monetary Union. Unit root tests are used not only to examine structural breaks and cointegration analysis, but also to investigate for regime shifts. They support the occurrence of sustainable deficits for the Greek, Spanish, and Portuguese economies. On the contrary, Italy and Belgium may incur unsustainable deficits, implying that their selection in Phase 2 of the European Monetary Union is questionable. This paper was presented at the Forty-Fifth International Atlantic Economic Conference, Rome, Italy, March 14–21, 1998.     

Ricardian fiscal regimes in the European Union

The prevalence of different fiscal regimes is important both for practical policy reasons and to assess fiscal sustainability, notably for European Union countries. The purpose of this article is to assess, with a panel data set, the empirical evidence concerning the existence of Ricardian fiscal regimes in EU-15 countries. The results give support to the Ricardian fiscal regime hypothesis throughout the sample period, and for sub-samples accounting for the dates of the Maastricht Treaty and for the setting-up of the Stability and Growth Pact. Furthermore, electoral budget cycles also seem to play a relevant role in fiscal behaviour.

Comparative fiscal illusion: a fiscal illusion index for the European Union

This paper provides an empirical analysis of fiscal illusion by estimating an index of fiscal illusion for 28 European countries over the period 1995–2008 employing a structural equation approach. Using Multiple Indicators Multiple Causes models, the paper investigates the main indicators of fiscal illusion and develops an index of fiscal illusion. It concludes that the chief determinants for the deployment of fiscal illusion strategies are the share of self-employment on total employment, the educational level of citizens, and the size of tax burden. At the same time, policy makers attempt to ‘conceal’ the real tax burden by means of debt illusion, fiscal drag, wage withholding taxes, as well as taxes on labour.     

In government we trust: The role of fiscal decentralization

This paper looks whether fiscal decentralization is associated with trust of citizens in government related institutions. We expect a positive relationship based on the argument of governments' improved responsiveness to preferences of citizens that is perceived to result from more decentralized fiscal systems. Survey data from up to 42 countries over the period 1994–2007 confirm this positive relationship. It is robust to controlling for unobserved country heterogeneity and a wide array of other explanatory variables that are associated with trust in government related institutions. Moreover, we do not find that the positive association with fiscal decentralization extends to other, non-government related institutions.     

The unintended composition effect of the subnational government fiscal rules: The case of Italian municipalities

Although numerical fiscal rules may be introduced to achieve several objectives, to date the maintenance of fiscal sustainability is their predominant goal. This is particularly true at subnational level; maintaining fiscal discipline in a decentralized setting is challenging and subnational government fiscal rules are considered one of the most valid solutions to the problem. While theoretical and empirical literature has mainly focused on their effectiveness in containing subnational deficit and/or debt, little attention has been paid to the possible trade–offs and side effects of the rules on the composition of subnational expenditure. The aim of this paper is to fill this gap by exploiting the case of Italian municipalities, which have been subject for fifteen years (1999–2015) to a set of rules called Domestic Stability Pact. The Italian DSP framework – imposing rules only on municipalities above a population threshold (5000 inhabitants) – allows us to implement a quasi–experimental technique to investigate the unintended composition effects of the rules. A difference–in–discontinuities design permits to find rigorous empirical evidence that the switching in 2007 to rules which are more binding in terms of fiscal discipline leads to a recomposition of municipal expenditure against investment spending. The analysis is then integrated by evaluating the impact of the rules on six categories of investment expenditure. Investment in human capital and infrastructure seems to be the most affected.     

Sovereign credit ratings in the European Union: A model-based fiscal analysis

We present a model-based measure of sovereign credit ratings derived solely from the fiscal position of a country: a forecast of its future debt liabilities, and its potential to use fiscal policy to repay these. We use this measure to calculate credit ratings for 14 European countries over the period 1995–2012. This measure identifies a European sovereign debt crisis almost two years before the official ratings of the credit rating agencies.     

Education and sustainable development in Romania and the European Union countries

The sustainable development supposes a development strategy that would ensure the interdependence and complementarily of objectives from the social, economic and environmental fields. The degree of priority established for the three dimensions of sustainable development differs from one country to another, a fact that confers a national and local meaning to this issue. For the Central and Eastern European countries, balanced economic development represents one of the fundamental objectives of the reforms started in 1990. Education represents a priority of any country＇s economic development and an extremely important element of economic growth. This paper presents the characteristics of the Romanian educational system while achieving a comparative analysis regarding different countries of the European Union, both from a quantitative viewpoint （using the main indicators in the education field） and a qualitative viewpoint （using student performances in international evaluations）. In the end, we present some proposals for the improvement of the present state of the Romanian educational system.     

The dual nature of public goods and congestion: the role of fiscal policy revisited

Abstract The role of fiscal policy is examined when public goods provide both productive and utility services. In the presence of congestion, the consumption tax is shown to be distortionary. Optimal fiscal policy involves using consumption‐based instruments in conjunction with the income tax. An income tax‐financed increase in government spending dominates both lump‐sum and consumption tax‐financing. Replacing the lump‐sum tax with an income tax to finance a given level of spending dominates introducing an equivalent consumption tax. These results contrast sharply with the literature, where the consumption tax is generally viewed as the least distortionary source of public finance.     

The effects of public deficits on money growth in the European Union

The impact of government debt on the money supply has been studied for different countries, with an emphasis on developing countries and the U.S. This topic becomes especially interesting in European Union countries that have high public deficits and low inflation rates. It is also very relevant in the monetary union, with a European central bank controlling monetary policy and introducing monetary measures for all the member countries. The main goal of this paper is to analyze if there is any relationship between public deficits and monetary growth in the European Union. The conclusions presented in the previous literature are ambiguous. Some studies concluded that there is little evidence that government debt influences money in some of the member countries.     

Fiscal harmonization in the European Union with public inputs

Fiscal harmonization among the European Union member states is a goal involving major difficulties for its implementation. Each country faces a particular trade-off between fiscal revenues generated by taxation and the productive efficiency loss induced by their respective tax code. This paper provides a quantitative analysis of these trade-offs for a number of the European Union (EU-15) member states using a dynamic general equilibrium model with public inputs. Calibration of the model for the EU-15 member states provides the following results: i) the maximum tax revenue level is relatively far from the current tax levels for most countries; ii) the cases of Sweden, Denmark and Finland are anomalous, as productive efficiency can be gained by lowering tax rates without affecting fiscal revenues; iii) in general, countries would obtain efficiency gains without changing fiscal revenues by reducing the capital tax and increasing the labor tax; and iv) capital tax harmonization to the average capital tax rate can be done with quite small changes in both fiscal revenues and output for most countries.     

Persistent government spending and fiscal multipliers: The investment-channel

This paper inspects the mechanism shaping government spending multipliers in various small-scale DSGE setups with endogenous labor supply and capital accumulation. We analytically characterize the short-run investment multiplier, which in equilibrium can be either positive or negative. The investment multiplier increases with the persistence of the exogenous government spending process. The response of investment to government spending shocks strongly affects short-run multipliers on output and consumption.     

The impact of national fiscal rules on the stabilisation function of fiscal policy

We study the relationship between discretionary fiscal policy and macroeconomic stability in 21 OECD countries over the 1985–2012 period. The novelties of our contribution lie in the use of annual panel data, whereas most of the existing evidence is cross-sectional, and more importantly in the thorough investigation of how fiscal rules affect the policy-macroeconomic stability relationship. We find that the aggressive use of discretionary fiscal policy, particularly of government consumption items, leads to higher volatility of output and, to a lesser extent, inflation. However, when strict fiscal rules are introduced, discretionary policy becomes output-stabilising rather than destabilising. This result can be more easily achieved by rules on balanced budgets, rather than on expenditures, revenues, or debt. On the other hand, fiscal rules are unable to affect the inflation-destabilising nature of discretionary policy, if any, probably because of the higher importance of central banks in that respect.     

The efficiency of social public expenditure in European countries: a two-stage analysis

Do European countries differ in the efficiency of their welfare policies? And which factors can account for such variability? To address these questions, we perform a two-stage efficiency analysis. First, based on a composite output indicator for social protection expenditure, we measure efficiency by means of the Free Disposable Hull and Data Envelopment Analysis techniques. Second, we perform an econometric analysis to identify the factors that can be associated to cross-country differences. We find that countries scoring higher efficiency have higher education and GDP levels, a smaller population size, a lower degree of selectivity of their welfare systems and a lower corruption level.     

The macroeconomic effects of fiscal rules in the US states

Fiscal policy restrictions are often criticized for limiting the ability of governments to react to business cycle fluctuations and, consequently, the adoption of quantitative restrictions is viewed as inevitably leading to increased macroeconomic volatility. In this paper, we use data from 48 US states to investigate how budget rules affect fiscal policy outcomes. Our key findings are that (1) strict budgetary restrictions lead to lower policy volatility (i.e. less aggressive use of discretion in conducting fiscal policy) and (2) fiscal restrictions reduce the responsiveness of fiscal policy to output shocks. These two results should have opposite effects on output volatility. While less discretion should reduce volatility, less responsiveness of fiscal policy might amplify business cycles. We provide empirical support for the first effect: restrictions, by reducing discretion in fiscal policy, can reduce macroeconomic volatility.