Austerity and anarchy: Budget cuts and social unrest in Europe, 1919–2008

Does fiscal consolidation lead to social unrest? Using cross-country evidence for the period 1919 to 2008, we examine the extent to which societies become unstable after budget cuts. We find a positive correlation between fiscal retrenchment and instability. Expenditure cuts are particularly potent in fueling protests; tax rises have only small effects. To isolate the effect of policy decisions on social unrest we exploit variation in neighboring countries’ past fiscal policies.     

The effects of fiscal policy in a two-period model

The paper analyzes fiscal policy in a model which differs from the conventional analyses in the following ways: 1) It is based on the intertemporal maximizing behavior of individual agents. 2) The government is assumed to actively balance its budget the long run. 3) Government expenditure is on useful goods and services. The welfare effects of fiscal policy are also examined. The principal conclusions are that fiscal policy is effective in the short run but the effects on both output and welfare may be perverse; and, that with full employment in the long run, fiscal policy still has allocative effects and so influences welfare.     

Welfare Capitalism in Post-Industrial Times: Trilemma or Power Over Rents?

The structure of ‘post-industrial’ economies is widely held to be problematic for welfare capitalism, because of inherent limits to productivity growth in services compared to manufacturing. The so-called post-industrial trilemma is suggested to allow only two of relative earnings equality, high levels of employment and fiscal balance, and has resulted in the widespread policy belief that greater earnings inequality and welfare state retrenchment are unavoidable. This article challenges the micro foundations of this understanding, that the production of economic value is technologically determined by the physical properties inherent in goods and services. In contrast, we argue theoretically, and demonstrate empirically, that production, allocation and distribution are contingent processes better conceived in terms of ‘power over rents’ with associated externalities between sectors. Our analysis suggests that the post-industrial trilemma thesis may have unduly distracted research from the potential for redistributive politics to achieve sustainable levels of productivity growth, fiscal balance and higher levels of earnings equality.     

Incentives for budget discipline in the presence of elections

This paper presents a mechanism to mitigate the adverse consequences of the political budget cycle on social welfare. We use a simplified two-period version of Rogoff's [Rogoff, K., 1990. Equilibrium political budget cycles. American Economic Review 80, 21–36.] rational budget cycle model to address the normative issue of reducing the budget deficit in pre-electoral periods. A regulation consisting of a sanction scheme contingent on fiscal policy joint with a fixed transfer is shown to provide the appropriate incentives for budget discipline in the presence of elections.     

Fiscal policy under a minimum‐time objective

In an endogenous growth model, we characterize the fiscal policy driven by a minimum‐time objective of economic development. We find that in equilibrium government should levy the highest possible consumption taxes, reduce public expenditures to the lowest possible level, and keep labor income tax rate and capital income tax rate satisfy a substitution relationship at the balanced budget constraint. We also identify the condition under which income tax rate should be set to zero. We further find that the equilibrium fiscal policy is equivalent to the growth‐maximizing fiscal policy, whereas it generally deviates from the welfare‐maximizing fiscal policy. We hence identify a circumstance where setting the policy goal of reaching an economic‐performance target as soon as possible cannot be justified in the sense of maximizing the welfare of households.     

The new stability and growth pact: A first assessment

The paper proposes a theoretical model of fiscal policy offering new insights on some of the key policy trade-offs involved in the recent reform of the Stability and Growth Pact. As suggested by the proponents of the reform, greater room for case-specific economic judgment in the implementation of the pact may improve welfare. In our model, these gains occur because the consolidation path implied by the implementation of the pact does not discourage high-quality measures. In practice, however, the difficulty to extract true policy intent from budget figures may hinder the qualitative assessment of fiscal policy. Hence, reforming a rules-based fiscal framework with a view to enhance its “economic rationale” would also require closer monitoring, a better grasp of the policies underlying the budget, and ultimately stricter enforcement. In that sense, recent reforms are at best unhelpful.     

The Effects of Fiscal Consolidation and Welfare Composition of Spending on Electoral Outcomes: Evidence from US Gubernatorial Elections between 1978 and 2006

This study attempts to make a contribution to the field of spending aspects of fiscal policy and their impacts on electoral outcome. Due to varying degrees of financial responsibilities and commitments to provide public goods and services, US state governments serve as a perfectly natural laboratory to test the electoral significance of fiscal policies. We adopt a probit model, with several specifications, to determine significant impacts of fiscal consolidation and increases in welfare spending on US gubernatorial elections from 1978 to 2006. The analyses show that voters are more concerned about the increase in debt than current budget deficits. An increase in welfare spending is negatively associated with reelection. Moreover, the impact of taxation on gubernatorial elections turns out to be insignificant. In particular, findings suggest that the political business cycle model does not hold true in US gubernatorial elections. Expansionary fiscal policy right before the election may not have crucial impacts on the chances of an incumbent winning the election.     

A common pool theory of supranational deficit ceilings

The budget deficit bias is modeled as the result of a domestic common pool problem and of an international externality. Deficits can be used to finance both unproductive and productive public spending. An optimally set supranational deficit ceiling is examined and welfare is compared to the unconstrained outcome and to the case of nationally set deficit ceilings. The supranational deficit ceiling is found to be welfare improving relative to similar national arrangements, but does not fully eliminate the deficit bias unless combined with a domestic fiscal institution allowing for precommitment to productive public spending.     

FISCAL POLICY IN AN ENDOGENOUS GROWTH MODEL WITH PUBLIC CAPITAL AND POLLUTION

This paper studies the growth and welfare effects of fiscal policy in an endogenous growth model with public capital and environmental pollution. I assume that pollution is due to aggregate production, and that it does not have a direct effect on production but only reduces household utility. I study the growth effects of fiscal policy for the model on the balanced growth path, taking transition dynamics into account. I then analyse the welfare effects of fiscal policy along the balanced growth path. Finally, I show how the fiscal parameters must be set so that the competitive economy replicates the social optimum.     

The Environmental Paradox of the Welfare State: The Dynamics of Sustainability

Thus far, there has been a reluctance to instigate a dialogue and engage with the tensions between two literatures with significant insights for each other. The first is the literature on the fiscal sustainability of welfare states, which is invariably predicated upon future growth primarily to manage demographic changes. The second is the post-growth literature, which has enjoyed a renaissance in recent years due to an environmental critique of economic growth. Both literatures contain implications for the analysis of welfare state sustainability. The primary contribution of this paper will be to explore the intractability of the tensions between these discourses and the difficulty of mapping out a progressive policy direction in the twenty-first century which meets both our environmental and social sensibilities. It is claimed that in the post-industrial world the fiscal sustainability of welfare capitalism is dependent upon public expenditure financed indirectly an environmentally unsustainable growth dynamic, but that ironically any conflagration of public welfare programmes is likely to be counter-productive as the welfare state is able to promote de-carbonisation strategies and notions of the public good as well as promoting monetarily and ecologically efficient public welfare services.     

The Welfare Effects of Environmental Taxation

Recent literature has investigated whether the welfare gains from environmental taxation are larger or smaller in a second-best setting than in a first-best setting. This question has mainly been addressed indirectly, by asking whether the second-best optimal environmental tax is higher or lower than the first-best Pigouvian rate. Even this indirect question has itself been approached indirectly, comparing the second-best optimal environmental tax to a proxy for its first-best value, marginal social damage (MSD). On closer examination, however, MSD becomes ambiguously defined and variable in a second-best setting making it an unreliable proxy for the Pigouvian rate. Given these observations, the current analysis reevaluates these welfare questions and finds that when compared directly to its first-best value, the second-best optimal environmental tax generally rises with increased revenue requirements. Even in cases where the second-best environmental tax is lower than its first-best value, the welfare gains may be greater than in a first-best setting. These results suggest that the marginal fiscal benefit (revenue recycling effect) exceeds the marginal fiscal cost (tax base effect) over a range of environmental tax rates that, for benchmark models, extends above the first-best Pigouvian rate. These findings reinforce the intuition that environmental policy complements rather than competes with the provision of other public goods.     

Countercyclical taxes in a monopolistically competitive environment

In the context of a neoclassical growth model with monopolistic competition, this paper studies the stabilizing effects of countercyclical tax policy when the income tax rate has an additional role of financing government budget deficits. Consistent with the conventional wisdom, countercyclical taxes generally reduce aggregate volatility, unless the fiscal response to debt accumulation is weak. The presence of monopoly power enhances these effects. Even when automatic stabilizers successfully stabilize business cycle fluctuations, countercyclical taxes are welfare inferior, due to reduced precautionary saving motives. While, if the fiscal response to debt is weak and countercyclical tax policy destabilizing, the increased precautionary saving motive is not welfare enhancing as the asset accumulated is government debt rather than capital. These results are generally robust. Nominal inertia may, however, dominate the precautionary saving mechanism.     

Indirect taxation and the welfare effects of altruism on the optimal fiscal policy

This paper analyzes the welfare effects of altruism on the optimal fiscal policy. The existence of positive bequests links present and future generations in the economy. We show that these altruistic links provide a new role for indirect taxation (consumption and estate taxes) with important welfare implications. We use three different altruistic approaches (warm-glow, dynastic, and family) to illustrate how the presence of bequests in the budget constraint of the donee gives the government the ability to use indirect taxation to mimic lump-sum taxes and to implement the first-best outcome in the long-run. This channel is not present in economies without altruism, such as the infinite-lived consumer economy or the overlapping generations economy, where long-run welfare is suboptimal and indirect taxation is irrelevant.     

Debt, Growth and Budgetary Regimes

Within the Barro (1990) model of productive public services, but with the inclusion of public debt, we derive and characterize on the balanced growth path, a set of welfare‐maximizing fiscal rules under two budgetary regimes – one with only the standard dynamic government budget constraint, and the other involving the golden rule of public finance. We demonstrate analytically that the optimal fiscal policy differs in the two budgetary regimes considered. We also analyse two cases within the second regime: one, where the ratio of current spending to tax revenues is parametrically given, and another, where this ratio is optimally chosen by the government.     

FIXED COSTS,THE BALANCED BUDGET MULTIPLIER AND WELFARE*

In a two‐sector model, where one of the sectors is monopolistically competitive and subject to increasing returns to scale but without love for variety, we analyse the effects of a balanced budget fiscal expansion. Such an expansion could increase the welfare of the representative individual, if elasticities of substitution in production and consumption are low. A reorganization of production takes place—increasing returns enabling a rise in real income.     

财政支出分权如何影响政府支出预算偏离*

政府支出决算与预算的差异可称之为支出预算偏离，其大小直接关系到现代预算制度的建设和积极财政政策提质增效的效果。预算最大化理论指出地方政府追求自由裁量预算的最大化，这会导致预算支出大于决算支出，而财政支出分权则便利了地方政府追求自由裁量预算最大化的条件，因此，财政支出分权是导致支出预算偏离的一个重要因素。利用1994—2017年全省层面和市县加总层面的财政预决算数据，本文发现，财政支出分权程度越高，政府支出预算偏离的程度也越大。不同形式的稳健性检验较好地支持了上述结论。此外，经济发展水平和财政透明度能够降低财政支出分权对预算偏离影响的程度。合理调整不同层级政府之间的事权，建立事权与支出责任相匹配的财政体制，适度加强中央事权和支出责任，将有效降低政府支出预算偏离的程度。     

财政支出分权如何影响政府支出预算偏离

政府支出决算与预算的差异可称之为支出预算偏离,其大小直接关系到现代预算制度的建设和积极财政政策提质增效的效果。预算最大化理论指出地方政府追求自由裁量预算的最大化,这会导致预算支出大于决算支出,而财政支出分权则便利了地方政府追求自由裁量预算最大化的条件,因此,财政支出分权是导致支出预算偏离的一个重要因素。利用1994—2017年全省层面和市县加总层面的财政预决算数据,本文发现,财政支出分权程度越高,政府支出预算偏离的程度也越大。不同形式的稳健性检验较好地支持了上述结论。此外,经济发展水平和财政透明度能够降低财政支出分权对预算偏离影响的程度。合理调整不同层级政府之间的事权,建立事权与支出责任相匹配的财政体制,适度加强中央事权和支出责任,将有效降低政府支出预算偏离的程度。     

Balanced-Budget Rules: Welfare Loss and Optimal Policies

Most economic models do not suggest an optimal fiscal policy in which the government's budget is balanced each period. Conventional wisdom suggests that the government run surpluses and deficits to smooth taxes. In this paper, I use an approach which brings together real business cycle theory and the theory of public finance to evaluate the effects of a balanced-budget restriction. Four fiscal policies are investigated in a model with growth. All models are solved numerically using a multidimensional collocation parameterized expectations algorithm. The welfare consequences of each policy are measured, and the optimal Ramsey policies are characterized. Journal of Economic Literature Classification Number: E62.     

Fiscal rules to tame the political budget cycle: Evidence from Italian municipalities

The paper provides evidence that fiscal rules can limit the political budget cycle. It uses data on Italian municipalities during the 2000s and shows that: 1) municipalities are subject to political budget cycles in capital spending; 2) the Italian sub-national fiscal rule (Domestic Stability Pact, DSP) introduced in 1999 has been enforced by the central government; 3) municipalities subject to the fiscal rule show more limited political budget cycles than municipalities not subject to the rule. In order to identify the effect, we rely on the fact that the domestic fiscal rule does not apply to municipalities below 5000 inhabitants. We find that the political budget cycle increases real capital spending by about 10–20 percent on average in the years prior to municipal elections and that municipalities subject to the DSP show a pre-electoral increase in capital spending which is only a quarter of the one of municipalities not subject to the rule.     

Intergenerational redistribution and risk sharing with changing longevity

Trend increases in longevity are a global phenomenon challenging the fiscal sustainability of current welfare arrangements. Policy proposals abound and often build on implicit assertions concerning intergenerational equity. This paper offers a simple but manageable OLG model with endogenous retirement and cohort-specific longevity to address intergenerational redistribution and risk sharing. While it is well known that a utilitarian planner strives for consumption smoothing, it is shown that healthy ageing calls for work smoothing in the sense that retirement ages increase with longevity. Hence, cohorts with higher longevity should contribute to their larger consumption needs via later retirement, although it is shown that the planner still front-loads some financing (pre-saving). Stochastic longevity raises the issue of intergenerational risk sharing, which implies that cohorts turning out to have a high longevity are compensated at the expense of cohorts turning out to have a relatively short longevity.