Political economy of prudent budgetary policy

The principles of tax smoothing and public debt management with stochastic shocks to future national income are extended for prudence. A prudent government deliberately underestimates future national income and the tax base, especially if the variance and persistence of shocks hitting the tax base are large and the tax rate is high. As a precaution the tax rate is thus set higher and public spending lower to build precautionary buffers. This leads to gradual reductions in debt and debt service over time and thus, depending on political preferences, cuts in taxes or increases in public spending. Prudence offsets the intertemporal spending, tax and debt biases resulting from common-pool distortions. Appointing a strong finance minister with as many voting rights as the spending ministers combined ensures that the intratemporal common-pool distortions of an excessively large public sector are eliminated. A strong and prudent minister of finance can thus offset the impatient profligacy of squabbling spending ministers. However, if voters care about outcomes on election eve, finance ministers are tempted to build excessive precautionary buffers early on to dish out tax cuts and boost spending on election eve. Too much prudence may thus be abused for short-run electoral gains.     

Explaining Welfare Reform: Public Choice and the Labor Market

This paper seeks to identify factors which could plausibly have led to the contractionary welfare reform initiatives begun at the state and federal levels in the U.S. in the 1990s, initiatives concentrated on the AFDC program. A review of aggregate time series evidence, cross-section regression research, and studies of attitudes toward welfare spending and toward welfare recipients suggests a role for three types of factors. First, a major expansion of the U.S. welfare system in the late 1980s in terms of expenditures and caseloads may have led voters to desire to retrench by cutting back on the AFDC program, even though that program was not primarily responsible for the expansion. Second, declines in the relative and absolute levels of household income, wages, and employment rates among the disadvantaged population may have driven up caseloads and costs, increased the social distance of voters from the poor, heightened concern with work incentives, and may have led, more generally, to a decrease in the perceived deservingness of the poor. Third, a surge of births to unmarried mothers in the 1980s is suggested, by cross-sectional and attitudinal evidence, to have led to a reduction in voter support for the AFDC program.     

The indirect effects of direct democracy: local government size and non-budgetary voter initiatives in Germany

Recently, a wide and empirically backed consensus has emerged arguing that direct democratic control over government’s spending decisions through initiatives and referendums constrains government size. This paper extends the discussion to German direct democracy reforms of the mid-1990s, which granted voters rights to launch initiatives on local issues, but neither the right nor the responsibility of voting on the implied costs of these initiatives. An analysis of around 2300 voter initiatives in the population of around 13,000 German municipalities from 2002 to 2009 demonstrates that in this sample—and in contrast to most of the Swiss and US evidence—direct democracy causes an expansion of local government size on average by around 8 % in annual per capita expenditure and revenue per initiative (on economic projects). This quite substantial increase in government size is financed by an increase in local taxes.     

Institutional spending policies: implications for future asset values and spending

University endowments, sovereign wealth funds, and foundations support spending. In this paper, we analyze how different spending policies affect future asset values and spending opportunities. We show that the covariance between the asset returns and the spending rate implied by the spending policy is important in this regard. Many of the spending policies used in practice aim at smoothing the spending level by letting current spending be a function of both current asset values and earlier spending levels. One feature of these types of spending policies is that the funds can be depleted. Depleted funds cannot support spending.     

The Effects of Social Spending on Economic Activity: Empirical Evidence from a Panel of OECD Countries*

The aim of this paper is to assess the short‐term effects of social spending on economic activity. Using a panel of OECD countries from 1980 to 2005, the results show that social spending has expansionary effects on GDP. In particular, we find that an increase of 1 per cent in social spending increases GDP by about 0.1 percentage points, which, given the share of social spending in GDP, corresponds to a multiplier of about 0.6. The effect is similar to that of total government spending, and it is larger in periods of severe downturns. Among spending subcategories, social spending on health and on unemployment benefits have the greatest effects. Social spending also positively affects private consumption, while it has negligible effects on investment. The empirical results are economically and statistically significant, and robust.     

The Effects of Consumer-Directed Health Plans on Health Care Spending

We use unique data from an insurer that exclusively offers high-deductible, "consumer-directed" health plans to identify the effect of plan features, notably employer contributions to the spending account, on health care spending. Our results show that the marginal dollar contributed by the employer to the spending account is entirely spent on outpatient and pharmacy services. In contrast, out-of-pocket spending was not responsive to the amount the employer contributes to the spending account. Our results represent the first plausibly causal estimates of the components of consumer-driven health plans on health spending. The magnitudes of the effects suggest important health care spending consequences to higher employer contributions to spending accounts. Our findings are most directly relevant to health reimbursement arrangement plan designs, though our results are still of value to health savings account plan designs.     

Political spending,related voluntary disclosure,and the cost of public debt

Following the Supreme Court decision in the Citizens United v. Federal Election Commission case of 2010, which removed restrictions in relation to firms’ political spending, and building on the growing debate over whether voluntary political spending disclosure (VPSD) provides valuable information, we examine the effect of political spending on the cost of public debt and the role of VPSD on this effect. Based on a measure of VPSD that became available in 2012 and a large dataset on US firms’ actual political spending, manually extracted from different filings, we provide novel evidence that, in the post-Supreme Court decision period, political spending increases the cost of public debt. This is consistent with the uncertainty associated with political spending. Moreover, we find that the level of voluntary disclosure weakens the positive association between political spending and the cost of public debt. These results hold across multiple specifications as well as when we use a sudden release of firms’ political spending as an exogenous shock to political spending.     

Budgeting for information technology

This paper examines patterns in the budgeting of information technology (IT). Using an econometric time-series model of budgeted versus actual spending, the paper explores, in the context of healthcare settings, the relationship between past, present, and future budgets with past, present and future spending for IT and non-IT variables. The results show a distinct difference in the patterns of budgeted and actual spending across IT and non-IT variables. Notably, actual IT capital spending does not correlate significantly with past or budgeted IT spending. These results signal a need for more research in the design of IT budgets.     

Voluntary disclosure of corporate political spending

In this paper, we study voluntary political spending disclosure, a widespread yet relatively unexplored corporate voluntary disclosure practice. Using an index created by the CPA-Zicklin Center that measures the level of voluntary political spending disclosure for S&P 500 firms, we examine firm-level characteristics associated with such disclosures, and their importance. We find that firms with greater political expenditures, direct political connections, higher investor activism, better corporate social responsibility performance and governance, and more industry competition tend to have a higher level of political spending disclosure. We also find that a higher level of political spending disclosure is positively associated with both the number of institutional investors and the proportion of shares owned by institutional investors, particularly socially responsible institutional investors, after controlling for the quality of other disclosures. The level of political spending disclosure is also associated with a higher analyst following, lower forecast error, and smaller forecast dispersion. Finally, we find that political spending disclosure enhances the positive relationship between annual corporate political spending and firm financial performance. Together, these results are consistent with the view that voluntary political spending disclosure helps align managers’ interests with those of shareholders.     

The effect of management incentives and cross-listing status on the accounting treatment of R&D spending

This paper investigates the effect of management incentives and cross-listing status on the accounting treatment of research and development (R&D) spending for a sample of Canadian hi-tech and biopharmaceutical firms. U.S. GAAP adopts an immediate expensing rule for all R&D spending except for software development costs for which technological feasibility has been established. Contrary to the U.S., Canadian and international standard setters recommend capitalization if development costs meet certain criteria. Because those criteria are largely based on management judgment, capitalization of R&D spending is an accounting choice that can be used for income manipulation or signaling.Using a logit model, we examine how the decision to capitalize R&D spending is influenced by the cross-listing status and several other key firm characteristics that are well documented in the accounting literature. We find that the probability of capitalizing R&D spending increases for cross-listed and non-cross-listed firms in the software industry. The probability of capitalizing R&D spending also increases for firms that are more leveraged, more mature, and have higher level of cash flows from operations. However, the probability of capitalizing R&D spending decreases for larger corporations, firms with more concentrated ownership and highly profitable firms. Overall our results indicate a preference for Canadian firms in the software industry to emulate U.S. accounting practices for R&D spending. They also suggest that firms use the decision to capitalize or expense R&D spending as an earning management tool to either meet debt covenants or to smooth income.     

Allocating Grant to the UK's Devolved Territories by Needs Assessment: Lessons from School Funding Formulae in England and Scotland

The UK's devolved governments (DGs) receive block grants to finance almost all their expenditure. The Barnett formula used to calculate these grants is often criticised because it does not consider the DGs’ spending needs. However, the feasibility of allocating block grants by needs assessment is often questioned, given the contestability of spending needs. This paper compares the formula used within England to assess the education spending needs of local authorities there with the equivalent Scottish formula, by using each formula in turn to calculate the relative spending needs of the UK territories. The rationale is to consider how similar the two formulae are in how they estimate the territories’ relative spending needs for education, a major responsibility of the DGs. The results show that the English and Scottish education allocation formulae produce similar estimates of the territories’ relative education spending needs. This suggests that it may be more feasible to allocate education resources to the UK's devolved territories based on needs assessment than some have suggested. The results also suggest some inequity in current patterns of education spending across the UK.     

Spending Reversals and Fiscal Multipliers under an Interest Rate Peg

This paper examines whether fiscal stimuli are more effective when the monetary policy is less responsive to inflation. First, we provide empirical evidence suggesting that, in the period of U.S. passive monetary policy, a positive government spending shock was followed over time by a spending cut. Second, our theoretical analysis reveals that the pegged nominal interest rate is not a sufficient condition to generate a large fiscal multiplier. An increase in government spending could increase the long‐run real interest rate, if it is associated with a government spending reversal and a less responsive monetary policy. Consequently, the response of private consumption can be negative and the government spending multiplier is not necessarily greater than 1.     

Government spending on research and development in the UK

This paper explores the extent of current UK government spending on science and technology placed in its recent historical context. The allocation of this spending across the different arms of government, the primary purposes of the expenditures undertaken and the extent to which the government performs as well as funds R&D are also explored, with some international comparisons analysed. The political and institutional processes that determine the revealed patterns of expenditure in the UK, the rationales behind such spending and the aims and objectives of the main spending departments are discussed, as is the interaction with EU expenditures on science and technology. The effectiveness of or pay-off to government support of this kind is also considered before future spending plans are addressed.     

Methodological Innovations in Collecting Spending Data: The HRS Consumption and Activities Mail Survey

It has traditionally been believed that collecting survey measures of total spending necessarily involved asking a large number of questions, too many for inclusion of a comprehensive spending measure in a general-purpose survey. In this paper we report on a supplemental survey to the Health and Retirement Study that took up this challenge. We discuss issues that arise designing a survey module to collect spending data with strict time constraints, describe how the implementation in the Consumption and Activities Mail Survey (CAMS) played out, and elicit anomalies that more detailed analysis of data quality revealed. We report how we addressed some of these anomalies in subsequent waves of CAMS. Other anomalies required conducting additional randomized experiments to find what explains the observed patterns. The results highlight the tension between asking about spending using a long time frame, which exacerbates recall bias, versus using a short time frame, which risks relying on an unrepresentative snapshot of a household's spending to proxy the total for the last 12 months. An important complicating factor in deciding which goods should be put into which time frames is that there is substantial heterogeneity in the frequency of spending across households even for the same category of spending.     

The Relationship between Energy Taxation and Business Environmental Protection Expenditures in the European Union

Businesses are often subject to energy taxes that impose a charge on greenhouse gas emissions. Theoretically, energy taxes should motivate business spending on emissions abatement up to the point that, at the margin, the cost of reducing emissions equals the amount of the tax that is avoided. We use European Union (EU) data from 2001 to 2008 to test the hypothesized positive relationship between energy taxes and business spending on abatement initiatives for the protection of ambient air and climate. We find that while overall business spending and business investment expenditures are positively related to energy tax rates, current period expenditures are not related to energy tax rates.Supplemental analyses indicate that the imposition of the EU Emissions Trading Scheme (ETS) in 2005 affected these relationships. In the pre-ETS period, energy taxes were not related to overall business spending or to current period expenditures, but there was a significant positive relationship between energy taxes and investment expenditures. After the ETS was introduced, there was a significant positive relationship between energy tax rates and both overall business spending and business current period abatement expenditures, but the relationship between business investment spending and energy tax rates was not significant.Our results indicate that energy taxes are effective in motivating business spending on emissions abatement. However, the nature of the effect varies across investment spending and current period expenditures. As both long-term and current initiatives are necessary to meet abatement goals, policymakers should be aware of these differences.     

Editorial

This article uses international comparisons to demonstrate the UK's relatively low spending on health care services and considers why extra money is being raised from National Insurance Contributions rather than from other sources of tax revenue. It outlines various options for measuring the UK-EU health spending gap and finds that they yield substantively different estimates of the size of the spending gap to be filled. It explains why closure of that gap may be aided by enlargement of the EU. It concludes that closure of the spending gap may be as much or more the result of accident than of design.     

Government spending,the balance of trade and the terms of trade in British history

This paper investigates the relationship between government spending, the balance of trade and the terms of trade using early British data. A large open-economy intertemporal framework, in which Ricardian equivalence holds, predicts a larger effect of temporary government spending changes on the trade deficit than permanent ones. Further, a pure switch between debt and taxes should have no effect on trade flows. The results provide some support for these hypotheses, although they are sensitive to sample period and the method of decomposition of government spending. A negative relationship between government spending and the terms of trade is also found.     

Financing Higher NHS Spending from Increased National Insurance

This article uses international comparisons to demonstrate the UK's relatively low spending on health care services and considers why extra money is being raised from National Insurance Contributions rather than from other sources of tax revenue. It outlines various options for measuring the UK–EU health spending gap and finds that they yield substantively different estimates of the size of the spending gap to be filled. It explains why closure of that gap may be aided by enlargement of the EU. It concludes that closure of the spending gap may be as much or more the result of accident than of design.     

制约居民信用卡有效消费的主要因素及建议——粤、桂、琼3省区12个地市信用卡消费情况调查

本文通过对粤桂琼3省区12个地市信用卡发展情况及居民刷卡消费意愿进行调查,深入总结了制约居民利用信用卡有效消费的主要因素,并对如何促进信用卡有效消费提出了具体建议.     

The Keynesian Multiplier Effect Reconsidered

In the standard Keynesian framework, government spending on useless public works has a larger multiplier effect than spending on government transfer payments does. In other words, spending on useless public works increases national income by more than an equivalent increase in government transfer payments would. Nevertheless, their effects on national benefit are identical. For both, the national benefit equals the direct benefit created by the spending. If there are two income classes, some transfers reduce both the national income and the national benefit. Some government purchases completely crowd out private consumption and reduce the national benefit.