Assessing Long-Term Fiscal Developments: A New Approach

Economic Policy, 2011

The huge increases in debt-GDP ratios following the 2007-2009 global financial crisis, which are unprecedented except in times of war, has focused attention on the viability of the fiscal positions of EU countries and the US, how to assess this and the likely future evolution of these positions. This paper proposes an indicator of the fiscal stance which computes the fiscal adjustment required to reach a specific debt-GDP targeted given the forecasts of future deficit and interest rates obtained from an unrestricted (recursively-estimated) VAR model. The index is easy to compute and can be decomposed to disclose the different contribution of revenue, expenditure, nominal yields, inflation and growth to the fiscal stance. For this reason it provides a transparent and detailed measure of the fiscal stance, particularly suitable for multi-country surveillance. As a result, the index improves on the tax-gap indicators widely used by governments and international agencies, and is far more informative than formal econometric tests of fiscal sustainability. The time series of the indicator for individual EU countries and the US show that their fiscal position has fluctuated considerably over the last 40 years, and has particularly deteriorated since 2007. The index predicts that the adjustment required to restore pre-crisis debt-GDP levels are higher for high debt countries like Greece, Italy and Portugal. They become more severe the shorter is the time horizon for the adjustment. As a large degree of uncertainty surrounds the assessment of the fiscal stance in the medium and long run, we argue that policy makers should inform their policy based on the worst case scenario predicted by the indicator.

European Economic Review, 2012

We argue that the conventional approach to assessing the fiscal stance based on econometric tests of the government present value budget constraint (PVBC) is of limited practical use. We propose an alternative measure that focuses on short-run fluctuations in the fiscal stance, namely, a model-based indicator that compares a target level of the debt-GDP ratio at a given point in the future with a forecast based on the government budget constraint (GBC) where the forecasts are obtained using a recursively estimated VAR. By log-linearising the GBC the index can be decomposed into the various different components of which it is comprised. Using data from 1970 to 2011 we conduct a detailed time-series study of the fiscal stances of four countries: the United States, the United Kingdom, Germany and Greece and we calculate the index for 11 other EU countries. For most countries the index shows that their fiscal stances vary from being too loose to too tight. Almost without exception the index drops sharply from 2007 showing the harmful effect on their fiscal stances of the recent recession.

2011

Comparative Economic Studies

The paper by Vítor Constâncio, who was the keynote speaker, is entitled ''The Return of Fiscal Policy and the Euro Area Fiscal Rule'' and addresses the return of fiscal policy to the frontline of economic thinking. Indeed, after monetary policy has emerged as the dominant policy, notably in the aftermath of the 2008 great financial crisis, such consensus started to change, and a new view has appeared, giving a more active role to fiscal policy. The article entitled ''Sustainable Debt Policy Rules and Growth in a Small Open Economy Model: Is a balanced government budget worthwhile?'' written by Fabienne Lara Dascher uses a model of endogenous economic growth to analyze sustainable debt policy rules and economic growth by investigating the dynamics, the characteristics and stability of the steady state, and the welfare effects on the sustainable balanced growth path (SBGP) and along the transition path of different debt policies: the Balanced Government Budget (BGP)

2004

Fiscal and monetary policies in Europe have been designed to ensure that a stability oriented framework is in place, but they have not always been successful in this end. In this paper we assess the fiscal rules in Europe in this context using NiGEM and other tools. We first look at fiscal developments and their impacts since 1997 in the four largest European Union countries. We then look in particular at the timing and nature of fiscal changes, and at the multiplier impacts of changes in taxes and in spending in these countries. We discuss why these multipliers differ between countries, and look in particular at the role of consumption behaviour and differing liquidity constraints in determining their size. We also argue that spending increases have more impacts than tax cuts. Hence, we conclude that the evolution of demand and budget deficits has varied between these countries both because of the composition of budget changes and their impacts. This analysis allows us to evaluate ...

Applied Economics Letters, 2009

Palgrave Macmillan UK eBooks, 2008

Oxford Economic Papers, 2010

Fiscal Adjustment to Cyclical Developments in the OECD:

Revista Econômica

The paper investigates how European fiscal authorities behaved in the last decades-namely, under the constraint posited by the European Monetary Systems during the 1980s, the Maastricht Treaty during the 1990s, and the Stability and Growth Pact (SGP) later on-also taking into account monetary and fiscal policy interactions. We argue that the traditional measure used for evaluating fiscal policy-the cyclically-adjusted public budget (CAPB)-is a too rough indicator of the fiscal stance as a function of the two objectives of output stabilization and debt decumulation. We construct two theoretical appraisals of the fiscal rule pursued by the government-Tax Smoothing and Expenditure Smoothing-and use them as dependent variables in our econometric estimates. Under quite plausible conditions, the compliance with the 3% limit on the public deficit / GDP ratio imposed by the SGP could imply the renounce during a downswing, not only to pursue discretionary fiscal policy but also to output stabilization by automatic stabilizers. We conclude that fiscal sustainability-that is the compliance with the intertemporal public budget constraint which is required to the fiscal authorities of the European Monetary Union (EMU)-stresses the objective of debt decumulation, thus creating a trade-off with the objective of output stabilization, especially for the high-debt EMU countries.

International Advances in Economic Research, 1999

In this paper the stationarity of the inclusive of interest public deficit is examined for the case of five European Union economies, four of them being recently selected for Euro entry. Unit Roots tests which in addition allow the examination structural breaks and cointegration analysis which also investigates the case for regime shifts, support the occurrence of sustainable deficits for the Greek, Spanish and Portuguese economy. On the contrary Italy and Belgium may incur with unsustainable deficits implying therefore their selection in phase 2 of EMU questionable.