Growth-friendly fiscal rules? Safeguarding public investment from budget cuts through fiscal rule design

Flexible fiscal rules include mechanisms to accommodate unexpected/exogenous shocks. In countries without fiscal rules, or with rigid rules (i.e., rules without flexible features), public investment falls sharply during fiscal consolidation episodesby as much as 10 percent on average. The negative impact of fiscal consolidations on public investment disappears in countries using flexible fiscal rules.

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Fiscal Rules and Public Investment: The Case of Peru, 2000-2019

10.18235/0003018 ◽

2021 ◽

Author(s):

Waldo Mendoza ◽

Marco Vega ◽

Carlos Rojas ◽

Yuliño Anastacio

Keyword(s):

Public Debt ◽

Public Investment ◽

Commodity Price ◽

Fiscal Sustainability ◽

Fiscal Rules ◽

Long Run ◽

Fiscal Rule ◽

Commodity Price Shocks ◽

Year 2000 ◽

The Impact

This article has three goals. First, it describes the genesis of fiscal rules in Peru and its degree of compliance. Second, it estimates the effect of fiscal rules adoption on public investment. Last, it analyzes the impact of alternative fiscal rules on public investment and public debt sustainability. Our main results are as follows. First, the implementation of fiscal rules in the year 2000 caused a 60 to 80 percent fall in public investment relative to several counterfactuals. Second, our DSGE model suggests a Structural Fiscal Rule would have increased the consumers welfare in the period 2000-2019 more than other fiscal designs. This rule reduces the procyclicality of public investment under commodity price shocks and macroeconomic volatility under world interest rate shocks. Third, a Structural Fiscal Rule has the lowest probability of exceeding the current public debt limit (30 percent of GDP), although there is a trade-off between investment-friendly rules and fiscal sustainability issues. Nevertheless, our quantitative results are limited to short spans of analysis. With a long-run perspective, we may say that fiscal rulesdespite constant modifications and recurring non-compliancehave fulfilled their original and most important goal of achieving the consolidation of public finances.

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Fiscal Rules and the Behavior of Public Investment in Costa Rica and Panama: Towards Growth-Friendly Fiscal Policy?

10.18235/0003071 ◽

2021 ◽

Author(s):

Eliécer Arce ◽

Edgar A. Robles

Keyword(s):

Costa Rica ◽

Financial Management ◽

Capital Expenditure ◽

Public Investment ◽

Fiscal Rules ◽

Public Financial Management ◽

Rule Compliance ◽

Pile Up ◽

Fiscal Rule

This paper aims to provide evidence on the effects of fiscal rules on public investment, fiscal results and growth in Costa Rica and Panama. First, we find that the budget formulation process and the political economy behind the adoption and compliance of fiscal rules explain that Panama has a bias to create and sequentially pile up rules, while Costa Rica has a tendency not to comply with them. Second, a retrospective analysis of the 2018 fiscal rules in both nations finds asymmetric effects on the fiscal results. In Panama it is difficult to separate the effect of fiscal rule designs on public investment; and, in Costa Rica, the application of the fiscal rule will decrease public investment, if the debt to GDP ratio exceeds 60 percent and current expenditure crowds out capital expenditure. Two lessons emerge. First, an effective fiscal rule compliance requires time consistent institutions, solid monitoring, enforcement schemes and improving the quality of public financial management systems. Second, it is necessary to review the design of fiscal rules in both countries to ensure they are investment and growth friendly.

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Fiscal Rules and the Behavior of Public Investment in Latin America and the Caribbean: Towards Growth-Friendly Fiscal Policy?: The case of Argentina

10.18235/0003057 ◽

2021 ◽

Author(s):

Daniel Artana ◽

Cynthia Moskovits ◽

Jorge Puig ◽

Ivana Templado

Keyword(s):

Capital Expenditure ◽

Previous Analysis ◽

Public Investment ◽

National Level ◽

Political Support ◽

Fiscal Rules ◽

Negative Effects ◽

The Caribbean ◽

Economic Boom ◽

High Level

This paper analyzes the implementation of Fiscal Rules (FR) in Argentina. Several clear attempts to establish a FR at the national level are identified. The analysis suggests that the environment matters. The only FR that was binding in the period was approved in 2004 during an economic boom, with the country under a program with the IMF and with high political support. During the world financial crisis the expenditure ceilings were relaxed, however, and current primary expenditures soared. Simulations show that a countercyclical fund could have been implemented even after reducing highly distorting taxes at the federal and provincial levels, and at the same time securing a high level of capital expenditure as a share of GDP, had Argentina complied with the 2004 FR. Moreover, an econometric exploration of the link between flexible FRs and public investment finds that a flexible FR helps to mitigate the negative effects of fiscal consolidations on provincial public investment. Based on the previous analysis, guidelines for a proposal for a FR in Argentina are provided.

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Public infrastructure investment and fiscal sustainability in Latin America: incompatible goals?

Journal of Economic Studies ◽

10.1108/jes-03-2012-0036 ◽

2014 ◽

Vol 41 (1) ◽

pp. 29-50 ◽

Cited By ~ 6

Author(s):

Luis Carranza ◽

Christian Daude ◽

Angel Melguizo

Keyword(s):

Developing Countries ◽

Latin America ◽

Latin American ◽

Public Investment ◽

Fiscal Rules ◽

Infrastructure Investment ◽

Fiscal Consolidation ◽

Public Infrastructure ◽

Content Type ◽

Fiscal Space

Purpose – This paper aims to understand the relationship in developing countries between fiscal consolidation and public investment – a flexible part of the budget that is easier to cut during consolidation effort, but with potentially negative growth effects. Analyzing in detail the case of Peru, the paper explores alternative fiscal rules and frameworks that might help create fiscal space for infrastructure investment. Design/methodology/approach – The paper analyses trends in public and total infrastructure investment in six large Latin American economies, in the light of fiscal developments since the early 1980s. In particular, the paper explores the association between fiscal consolidations (improvements in the structural fiscal balance) and public infrastructure investment rates. In the second part, the paper analyzes recent changes in the fiscal framework of Peru and shows how they were conductive in creating additional fiscal space. Findings – The authors argue that post-crisis fiscal frameworks, notably fiscal rules that are increasingly popular in the region, should not only consolidate the recent progress towards debt sustainability, but also create the fiscal space to close these infrastructure gaps. These points are illustrated in a detailed account of recent developments in the fiscal framework and public investment in the Peruvian case. Originality/value – The paper contributes new evidence to the literature on fiscal consolidation and the composition of government expenditures. While the literature based on evidence from the 1990s has argued that fiscal consolidation plans in Latin America have almost always led to a significant reduction in public infrastructure investment, the paper finds less clear cut evidence when extending the analysis backwards (1980s) and forwards (2000s). The example of the case of Peru is used to explore fiscal institutions and rules that might be useful for other developing countries that face important infrastructure gaps.

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The Effect of Fiscal Rules on Public Investment if Budget Deficits Are Politically Motivated

SSRN Electronic Journal ◽

10.2139/ssrn.93812 ◽

2004 ◽

Cited By ~ 3

Author(s):

Robert Dur ◽

Ben D. Peletier ◽

Otto H. Swank

Keyword(s):

Public Investment ◽

Fiscal Rules ◽

Budget Deficits

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Public Investment and Fiscal Crisis in Brazil: Finding Culprits and Solutions

10.18235/0003199 ◽

2021 ◽

Author(s):

Marco Bonomo ◽

Claudio R. Frischtak ◽

Paulo Ribeiro

Keyword(s):

Narrative Analysis ◽

Public Investment ◽

National Level ◽

Fiscal Crisis ◽

Fiscal Rules ◽

Steady Increase ◽

Empirical Estimation ◽

Fiscal Management ◽

Fiscal Conditions ◽

Effective Instrument

We investigate the relation between existing fiscal rules and investments in the context of a fiscal crisis in Brazil. We analyze existing fiscal rules at national and subnational levels, their enforcement, and proposed alternatives. Using narrative analysis, case studies, interviews, empirical estimation, and model simulations, we conclude that public investment is not closely related to fiscal rules in Brazil but is mainly determined by fiscal conditions both at national and subnational (state) levels. It is the steady increase of personnel expenditures in real terms that underlies the fiscal deterioration of the last decade, despite the existence of fiscal rules devised to prevent it. We argue that a constitutional rule limiting subnationals personnel expenditures to 50 percent of net revenues, triggering adjustment measures when reaching 47.5 percent, would be an effective instrument for subnational fiscal management, opening fiscal space for increasing investments. At the national level, despite the existence of several fiscal rules, the only effective fiscal anchor is the primary expenditure ceiling introduced in 2016, which has successfully curbed expenditures, including those of the judiciary and legislature.

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Public Investment, Government Indebtedness and Transitional Dynamics

Review of Economic Analysis ◽

10.15353/rea.v10i2.1441 ◽

2018 ◽

Vol 10 (2) ◽

pp. 121-150

Author(s):

Constantine Angyridis ◽

Panagiotis Tsintzos

Keyword(s):

Growth Models ◽

Public Investment ◽

Income Taxation ◽

Fiscal Rules ◽

Aggregate Fluctuations ◽

Endogenous Growth Model ◽

The Government ◽

Progressive Income Taxation ◽

Unstable Dynamics

This paper considers an endogenous growth model with public capital and government debt. In setting the level of public investment each period, the government is assumed to follow two commonly used in the growth literature fiscal rules: public investment is either equal to a constant fraction of output or equal to a constant share of tax revenues. In our model, we allow revenues to be raised by the government through progressive income taxation and bonds issue. For both fiscal rules, we show that the potential occurrence of either indeterminacy or instability crucially depends on whether the government is a debtor or a creditor. In particular, government indebtedness causes the economy to be prone to either belief-driven aggregate fluctuations or unstable dynamics. This is a novel result in the related literature which has largely overlooked the role of public debt as a possible contributing factor to the presence of indeterminacy and instability in growth models.

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