Research Insights: Can the Design of Fiscal Rules Help to Protect Productive Public Investment from Budget Cuts?

2021 ◽  
Author(s):  
Martín Ardanaz ◽  
Eduardo A. Cavallo ◽  
Alejandro Izquierdo ◽  
Jorge Puig
Keyword(s):  
Negative Impact ◽  
Public Investment ◽  
Fiscal Rules ◽  
Fiscal Consolidation ◽  
Budget Cuts ◽  
Exogenous Shocks ◽  
Fiscal Consolidations

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.

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

2021 ◽  
Vol 111 ◽  
pp. 102319
Author(s):  
Martín Ardanaz ◽  
Eduardo Cavallo ◽  
Alejandro Izquierdo ◽  
Jorge Puig
Keyword(s):  
Public Investment ◽  
Fiscal Rules ◽  
Budget Cuts ◽  
Fiscal Rule

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

2014 ◽  
Vol 41 (1) ◽  
pp. 29-50 ◽  
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.

Output Effects of Fiscal Consolidations: Does Spending Composition Matter?

2021 ◽  
Author(s):  
Martín Ardanaz ◽  
Eduardo A. Cavallo ◽  
Alejandro Izquierdo ◽  
Jorge Puig
Keyword(s):  
Public Investment ◽  
Private Investment ◽  
Output Growth ◽  
Policy Implications ◽  
Budget Cuts ◽  
Fiscal Adjustment ◽  
Public Consumption ◽  
Fiscal Adjustments ◽  
Fiscal Consolidations ◽  
Alternative Identification

This paper studies whether changes in the composition of public spending affect the macroeconomic consequences of fiscal consolidations. Based on a sample of 44 developing countries and 26 advanced economies during 1980-2019, results show that while fiscal consolidations tend to be on average, contractionary, the size of the output fall depends on the behavior of public investment vis-a-vis public consumption during the fiscal adjustment, with heterogeneous responses growing over time. When public investment is penalized relative to public consumption and thus, its share in public expenditures decreases, a 1 percent of GDP consolidation reduces output by 0.7 percent within three years of the fiscal shock. In contrast, safeguarding public investment from budget cuts vis-a-vis public consumption can neutralize the contractionary effects of fiscal adjustments on impact, and can even spur output growth over the medium term. The component of GDP that mostly drives the heterogeneity between both types of adjustments is private investment. The results hold up to a number of robust-ness tests, including alternative identification strategies of fiscal shocks. The findings have policy implications for the design of fiscal adjustment strategies to protect economic growth as countries recover from the coronavirus pandemic.consolidation reduces output by 0.7 percent within three years of the fiscal shock. In contrast, safeguarding public investment from budget cuts vis-a-vis public consumption can neutralize the contractionary effects of fiscal adjustments on impact, and can even spur output growth over the medium term. The component of GDP that mostly drives the heterogeneity between both types of adjustments is private investment. The results hold up to a number of robustness tests, including alternative identification strategies of fiscal shocks. The findings have policy implications for the design of fiscal adjustment strategies to protect economic growth as countries recover from the coronavirus pandemic.

scholarly journals Growth-friendly Fiscal Rules?: Safeguarding Public Investment from Budget Cuts through Fiscal Rule Design

2020 ◽  
Author(s):  
Martín Ardanaz ◽  
Eduardo Cavallo ◽  
Alejandro Izquierdo ◽  
Jorge Puig
Keyword(s):  
Public Investment ◽  
Fiscal Rules ◽  
Budget Cuts ◽  
Fiscal Rule

scholarly journals Growth-Friendly Fiscal Rules?: Safeguarding Public Investment from Budget Cuts through Fiscal Rule Design

2019 ◽  
Author(s):  
Martin Ardanaz ◽  
Eduardo Cavallo ◽  
Alejandro Izquierdo ◽  
Jorge Puig
Keyword(s):  
Public Investment ◽  
Fiscal Rules ◽  
Budget Cuts ◽  
Fiscal Rule

scholarly journals Namibia

2016 ◽  
Vol 2016 (374) ◽  
Author(s):  
Keyword(s):  
Negative Impact ◽  
Public Investment ◽  
Structural Reforms ◽  
Fiscal Consolidation ◽  
Negative Effects ◽  
Fiscal Adjustment ◽  
Negative Effect ◽  
Combined Strategy ◽  
The Impact ◽  
The Imf

This Selected Issues paper assesses the impact of alternative fiscal consolidation strategies on Namibia’s growth. It uses a model developed at the IMF to gain insights on what would be a growth-friendly composition of the fiscal adjustment. The analysis suggests that a combined strategy of revenue and expenditure measures has lower negative effects on growth than a pure expenditure-based adjustment. Structural reforms improving the efficiency of public investment can further reduce the negative effect of consolidation on growth, and potentially strengthen growth. Overall, minimizing the negative impact of fiscal consolidation on growth requires combining revenue and expenditure measures, together with fiscal structural reforms.

scholarly journals Corruption, Investment and Economic Growth in WAEMU Countries

2019 ◽  
Vol 11 (4) ◽  
pp. 30
Author(s):  
Ndiaye Cheikh Tidiane
Keyword(s):  
Economic Growth ◽  
Empirical Study ◽  
Monetary Union ◽  
Negative Impact ◽  
Public Investment ◽  
Specific Effect ◽  
Economic And Monetary Union ◽  
Panel Var ◽  
Auto Regressive ◽  
Auto Regressive Model

The purpose of this paper is to study the relationships between corruption, public investment and economic growth in WAEMU (West Africa Economic and Monetary Union) countries during the period 2001-2014. This, by using a panel VAR (Vector Auto Regressive) model. The results stemming from this empirical study stipulate a significant link between corruption and investment, economic growth and investment, corruption and economic growth. These results also show that corruption reduces the ratio of public investment and has a negative impact on economic growth among WAEMU countries. It has more of a specific effect on investment and affects negatively through this mean countries of the area.

scholarly journals Central African Economic and Monetary Community (CEMAC)

2019 ◽  
Vol 19 (383) ◽  
Author(s):  
Keyword(s):  
Public Investment ◽  
Oil Prices ◽  
Terms Of Trade ◽  
Equatorial Guinea ◽  
Structural Reforms ◽  
Fiscal Consolidation ◽  
Significant Progress ◽  
Financial Policies ◽  
Trade Shocks ◽  
Global Growth

Tighter macroeconomic and financial policies helped to avert a deeper crisis, and gross external reserves increased more rapidly in recent months, largely exceeding the mid-2019 target. However, reserves are still below the level appropriate for commodityexporting economies (5 months of imports) to absorb terms of trade shocks. Fiscal consolidation has been tilted towards cuts in public investment. This, together with a lack of significant progress in structural reforms, has weighed on growth which remains too low. The outlook for 2019 and beyond foresees further improvement in regional reserves assuming CEMAC countries remain committed to their program objectives and new programs with CAR and Equatorial Guinea could start around end-2019. This outlook is subject to potentially significant risks, including: a significant slowdown in global growth and associated decline in oil prices; a deterioration in the security situation in some countries; and weaker implementation of IMF-supported programs.

scholarly journals DYNAMIC ANALYSIS OF REDUCTIONS IN PUBLIC DEBT IN AN ENDOGENOUS GROWTH MODEL WITH PUBLIC CAPITAL

2016 ◽  
Vol 21 (6) ◽  
pp. 1454-1483 ◽  
Author(s):  
Noritaka Maebayashi ◽  
Takeo Hori ◽  
Koichi Futagami
Keyword(s):  
Endogenous Growth ◽  
Growth Model ◽  
Public Investment ◽  
Public Capital ◽  
Government Debt ◽  
The European Union ◽  
Fiscal Consolidation ◽  
Growth Pact ◽  
Endogenous Growth Model ◽  
The Government

We construct an endogenous growth model that includes productive public capital and government debt. We assume that the government debt-to-GDP ratio is gradually adjusted to a target level, reflecting the permanent commitment rules in the Stability and Growth Pact or the Maastricht Treaty in the European Union (i.e., the well-known 60% rule). These rules affect government borrowing and public investment. Here, we examine the welfare implications of the permanent commitment rules. We find that fiscal consolidation based on the rules improves social welfare. Moreover, the improvement in welfare accelerates as fiscal consolidation progresses more rapidly. Last, we also discuss and derive the optimal long-run debt-to-GDP ratio.

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

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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