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

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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Fiscal Policy Under Labour

National Institute Economic Review ◽

10.1177/0027950110372734 ◽

2010 ◽

Vol 212 ◽

pp. R34-R48 ◽

Cited By ~ 5

Author(s):

Alan Budd

Keyword(s):

Fiscal Policy ◽

Financial Crisis ◽

Previous Experience ◽

Fiscal Rules ◽

Budget Deficits ◽

Labour Government ◽

New Approach ◽

Preceding Period ◽

The Uk

The incoming Labour Government of 1997 promised a new approach to the conduct of fiscal policy. Two lessons to be learnt from previous experience were: (1) adjust for the cycle and build in a margin for uncertainty; (2) set stable fiscal rules and explain clearly fiscal policy. Although the claims for novelty were exaggerated there was a serious attempt to expand the supporting explanatory material at the time of the Budget and the Pre-Budget Report (which was itself an innovation). It started well, with the most significant tightening of fiscal policy occurring in 1997–8; but it ended with a record postwar deficit, a debt/GDP ratio heading for more than 75 per cent of GDP and the suspension of the fiscal rules. While the Treasury was not alone in failing to forecast the financial crisis and its consequences, doubts about the policy were being raised before 2007. Although the fiscal rules were met over the preceding period and projected to be met in future, a succession of current budget deficits and a tendency, from 2001 onwards, for over-optimism in fiscal projections left the UK less well equipped than it might have been to meet the challenges of the crisis.

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

Journal of International Money and Finance ◽

10.1016/j.jimonfin.2020.102319 ◽

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

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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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Fiscal rules, budget deficits and budget projections

International Tax and Public Finance ◽

10.1007/s10797-012-9245-9 ◽

2012 ◽

Vol 20 (5) ◽

pp. 785-807 ◽

Cited By ~ 24

Author(s):

Simon Luechinger ◽

Christoph A. Schaltegger

Keyword(s):

Fiscal Rules ◽

Budget Deficits

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Fiscal Rules, Creative Accounting and Fiscal Transparency: An Evaluation on the Transition Economies

International Conference on Eurasian Economies 2015 ◽

10.36880/c06.01324 ◽

2015 ◽

Author(s):

İlter Ünlükaplan ◽

Volkan Yurdadoğ ◽

Ebru Canıkalp

Keyword(s):

Public Finance ◽

Good Governance ◽

Fiscal Rules ◽

Accounting System ◽

Budget Deficits ◽

The Public ◽

Fiscal Transparency ◽

Government Accounting ◽

Creative Accounting ◽

The Relationship

An anonymous idea is observed in the public finance literature that includes where fiscal rules, i.e numerical rules on the fiscal indicators, are strict and stringent, policy executives will have incentives to recourse to creative accounting implementations to overcome these numerical limits. Creative accounting is applied for demonstrating economic, especially fiscal indicators better than the originals to reach the necessary fiscal limit, even if they are primarily conducted by private firms. Many countries applied these illusory implementations to hide their reported budget deficits especially in the last global crisis period. With this manner, creative accounting violates the basic principles of governance in public finance. In this context, governments should have to establish statistical classification structure and government accounting system that aims to prevent creative accounting. With this dimension, fiscal transparency will prevent from creative accounting implementations. In this study, the relationship between fiscal rules and creative accounting on the public finance administration level will be determined and fiscal transparency suggestions that prevent these frauds in the economies will be evaluated. As a result, the practice of good governance in public finance should be implemented to provide financial transparency. In addition, the reforms about transparency in the legislation should be consider as an important proposal.

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Proces doskonalenia oceny równowagi budżetowej w Unii Gospodarczej i Walutowej

Kwartalnik Kolegium Ekonomiczno-Społecznego Studia i Prace ◽

10.33119/kkessip.2015.4.3.1 ◽

2015 ◽

Vol 4 (3) ◽

pp. 13-26

Author(s):

Juliusz Giżyński ◽

Ryszard Wierzba

Keyword(s):

Global Financial Crisis ◽

Fiscal Rules ◽

Stability And Growth Pact ◽

Budget Deficits ◽

Budget Balance ◽

Fiscal Discipline ◽

Political Will ◽

Growth Pact ◽

The Stability ◽

The Global Financial Crisis

Fiscal discipline is one of fundamental requirements of the Economic and MonetaryUnion as specified in the provisions of the Maastricht Treaty (1992) and laterelaborated on in the Stability and Growth Pact (1997). EMU Member States fromthe beginning had serious difficulties in adhering to the fiscal rules, which ledto the first reform of the SGP in 2005 resulting in more flexible fiscal rules. Despitegood economic situation, EMU’s economies still had budget deficits which furtherincreased with the global financial crisis causing government debts to soar overacceptable limits. In due time, two further reforms of SGP were enacted, in 2011and 2013, introducing new indicators and improvements in the assessment of thegovernment budget balance in the euro area. Nevertheless, enforcement of newrules still will depend on EMU governments political will.

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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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Fiscal Constraints In The European Union – When More Is Less?

Annals of the Alexandru Ioan Cuza University - Economics ◽

10.1515/aicue-2015-0033 ◽

2015 ◽

Vol 62 (s1) ◽

pp. 19-28

Author(s):

Florin-Alexandru Macsim ◽

Florin Oprea

Keyword(s):

Public Policy ◽

European Union ◽

Public Debt ◽

Fiscal Rules ◽

Fiscal Policies ◽

Budget Deficits ◽

The European Union ◽

Fiscal Institutions ◽

Fiscal Constraints ◽

Key Aspects

Abstract This paper examines the implications of fiscal rules measured through the Fiscal Rules Index and fiscal institutions that supervise fiscal policies on key aspects of fiscal policies such as public debt and budget deficits. Our goal was to identify the specific links between fiscal rules, institutions and fiscal policies, to support any rethinking of public policy matters. Our results confirm that the government’s consolidated debt is influenced by both fiscal rules and institutions. Through this research we have showed that an increased number of institutions and fiscal rules is closely related to an increase in public debt levels. We explained this influence by stating that cause may consist in not having one strong and independent institution, but more institutions more or less independent that divide key responsibilities. Also our results indicate that budget deficits aren’t influenced either by supervising institutions or fiscal rules.

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