Present-biased Government, Creative Accounting and a Pitfall in Balanced Budget Rules

I propose a general equilibrium model with a quasi-hyperbolic discounting government that optimally decides upon using creative accounting in order to evaluate a balanced budget rule and a debt rule. In that context, I find that a binding balanced budget rule could fail to properly constrain public overindebtedness when government uses creative accounting while a debt rule is effective, since targets are set on total public liabilities. Results suggest that a balanced budget fiscal rule can also deteriorate welfare due to the higher interest rates derived from doing operations under the line, implying future expenditure cuts that are harmful for households, who value public goods and services. A debt rule is also preferred for its capacity to reverse some welfare losses generated by the present-biased government.

CURRENT TREND IN THE FISCAL DEFICIT OF THE UNION BUDGET IN INDIA

The present study analyze the fiscal deficit as an instrument to measure the amount of government borrowing to require the financial position and their budget shortfall. This study traces the major current changes in Indian fiscal system during the period 2019-20, though the unions Government adopt the fiscal rule for reduction the financial crisis during the epidemic period of Covid-19. However the current study also traces the percentage of GDP decrease because of the problem of lock-down during the Covid-19. The paper concludes with discussion on the composition of union government receipts and expenditure position in present scenario and indicated the situation of fiscal and revenue deficit of the government budget.

Die Zukunft der Schuldenbremse nach der Pandemie

The German constitutional fiscal rule (the „debt brake“) is increasingly subject to a reform debate that has intensified with the fiscal fallout from the Covid-19 pandemic. This article presents survey evidence from the German state parliaments on views and preferences for the future of Germany’s fiscal rule. The survey among all 16 state parliaments was conducted between May and July 2020 with a participation of almost 30 per cent of all state parliamentarians. The results indicate that the debt brake still enjoys a large general support from more than two thirds of the parliamentarians. However, a reform in the direction of an investment clause is increasingly popular, much more than a clause that would support debt-financed climate policy measures.

Does a Clarke-Groves type tax prevent free riding when implementing Eurobonds?

Purpose The purpose of this paper is to propose a Clarke-Groves Tax (CGT) type as a remedy to the criticism that the implementation of Eurobonds has raised regarding the risk of undermining fiscal discipline. In this model, a government minimizes its sovereign debt-to-GDP ratio in a given period and decides whether to join a common sovereign debt club. In doing so, it exposes itself to a positive or negative tax burden while benefiting from the liquidity premium involved in creating a secure asset. The authors found that the introduction of this tax may prevent free riding behaviours if Eurobonds were to be implemented. To illustrate this, the authors provide some numerical simulations for the Eurozone. Design/methodology/approach In the model presented, a government which optimizes a social utility function decides whether to join the common debt club. Findings The adoption of the proposed tax could prevent free-riding behaviours and, therefore, encourages participation by those countries with lower debt levels that would have not otherwise taken part in this common debt mechanism. Under certain circumstances, we can expect the utility of all members of this club to improve. The bias in the distribution of gains might be mitigated by regulating the tax rule determining the magnitude of payment/reward. The proportion of the liquidity premium, arising from the implementation of a sovereign safe asset, has a decisive impact on the degree of the governments’ utility enhancement. Research limitations/implications The adoption of a CGT would require Eurobonds club members to reach an agreement on “the” theoretical model for determining the sovereign debt yield. One of the limitations of this model is considering the debt-to-GDP ratio as the sole determinant of public debt yields. Moreover, the authors assumed the relationship between the debt-to-GDP ratio and funding costs to be identical for all countries. Any progress in the implementation of the proposed transfer scheme would require a more realistic and in-depth analysis. Practical implications A new fiscal rule based on compensating countries with lower public debt levels could be a way to mitigate free-riding problems if a Eurobond mechanism is to be established. Originality/value This fiscal rule has not been proposed or analysed before in a context such as that considered by this paper.

Fiscal Rules for Natural Disaster- and Climate Change-Prone Small States

How should small states formulate a countercyclical fiscal policy to achieve economic stability and fiscal sustainability when they are prone to natural disasters, climate change, commodity price changes, and uncertain donor grants? We study how natural disasters and climate change affect long-term debt dynamics, and we propose cutting-edge fiscal policy rules. We find the primacy of a recurrent expenditure rule based on non-resource and non-grant revenue, interdependently determined by government debt and budget balance targets with expected disaster shocks. This innovative fiscal rule is classified as a natural disaster-resilient fiscal rule, which comprises a plethora of new advantages compared to existing fiscal rules. This new type of fiscal rule can be called as the third-generation fiscal rule. It encompasses natural disasters and climate change, uses budget data only, avoids the need for escape clauses, and operates on a timely basis. Our rule-based fiscal policy framework is practically applicable for many developing countries facing an increasing frequency and impact of devastating natural hazards, and climatic change.

Die Durchsetzung der Haushaltspolitik und der Haushaltsführung

Adopting the debt break as the highest fiscal rule for the Swiss federal budget has ended the long legalization process surrounding the federal budget management. The debt break guarantees a passive-anticyclic budget policy by allowing discretionary measures during extraordinary circumstances. Through its standards in law and regulation, it binds the financial management to a supervisory fiscal rule. Furthermore, the Swiss federal debt break served as a model for the German federal debt break. It also functions as an addition to the various cantonal fiscal rules. While the German Federal Constitutional Court is able or even obliged to check whether each and every proposal is compliant with the debt break, the Swiss equivalent lacks any possibility for legal review. The cantonal budget laws, too, lack any judicial protection. To ensure that supervisory fiscal rules are enforced, financial policy actors can choose to follow the implementation laws. Also, the implementation of such is supervised by financial control authorities and independent control mechanisms within the budget laws. These enforcement mechanisms are supported by the principles of budget management that are valid throughout the entire budget and accounting process. Comparing the enforceability of the Swiss federal budget with its cantonal equivalents as well as the German federal debt break leads to the question whether the Swiss rules are sufficiently actionable. For the Swiss federal budget, the possibilities for legal enforcement or even individual legal protection are indeed only indirect and very limited. Still, expanding legal measures for enforcing standards under the current financial legislation would be alien to the system and cannot be accomplished without additional friction between their enforcement and other financial laws and policies. In addition to simply expanding enforcement capabilities, it is worth considering and evaluating alternatives. It is especially recommended to continuously examine whether current budget laws are compatible with and suitable for achieving a medium- to long-term budget balance.

Fiscal Rule and Public Investment in Chile

This paper reviews the design and operation of the Chilean fiscal rule in the past 30 years. Using different empirical approaches, we assess its impact on fiscal procyclicality, public debt, and public investment. While there has been substantial progress in building a modern institutional framework for fiscal policy, we find that the rule is incomplete in two dimensions: it lacks an escape clause, and it needs to supplement the budget balance rule with a debt rule. The former is seen in the pervasive inability of the authorities to steer fiscal accounts back to their long-term sustainable path after the rule was breached the rule in 2009. The latter issue is illustrated by the speedy build-up of the public debt as a result of the need to finance fiscal deficits. We do not find, nevertheless, a negative impact of the rule on public investment. We propose reforms to improve on transparency and accountability, as well as to supplement the rule with escape clauses and a debt anchor.

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

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.