nach oben

International Tax and Public Finance

Erschienen in:

01.08.2014

Fiscal consolidations and public debt in Europe

verfasst von: Gianluca Cafiso, Roberto Cellini

Erschienen in: International Tax and Public Finance | Ausgabe 4/2014

Einloggen

Aktivieren Sie unsere intelligente Suche, um passende Fachinhalte oder Patente zu finden.

search-config

KI-gestützte Suche

Aus

Abstract

The objective of this paper is to gain insights into the relationship between deficit-reducing policies and the evolution of the debt/GDP ratio. We consider past events of fiscal consolidation in a selected group of EU countries and check what is the associated change of the debt/GDP ratio both from a short- and medium-term perspective. In the analysis, we also differentiate between tax-based and savings-based fiscal consolidations and the pre-Euro and Euro periods. Our results point towards a positive short-term effect, while the medium-term effect turns out to be negative. Savings-based fiscal consolidations result to be less negative on the DGR evolution than tax-based ones. The Euro’s introduction seems not to have altered significantly the relationship studied.

Vorheriger Artikel Euro membership and fiscal reaction functions

Nächster Artikel Tax reforms and the capital structure of banks

Sie haben noch keine Lizenz? Dann Informieren Sie sich jetzt über unsere Produkte:

Springer Professional "Wirtschaft+Technik"

Online-Abonnement

Mit Springer Professional "Wirtschaft+Technik" erhalten Sie Zugriff auf:

über 102.000 Bücher
über 537 Zeitschriften

aus folgenden Fachgebieten:

Automobil + Motoren
Bauwesen + Immobilien
Business IT + Informatik
Elektrotechnik + Elektronik
Energie + Nachhaltigkeit
Finance + Banking
Management + Führung
Marketing + Vertrieb
Maschinenbau + Werkstoffe
Versicherung + Risiko

Jetzt Wissensvorsprung sichern!

Jetzt informieren

Springer Professional "Wirtschaft"

Online-Abonnement

Mit Springer Professional "Wirtschaft" erhalten Sie Zugriff auf:

über 67.000 Bücher
über 340 Zeitschriften

aus folgenden Fachgebieten:

Bauwesen + Immobilien
Business IT + Informatik
Finance + Banking
Management + Führung
Marketing + Vertrieb
Versicherung + Risiko

Jetzt Wissensvorsprung sichern!

Jetzt informieren

Nur mit Berechtigung zugänglich

The analysis here considers the overall deficit; for a discussion of how differently the primary balance and the interest bill determine the debt evolution, refer to Cafiso (2012b). It is to say that also below-the-line budget operations contribute to the debt level for an amount known as Stock-Flow Adjustment. In this context, we disregard such operations, but we check their effect on the results of our analysis in Sect. 5.3.

For this reason, the derivatives in Sects.2.1 and 2.2 are defined for the DGR variation. However, they are formally equal to those for the DGR level.

The size of the multiplier is a debated issue in the literature because, among other things, it determines whether or not fiscal stimuli are worth to invert a recession. For a recent discussion of this issue referring to the policy answer to the 2008–2009 crisis, see Cwik and Wieland (2011).

With the term ‘countercyclical response bias’, Perotti means that cyclical adjustment methods might not allow to detect all the years when a discretionary consolidation is truly put in place. This may happen when their budget effect results to be offset by countercyclical policies enforced to contrast unexpected negative shocks, so that there is little or no rise in the cyclical-adjusted primary balance.

The same Devries et al. ’s (2011) data set is used by Guajardo et al. (2011) to test the expansionary austerity hypothesis as documented in several contributions (Alesina and Ardagna 2010; Giavazzi and Pagano 1990). With a specific reference to Alesina and Ardagna (2010), the objective of Guajardo et al. (2011) is to prove that the expansionary austerity hypothesis emerges as a bias of using significant variation of the CAPB to account for changes in the fiscal stance. They provide evidence that this is the case, by showing that fiscal consolidations cause real GDP contractions. The result by Guajardo et al. (2011) is relevant for our analysis because the negative effect of fiscal consolidations on the GDP affects the association between fiscal consolidations and the DGR as discussed in Sect. 2.

We ourselves have compared the data set by Devries et al. (2011) with what obtained considering variations of the CAPB; we used CAPB data made available by the EU commission (Ameco database). As matter of fact, the two series do not diverge excessively. The main problem consists in setting the significance threshold for CAPB variations. This is why the narrative approach a-làDevries et al. (2011) seemed more reliable in the end.

In their data set, Devries et al. (2011) report a line with the budget effect only when a consolidation occurs. Then, there is no entry for years of no-FC. In the construction of our BEC variable, we simply convert a no entry in Devries et al. ’s (2011) with a zero value of the BEC variable.

In the context of our analysis, we do not treat consecutive FCs differently given the impracticality of an alternative procedure. Nevertheless, it is to acknowledge that, if consecutive FCs are the result of a multiyear adjustment plan, these might have a different effect on the GDP since economic agents might react and adjust in a different way.

Either the DGR increase is higher, or its reduction smaller, with respect to the previous 2-year average.

As a robustness check of the analysis in Sect. 5.1, which is based on the Trend-Break variable defined here, we also apply the 1 and 10 % thresholds for the selection of non-marginal observations.

Other authors choose a 3-year period instead. We tested our conclusions also using such horizon, they remain largely unchanged.

As a robustness check of the analysis in Sect. 5.2, which is based on the Cumulated Change variable defined here, we also apply the 1 and 10 % thresholds for the selection of non-marginal observations.

In a previous working-paper version of this work (Cafiso and Cellini 2013, Appendix 1), we used the \(\Delta _{2} b_{it+1}\)variable for a cluster analysis which splits the country sample into two groups in order to understand among which countries similarities in the DGR evolution emerge. The analysis suggested that Ireland, Portugal and Spain can be grouped together in terms of most adverse evolution.

Alesina and Ardagna (2010) limit themselves to compare means without testing their statistical difference. In this regard, we therefore improve with respect to previous contributions.

Indeed, it is to say that those might bias the coefficients upwards; although, it is to exclude that they cause wrongly signed coefficients.

However, the regression analysis will regard the medium-term effect only because it is the more policy relevant. Indeed, apart from the research interest in the potential difference between the short- and medium-term effect, it is the cumulated change which matters from a policy-perspective (to wit, sustainability).

To wit, in case of a fiscal consolidation in 1989 we look at the economic conditions in 1988, in case of a multiyear period of fiscal consolidation from 1979 to 1985, we look at the economic conditions in 1978.

This is also supported by the non-significance of the estimated coefficient of the Interest Bill in the estimations in Table 5. Nonetheless, we highlight that this is just an attempt to understand what’s behind a consolidation without presumption to deliver reliable information. This is so also because fiscal consolidations can be enforced through decisions taken in the same year of consolidation via extraordinary budget measures.

For space constraints, only the Table for the alternative 1 % threshold is in the appendix; the one for the alternative 10 % threshold is available upon request from the authors.

A spreadsheet containing the yearly DGR variation, the SFA-corrected DGR variation and the contribution of the SFA component to the yearly DGR variation can be obtained from the authors upon request. The SFA data are extracted from the ECFIN Ameco database.

The introduction of numerical fiscal rules monitored at the European level has posed a limit to deficit spending forthe Euro Area countries. Even if the effectiveness of the Euro-related fiscal rules is questionable in the Euro period, on the contrary, they were effective during the Maastricht period since the bulk of countries considered had a strong motivation to enforce discretionary fiscal consolidations to meet the required parameters for Euro membership. Indeed, the analysis in Appendix 2 shows a very different frequency of consolidation events across the three periods: it emerges that the Maastricht period was one of widespread fiscal consolidation, while the Euro period is when we observe the fewest (look also Table 6 in Appedix 1).

Nickel et al. (2010) include the Hodrick-Prescot GDP trend as well. We prefer to keep it out because it is never significant when included and, differently from the Interest Bill which is also always not significant, the information provided is already given by the hpGDPgap regressor.

To check that the results of our estimation are not driven by the years of the Global Financial Crisis included in our sample (2008, 2009), we have re-estimated the regression in column 1 when those are ruled out. The estimation output is alike; this excludes that the results are driven by the crisis years. The estimation output is not included in the paper, but available upon request from the authors.

We consider also the mixed-consolidations category to separate more markedly the tax-based from the savings-based group.

As a robustness check, we have ruled out Italy from the estimation reported in column 2. The choice fell on Italy because it is known to enforce fiscal consolidations which are mainly tax based. The conclusions from the estimation remain unchanged. The estimation output is not included in the paper, but available upon request from the authors.

It is to say that this is true both for the countries which joined the Euro in the end and those which did not (Denmark, Sweden and the United Kingdom); check Table 6 in Appendix 1. The lack of any relevant difference between non-Euro and Euro countries is the main reason, together with the need to avoid the loss of valuable observations when going period by period, why we do not rule the non-Euro countries.

Alesina A., Favero, C., & Giavazzi, F. (2013). The output effect of fiscal consolidations. Mimeo

Alesina, A., & Ardagna, S. (2010). Large changes in fiscal policy: Taxes versus spending. In J. R. Brown (Ed.), Tax policy and the economy (Vol. 24). Cambridge, MA: NBER.

Cafiso, G. (2012a). Debt developments and Fiscal adjustment in the EU. Intereconomics, 47(1), 61–72.CrossRef

Cafiso G. (2012b). A guide to public debt equations, 3rd version, SSRN eLibrary, November 2012

Cafiso, G. & Cellini, R. (2013). Fiscal consolidations and public debt in Europe. CEPII working paper no. 2013-35

Clinton, K., Kumhof, M., Laxton, D., & Mursula, S. (2011). Deficit reduction: Short-term pain for long-term gain. European Economic Review, 55, 118–139.CrossRef

Conen, G., Mohr, M., & Straub, R. (2008). Fiscal consolidation in the euro area: Long run benefits and short-run costs. Economic Modelling, 25, 912–932.CrossRef

Conover, W. J. (1999). Practical nonparametric statistics. New York: Wiley.

Corsetti, G., Kuester, K., Meier, A., & Muller, J. (2010). Debt consolidation and fiscal stabilization of deep recessions. American Economic Review, 100(2), 41–45.CrossRef

Corsetti, G., Meier, A., & Muller, J. (2012). Fiscal stimulus with spending reversals. Review of Economics and Statistics, 94, 878–895.CrossRef

Cwik, T., & Wieland, V. (2011). Keynesian government spending multipliers and spillovers in the Euro area. Economic Policy, 26(67), 493–549.CrossRef

Devries P., Guajardo, J., Leigh, D., & Pescatori, A. (2011). A new action-based dataset of Fiscal consolidation. IMF working paper, International Monetary Fund

Escolano, J. (2010). A practical guide to public debt dynamics, Fiscal sustainability, and cyclical adjustment of budgetary aggregates. IMF Technical Notes and Manuals. Washington, DC : International Monetary Fund

Eurostat. (2010). Stock-flow adjustment report (October 2010). Luxembourg: Eurostat

Giavazzi, F., & Pagano, M. (1990). Can severe Fiscal contractions be expansionary? Tales of two small European countries. In O. J. Blanchard & S. Fischer (Eds.), NBER macroeconomics annual 1990. Cambridge, MA: MIT Press.

Gros, D. (2011). Can Austerity be self-defeating?. Vox. Retrieved December 28, 2013, from http://www.voxeu.org/

Guajardo J., Leigh, D., & Pescatori, A. (2011). Expansionary Austerity: New international evidence. IMF Working Paper, International Monetary Fund.

Krugman P. (2011). Self-defeating Austerity. New York Times Column, 7 July

Nickel C., Rother, P., & Zimmermann, L. (2010). Major public debt reductions: Lessons from the past, lessons for the future. ECB Working paper series, no 1241

Perotti, R. (2013). The Austerity myth: Gain without pain? In A. Alesina & F. Giavazzi (Eds.), Fiscal policy after the financial crisis. Cambridge, MA: NBER.

Ramey, V. (2013). Government spending and private activities. In A. Alesina & F. Giavazzi (Eds.), Fiscal policy after the financial crisis. Cambridge, MA: NBER.

Romer, C. D., & Romer, D. H. (2010). The macroeconomic effects of tax changes: Estimates based on a new measure of Fiscal shocks. American Economic Review, 100(3), 763–801.CrossRef

Sutherland D., Hoeller P., & Merola, R. (2012). Fiscal consolidation: Part 1. How much is needed and how to reduce debt to a prudent level? OECD Economics Department working papers no. 932. Parris: OECD Publishing

Stata. (2009). Stata base reference manual, release 11. College Station, Texas : Stat Corp

Wilcoxon, F. (1945). Individual comparisons by ranking methods. Biometrics, 1, 80–83.CrossRef

Titel: Fiscal consolidations and public debt in Europe
verfasst von: Gianluca Cafiso
Roberto Cellini
Publikationsdatum: 01.08.2014
Verlag: Springer US
Erschienen in: International Tax and Public Finance / Ausgabe 4/2014
Print ISSN: 0927-5940
Elektronische ISSN: 1573-6970
DOI: https://doi.org/10.1007/s10797-014-9319-y

Springer Professional

Abstract

Bitte loggen Sie sich ein, um Zugang zu Ihrer Lizenz zu erhalten.

Sie haben noch keine Lizenz? Dann Informieren Sie sich jetzt über unsere Produkte:

Springer Professional "Wirtschaft+Technik"

Springer Professional "Wirtschaft"

Weitere Artikel der Ausgabe 4/2014

Rethinking the Pfähler–Lambert decomposition to analyse real-world personal income taxes

Tax reforms and the capital structure of banks

Introduction to the special issue on the role of the state in growth and development

Thresholds, informality, and partitions of compliance

An assessment of the waste effects of corruption on infrastructure provision

Euro membership and fiscal reaction functions