Federico Diaz Kalan, Ms. Adina Popescu, and Julien Reynaud
There is evidence that fiscal rules, in particular well-designed rules, are associated with lower sovereign spreads. However, the impact of noncompliance with fiscal rules on spreads has not been examined in the literature. This paper estimates the effect of the Excessive Deficit Procedure (EDP) on sovereign spreads of European Union member states. Based on a sample including the 28 European Union countries over the period 1999 to 2016, sovereign spreads of countries placed under an EDP are found to be on average higher compared to countries that are not under an EDP. The interpretation of this result is not straight-forward as different channels may be at play, in particular those related with the credibility and the design of the EU fiscal framework. The specification accounts for typical macroeconomic, fiscal, and financial determinants of sovereign spreads, the System Generalized Method of Moments estimator is used to control for endogeneity, and results are robust to a range of checks on variables and estimators.
Delegating fiscal decision making power to sub-national governments has been an area of interest for both academics and policymakers given the expectation that it may lead to better and more efficient provision of public goods and services. Decentralization has, however, often occurred on the expenditure and less on the revenue side, creating “vertical fiscal imbalances” where sub-national governments’ expenditures are not financed through their own revenues. The mismatch between own revenues and expenditures may have consequences for public finance performance. This study constructs a large sample of general and subnational level fiscal data beginning in 1980 from the IMF’s Government Finance Statistics Yearbook. Extending the literature to the balance sheet approach, this paper examines the effects of vertical fiscal imbalances on government debt. The results indicate that vertical fiscal imbalances are relevant in explaining government debt accumulation suggesting a degree of caution when promoting fiscal decentralization. This paper also underlines the role of data covering the general government and its subectors for comprehensive analysis of fiscal performance.
The need to revive Euro area growth highlights the importance of the evolution of domestic and external demand in the core. This paper puts recent demand patterns in France, Germany, and Belgium into historical perspective. We find that, first, dynamics for private consumption, non-residential business investment, and exports since 2008 is dominated by conventional determinants, with no discernible structural break as a result of the crisis. Second, although country-specific factors matter in some cases, demand patterns in these countries are largely driven by common determinants. Third, developments in common fundamentals tend to dominate demand dynamics, coupled, in a few cases, with structurally different elasticities across countries. Fourth, short-term analysis suggests a role for confidence and uncertainty factors in explaining temporary deviations of these variables from long-term fundamentals.
Emilio Fernández Corugedo and Mrs. Esther Perez Ruiz
The EU Services Directive was adopted in 2006 to foster competition in services across Europe. However, progress in liberalizing services has fallen short of expectations due to the article 15 of the Directive, which allows countries to maintain pre-existing restrictions if judged necessary to protect the public interest. Through input output analysis, this paper finds important multiplier effects of greater efficiency services to the rest of the economy. A renewed impulse to the liberalization process could be given by enhancing the advocacy role of national competition authorities in interpreting the notion of public interest underpinning existing regulations.
Esta nota1 trata las siguientes cuestiones principales: • ¿En qué momento del ciclo presupuestario debería participar el parlamento? • ¿Qué aspectos aprueba normalmente el parlamento, a diferencia de los aspectos que revisa? • ¿Con qué estructura interna y apoyo debería contar el parlamento para examinar los proyectos de presupuesto preparados por el gobierno y el presupuesto aprobado? • ¿Qué requisitos legales y de rendición de cuentas debería imponer el parlamento al poder ejecutivo? • ¿De qué manera debería formalizarse la participación de la legislatura en los procesos presupuestarios en las leyes y reglamentaciones?
This paper examines the role of the legislature in budget processes. The paper highlights that for promoting good governance and fiscal transparency, the legislature’s active engagement in the budget process is essential. When fiscal policies and medium-term budgetary objectives are debated in parliament, budget strategies and policies are “owned” more widely. However, more active participation by the legislature runs the risk that fiscal discipline deteriorates. In countries where the legislature has unrestrained budget amendment authority, parliament is prone to introduce changes that increase spending or reduce taxes.
This paper discusses how to enhance automatic stabilizers without increasing the size of government. We distinguish between permanent changes in the parameters of the tax and expenditure system (e.g., changes in tax progressivity) that will enhance the traditional automatic stabilizer, and temporary changes triggered by certain economic developments (e.g., tax measures targeted at credit and liquidity constrained households, triggered during a severe downturn). We argue that, with some exceptions, the latter are preferable as they can be implemented with lower disruptions in other fiscal policy goals (e.g., economic efficiency). Moreover, countries should also avoid introducing procyclicality as a result of fiscal rules, as these would offset the effect of existing automatic stabilizers.
This paper develops a political-economy model of the budget process focusing on the common pool problem of the public budget. We show that the externality arising from the fact that public spending tends to be targeted at individual groups in society while the tax burden is widely dispersed creates a bias towards excessive expenditures and debt. This bias can be reduced by introducing elements of centralization in the budget process, that is, institutional structures that strengthen a comprehensive view of the budget over the particularistic view of the spending ministers and the members of parliament. Using examples from EC countries, we show how budget processes lack or possess such elements. We then present empirical evidence supporting the claim that centralizing elements reduce the deficit bias. The last section concludes with models for reform of the budget process.
The IMF Working Papers series is designed to make IMF staff research available to a wide audience. Almost 300 Working Papers are released each year, covering a wide range of theoretical and analytical topics, including balance of payments, monetary and fiscal issues, global liquidity, and national and international economic developments.
This paper discusses basic principles underlying budget law and reviews key features of budget legislation in several OECD countries as a basis for development of budget legislation in economies in transition to a market environment (EITs). It recommends a broad structure and a number of specific provisions that could be included in budget law for EITs.