Lessons Learned from Tax versus Expenditure Based Fiscal Consolidation in the European Transition Economies

Mirdala, Rajmund (2013): Lessons Learned from Tax versus Expenditure Based Fiscal Consolidation in the European Transition Economies. Published in: Journal of Applied Economic Sciences , Vol. 8, No. 1 (April 2013): pp. 73-98.

Abstract

European Union member countries are currently exposed to negative implications of the economic and debt crisis. Questions associated with disputable implications of fiscal incentives seem to be contrary to the crucial need of the effective fiscal consolidation that is necessary to reduce excessive fiscal deficits and high sovereign debts. While challenges addressed to the fiscal policy and its anti-cyclical potential rose steadily but not desperately since the beginning of the economic crisis, the call for fiscal consolidation became urgent almost immediately and this need significantly strengthen after the debt crisis contagion flooded Europe. In the paper we provide an overview of main trends in public budgets and sovereign debts in ten European transition economies during last two decades. We identify episodes of successful and unsuccessful (cold showers versus gradual) fiscal (expenditure versus revenue based) consolidations by analyzing effects of improvements in cyclically adjusted primary balance on the sovereign debt ratio reduction. We also estimate VAR model to analyze effects of fiscal shocks (based on one standard deviation in total expenditure, direct and indirect taxes) to real output. It is expected that responses of real output to different types of (consolidating) fiscal shocks may vary and thus provide more precise ideas about a feasibility (i.e. side effects on the macroeconomic performance) of expenditure versus revenue based fiscal consolidation episodes. Economic effects of fiscal consolidating adjustments are evaluated for two periods (pre-crisis and extended) to reveal crisis effects on fiscal consolidation efforts.

• Item Type: MPRA Paper
• Language: English
• Keywords: fiscal policy adjustments, fiscal consolidation, cyclically adjusted primary balance, government expenditures, tax revenues, unrestricted VAR, Cholesky decomposition, SVAR, structural shocks, impulse-response function
• Subjects: C - Mathematical and Quantitative Methods > C3 - Multiple or Simultaneous Equation Models ; Multiple Variables > C32 - Time-Series Models ; Dynamic Quantile Regressions ; Dynamic Treatment Effect Models ; Diffusion Processes ; State Space Models; E - Macroeconomics and Monetary Economics > E6 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook > E62 - Fiscal Policy; H - Public Economics > H2 - Taxation, Subsidies, and Revenue > H20 - General; H - Public Economics > H5 - National Government Expenditures and Related Policies > H50 - General; H - Public Economics > H6 - National Budget, Deficit, and Debt > H60 - General

References

ALTÃR, M. - NECULA, C. - BOBEICÃ, G. (2010) Estimating the Cyclically Adjusted Budget Balance for the Romanian Economy. A Robust Approach, Romanian Journal of Economic Forecasting 13(2): 79-99.

ALESINA, A. - PEROTTI, R. (1997) Fiscal Adjustments in OECD Countries: Composition and Macroeconomic Effects. [International Monetary Fund Staff Paper No. 44/1997] Washington, D.C., International Monetary Fund, pp. 297-329.

ALESINA, A. - ARDAGNA, S. (2009) Large Changes in Fiscal Policy: Taxes vs. Spending. [National Bureau of Economic Research Working Paper No. 15438] New York, National Bureau of Economic Research, 37 p.

ANTONESCU, M. - MANEA, S. - ANTONESCU, L. (2008) Fiscal Aspects Regarding Taxing The Incomes Of Non-Residents in Romania, Journal of Applied Economic Sciences, 3(4): 359-364.

BARRIOS, S. - LANGEDIJK, S. - PENC, L. (2010) EU Fiscal Consolidation after the Financial Crisis. Lesson from Past Experience, [European Commission Economic Paper No. 418/2010] Brussels, European Commission, 47 p.

BENČÍK, M. (2008) Analysis of Fiscal Policy Impacts of the Business Cycle, [National Bank of Slovakia Working Paper No. 2/2009] Bratislava, National Bank of Slovakia, 30 p.

BLANCHARD, O.J. - PEROTTI, R. (2002) An Empirical Characterization of the Dynamic Effects of Changes in Government Spending and Taxes on Output, Quarterly Journal of Economics 117 (4): 1329-1368.

BOUTHEVILLAIN et al (2001) Cyclically Adjusted Budget Balances: An Alternative Approach, [European Central Bank Working Paper No. 77/2001] Frankfurt am Main, European Central Bank, 73 p.

BRIOTTI, M.G. (2002) Fiscal Consolidation in EU Countries in the Nineties: New Facts and Policy Implications, VI. International Conference in Economics, September 11th-14th, Ankara, Turkey, 52 p.

BURNSIDE, C. - EICHENBAUM, M. - FISHER, J. (2003) Fiscal Shocks and their Consequences, Journal of Economic Theory, 115(1): 89-117.

CALDARA, D. - CAMPS, C. (2008) What are the Effects of Fiscal Policy Shocks, [European Central Bank Working Paper No. 877/2008] Frankfurt am Main, European Central Bank, 47 p.

CORSETTI, G. - KUESTER, K. - MEIER, A. - Müller, G.J. (2010) Debt Consolidation and Fiscal Stabilization of Deep Recessions, American Economic Review: Papers & Proceedings 100: 41-45.

EUROPEAN COMMISION (2012), Report on Public Finances in EMU - 2012, European Economy No. 4/2012, (Brussels: European Commission).

FEDELINO, A. - IVANOVA, A. - HORTON, M. (2009) Computing Cyclically Adjusted Balances and Automatic Stabilizers. [International Monetary Fund Technical Notes and Manuals No. 5/2009] Washington, D.C., International Monetary Fund, 15 p.

GIROUARD, N. - ANDRÉ, Ch. (2005) Measuring Cyclically-Adjusted Budget Balance for EOCD Countries, [Organization for Economic Cooperation and Development Working Paper No. 21/2005] Paris, Organization for Economic Cooperation and Development, 42 p.

GIULIODORI, M. - BEETSMA, R. (2004) What are the Spill-overs from Fiscal Shocks in Europe? An Empirical Analysis, [European Central Bank Working Paper No. 325/2004] Frankfurt am Main, European Central Bank, 43 p.

GÜNAYDIN, E. - UĞRAŞ ÜLKÜ, Z. (2002) Cyclically Adjusted Primary Balance: The Case of Turkey, VI. International Conference in Economics, September 11th-14th, Ankara, Turkey, 52 p.

JOHANSEN, S. (1988) Statistical analysis of cointegrating vectors, Journal of Economic Dynamic & Control, 12(2-3): 231-254.

JOHANSEN, S. (1991) Estimation and Hypothesis Testing of Cointegrating Vectors in Gaussian Vector Autoregressive Models, Econometrica, 59(6): 1551-1580.

LAMBERTINI, L. - TAVARES, J. (2003) Exchange Rates and Fiscal Adjustments: Evidence from the OECD and Implications for EMU, Boston College Working Papers in Economics No. 576/2003, Boston College Department of Economics

MIRDALA, R. (2009) Effects of Fiscal Policy Shocks in the European Transition Economies, Journal of Applied Research in Finance, 1(2):141-155

MIRDALA, R. (2011) Stimulation Effects of Fiscal Policies in the European Converging Economies, Journal of Economics (Ekonomický časopis), 59(9): 918-941

MOUNTFORD, A. - UHLIG, H. (2008) What are the Effect of Fiscal Policy Shocks? [National Bureau of Economic Research Working Paper No. 14551] New York, National Bureau of Economic Research, 46 p.

PEROTTI, R. (2005) Estimating the Effects of Fiscal Policy in OECD Countries, [European Central Bank Working Paper No. 168/2005] Frankfurt am Main, European Central Bank, 63 p.

REDŽEPAGIC, S. - LLORCA, M. (2007) Does Politics Matter in the Conduct of Fiscal Policy? Political Determinants of the Fiscal Sustainability: Evidence from Seven Individual Central and Eastern European Countries (CEEC), Panoeconomicus, 54(4): 489-500.

ROMER, C.D. - ROMER, D.H. (2007) The Macroeconomic Effects of Tax Changes: Estimates Based on a New Measure of Fiscal Shocks, [National Bureau of Economic Research Working Paper No. 13264] New York, National Bureau of Economic Research, 71 p.

TSIBOURIS, G.C. - HORTON, M.A. - FLANAGAN, M.J. - MALISZEWSKI, W.S. (2006) Experience with Large Fiscal Adjustments. [International Monetary Fund Occasional Paper No. 246/2006] Washington, D.C., International Monetary Fund, 51 p.

von HAGEN J. - HALLET, A.H. - STRAUCH, R. (2002) Budgetary Consolidation in Europe: Quality, Economic Conditions, and Persistence, Journal of the Japanese and International Economics, vol. 16, pp. 512-535.