Gauging by numbers: A first attempt to measure the quality of public finances in the EU

Ensuring high quality of public finances (QPF) with a view to supporting long-term economic growth has gained new urgency as the room for fiscal manoeuvre has shrunk in light of the current crisis. To more systematically analyse QPF and compare developments across countries and over time, a greater focus on identifying and developing comparable QPF indicators is needed. This paper provides a first attempt in this respect. Based on the view that QPF is a multi-dimensional concept, it creates composite indicators for twelve areas of public finances that are linked to long-term economic growth. While the proposed alternative calculation methods yield relatively robust results and findings are in line with conventional wisdom, due to data problems the composite indicators should only be seen as a useful starting point for identifying a country's main strengths and weaknesses in QPF. This would need to be complemented by qualitative analysis that also accounts for country and other specificities. JEL classification: E62, H11, H50, H52, H60Quality of public finances, public finances, fiscal policy, long-term economic growth, public expenditure, public revenue, fiscal governance, Barrios, Schaechter

The dynamics of regional inequalities

This paper analyses empirically the dynamics of regional inequalities in GDP per capita. Our starting hypothesis is that the evolution of regional inequalities should follow a bell-shaped curve depending on the level of national economic development. A number of authors going from Kuznets (1955) to Lucas (2000) have provided extensive theoretical arguments along this line suggesting that growth, because of its very nature, is unlikely to appear everywhere at the same time. Regional inequalities should then rise when countries start developing and then fall once a certain level of national economic development is reached as long as spillovers are strong enough to transmit growth and technological progress across regions. We test empirically these predictions by using regional data for a panel of European countries and by making use of semi-parametric estimation techniques. Our results provide strong support for a bell-shaped curve in the relationship between the national GDP per capita level and the extent of regional inequalities independently of the time period and regional administrative units considered. The nature of this non-monotonic relationship is not altered by the inclusion of other possible determinants of regional inequalities. A number of policy implications are derived from our results.Kuznets curve, economic development, regional inequalities, Europe, Barrios, Strobl

Unexpected changes in tax revenues and the stabilisation function of fiscal policy. Evidence for EU

This paper analyzes the size and the determinants of unexpected changes in EU countries' tax revenues and their impact on the ability of EU governments to use fiscal policy as a macroeconomic stabilisation device. We make use of information taken from the Stability and Convergence Programmes (SCP) setting countries' medium-term fiscal plans and focus on the period preceding the 2008/2009 global financial crisis. Tax revenue surprises are found to have fluctuated widely, alternating periods of sizeable windfalls and periods of substantial shortfalls.When analysing this, we find that GDP growth surprises and, in some cases (i.e. Ireland, Spain the UK and Finland) asset prices fluctuations have exerted the most significant influence. In the sequel we provide evidence on the incidence of these unexpected changes in governments' tax revenues on the ability of governments to conduct counter-cyclical fiscal policies, which are desirable from a macroeconomic perspective.We find that countries that have experienced the largest tax revenue windfalls in the run-up to the 2008/2009 crisis have also tended to run more pro-cyclical fiscal policies although these results vary depending on the use of ex-post vs. real-time data and on the method used to calculate the cyclical position of the economy. Put differently, these results tend to indicate that while tax revenue windfalls may be good for the public purse during favourable times they may also (paradoxically) dwindle the ability of the countries concerned to run counter-cyclical fiscal policies when cyclical conditions revert.european union eu tax revenues windfalls shortfalls business cycles fiscal policy stabilisation barrios rizza

The quality of public finances and economic growth

Improving the quality of public finances (QPF) has become a new focus for European policy makers. This focus is largely a response to preparing the European economies for the dual challenge of ageing populations and increased exposure to global competition. At the EU level, the Stability and Growth Pact and the Lisbon Strategy for Growth and Jobs provide, in principle, the appropriate tools for fostering a greater role of QPF in fiscal surveillance but this has not yet fully materialised in practice. This is partly because a broad-based conceptual framework on what makes up QPF has been missing. This paper attempts to close this gap by developing a multi-dimensional approach on QPF. Moreover, it reviews how EU Member States fare in each dimension and summarises empirical findings on the links between QPF and growth, including through a growth-accounting approach using discriminant analysis.Public finances, fiscal policy, public spending, fiscal governance, expenditure efficiency, revenue systems, growth accounting, Barrios, Schaechter

Discretionary measures and tax revenues in the run-up to the financial crisis

Summary for non-specialistsThis paper examines the influence of governments' discretionary measures on tax revenues and tax elasticity in the European Union during the run-up to the 2008/2009 global financial crisis which was characterised by large swings in tax revenues.Using data collected in the context of the Output Gap Working Group of the Economic Policy Committee we show that while discretionary measures have had a limited impact on tax yields, they have in some cases significantly affected tax elasticities and thereby altered the relationship between tax revenues and the business cycle which plays a key role in the EU fiscal surveillance framework. Furthermore we provide evidence on the pro-cyclical nature of discretionary measures affecting tax revenues whereby governments tend to implement tax cuts during expansionary phases while resorting to tax increases during slowdowns. More generally our results suggest that the availability of detailed projections on the impact of discretionary measures by broad tax category would be instrumental to a better monitoring of tax revenues developments in the EU in order to better identify the role played by non-policy factors (such as asset prices) in driving tax revenues. Given that the time span covered by this database is in most cases still relatively short (covering on average 7 to 8 years) future updates of the data would allow to further dig into the issue of the influence of discretionary measures on tax elasticities as well as to provide elements for a backward assessment of fiscal plans vs. outcome.financial crisis barrios Taxation discretionary measures fiscal policy financial crisis fiscal stance business cycle Fargnoli

Information and Communication Technologies, Market Rigidities and Growth: Implications for EU Policies

The renewed Lisbon strategy puts special emphasis on the potential role that Information and Communication Technologies can play in meeting the challenges of boosting growth, competitiveness and cohesion throughout the EU. There is also a general understanding among policy makers that investment of this kind and its related economic benefits can only materialize if labour, capital, product and service markets are flexible enough to facilitate ICT investment and the re-organisation of economic activities. This paper provides evidence of the influence of market rigidities on the propensity to invest in ICT and on the economic return of ICT investment in a number of EU countries, and in the US and Japan. We provide evidence that indicates that market rigidities deter ICT investment and lower the impact of ICT on GDP growth by considering a number of indicators reflecting barriers to business creation and the degree of market regulation in labour and capital markets. These results are invariant, even when other potential determinants of ICT investments and ICT contribution to GDP growth such as the degree of specialisation in ICT-producing industries, past ICT investment, business cycles conditions and a measure of trade openness are controlled for. The paper provides a number of policy implications, most notably, regarding the role played by structural reforms in promoting both ICT adoption and setting the best framework conditions for ICT impact on GDP growth. While the renewed EU Lisbon strategy of economic reforms is badly needed to increase EU growth potential, we show here that this strategy is also needed to promote technological change in the EU economy.Information and Communication Technologies, ICT, Growth, European Union, Lisbon Strategy

Climatic Change and Rural-Urban Migration: The Case of Sub-Saharan Africa

We investigate the role that climatic change has played in the pattern of urbanization in sub-Saharan countries compared to the rest of the developing world. To this end we assemble a cross-country panel data set that allows us to estimate the determinants of urbanization. The results of our econometric analysis suggest that climatic change, as proxied by rainfall, has acted to change urbanization in sub-Saharan Africa but not elsewhere in the developing world. Moreover, this link has become stronger since decolonization, which is likely due to the often simultaneous lifting of legislation prohibiting the free internal movement of native Africans.urbanization, climate change, rainfall, rural-urban migration, Africa

The Impact of Climatic Change on Agricultural Production: Is it different for Africa?

This paper examines the impact of climatic change on the level of total agricultural production of Sub-Sahara Africa (SSA) and non-Sub-Sahara Africa (NSSA) developing countries. In doing so it uses a new cross-country panel climatic dataset in an agricultural production framework. The results show that climate, measured as changes in country-wide rainfall and temperature, has been a major determinant of agricultural production in SSA. In contrast, NSSA countries appear not to be affected by climate in the same manner. Simulations using the estimates suggest that the detrimental changes in climate since the 1960s can account for a substantial portion of the gap in agricultural production between SSA and the rest of the developing world.Climate change, Africa, Agriculture

Dry Times in Africa: Rainfall and Africa's Growth Performance

While there have been some references in the literature to the potential role of the general decline in rainfall in sub-Saharan African nations on their poor growth performance relative to other developing countries, this avenue remains empirically unexplored. In this paper we use a new cross-country panel climate data set in an economic growth framework to explore the issue. Our results show that rainfall has been a significant determinants of poor economic growth for Africa but not for other developing countries. Depending on the benchmark measure of potential rainfall, we estimate that the direct impact under the scenario of no decline in rainfall would have resulted in a reduction of between 13 and 36 per cent of today's gap in African GDP per capita relative to the rest of the developing world.Development, Africa, Climate

The Evolution of the Firm Size Distribution and Nationality of Ownerhship

It has recently been shown that the firm size distribution is initially skewed to the right and then evolves over time to become more lognormal, and argued that this is likely due to firms initially facing financial constraints, see Cabral and Mata(2003). We conjecture that, if this is true, then such a pattern should be much less apparent for multinational companies for which financial constraints are generally considered to be lower than non-multinationals. Moreover, such a difference should be re-enforced by the fact that multinationals are less likely to face selection issues. These propositions are confirmed using plant level Irish manufacturing data.