The short- and long-run tax revenue response to changes in tax bases

This paper examines the short- and long-run behavior of tax receipts with regard to their tax bases. In addition, the possibility of asymmetries in tax responses is explicitly included. The methodology is applied to the three main tax categories in the Netherlands for the period 1971-2005, after removing effects from discretionary measures. The outcomes indicate that short-term elasticities can deviate markedly from long-term ones. Furthermore, short-term elasticities tend to be smaller in less favorable circumstances. Ignoring such differences between various elasticity measures may contribute to adverse revenue surprises.Tax revenue, income elasticity, fiscal indicators, The Netherlands

Market discipline, financial integration and fiscal rules: what drives spreads in the euro area government bond market?

This paper studies the determinants of interest rate spreads of euro area 10 year government bonds against the benchmark, the German bund, after the introduction of the euro. In particular, it pays attention to the question whether market discipline is advanced or obstructed by financial integration and by fiscal rules like the Stability and Growth Pact. We first argue that financial integration – by improving market efficiency – is instrumental for markets to exert their disciplinary role. Next, we discuss the relationships between market discipline and fiscal rules, arguing that these in principle may reinforce each other. Finally, we provide strong empirical evidence that spreads depend on the ratings of the underlying bond and to a large extent are driven by the level of short-term interest rates. JEL Classification: G12, G18, C23Bond spreads, Credit risk, liquidity risk

What determines fiscal balances? An empirical investigation in determinants of changes in OECD budget balances

Fiscal balances have deteriorated quickly in recent years, bringing back to the foreground the question what factors help explain such sharp changes. This paper takes a broad perspective at the issue regarding countries included, the range of explanatory variables tried, and the time-span. The empirical analysis shows that changes in budget balances are affected by debt growth, macroeconomic developments and political factors. In particular, we find that the run-up to EMU induced additional consolidation in Europe and that budget balances deteriorate markedly in election years. Asset prices also may affect budgets, but the impact remains limited in normal times. JEL Classification: E61, E62, H61, H62asset prices, budget balance, Economic Growth, Fiscal Policy, Stability and Growth Pact

Government debt management in the euro area - recent theoretical developments and changes in practices

This paper reviews recent developments in the management of government debt in the euro area, covering both theoretical and practical aspects. It focuses on key aspects of debt management; the objectives of debt management, its organisation, the maturity of debt, inflation-indexation, currency-denomination, the ownership of debt, and debt issuing and trading practices. Main adjustments include an increase in autonomy of debt management agencies, and a convergence in debt maturities and in debt issuing strategies. Issuance of inflation-indexed bonds and the use of interest rate swaps have increased strongly. While the share of government debt denominated in non-domestic currencies is falling, foreign ownership of euro area government debt is increasing markedly. The observed changes in recent years in part reflect the introduction of the euro and the related integration of European capital markets.

Short- and long-run tax elasticities: the case of the Netherlands

This paper provides estimates for the base elasticities of Dutch taxes, paying particular attention to differences between short-and long-term elasticities, and allowing for asymmetric adjustment. Estimates are presented for five tax categories for the period 1970-2005, after making appropriate corrections for effects of discretionary tax measures. The empirical results indicate that shortterm elasticities often are lower than long-term ones, notably when taxes are subdued. Consequently, shocks to tax revenues tend to be aggravated by the dynamics of short-term elasticities. Ignoring differences between short- and long-term elasticities contributes to revenue ‘surprises’ and an incorrect assessment of the fiscal stance. JEL Classification: H2, H62, H68fiscal indicators, income elasticity, Tax revenue, The Netherlands

Government risk premiums in the bond market: EMU and Canada

This paper focuses on risk premiums paid by central governments in Europe and sub-national governments in Germany, Spain, and Canada. With regard to the European governments, we are interested in how these premiums were affected by the introduction of the euro. Using data for bond yield spreads relative to an appropriate benchmark, for the period 1991-2005, we find that risk premiums incurred by central governments of EU member states respond positively to central government debts and deficits. This is consistent with the notion of market-imposed fiscal discipline. We find that German states and, among them, especially those usually receiving transfers under the German fiscal equalization system, enjoyed a very favourable position in the financial markets before EMU as their risk premiums did not respond to fiscal balances. This special status seems to have disappeared with start of EMU. Monetary union, therefore, imposes more fiscal discipline on German states. In contrast, Spanish provinces paid risk premiums related to their fiscal balances both before and after the start of EMU. Both German and Spanish sub-central governments paid fixed interest rate premiums over their national governments which became smaller after the introduction of the euro and are more likely to be interpreted as liquidity premiums. We also estimate empirical models of risk premiums for Canadian provinces for which we find financial market penalties of adverse fiscal balances and debt indicators. However, as in the case of Germany before EMU, those provinces that typically receive transfers under the Canadian fiscal equalization scheme have a more favourable bond market treatment than others. The evidence of market discipline at work in European government bond markets supports the notion that the no-bailout clause in the EU Treaty is credible. JEL Classification: E43, E62, H63, H74bail out, Fiscal Policy, government debt, Interest Rates, regional public finances

Determinants of Mortgage Debt Growth in EU Countries

This paper presents an analysis of mortgage debt growth in the EU-15 countries. Mortgage debt has risen quickly in many countries in recent years, reaching historically very high levels that increasingly attract the attention from both researchers and policymakers. While there are some papers on factors behind national mortgage debt developments, studies taking a broader approach, both regarding the number of countries included and the potential determinants of mortgage debt growth, are still lacking. This study aims at filling this gap and presents estimates for real mortgage debt growth for the EU-15 countries, using pooled regressions for the period 1982--2003. Special attention is paid to properly defining mortgage costs, for which an after-tax measure is constructed. The regressions indicate that real mortgage debt is affected by after-tax mortgage interest costs, by house prices, financial deregulation, and stock markets, while the effects of household disposable income and inflation are less evident. These results are shown to be relatively robust using alternative time periods, estimation techniques, and groups of countries, only Greece being somewhat of an exception. Finally, we pay attention to tax instruments for influencing housing market developments, notably the deductibility of mortgage interest payments from personal income tax. The paper concludes that tax instruments have the potential to contribute to more stable mortgage debt developments.Mortgage, European Union, tax policy,