Fiscal performance and income inequality: Are unequal societies more deficit-prone? Some cross-count

Summary for non-specialistsA bias towards running deficits is an entrenched feature of fiscal policy making in most developed economies.Our paper examines whether this tendency is in any way associated with the personal distribution of income of a country. It takes inspiration from theoretical work according to which distributional conflicts may give rise to deficit spending or to delayed fiscal adjustment. Although these theories have been around for years the empirical literature on the determinants of fiscal performance has so far paid little or no attention to the possible role played by different degrees of income inequality.Our results suggest that this neglect was not justified. Using cross-country data we find evidence that a more unequal distribution of income can weigh on a country's fiscal performance. These findings can be relevant in the aftermath of the post-2007 global financial and economic crisis in particular when designing fiscal exist strategies. The success and sustainability of such strategies may inter alia depend on their distributional implications.Income distribution fiscal performance Gini coefficient panel regression Larch BEPA

Testing the EU fiscal surveillance: How sensitive is it to variations in output gap estimates?

Real-time estimates of the potential output are essential in the EU fiscal surveillance framework. They are used for the calculation of the cyclically-adjusted budget balance, one of the main indicators in the assessment of the fiscal performance of EU Member States. Our paper examines whether and how different degrees of smoothness of potential output would have supported different decisions in the EU budgetary surveillance in terms of both timing and substance. The results of our simulations show that, the accuracy of the diagnostic instruments especially those that measure the risk of breaching the 3% of GDP reference value of the Treaty is surprisingly robust. Only a very high and excessive degree of smoothing of potential output would significantly reduce the reliability of the surveillance indicators. In the light of our results a somewhat higher degree of smoothing compared with the current practice would not seem to be harmful for EU fiscal surveillance. During economic upturns it would guaranty a higher degree of caution by signalling larger and possibly longer periods of economic 'good times' which would in turn warrant more fiscal consolidation.EU fiscal surveillance, potential output, output gap, Langedijk, Larch

A supplier development service for the East Midlands feasibility study

This study assesses the need for a Supplier Development Service (SDS) in the East Midlands. Research was undertaken into previous and current programmes of this type and sets out a proposed model for the service

Comparative Advantage and Skill-Specific Unemployment

We introduce unemployment and endogenous selection of workers into different skill-classes in a trade model with two sectors and heterogeneous firms. This allows us to study the distributional consequences and the skill-specific unemployment effects of trade liberalization. We show that the gains from trade will be distributed very unequally. While unskilled workers loose in terms of real wages and employment levels in the skilled labor intensive sector, skilled workers loose in terms of real wages and unemployment levels in the unskilled labor intensive sector. However, the inequality of workers between sectors is much larger for skilled labor than for unskilled labor. On average, unemployment among unskilled workers increases when a skill-abundant country opens up to trade.comparative advantage, heterogeneous firms, labor market frictions, unemployment, trade liberalization

Improving fiscal policy in the EU: the case for independent forecasts

The evidence from several euro-area countries demonstrates the existence of a forecast bias in the budgetary process, which negatively affects fiscal performance. To remedy this bias, we suggest that forecasting should be assigned to an authority independent from the ministry of finance and the government, with the task of producing unbiased projections of growth and other variables crucial for the budgetary process.independent forecasts, taxation, fiscal policy, forecast bias, forecasts, Jonung, Larch

The Cyclically Adjusted Budget Balance in EU Fiscal Policymaking. Love at First Sight Turned into a Mature Relationship

The cyclically adjusted budget balance (CAB) plays a key role in the EU fi scal surveillance framework. It started off in a supporting role in the shadow of the headline defi cit and, before long, turned into the linchpin of the rules of the Stability and Growth Pact. The steep ascent was driven by high expectations which, with the passing of time, were only partly met. The everyday practice of the EU fi scal surveillance rapidly revealed a number of caveats of the CAB which, at times, hampered the effectiveness of fi scal surveillance. This paper provides a comprehensive review of the changing fortunes of the CAB in the EU fi scal surveillance framework. It portrays its main shortcomings and the way they are dealt with in practice.Cyclically adjusted budget balance, Stability and Growth Pact, Fiscal Policy

A supplier development service for the East Midlands feasability study

This study assesses the need for a Supplier Development Service (SDS) in the East Midlands. Research was undertaken into previous and current programmes of this type and sets out a proposed model for the service

Received wisdom and beyond: Lessons from fiscal consolidations in the EU

The paper examines consolidation episodes in the EU since 1970 with a view to shedding light on the factors that determine the success or failure of fiscal adjustment. Compared to the existing literature on successful fiscal consolidations we add a number of new dimensions. Three deserve particular attention. Firstly, we explore a broader set of potential ingredients of the recipe for success. In addition to the composition of adjustment, which has extensively been examined in the literature, we consider further elements such as the quality and strength of fiscal governance and the implementation of structural reforms. Secondly, our analysis seeks to differentiate between at least two different types of consolidation episodes, one in which a relatively big fiscal correction is implemented in a short period of time, dubbed 'cold shower' consolidation, as compared to more gradual episodes of adjustment. Thirdly, we check whether the 'recipe for success' changed over time. Our analysis broadly confirms the results established in the literature for what concerns (i) the conditions triggering a consolidation episode and (ii) the composition of adjustment, with minor but important qualifications related to the role played by government wages. In addition it provides evidence that well-designed fiscal governance as well as structural reforms improve the odds of both starting a consolidation episode and achieving a lasting fiscal correction. Our analysis also shows that the composition of successful and unsuccessful consolidation has become more similar over time and that other discriminating factors such as fiscal governance and structural reforms turn out to make an increasing difference for success.Fiscal consolidations, fiscal rules, budgetary procedures, structural reforms

Migration, Trade and Unemployment

A source of anxiety of policy makers and the public in general is the detrimental impactof globalization and immigration on unemployment. The transitory restrictions forworker migration after the EU enlargements of 2004 and 2007 exemplify the supposednegative effect of immigration on labor markets. This paper aims to identify the effectsof immigration alongside trade on unemployment taking into account the substitutabilityof worker and goods flows. We use data from 24 OECD countries over the periodfrom 1997 to 2007 and employ instrumental variables fixed effects and dynamic panelestimators in order to account for unobserved heterogeneity as well as the potentialendogeneity of migration flows and the high persistence of unemployment. We find asignificant negative effect of immigration on unemployment on average.Migration, unemployment, international trade, fixed effects instrumental variable panel estimators, dynamic panel estimators

Fiscal rules, inertia and discretionary fiscal policy

In current practice, changes in the cyclically-adjusted budget balance (CAB) are generally interpreted as reflecting the effort of discretionary fiscal policy. This paper shows that such an interpretation is not a sufficiently accurate description of the behaviour of fiscal policy, and, in some cases, it may even conceal an important deficit bias. Specifically, as growth projections are an important building block of budgetary plans, optimism in forecasting growth, coupled with pervasive lags and inertia in the implementation phase of the budget, will result in a fiscal expansion, even in the absence of discretionary measures.fiscal policy, cyclically-adjusted budget balance, potential output, forecast accuracy, policy inaction, Larch, Salto