Fiscal Adjustments and the Short-Term Trade-Off between economic growth and equality

This article examines the short-term economic impact of alternative fiscal adjustment strategies, with an especial focus on their effect on economic growth and income distribution Based on a sample of 53 adjustment episodes occurred in the fifteen EU Member States between 1960-2000, this article shows that different strategies of fiscal adjustment bring about different economic consequences. Expenditure-based adjustments that are preceded by bad economic and fiscal initial conditions, that are accompanied by a devaluation, and that succeed in cutting the least productive expenditures of the budget, are likely to have anti-Keynesian effects and to be expansionary. Nevertheless, they do so at the expense of increasing income inequality. The opposite is true for revenue-based consolidations. The nineties epitomize the story of expansionary fiscal consolidations via strong wealth and credibility effects, but also the rebirth of the trade-off between growth and equality, mediated by fiscal policy.Fiscal adjustment, economic growth, equality, budget composition.

La actualización del Programa Nacional de Reformas para alcanzar los objetivos de la Estrategia de Lisboa: ¿Cumple España con Europa?

Este análisis valora la actualización del Programa Nacional de Reformas (PNR) de España para cumplir los objetivos de la Estrategia de Lisboa, que fue aprobado por el Consejo de Ministros el pasado 13 de octubre y enviado a Bruselas, por segundo año consecutivo. Argumenta que España ha dado amplia cobertura a las áreas en las que la Comisión le pedía ser más explícito en su valoración del PNR original del pasado año, y ha sido muy transparente a la hora de juzgar el avance realizado en los diferentes objetivos. No obstante, España, como la mayoría de los países europeos, aún tiene que esforzarse más por incrementar la visibilidad de la Estrategia de Lisboa entre los ciudadanos. El análisis expone, en primer lugar, los rasgos básicos del Programa Nacional de Reformas (PNR) enviado por el Reino de España a la UE el año pasado. A continuación, describe la valoración que Bruselas realizó del mismo y señala los puntos fundamentales que España debía atender en la actualización del PNR en 2006. En tercer lugar, se valora en qué medida nuestro país ha dado satisfacción a todos esos puntos. Y, finalmente, se apuntan algunas áreas en las que todavía hay camino por recorrer para liderar en Europa el relanzamiento de la Estrategia de Lisboa. Este análisis concluye que España acaba de realizar a mediados de octubre de 2006 un ejercicio de rendición de cuentas sin precedentes en la historia de la política económica de nuestro país, al ofrecer una batería completa de seguimiento de los objetivos e indicadores principales, incluso si éstos no le eran favorables. En este sentido, nuestro país tiene todos los puntos para volver a convertirse en el país de referencia, reconocido por la UE como best practice en términos de accountability. Sin embargo, España ha avanzado poco en términos de apropiación y visibilidad de la Estrategia de Lisboa. Para ello, debe esforzarse aún más en involucrar a las Comunidades Autónomas, al Parlamento, a la comunidad científica y a los medios de comunicación durante todo el proceso de actualización del PNR que deberá producirse cada año

Mejorando la gobernanza económica en la UE

Este documento examina las críticas y soluciones formuladas en los últimos años con respecto a la gobernanza económica de Europa y formula algunas propuestas sobre el camino a seguir. En este ARI se estudian las críticas a la gobernanza económica de Europa en los últimos años, así como las soluciones planteadas al respecto, y se ofrece una breve reflexión sobre las ligeras mejoras introducidas en el Tratado de Lisboa (2007), aún por ratificar. El documento concluye con algunas reflexiones sobre las lecciones que podrían extraerse de la actual crisis financiera y formula algunas propuestas sobre el camino a seguir

Duration of Fiscal Budgetary Consolidations in the European Union

This paper examines the duration of fiscal consolidations among the fifteen EU Members States using data from the European Commission for the period 1960-2000. Using the duration model approach, we estimate the hazard and survivor functions of our series. Then we discuss what is the duration model that best fits our data, and which are the explanatory variables that best exp lain the probability of ending a fiscal consolidation period. We also deal with those aspects related to sample heterogeneity and the sensitivity of the results to different possible definitions of fiscal adjustment. We find evidence that the probability of ending a period of fiscal consolidation depends on the debt level, the magnitude of the adjustment, the extent of expenditure cuts, and the degree of cabinet fragmentation. We also find that under a stricter definition of fiscal consolidation, political variables, such as coalition size and election year, gain importance with respect to economic variables as predictors of the probability of ending a fiscal consolidation period.

The Trade-Off between Growth & Equality and the Economic Impact of Alternative Fiscal Adjustment Strategies in the EU

This paper examines the economic impact of alternative budgetary compositions with an special focus on the effect that different fiscal adjustment strategies have on growth and equality. Based on a sample of 53 adjustment episodes occurred in the fifteen EU Member States between 1960-2000, this paper shows that different strategies of fiscal adjustment bring about different economic consequences. Expenditure-based adjustments that are preceded by bad economic and fiscal initial conditions, that are accompanied by a devaluation, and that succeed in cutting the least productive expenditures of the budget, are likely to have anti-Keynesian effects and to be expansionary. Nevertheless, they do so at the expense of increasing income inequality. The opposite is true for revenue-based consolidations. The nineties epitomize the story of expansionary fiscal consolidations via strong wealth and credibility effects, but also the rebirth of the trade-off between growth and equality, mediated by fiscal policy.

Spatial distribution of R&D expenditure and patent applications across EU regions and its impact on economic cohesion

This article explores the spatial distribution of regional technology indicators in the EU over the last decade and its impact on cohesion. Thus, we find that public R&D spending and patent applications have converged among regions during the nineties. On the other hand, private R&D activities have diverged, as a result of an asymmetric expansion during the second half of the nineties. We show that when the dispersion of public R&D across regions diminished in the second half of the nineties, income disparities at regional level also decreased. Therefore, while technology policy based on efficiency criteria should remain as a policy tool for economic growth, this policy should be counterbalanced by R&D funds to the least developed regions to maintain economic cohesion.

Fiscal discipline and exchange rates : does politics matter?

We look at the effect of exchange rate regimes on fiscal discipline, taking into account the effect of underlying political conditions. We present a model where strong politics (defined as policymakers facing longer political horizon and higher cohesion) are associated with better fiscal performance, but fixed exchange rates may revert this result and lead to less fiscal discipline. We confirm these hypotheses through regression analysis performed on a panel sample covering 79 countries from 1975 to 2012. Our empirical results also show that the positive effect of strong politics on fiscal discipline is not enough to counter the negative impact of being at/moving to fixed exchange rates. Our results are robust to a number of important sensitivity checks, including different estimators, alternative proxies for fiscal discipline, and sub-sample analysis.info:eu-repo/semantics/publishedVersio

Politics and Public Investment

Virtually all countries need additional infrastructure such as roads, bridges, airports, telecommunications networks, power plants, and public transportation. With interest rates low—and, as a result, cheap financing for government spending—many analysts and policy advisors advocate increasing public investment in infrastructure to promote growth, which would both lower the debt-to-GDP ratio and expand an economy’s long-term productive capacity (IMF, 2014). However, even if shovel-ready projects have been identified and decision-making processes for public investment are working efficiently, investment still may not happen. Why? Political considerations get in the way. When elections loom, policymakers choose to provide immediate benefits to the electorate through lower taxes or increased income transfers—at the expense of public investment, which takes time to come to fruition. Other factors can also play a role in discouraging needed investment. For example, the political orientation of parties that form a government may favor a lower level of public investment. When there are no political or institutional constraints, public investment should be determined mainly by development needs—to meet the requirements of a growing population and to reduce infrastructure bottlenecks. Occasionally, public investment can be triggered by demand management considerations— for example, when an economy has spare capacity and policymakers believe investment would increase aggregate demand and raise employment in the short term. In reality, however, political considerations often strongly influence public investment decisions

Spatial distribution of R&D expenditure and patent applications across EU regions and its impact on economic cohesion

This article explores the spatial distribution of regional technology indicatorsin the EU over the last decade and its impact on cohesion. Thus, we find thatpublic R&D spending and patent applications have converged among regions duringthe nineties. On the other hand, private R&D activities have diverged, as a result of anasymmetric expansion during the second half of the nineties. We show that when thedispersion of public R&D across regions diminished in the second half of the nineties,income disparities at regional level also decreased. Therefore, while technologypolicy based on efficiency criteria should remain as a policy tool for economicgrowth, this policy should be counterbalanced by R&D funds to the least developedregions to maintain economic cohesion

How much is a lot? The maximum size of fiscal adjustments

The sizeable fiscal consolidation required to stabilize the debt-toGDP ratios in several countries in the aftermath of the global crisis raises a crucial question on its feasibility. To answer this question, we propose a methodology to identify historical fiscal adjustment episodes for countries that both needed and wanted to adjust in order to stabilize debt to GDP. We identify 91 adjustment episodes in 49 countries during 1945–2014. We find that countries typically improved their cyclically adjusted primary balances by close to 5 percent of GDP. We also observe that countries make substantial efforts to stabilize debt, but ease their primary balances once this objective is achieved, without getting back to their initial lower debt-to-GDP ratio. Consolidations were larger when sustained over time and the initial deficit was high. Fiscal adjustments were also larger when accompanied by monetary easing and, to a lesser extent, by an improvement in credit conditions