Implicit public debt thresholds: An operational proposal

Gauging the public debt-to-GDP ratio a country can sustain in the medium-run without putting fiscal sustainability at risk is a question of key relevance for policy-makers. Deviations from a safe level of debt should be watched over in order to take corrective measures. In this paper we make a proposal for an operational characterization of the “prudent debt level”. To do so, we use standard methods based on Vector Autoregressions to compute the probability that the public debt ratio exceeds a given threshold, using the Spanish case as an example. The resulting probabilities are highly and positively correlated with market risk assessment, measured by the spread with respect to the German bond. Our estimation of the “prudent debt level” is obtained as the debt-to-GDP ratio that maximizes the correlation between the probability of passing a pre-specified debt threshold and the spread. The so-obtained implicit debt threshold or “prudent debt level”, which is consistent with the medium-term debt-to-GDP ratio anchor of 60% of GDP, presents several advantages as a complement to existing DSA toolkits.     

Spillover effects of taxes on government debt: a spatial panel approach

It is claimed that tax policy is neither time- nor space-independent due to cross-border tax base mobility, which induces spillovers. Specifically, fiscal shocks in one country are supposed to have an impact on fiscal policies in other countries. Different types of taxes influence economies differently. This paper addresses the question of their impact on government debt. Within a framework of spatial econometric modeling, we evaluate the impact of capital, labor and consumption taxes on public debt in 34 European countries in 2002–2011, and find strong spatial spillovers. We show that a consumption tax and, to a lesser degree, a capital tax significantly affect the sovereign debt, and that the global relations play a leading role (i.e. dominate the local ones) in shaping fiscal policy.     

The role of deficit and debt in financing growth in West Africa

Empirical literature on debt–growth nexus and deficit-growth nexus indicate that government debt and fiscal deficit could have negative effects on economic growth after a certain threshold level. However, the impacts of debt and deficit on economic growth via the financial sector have not been thoroughly explored. Thus, this study examines the effects of debt and deficit on finance–growth nexus in West African region. It employs empirical strategies that account for various economic and econometrics issues. Evidence from the study reveals that the impact of financial development on growth varies with the levels of debt and deficit. Specifically, the marginal effects of financial development on growth turn negative when debt and deficit exceed the threshold levels of 48.6% and −13.5% of GDP, respectively. The implication of this study is that the financial sector is one of the channels through which debt and deficit exert their influences on economic growth. Thus, an increase in financial development would not produce the desirable long-run economic benefits unless it is accompanied by a reduction in government debt and fiscal deficit. Based on the findings, the study makes some policy recommendations.     

Recurrent explosive public debts and the long-run fiscal sustainability

In this paper, the dynamics of debt-to-GDP ratio is analyzed for three countries with long fiscal records: Sweden, the UK and the US. A novel procedure of testing for recurrent explosive behavior is implemented in order to identify episodes of explosive debt dynamics. The detected periods of explosive debt growth can be attributed to changes in economic, political and institutional environment which required active policy responses subsequently followed by fiscal adjustments. The results of the study indicate that the long-run sustainability found for these countries in other studies can be interpreted as the outcome of fluctuating fiscal policies, some of which were unsustainable.     

Macroeconomic impact of public debt and foreign aid in Sri Lanka

Accumulation of public debt in Sri Lanka is raised significantly since the independence. It exceeded 100% of gross domestic products (GDP) in the late 1980s and the early 2000s. Although it has been declined in the recent past and becomes 79.3% of GDP in 2016; the high level of debt in a weak fiscal position of the small economy Sri Lanka is an issue of concern. In this backdrop, this paper examines the impact of public debt and foreign aid on income, price level and interest rate in Sri Lanka for the post-reform period. It is found that public debt in general and foreign debt, in particular, depresses income and stimulates price level. Domestic debt has some impact on the price level. On the other hand, foreign aid has a deleterious effect on both the income and price level. The foreign debt and aid have raised interest rate both in the short-run and in the long-run, while no significant impact of the domestic debt on interest rate is found. Based on these findings, the paper elaborates on some long-term measures for reducing the dependence on debt and aid in Sri Lanka.     

The size and structure of China's government debt

This paper analyzes the size and structure of China's government debt. In addition to explicit government debt, we consider three types of government contingent liabilities: local government debt, university debt, and state banks’ nonperforming loans. The size of each types of debt is estimated and the reasons for the emergence of each type of debt are analyzed. International comparisons are made and it is found that China's government debt is larger than many other developing countries. To insure fiscal sustainability and to leave rooms for future expansionary fiscal policies, the government should reduce contingent liabilities.     

Issues in the theory of sovereign debt and post-covid workouts

With a number of emerging markets and particularly low-income countries experiencing debt distress after COVID, there is a lively policy debate. At the root of the debate is the fundamental question of what incentivizes a sovereign has to repay its debts; without answering this question, it is difficult to appraise policy options. The tension between developing a realistic model of sovereign debt and having an elegant self-contained general equilibrium macroeconomic model are familiar from corporate finance. The general equilibrium approach has important philosophical implications, but the more targeted corporate-finance-like approach is needed for most practical problems that policymakers face.     

美欧债务危机应对路径的国际比较研究

美欧发达国家政府的债务危机问题已越来越严重,逐渐引起了包括发展中国家在内的世界各国的广泛关注。面对此次危机,美欧各国都相继采取了各种财政、货币政策措施加以应对,由于各国国情各异,采取的措施和取得的效果也不同。通过分析美欧国家债务危机产生的原因,列举美欧应对危机采取的措施,并对其进行分析比较,得出了主权债务危机给中国发展的几点启示。     

Fiscal stringency and fiscal sustainability: Panel evidence from the American state and local governments

Most state (and local) governments in the U.S. operate under formal fiscal rules which limit their ability to run budget deficits and resort to debt financing. A priori, one would expect to find evidence in favor of an intertemporally balanced budget, or fiscal sustainability, for these states, especially those characterized by a relatively high degree of fiscal stringency. We test this hypothesis for a panel of 47 state–local government units (1961–2006) using four budget balance definitions and several subsamples defined based on regional classifications, or presence of certain balanced budget requirements (BBRs). Our results, obtained from panel estimation techniques that allow for general forms of serial and cross-sectional dependence, suggest that a sufficient condition for “strong” sustainability is consistently satisfied for the full sample and all subsamples in relation to balances that include special funds and/or federal grants. However, we find evidence consistent with the “weak” version of sustainability for the full sample and some regional subsamples (particularly Far West dominated by California) in at least one of the two balances that exclude these items. Finally, the BBRs seem to matter only in relation to the sustainability of the more narrowly defined balances. We discuss the implications of these findings for the role of fiscal rules and federal grant policies.     

Towards expenditure rules and fiscal sanity in the euro area

The study demonstrates the key role of expenditure policies in explaining fiscal developments during EMU in the euro area, its three largest members and four “macro-imbalances” countries. It compares actual primary expenditure trends with those that would have prevailed if countries had followed neutral policies based on expenditure rules since the start of EMU. Moreover, the implications for debt trends are calculated. Results show that all sample countries except Germany applied expansionary expenditure policies already before the crisis. Consequently, expenditure and debt paths were much higher compared to a counterfactual neutral expenditure stance. Rule-based expenditure policies could have led to much safer fiscal positions much more in line with the EU's Stability and Growth Pact. An empirical analysis of the determinants of countries’ expenditure stance confirms the need for stronger fiscal rules and institutions in the euro area.     

Reforming public debt governance in Turkey to reach debt sustainability

The paper argues that the achievement of sustainability of public debt requiring the fulfillment of solvency and liquidity conditions in countries for which real interest rates are above the real growth rates is challenging and difficult. Since solvency is a rather complex concept and its governance is difficult and delicate, the paper maintains that such countries could try to achieve the sustainability of public debt by delegating the tasks of securing the observance of solvency and liquidity conditions to fiscal councils (FC) that need to be formed as autonomous public institutions with sufficient financial and technical resources. In Turkey FC needs to be assigned the further task of improving policymakers’ incentives to opt for sound government procurement and taxation policies that would lead to the achievement of efficient allocation of resources and elimination of corruption and nepotism in the economy.     

Fiscal deficits under financial pressure and insolvency: Evidence for Italy,Greece and Spain

This article attempts to re-evaluate the sustainability of the fiscal deficit as well as the long-run macroeconomic relationship between government spending and revenues for three South-European economies under financial market pressure and insolvency; Italy, Greece and Spain. The empirical analysis uses annual data from 1970 to 2010 and employs various cointegration techniques to account for possible linear and nonlinear effects in fiscal policy actions. The evidence for all three countries suggests that, allowing for structural break, (i) the fiscal deficits are weakly sustainable in the long-run, (ii) the spend-and-tax hypothesis is supported and (iii) the budgetary adjustment process is asymmetric in Italy and Spain.     

印度积极应对世界金融风暴的挑战

本文联系印度经济近几年高速增长和国民经济结构不平衡的背景,探讨当前世界金融风暴对印度经济影响的程度,着重分析印度抵御世界金融风暴冲击的政策措施。     

Public sector efficiency in the design of a euro-area social benefit scheme

This study examines the importance of public sector efficiency in the design of a euro area-wide social benefit scheme. Our results reveal large-scale inefficiencies in the use of funds allocated to the scheme during the great recession and euro area sovereign debt crisis that followed, with member states wasting on average 34.6% of funds allocated to it. We therefore propose that to ensure the smooth functioning of the scheme, the fiscal union will first of all have to strengthen it at the national level by improving efficiency in the use of funds by governments. We show that this can be achieved by providing a framework for the transfer of the “critical success factors” in the policies implemented by the most efficient administrations. Furthermore, we show how public sector efficiency considerations can help ameliorate the problem of moral hazard associated with a centralized insurance scheme.     

The language and techniques of multiyear restructing of sovereign debt: Lessons from the Mexican experience

While many economists assure that the restructing of sovereign external debt is a straightforward matter, there are many practical details that bankers must address in negotiating a deal. The problems are compounded in a multiyear restructing, where a new frame of reference had to be established for the problem of debt restructing, including new concepts for included and excluded debt, various schedule for amortizations, monitoring, and conditionality procedures, and pricing considerations. The end result achieved for Mexico can be used as starting point for other debt restructing discussions, at least from a technical point of view.     

The impact of fiscal shocks on real GDP and income inequality: What do Australian data say?

This paper examines the impact of three fiscal policy shocks on per capita real GDP and income inequality in Australia during the period 1965–2014. A small structural vector autoregressive (SVAR) model is constructed for an open economy for contemporaneous identification and estimation purposes. Based on the evidence of one cointegrating vector among the variables, a structural vector error correction (SVEC) model is specified for the long run. Direct taxation, indirect taxation receipts and government spending are identified as permanent fiscal policy shocks. The convergent use of two different models (SVAR & SVEC) strengthens the credibility of the results. The results have three key policy implications. First, a reduction in direct taxation receipts increases per capita real GDP without increasing income inequality. Second, a reduction in government expenditure significantly increases income inequality. Third, the adverse effect of indirect taxation receipts on income inequality is greater than the redistributive effect of government expenditure, which questions the widely held fiscal policy strategy of using indirect taxation to finance redistributive expenditure.     

When can fiscal consolidation be expansionary? Evidence from a small open economy

The paper focuses on the implications of stabilisation policies in a small open economy that were introduced to reverse burgeoning public sector deficit. In particular, I examine the hypothesis that such stabilisation policies can actually have expansionary effects on business investment. While this goes against the standard Keynesian view that the institution of more conservative fiscal and monetary programmes will, at least initially, lead to deflationary outcomes, there are important reasons for believing that such policies will in fact be expansionary. Such predictions are made in a dynamic setting, which weighs the short-term consequences of curtailed government expenditures against their long run implications for future increases in government spending, a reduction in debt burdens and greater stability. With the introduction of expectations, the positive implications of such policies can be immediate. This paper tries to clarify the ‘expectational crowding-in’ process and investigates whether the effects of stabilisation on business investment were due to that process or to other features of the stabilisation programmes. The policy message from my analysis is that budget consolidations producing expansionary effects are more than a theoretical construction. The experience of small open economies mentioned above should be taken into account also in policy making. Empirical findings indicate that EMU countries may need to carry out budgetary consolidations to dispose of room for manoeuvre against first the fiscal constraints in smoothing the business cycle imposed by the Stability Pact, and second, the looming budgetary implications of ageing populations.     

Lebanon's economic reconstruction after the war: A bridge too far?

Since the onset of the Civil War in 1975 Lebanon has experienced burgeoning fiscal deficits and an unsustainable public debt overhang. Much of this arose from the loss of revenues during the period of the Civil War 1975–1990 and attempts to maintain basic public expenditure, while from 1990 to 2006 this reflected post-Taif rebuilding and reconstruction of key infrastructure with limited revenue capacity. Considerable progress from the 1990s had been achieved in rebuilding the shattered economy from both public and private international and domestic sources, but its legacy is a huge public debt and a servicing requirement that currently absorbs alone almost 30 per cent of total government revenue and is the highest in the world on a per capita basis. While the need to reduce this debt to a sustainable level would be daunting enough in itself, Lebanon's fiscal predicament was further compounded by the outbreak of war with Israel during July–August 2006. The consequence of this 34-day war was the devastation of residential property, vital infrastructure, loss of agricultural production, industrial production, exports, environmental damage, the collapse of tourism and a further erosion of the influence and power of the central government. Estimates of the direct and indirect costs for Lebanon of this relatively brief but devastating war conservatively vary from US$ 10–15 billion. The implications of such reconstruction and rebuilding costs for the budget and public debt are potentially calamitous for Lebanon which is already struggling under the weight of debt overhang and its servicing. A key question is whether Lebanon can tackle this enormous task in insolation.This paper explores the background to the fiscal crisis, identifies from available literature the extent, nature and cost of the war damage, analyses the options available to the authorities in rebuilding the economy and highlights key policy issues and measures that will be required if a sustainable economic recovery is to be achieved. Despite its demonstrated and remarkable resilience to past trauma the paper concludes that the fiscal crisis makes it impossible for Lebanon to tackle the reconstruction and rebuilding task on its own and particularly in the wake of the events of summer 2006. The country will require substantial and ongoing financial support from international lenders and donors. The success of these efforts in the case of Lebanon is of particular interest as it could well be a microcosm of possible future outcomes for the region more generally.     

The political budget cycles in the presence of a fiscal rule: The case of farm debt waivers in India

Farm debt waivers which are meant to be a one-time settlement of loans have become common in India. This paper finds, after controlling for variables related to farming distress, that the timing of waiver announcements by state governments between 2001-02 and 2018–19 is associated with the timing of elections. This points toward a pattern of policy manipulation that suggests election-year targeting of the largest special interest group in India, namely farming households. The debt waivers, either announced as policies by incumbent governments prior to upcoming elections or as election pledges by political parties which are fulfilled after winning elections, are unanticipated shocks to government revenue expenditure. We find that the waivers are associated with an increased revenue deficit, which is accommodated by a nearly 1/3rd cut in capital outlay to control the fiscal deficit, given the presence of a fiscal rule. Given its path dependence, lower capital expenditure also reduces the quality of government spending in subsequent years.     

Financial Crisis and Sustainability of US Fiscal Deficit: Indicators or Tests?

Whether or not budgetary policies are sustainable and can be conducted without creating the potential for government bankruptcy is a central question for macroeconomic analysis. In this paper, we show that indicators and tests to assess government solvency should not be used alternatively. We lay out a simple and intuitive procedure to integrate simultaneously the results from the two approaches to fiscal sustainability. Indicators are forward looking, for they are based on published forecasts, thus reacting to a set of current and expected future conditions in fiscal-policy making. Tests, by contrast, are backward looking, for they are based on a sample of past data. In the event of conflicting results, indicators may signal the occurrence of a structural change in policy, which may reverse the predictions of tests. Whether the results from indicators or from tests should be given priority in the assessment of the sustainability of public debt will thus depend on the structural stability of the historical data generating process of the primary surplus. Only in the absence of a structural break in the stance of fiscal policy, the potential warning predictions of fiscal indicators should be interpreted as merely reflecting transitory factors to be eventually reversed. An application to U.S. post-World War II historical data, from 1948 to 2016, and forecasts, from 2017 to 2027, demonstrates the empirical relevance of the proposed comprehensive approach and helps add new insights to the evaluation of the U.S. fiscal position. In particular, our results suggest that the potentially unsustainable course of U.S. fiscal policy from 2008 onwards, advocated by the use of fiscal indicators, reflects systematic—not cyclical—factors. The main policy implication is that deficit increases in the U.S. from 2008 onwards cannot be regarded as a transitory phenomenon and hence do entail an urgent need for a structural change in the future stance of budgetary policy.