Top PDF Measuring the Success of Fiscal Consolidations

Measuring the Success of Fiscal Consolidations

Measuring the Success of Fiscal Consolidations

We uncover the result that such fiscal episodes tend to bring about reductions in debt ratios only if economic growth is strong and the output gap increases. Furthermore, the size of the fiscal consolidations does not differ much in terms of the share of the consolidation that is done via the expenditure side of the budget. Finally, evidence suggests that the change in the cyclically adjusted primary balance contributes positively for the success of a fiscal consolidation and the opposite applies if the latter is more based on the revenue side. Also duration matters and it contributes positively to the probability of success of a fiscal consolidation episode.
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Measuring Success by Degrees:

Measuring Success by Degrees:

This report — Measuring Success by Degrees — complements No Time to Waste by providing a status report for states on college completion. More importantly, it shows what is at stake if states do not begin measuring success by degrees — and certificates. No Time to Waste provides recommendations on policies and practices that states can use to increase graduation rates and the numbers of college degrees and high-quality career certificates awarded each year. Its main recommendations follow in the Appendix. Further information and the complete No Time to Waste report are available at www.sreb.org.
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Defining and measuring project success

Defining and measuring project success

management success and software project product success and proposes a set of dimensions for defining and measuring software project success. An extension of the DeLone and Mclean (1992, p. 87) model is proposed as a base model for software project success. Even though this investigation is only a first step in defining project success, it is expected to be of interest to both Information System and Project Management researchers and practitioners.

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Fiscal Federalism, Fiscal Consolidations and Cuts in Central Government Grants : Evidence from an Event Study

Fiscal Federalism, Fiscal Consolidations and Cuts in Central Government Grants : Evidence from an Event Study

failed consolidation attempts. The temporary nature of the revenue hikes is not readily evident from the Alesina-Perotti studies because their analy- sis does not include the periods following the actual consolidation attempts. Panel O shows that unsuccessful attempts seem to be characterized more by an increase in sub-central governments' revenues. Breaking down revenues into taxation and other charges (including user charges), as shown in panels P-S, one can see that there is a tendency for sub-central governments to raise taxation 15 in the period of the consolidation. There is also a tendency for user charges and fees to be somewhat lower in the case of successful con- solidations, although the di erence is barely signi cant. We conclude that revenue adjustments appear to contribute little to the cumulative pro le of scal consolidations at central or sub-central levels. Furthermore, where rev- enue adjustments are present, they appear to be more likely to be associated with unsuccessful consolidation attempts and/or to be temporary measures. What seems to matter more, in terms of the success of scal consolidation attempts, is the role played by intergovernmental grants and transfers. Panel T shows the extent to which central governments adjust sub-central grants around the time of scal consolidations. It is important to note that all the countries in our sample exhibit some degree of vertical imbalance in that expenditures at the sub-central tier exceed own-source revenues with the di erence being nanced by central government grants 16 . Any changes in
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Macroeconomic effects of fiscal consolidations in a DSGE model for the Euro Area: does composition matter?

Macroeconomic effects of fiscal consolidations in a DSGE model for the Euro Area: does composition matter?

Motivated by a growing consensus that the success of a fiscal consolidation depends on the "quality" of fiscal adjustments, i.e. on shifts in the budget decreasing less pro- ductive forms of expenditure (Romero-Ávila and Strauch (2008)), we simulate several experiments of fiscal consolidations with alternative changes in the budget composition. Our main results may be summarized as follows: (i) The success — dimension and sustainability — of fiscal consolidations, either via public spending reductions or em- ployment costs reduction, decreases with their degree of productivity; (ii) Consolida- tions through contractions of weakly-productive or, alternatively, non-productive public spending, generate short-run contractions of output; however, output falls twice as much in the case of weakly-productive spending consolidations, as investment falls, in con- trast to what happens in the case of unproductive spending consolidations; (iii) If the consolidation is conducted with a structural change in the fiscal budget in favor of more productive spending — a cut in weakly- (or non-) productive spending together with a symmetric increase in highly-productive spending — the model predicts a positive short- run impact on output; there is a positive impact on output as long as highly-productive spending increases by 70 percent of the reduction in the weakly-productive spending (or 40 percent of the cut in non-productive spending); (iv) Consolidation through a re- duction in weakly-productive public employment yields results that are similar to those of a reduction in weakly-productive public spending; however the negative effects on output decrease with the degree of labor market competition and can even turn out to be positive in a perfect competition scenario; (v) The less productive is the public ex- penditure that is cut, and the more competitive the labor market is, the more favorable is the reaction of private investment.
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Fiscal consolidations in the Central and Eastern European countries

Fiscal consolidations in the Central and Eastern European countries

To evaluate the success of fiscal consolidations, some authors estimate Logit and Probit specifications. For instance, McDermott and Westcott (1996) estimate Logit models for the OECD countries. The dependent variable assumes the value one if the episode is successful and the value zero if the episode is not successful. Additionally a dummy explanatory variable takes the value one if at least 60 per cent of the fiscal adjustment results from a decrease of public spending and takes the value zero otherwise. There is by now a wide range of comparable studies. Alesina and Perotti (1995, 1997), Giavazzi and Pagano (1990, 1996), McDermott and Wescott (1996), Alesina and Ardagna (1998), Perotti (1998) and Giavazzi, Jappelli and Pagano (2000), and EC (2003) present empirical results concerning the composition and size determinants of successful adjustments. On the other hand, Heylen and Everaert (2000) empirically contest the idea that current expenditure reductions are the best policy to get a successful fiscal consolidation. Von Hagen, Hughes-Hallet and Strauch (2001) and EC (2003) also provide additional descriptive analysis and case studies.
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Duration of Fiscal Budgetary Consolidations in the European Union

Duration of Fiscal Budgetary Consolidations in the European Union

The integration into the European Monetary Union originated a wave of fiscal adjustments around Europe. This called the attention of some prominent scholars who started to study aspects such as the type of fiscal adjustments, the quality of these adjustments and the determinants of successful consolidations. For example, according to McDermott and Wescott (1996) and Alesina and Perotti (1995, 1996a, 1996b, 1998), Buti and Sapir (1998) and Von Hagen, Hallett and Strauch (2001), fiscal adjustments that rely primarily on spending cuts in transfers and in the government wage bill can be expansionary (anti-keynesian effect) and have a better chance of success than do fiscal adjustments that rely primarily on tax increases and cuts in public investment (which tend not to last and are contractionary). With respect to the best moment to introduce a consolidation and the speed of the adjustment, it has been affirmed that fiscal consolidations are usually started in periods of positive economic growth (Von Hagen, Hallett and Strauch, 2001), and that fast tax- reforms accompanied by deep labour market reforms increase the chances of success of the fiscal adjustment (Lindbeck, 1994).
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Uncertain Fiscal Consolidations

Uncertain Fiscal Consolidations

will remain high for four quarters, raising real wages and marginal costs. Firms raise prices in anticipation of this sustained rise in marginal costs; inflation jumps up and gradually declines over the course of the consolidation. While the initial jump helps deflate the real value of government debt, the active monetary policy raises real interest rates in response to the rise in inflation, offsetting some of the debt reduction. In the no-RS case, consolidations arrive as i.i.d. shocks. Price-setters are repeatedly surprised by the sustained increase in marginal costs and inflation. Active monetary policy does not raise real interest rates by as much and the repeated inflation surprises drive a wedge between ex-ante and ex-post real interest rates, making the consolidation more effective in stabilizing debt. The uncertainty over the duration of fiscal consolidations may affect their likelihood of success.
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Received wisdom and beyond: Lessons from fiscal consolidations in the EU

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.
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Fiscal Consolidations in Advanced Industrialized Democracies: Economics, Politics, and Governance

Fiscal Consolidations in Advanced Industrialized Democracies: Economics, Politics, and Governance

The qualification is that the success of a consolidation program is conditional on its legislative passage; we observe the consequences only of consolidation programs that are actually passed in the legislature, either through annual budgets, special crisis packages or both. In order for a crisis package to pass in the first place, it may be necessary to combine spending cuts and tax increases in a way considered fair or reasonable by (a majority of) voters. This observation can also help explain the question raised by Alesina and Perotti (1997): why, if consolidations based on spending cuts are so effective, do not all consolidation efforts focus on this? The reason could easily be that consolidation efforts focused solely on expenditure cuts, the incidence of which almost by necessity will fall primarily on those dependent on the state for their livelihood, can be politically infeasible, a point reinforced by former Prime Minister of Sweden, Göran Persson, in his account of the Swedish consolidation experience of the 1990’s (Persson, 2009). According to Persson, the consolidation package consisted of two-thirds spending cuts and one third tax increases, a mix necessary for popular support of the entire policy of consolidation.
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Can fiscal consolidations be expansionary in the EU? Ex-post evidence and ex-ante analysis

Can fiscal consolidations be expansionary in the EU? Ex-post evidence and ex-ante analysis

Overall, although cross-country empirical analyses permit to shed light on several features of fiscal consolidations, the results arising from such analyses need to be interpreted with caution for a number of reasons. First, there are problems in measuring and defining fiscal consolidation episodes. In particular, relying on deficit-based measures tends to exclude fiscal reforms with a limited impact on current budget balances but potentially large effects on long-term public finances and on permanent income, such as pension reforms. Second, existing empirical analyses quite often fail to take properly into account relevant factors, such as developments in monetary and exchange rate policies, that contribute to shape the links between fiscal consolidations and economic activity. 6 Third, when interpreting the links between fiscal policy and economic activity spurious relations and simultaneity issues are to be taken into account. The output expansion following fiscal consolidations may be due to independent cyclical developments rather than to the factors outlined in the previous section, especially when fiscal consolidations are undertaken in weak phases of the cycle. Moreover, the relation between fiscal consolidations and short run growth may go the other way round: the expectation of a recovery (stronger during the trough of the cycle) may increase the likelihood of public finance consolidation. 7 Finally, there is the possibility that results are driven to some extent by a sample selection bias. Most of the episodes of fiscal consolidations that, once started, have been aborted due to very adverse growth consequences are by definition missing from the samples used in cross-country analyses.
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Fiscal Consolidations in the Central and Eastern European Countries

Fiscal Consolidations in the Central and Eastern European Countries

To evaluate the success of fiscal consolidations, some authors estimate Logit and Probit specifications. For instance, McDermott and Westcott (1996) estimate Logit models for the OECD countries. The dependent variable assumes the value one if the episode is successful and the value zero if the episode is not successful. Additionally a dummy explanatory variable takes the value one if at least 60 per cent of the fiscal adjustment results from a decrease of public spending and takes the value zero otherwise. There is by now a wide range of comparable studies. Alesina and Perotti (1995, 1997), Giavazzi and Pagano (1990, 1996), McDermott and Wescott (1996), Alesina and Ardagna (1998), Perotti (1998) and Giavazzi, Jappelli and Pagano (2000), and EC (2003) present empirical results concerning the composition and size determinants of successful adjustments. On the other hand, Heylen and Everaert (2000) empirically contest the idea that current expenditure reductions are the best policy to get a successful fiscal consolidation. Von Hagen, Hughes-Hallet and Strauch (2001) and EC (2003) also provide additional descriptive analysis and case studies. Table 2 summarises the main empirical literature using Logit and Probit analyses to assess the success of fiscal consolidations.
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Monetary developments and expansionary fiscal consolidations : evidence from the EMU

Monetary developments and expansionary fiscal consolidations : evidence from the EMU

This paper provides new insights about the existence of expansionary fiscal consolidations in the Economic and Monetary Union, using annual panel data for 14 European Union countries over the period 1970-2012. Different measures for assessing fiscal consolidations based on the changes in the cyclically adjusted primary balance were calculated. A similar ad-hoc approach was used to compute monetary expansions, in order to include them in the assessment of non-Keynesian effects for different budgetary components. Panel Fixed Effects estimations for private consumption show that, in some cases, when fiscal consolidations are coupled with monetary expansions, the traditional Keynesian signals are reversed in the cases of general government final consumption expenditure, social transfers and taxes. Keynesian effects prevail when fiscal consolidations are not matched by monetary easing. Panel probit estimations suggest that longer and expenditure-based consolidations contribute positively for its success, whilst the opposite is the case for tax-based ones.
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Fiscal consolidations and banking stability

Fiscal consolidations and banking stability

In principle, there might be potential problems of endogeneity arising from the inclusion of variables measuring discretionary fiscal adjustment on the RHS of our regression equation. First, due to measurement errors these measures might not be orthogonal to developments of the business cycle which may also be reflected in our banking stability variable. This could result in biased estimates due to problems of reverse causality. However, using the action-based dataset of fiscal consolidation proposed by (see Devries et al. (2011)) described in Section 3 should to a large extent limit such problems since the dataset was explicitly built with the aim of capturing purely exogenous and unsystematic (i.e. unrelated to cyclical conditions) fiscal consolidation efforts. Moreover, we include the output gap to capture the effects of the business cycle, a measure that is widely used in the literature. Second, there might be episodes of fiscal consolidation that follow a financial shock such as a banking crises which again would be reflected in our LHS variable and potentially cause problems of reverse causality in our regression analysis. We address this problem by explicitly controlling for financial and banking crises using a dummy variable approach (see Section 4.1). Moreover, we employ a dynamic specification which controls for the lagged effect of the capital ratio and therefore should further reduce potential problems of reverse causality.
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How long can austerity persist? The factors that sustain fiscal consolidations

How long can austerity persist? The factors that sustain fiscal consolidations

exchange rates as currency devaluations increase the likelihood of success. Heylen and Everaert (2000) suggest that currency devaluations prior to consolidation episodes may be beneficial to their success, but only under the right composition of fiscal adjustment – otherwise it is counterproductive. Also a favourable international economic environment (high economic growth) has generally been assessed as sustaining fiscal consolidations (Alesina and Perotti (1995) and Heylen and Everaert (2000)). There is a lack of empirical evidence, to the best of our knowledge, on the impact of private sector balance sheets and wider financial conditions in sustaining consolidations. For some euro area members, with on-going private sector balance-sheet adjustment and financial sector restructuring, weak growth prospects and large current account deficits, the ability to change course – and not simply the government’s willingness to make the adjustment – will matter. The literature suggests that consolidations are more difficult after financial crises and depend crucially on the resolution of problems in the banking sector (Baldacci, Gupta and Mulas-Granados (2010); and Barrios et al. (2010)). In identifying financial factors, we follow the IMF (2008 and 2009), which identified fifteen recessions that were associated with (i.e. followed) financial crises. In doing so they relied on the narrative analysis of Reinhart and Rogoff in a series of recent papers (2008, 2009) describing banking crises over the past four decades. That analysis built on work identifying banking crisis episodes from the World Bank – see Caprio, Klingebiel, Laeven and Noguera (2003).
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The importance of institutions in expansionary fiscal

consolidations. A critical assessment of non-Keynesian effects

The importance of institutions in expansionary fiscal consolidations. A critical assessment of non-Keynesian effects

(ii) Turning to the empirical side of the problem, it would be a failure, however, to claim that countries with a relatively complex and deep financial intermediation will always conduct a successful fiscal consolidation where success means accelerated economic growth in the short term. It would also be misleading to argue that an underdeveloped financial system necessarily prevents a country from experiencing accelerated growth following a fiscal adjustment. Ireland in the eighties with its relatively underdeveloped financial intermediation system is a good example for underpinning this. While with its relatively underdeveloped financial system in the late eighties Ireland was able to experience non-Keynesian effects, no such experiment was made either in the nineties or in the new millennium – times when the depth of financial intermediation increased dramatically in the country. However, elaborating on the eighties, Giavazzi and Pagano (1990) made an interesting observation regarding the Irish case. According to the authors, among several other factors, liquidity constraint might have contributed significantly to the failure of the first Irish stabilisation attempt in 1982-83: the cuts in public spending and especially the raise in taxes triggered an immediate decrease of disposable household income (causing a drastic fall in private consumption as well). The second Irish consolidation attempt between 1987 and 1989 was undertaken after the initiation of a wide-scale liberalisation programme in credit markets. Liberalisation increased substantially households’ ability to borrow in the anticipation of higher future wealth. The Irish example may suggest therefore that it is not the level of financial depth what matters but its dynamism.
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The role of social expenditures in budget consolidations - an analysis of the fiscal and macroeconomic effects

The role of social expenditures in budget consolidations - an analysis of the fiscal and macroeconomic effects

fiscal success. Speaking of economic effects, the dependent variable is exchanged by other macroeconomic data like GDP growth or unemployment rates. Hence, the data used in the OLS regression are usually the same like in the other methods. Whereas this method avoids the problem of arbitrary definitions, OLS Regressions have their disadvantages in other areas. One potential disadvantage depending on the research question is the possibility that results are biased by data developments in times, where no consolidations are carried out. Some studies tried to overcome this pitfall by filtering the periods, which are characterized by an improvement in the primary balance. By using this approach, however, the arbitrariness argument comes up again as a specific minimum improvement has to be set. This is necessary, as small changes in the balance can be caused by coincidence. As numerous studies have shown, only about 20-40% of all periods can be seen as consolidation periods. Therefore, by using the whole data set like OLS Regressions do, only 20-40% of the result is explained by consolidation periods. Hence, studies concentrating on OLS Regressions only are often criticized as being insufficiently focused on fiscal adjustments.
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Measuring Fiscal Sustainability

Measuring Fiscal Sustainability

We propose an index of the fiscal stance that is convenient for practical use. It is based on a finite time horizon, not on an infinite time horizon like most tests. As it employs VAR analysis it is simple to compute and easily automated. We also show how it is possible to analyse a change of policy within a VAR framework. We use this methodology to examine the effect on fiscal sustainability of a change in policy. We then conduct an empirical examination of the fiscal stances of the US, the UK and Germany over the last 25 or more years, and we carry out a counter-factual analysis of the likely consequences for fiscal sustainability of using a Taylor rule to set monetary policy over this period. Among our findings are that the recent fiscal stances of all three countries are not sustainable, and that using a Taylor rule in the past would have improved the fiscal stances of the US and UK, but not that of Germany. Keywords: Budget deficits, government debt, fiscal sustainability, VAR
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Measuring the Fiscal Stance

Measuring the Fiscal Stance

In this paper we propose an index of the fiscal stance suitable for practical use in short-term policy making. The index is based on a comparison of a target level of the debt-GDP ratio for a given finite horizon with a forecast of the debt-GDP ratio based on a VAR formed from the government budget con- straint. This approach to measuring the fiscal stance is different from the literature on fiscal sustainability. We emphasise the importance of having a forward-looking measure of the fiscal stance for the immediate future rather than a test for fiscal sustainability that is backward-looking, or based just on past behaviour which may not be closely related to the current fiscal position. We use our methodology to construct a time series of the indices of the fiscal stances of the US, the UK and Germany over the last 25 or more years. We find that both the US and UK fiscal stances have deteriorated considerably since 2000 and Germany’s has been steadily deteriorating since unification in 1989, and worsened again on joining EMU.
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UNPLEASANT DEBT DYNAMICS: CAN FISCAL CONSOLIDATIONS RAISE DEBT RATIOS?

UNPLEASANT DEBT DYNAMICS: CAN FISCAL CONSOLIDATIONS RAISE DEBT RATIOS?

We show that the snowball effect—triggered by the decline in real GDP growth and inflation—can outweigh the consolidation effort and bring about an increase in the debt ra- tio in the short term. This outcome may hold under regular conditions—for consolidations carried out in normal times in economies characterized by moderate indebtedness levels— but it is substantially amplified by the initial outstanding debt ratio and the fiscal effort level. A higher initial outstanding debt ratio boosts the snowball effect. A larger effort level triggers a steeper decline in nominal GDP and thus a stronger snowball effect, whose short-run impact on the debt ratio may outweigh that of the stiffer adjustment. Fiscal consolidations performed in periods of crisis and preceded by hikes in the nationwide risk premia place a natural upward pressure in the snowball effect and thus in the debt ratio, forcing fiscal authorities to enlarge the fiscal package to comply with the new fiscal target. Stiffer consolidation measures, jointly with the unfavorable economic environment, entail larger output losses and pressure the debt ratio further upwards. In the medium run, credible fiscal adjustments successfully lower the debt ratio, though at potentially large output losses when carried out under unfavorable budgetary and economic conditions. Output losses can be mitigated if expenditure-side measures and back-loaded adjustments are used instead of revenue-side measures—which depress output for a protracted time pe- riod due to important distortionary effects—and front-loaded adjustments—which trigger more severe slumps. Expenditure-side measures and back-loaded adjustments generally entail, however, a larger short-run increase in the debt ratio. 5
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