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Fiscal Politics
Two main themes of the book are that (1) politics can distort optimal fiscal policy through elections and through political fragmentation, and (2) rules and institutions can attenuate the negative effects of this dynamic. The book has three parts: part 1 (9 chapters) outlines the problems; part 2 (6 chapters) outlines how institutions and fiscal rules can offer solutions; and part 3 (4 chapters) discusses how multilevel governance frameworks can help.
Excerpt: Fiscal Politics
This paper discusses how politics affects policies on the fiscal front. The literature on the political economy of fiscal policy dates back to the nineteenth century when the Italian and Swedish schools of public finance began to analyze how governments choose policies. During the twentieth century, the Public Choice school continued this work and focused on the political incentives and constraints in policy formulation. Elections mainly affect the stabilization and redistribution functions of the government. Proximity of elections can influence the government’s budget decisions in various ways. Ideology heavily influences fiscal policies that pertain to redistribution. Leftwing parties dr...
Functional Income Distribution and Its Role in Explaining Inequality
This paper is motivated by two parallel trends: the declining labor share of income and increasing inequality. Micro and macroeconomic data, covering up to 93 countries between 1970 and 2013, are used to assess whether the declining labor share of income has been a key factor driving growing inequality. The major conclusion is that changes in income inequality across a wide range of countries have been driven significantly by changes in the inequality of wages, while the distribution of income between labor and capital has not been a major factor.
Debt Reduction, Fiscal Adjustment, and Growth in Credit-Constrained Economies
This paper assesses the effects of fiscal consolidations associated with public debt reduction on medium-term output growth during periods of private debt deleveraging. The analysis covers 107 countries and 79 episodes of public debt reduction driven by discretionary fiscal adjustments during 1980–2012. It shows that expenditure-based, front-loaded fiscal adjustments can dampen growth when there are credit supply restrictions. Instead, fiscal adjustments that are gradual and rely on a mix of revenue and expenditure measures can support output expansion, while reducing public debt. In this context, protecting public investment is critical for medium-term growth, as is the implementation of supply-side, productivity-enhancing reforms.
How Much is A Lot? Historical Evidence on the Size of Fiscal Adjustments
The sizeable fiscal consolidation required to stabilize the debt-to-GDP ratios in several countries in the aftermath of the global crisis raises a crucial question on its feasibility. To answer this question, we rely on historical evidence from a sample of 91 adjustment episodes of countries during 1945–2012 that needed and wanted to adjust in order to stabilize debt to GDP. We find that, in at least half the cases, countries improved their cyclically adjusted primary balances by close to 5 percent of GDP. We also observe that, while countries typically make substantial efforts to stabilize debt, once this objective is achieved, they tend to ease their primary balances and do not necessarily get back to their initial lower debt-to-GDP ratio. We find that consolidations tended to be larger when the initial deficit was high and adjustment efforts were sustained over time. Fiscal adjustments also tended to be larger when accompanied by an easing of monetary conditions and, to a lesser extent, by an improvement in credit conditions.
Fragmented Politics and Public Debt
In this paper, we study the impact of fragmented politics on public debt—in particular, between two consecutive legislative elections. Using data for 92 advanced and developing countries during 1975-2015, we find a positive association between political fragmentation and public debt changes. Corruption magnifies the effects; with higher perceived corruption, political fragmentation has a bigger sway on debt increases. The influence of political fragmentation on debt dynamics is somewhat asymmetric, with larger and more significant effects during periods of debt reduction. Establishment of fiscal councils helps attenuate the negative impact of political fragmentation on public debt dynamics.
Automation, Skills and the Future of Work: What do Workers Think?
We exploit a survey data set that contains information on how 11,000 workers across advanced and emerging market economies perceive the main forces shaping the future of work. In general, workers feel more positive than negative about automation, especially in emerging markets. We find that negative perceptions about automation are prevalent among workers who are older, poorer, more exposed to job volatility, and from countries with higher levels of robot penetration. Perceptions over automation are positively viewed by workers with higher levels of job satisfaction, higher educational attainment, and from countries with stronger labor protection. Workers with positive perceptions of automation also tend to respond that re-education and retraining will be needed to adapt to rapidly evolving skill demands. These workers expect governments to have a role in shaping the future of work through protection of labor and new forms of social benefits. The demand for protection and benefits is more significant among women and workers that have suffered job volatility.
The Blind Side of Public Debt Spikes
What explains public debt spikes since the end of WWII? To answer this question, this paper identifies 179 debt spike episodes from 1945 to 2014 across advanced and developing countries. We find that debt spikes are not rare events and their probability increases with time. We then show that large public debt spikes are neither driven by high primary deficits nor by output declines but instead by sizable stock-flow adjustments (SFAs). We also find that SFAs are poorly forecasted, which can affect debt sustainability analyses, and are associated with a higher probability of suffering non-declining debt paths in the aftermath of public debt spikes.
Fiscal Discipline and Exchange Rates
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. Finally, we use the synthetic control method to illustrate how the transition from flexible to fully fixed exchange rate under the Euro impacted negatively fiscal discipline in European countries. Our results are robust to a number of important sensitivity checks, including different estimators, alternative proxies for fiscal discipline, and sub-sample analysis.
Fiscal Challenges of Population Aging in Brazil
In recent decades, population has been aging fast in Brazil while old age pensions and healthrelated spending have increased. As the population ages, the spending trend threaten to reach unsustainable levels absent reforms. Increasing the retirement age is key, but by itself will not provide sufficient savings to close the pension system financing gap, and reforms reducing replacement rates are necessary. In the area of health, there is scope for improving expenditure efficiency by strengthening outpatient care and regional networks, and developing clinical guidelines for cost-effective treatments and drugs. Reforms are urgent, so that they can be gradual.
