Francesco Forte

Optimal Size Government and Economic Growth in EU Countries

Using time-series and panel data methodologies, the paper analyzes the existence and shape of the «BARS curve» (Barro, Armey, Rahn, and Scully) for EU countries in the period 1970-2009, connecting the size of Government (measured by the share of public expenditure on GDP) to the rate of economic growth. Individual countries research has been conducted for twelve EU countries for which enough data were available, while panel analysis has been performed both for EU-27 and for some sub-groups, distinguished by their different socio-economic and monetary structures, and per capita GDP. BARS curves were generally found, and the shares of actual public expenditures generally exceed substantially those related to the maximization of GDP growth. However, great differences emerge. For the 12 countries examined by time-series techniques, the difference between the actual level and the peak of the BARS curve ranges from 2.3 points for Ireland and 18.1 points for Belgium. Similar situations were found in the panel analysis, with a smaller gap for the Anglo-Saxon countries in comparison to the Western Continental countries. For low per capita GDP countries the peak is higher than for the mature economies. Moreover, we found a long-run relationship between real GDP and public expenditure for six countries, while Granger-causality tests suggest different flows of direction for each country. So, further research may prove useful to shed light on the disparities emerging in the empirical analysis of individual countries, as well as within panel sub-groups. Results in the paper highlight that European countries are very heterogeneous in terms of the peak of the BARS curve. This evidence leads to an interesting question, i.e. if the fiscal adjustment should be the same for all the states or it should depend on the weight of the public sector on GDP in each country.

Joint income-tax and VAT-chain evasion

Abstract We consider joint income-tax evasion and VAT-chain evasion, acknowledging that decisions are not taken by agents in isolation, but result from negotiation between purchasers and suppliers in the chain of exchanges from producers/importers to final consumers. We establish outcomes in terms of Nash-bargaining-equilibria, and show that the greatest evasion is at the last stage of the chain. We then consider strategies that either recover lost revenues or deter tax evasion of all taxpayers in the chain.

A profile of the Italian state Audit Court: An agent in search of a resolute principal

The Italian Court of Accounts has a long and well documented history, but its functions are limited and not clearly revealed from analysis of the historical record. However, the institutional background of the Italian case is vital for understanding the notion that an agent due to the function he has been assigned, is in search of his principal. This article offers historical and institutional documentation on which a theoretical analysis can be built.

Fiscal policies in EMU countries: strategies and empirical evidence

Purpose The aim of the paper is to evaluate fiscal adjustments that have occurred in the Economic and Monetary Union (EMU) countries in the last 35 years, and their consequences on the economic growth process by using the mean group (MG) estimators. Design/methodology/approach Our emphasis is on the effects of different composition of fiscal stimuli and consolidations. We compare the effects on the economic growth rate of different compositions of major fiscal changes. We use a cyclically adjusted value of the fiscal variables to leave aside variations of the fiscal variables induced by business cycle fluctuations. Findings Our empirical research of the effects of large changes in fiscal policy, both in case of a fiscal consolidation and of fiscal stimulus in the 18 EMU countries from 1980 to 2015, shows that adjustments by cutting current expenditures, rather than by tax increases are more likely to boost economic growth. It also shows that cuts of investment expenditures may reduce GDP growth. During fiscal stimulus episodes, tax cuts and public investments are more likely to increase growth than current public expenditure. Originality/value This is the first study devoted to the EMU countries. It should be underlined that the results obtained as for EMU countries are not necessarily applicable to other countries, as the different government size as well as different market institutions may influence the results.

A Game Theoretic Approach to Cross-Border VAT Evasion within EU Member States and its Relationship with the Black Economy

The interruption of the VAT chain at national borders makes several types of tax fraud possible. One is the multi stages black VAT chain in the domestic markets of various countries, which facilitates the development of a black economy favouring the evasion of income tax, social security contributions and other market regulations, including the protection of intellectual property and of brands. We devise a stylised model of Nash equilibrium-black chain for the “VAT-free goods”, depicting its effects on both market prices and illegal gains for fraudsters. The policy implications of the model aiming to contrast the black economy are analysed.

Applying game theory to the protection of public funds: Some introductory notes

Regulatory agencies responsible for preventing misuse of public funds do not all operate in the same fashion. Some carefully weigh the costs and benefits associated with various enforcement policies, but others do not. We use game theory to suggest that (1) regulatory agencies actually have a range of enforcement options at their disposal and (2) these enforcement options can have quite different cost-benefit ratios, depending on the resources of the enforcement agency, the nature of its connection to principals, and the strategies adopted by opportunistic actors. We conclude that enforcement organizations must be flexible in order to be effective.

Public Co-Financing of Private Sector's Investments: Subsidiarity and Corruption

The literature on corruption makes unclearpredictions on the relations betweensubsidiarity principle, according to whichpublic decisions should be done at thelower level government possible, andcorruption of public officials. In thispaper, we compare two alternative regimes,centralised vs. decentralised, forthe public co-financing of privateprojects. We show that, in the absence ofcorruption, the two regimes give the same results. Borrowing from the Chamberlins analysis ofmonopolistic competition and from therent-seeking literature, we introducecorruption in the model as a selling costfor the private suppliers. We show that acentralized regime causes higher corruptionlevels because of the higher number ofprivate suppliers of competing projects. Asa result, a central government tends tohave a higher level of public capitalexpenditure than two (equally corruptible)regional governments.

Optimal size of governments and the optimal ratio between current and capital expenditure

This comprehensive and thought-provoking Handbook reviews public sector economics from pluralist perspectives that either complement or reach beyond mainstream views. The book takes a comprehensive interdisciplinary approach, drawing on economic elements in the fields of philosophy, sociology, psychology, history and law.

The Italian Post War Fiscal Constitution: Reasons of a Failure

If the Italian Constitution shall be changed, to transform Italy in a semi-Presidential Republic-as in the project of constitutional revision recently approved by the Parliamentary Committee for Constitutional Reforms-the President of the Republic, elected by the people, shall become the natural guardian of the fiscal constitution, under direct control of the public opinion (17). He should, then, be staffed with an office, to check the conformity of laws to the fiscal constitutional rules and claims might be addressed by a qualified number of Parliamentarians, in addition to the Court of Accounts, to him. The chain connecting the President of the Republic to the Parliament, in this new constitutional model, will be broken. And hardly the President could stand still, in case of open violation of the rules of the fiscal constitution by the Government on the Parliament, because of the risk of loss of reputation. If he were to overlook negative checks by the Court of Accounts, his behaviour would greatly damage his credibility among the electors. Thus, it seems that the difference in the model of State, whether is a parliamentary system or a system where the President of the Republic is elected by the people, has much to do with the workability of a fiscal constitution aiming to monetary and fiscal soundness.

Wagner’s Law, Government Size and Economic Growth: An Empirical Test and Theoretical Explanations for Italy 1861–2008

By the BARS algorithm, we econometrically assess, for Italy, for the 1861–2008 years (divided in the two monarchic and republican periods and in seven subperiods)- the Wagner empirical law of growth of public expenditure G and the Wagner optimal public expenditure growth G*, defined as GDP maximisation. Our results show the presence of a non-linear relationship between G and G* with an inverted “U-shape” curve. In the monarchic period until 1914 G G*. In the centre and centre left sub-period of the Republican epoch from 1946 to 1972 again G > G*. In the subsequent unstable period 1973–1992 and in the euro subperiod too G > G*, in spite of the fiscal compact. The two Wagner laws, as emerging in the Italian case, may be interpreted by Montemartini’ paradigm of the government as a political enterprise, which employs its coercive power to distribute the cost of the collective goods approved by its majority (but not necessarily fitting their true preferences) on the entire community. Another explanation may lie in Wagner principle about the natural tendency of public bureaucracy to expansion. The European rules as well as the Italian policies, in the application of the fiscal compact, should more clearly and firmly distinguish the reductions of public spending and the increases of taxes as instruments of reduction of public deficits and debts.