Rolf Strauch

Fiscal consolidations: Quality, economic conditions, and success *

Recent research has demonstrated theimportance of good quality of fiscaladjustments for the success of governmentbudget consolidations. We extend thisapproach to analyze the importance of theeconomic conditions in which fiscalconsolidations are started for theirsuccess. The cyclical positions of thedomestic and international economy, theinitial debt level and the stance of fiscalpolicy in the OECD are all importantdeterminants of the likelihood of fiscalconsolidations. They also affect thegovernments choice of consolidationstrategy, making them importantdeterminants of the success of fiscalconsolidations. In contrast, the monetarypolicy stance plays only a negligible rolefor fiscal consolidations. We use theanalysis to test for any Maastricht effectson the performance of European governmentsduring the 1990s. Such effects are weak atbest and occurred only during the firsthalf of the decade.

Institutions, politics, and fiscal policy

Introduction. Acknowledgements. Part I: Partisan Politics and Debt. 1. On the Redistributive Property of Budget Deficits L. Lambertini. 2. Parliamentary Dynamics and Fiscal Policy A. Baldini. 3. Electoral and Partisan Manipulation of Public Debt in Developed Democracies, 1956-90 R.J. Franzese, Jr. Part II: Parliamentary Institutions, Formal Budget Restraints and Fiscal Discipline. 4. The Role of Parliamentary Committees in the Budgetary Process Within Europe M. Hallberger. 5. Fiscal Constitutions, Fiscal Preferences, Information and Deficits: An Evaluation of 13 West-European Countries 1978 - 95 L. Helland. 6. Information and Public Spending: An Empirical Study of Budget Processes in the US States R. Strauch. 7. Fiscal Institutions in US States B. Knight, A. Levinson. Part III: Three Cases of Institutional Reform. 8. Reforming Budgetary Institutions: Swedish Experiences P. Molander. 9. Institutional Reforms and Belgian Fiscal Policy in the 90s G. Stienlet. 10. A Case of Institutional Endogeneity? A Study of the Budgetary Reforms of the Government of Alberta, Canada R.D. Kneebone, K.J. McKenzie. Index.

On the Cyclicality of Public Finances in Europe

Under EMU, monetary policy is oriented toward the euro area as a whole and fiscal policy is an important instrument remaining in the hands of national governments to cushion economic shocks to individual countries. The current paper analyses the cyclical pattern of public finances in Europe and addresses the question of whether fiscal policies have been geared towards this stabilising role. Although taxes fluctuate countercyclically in a conventional manner, we find that discretionary measures have tended to undermine automatic stabilisers. On the expenditure side, we find that public investment also displays a consistent procyclical pattern. Dynamic analysis reveals that a permanent shock to output induces asynchronous fluctuations in taxes and expenditures in the year of the shock and in periods thereafter. Finally, we examine political and institutional factors. The political fragmentation of the government as well as the partisan hue of the government do not interfere with the cyclical response of public finances, but we do find evidence of a pronounced electoral cycle.

Formal Fiscal Restraints and Budget Processes as Solutions to a Deficit and Spending Bias in Public Finances: US Experience and Possible Lessons for EMU

Against the commonly accepted view that in the run-up to EMU the Maastricht fiscal restraints were quite effective in re-aligning public finances in Member States that were showing large excessive deficits, Strauch and von Hagen stress that there are some objections concerning this initial sign of institutional effectiveness. They note that the restraining effect is much less apparent in the early stages of the post-1992 period for some larger countries. Moreover, some countries might have consolidated their public finance position even without the Maastricht fiscal criteria, given their debt level and the macro-economic environment. The authors argue that formal fiscal restraints may be an effective instrument for avoiding excessive deficits, provided they incorporate certain institutional features: the fiscal target must be clear-cut and comprehensive, enforcement should rely on independent agents, and the formal restraints involved should be difficult to amend. They find that EMU fiscal rules show some weaknesses with respect to these guidelines. The authors also stress that the budget process can be an effective instrument for solving the problem posed by a “deficit and spending bias” in public finance. In their opinion this holds also if strict fiscal rules already exist.

Tumbling giant: Germany's experience with the Maastricht fiscal criteria

From the first time European Monetary Union (EMU) was officially declared a goal of European integration in 1969, to its realisation thirty years later, Europeans were divided over the question whether the common currency should be the beginning or the end of a process of monetary and fiscal convergence.1 The former was claimed by the ‘monetarists’, who argued that the adoption of a common currency would lead to the convergence of price and wage developments and of fiscal performance among the member states. The opposite view was held by the ‘economists’, who thought that the stability of the common currency could only be guaranteed, if the member states first proved that each could live with fiscal and monetary discipline.

The Contribution of Public Finances to the European Growth Strategy

The objective of the paper is to point out the impact of public finances in the context of the Lisbon growth strategy. Official communications from the Commission and ECOFIN Council note that public finances can contribute to achieving the goal of higher growth and employment via three mechanisms: supporting a stable macro-economic environment, making tax and benefit systems more employment friendly, and redirecting public expenditures towards productive areas. This paper surveys the literature to investigate these channels, to quantify their impact and to identify conditions for their effectiveness. Based on empirical results in the literature, we conclude that there is substantial evidence to suggest that public finances can be considered a source of endogenous growth, but there remains considerable uncertainty regarding the size of their impact. This uncertainty emerges, among other factors, because the effectiveness of fiscal policies hinges on external conditions, such as the state of development. In addition, the link between these policy mechanisms and economic growth seems to have a non-linear functional form in the short and in the long-run.