Governments around the world responded to the COVID19 crisis (CVC) by aggressively deploying fiscal policy to boost health expenditure, income transfers and increased welfare payments, as well as ...wage subsidies to firms to retain employees to minimize short term unemployment. A fiscal response was in principle both necessary and timely, but the nature of the responses adopted by governments differed markedly around the world. After describing the global macroeconomic impact of the CVC and its effect on budget deficits and public debt levels, this paper critically evaluates the global fiscal response with reference to comparable historical episodes. The analysis suggests some fiscal responses were too expansive and of the wrong form. The paper then highlights the future macroeconomic risks arising from the highly elevated public debt levels the CVC has caused, concluding that fiscal consolidation rather than further fiscal ‘stimulus’ will be needed to address the parlous fiscal legacy of the crisis.
•European Union countries generally form fiscal policy plans with an acyclical stance.•The cyclical reaction worsens during implementation of the policy plans, whereas budgetary outcomes end up being ...procyclical.•Fiscal rules and government efficiency improve the cyclical reaction of fiscal policies.•Strong fiscal rules and efficient government institutions induce acyclical fiscal policy outcomes.
Using real-time data, we examine whether fiscal policy has been counter- or procyclical in a panel of 27 European Union (EU) member states over the period 2000–2015. We also investigate whether fiscal rules and government efficiency improve the cyclical reaction of fiscal policy. Our results suggest that even though fiscal plans in EU countries have an acyclical stance, budgetary outcomes are procyclical. Government efficiency and fiscal rules seem to reduce fiscal procyclicality. Further analysis also reveals that fiscal policy seems to be more procyclical in non-euro area countries and in times of economic prosperity.
We develop an agency model explaining why third-party information reporting by firms makes tax enforcement successful. While third-party reporting would be ineffective with frictionless collusion ...between firms and employees, collusive evasion is impossible to sustain in firms with many employees and accurate business records as any single employee may reveal evasion. We embed our agency model into a macro model where the number of employees grows with development, showing that the tax take evolves as an S-shape driven by changes in third-party information. We show that our model is consistent with a set of stylized facts on taxation and development.
This article examines the effectiveness of Guyana s fiscal framework as the country is set to usher in an era of oil wealth. It draws on a large body of literature to determine the key elements of an ...effective fiscal framework for resource-dependent economies. In summary, the literature argues for resource-dependent countries to have appropriate levels of stabilisation savings, a strong institutional framework, and effective spending policies and use taxation effectively to reduce revenue volatility. We examine how Guyana stacks up against those requirements and what lessons Guyana can learn from other hydrocarbon-dependent economies. We find that Guyana has a lot of work to do in all these areas. We argue that Guyana should place a strong emphasis on strengthening expenditure policies and improving budget transparency and governance. These improvements could potentially increase the productivity of public investment, reduce the wastage of public funds, and reduce the perception of corruption.
The global financial crisis has permanently lowered the path of GDP in all advanced economies. At the same time, and in response to rising government debt levels, many of these countries have been ...engaging in fiscal consolidations that have had a negative impact on growth rates. We empirically explore the connections between these two facts by extending to longer horizons the methodology of Blanchard and Leigh (2013) regarding fiscal policy multipliers. Our results provide support for the presence of strong hysteresis effects of fiscal policy. The large size of the effects points in the direction of self-defeating fiscal consolidations as suggested by DeLong and Summers (2012). Attempts to reduce debt via fiscal consolidations have very likely resulted in a higher debt to GDP ratio through their long-term negative impact on output.
Research on the spatial aspects of economic activity has flourished over the past decade due to the emergence of new theory, new data, and an intense interest on the part of policymakers, especially ...in Europe but increasingly in North America and elsewhere as well. However, these efforts--collectively known as the "new economic geography"--have devoted little attention to the policy implications of the new theory.
Using a new narrative measure of fiscal policy shocks for the U.K., we show that households with mortgage debt exhibit large and significant consumption responses to tax changes. Homeowners without a ...mortgage, in contrast, do not adjust their expenditure, with responses not statistically different from zero at all horizons. We compare our findings to the predictions of traditional and newer theories of liquidity constraints, providing a novel interpretation for the aggregate effects of tax changes on the macroeconomy.
After the Global Financial Crisis, a controversial rush to fiscal austerity followed in many countries. Yet research on the effects of austerity on macroeconomic aggregates was and still is ...unsettled, mired by the difficulty of identifying multipliers from observational data. This article, reconciles seemingly disparate estimates of multipliers within a unified and state-contingent framework. We achieve identification of causal effects with new propensity-score based methods for time series data. Using this novel approach, we show that austerity is always a drag on growth, and especially so in depressed economies: a 1% of GDP fiscal consolidation translates into a loss of 3.5% of real GDP over five years when implemented in a slump, rather than just 1.8% in a boom.
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