Lessons Learned from Tax vs. Expenditure Based Fiscal Consolidation in the European Transition Economies

Rajmund Mirdala ()

No wp1058, William Davidson Institute Working Papers Series from William Davidson Institute at the University of Michigan

Abstract: European Union member countries are currently exposed to negative implications of the economic and debt crisis. Questions associated with disputable implications of fiscal incentives seem to be contrary to the crucial need of the effective fiscal consolidation that is necessary to reduce excessive fiscal deficits and high sovereign debts. While challenges addressed to the fiscal policy and its anti-cyclical potential rose steadily but not desperately since the beginning of the economic crisis, the call for fiscal consolidation became urgent almost immediately and this need significantly strengthen after the debt crisis contagion flooded Europe. In the paper we provide an overview of main trends in public budgets and sovereign debts in ten European transition economies during last two decades. We identify episodes of successful and unsuccessful (cold showers versus gradual) fiscal (expenditure versus revenue based) consolidations by analyzing effects of improvements in cyclically adjusted primary balance on the sovereign debt ratio reduction. We also estimate VAR model to analyze effects of fiscal shocks (based on one standard deviation in total expenditure, direct and indirect taxes) to real output. It is expected that responses of real output to different types of (consolidating) fiscal shocks may vary and thus provide more precise ideas about a feasibility (i.e. side effects on the macroeconomic performance) of expenditure versus revenue based fiscal consolidation episodes. Economic effects of fiscal consolidating adjustments are evaluated for two periods (pre-crisis and extended) to reveal crisis effects on fiscal consolidation efforts.

Keywords: fiscal policy adjustments; fiscal consolidation; cyclically adjusted primary balance; government expenditures; tax revenues; unrestricted VAR; Cholesky decomposition; SVAR; structural shocks; impulse-response function (search for similar items in EconPapers)
JEL-codes: C32 E62 H20 H50 H60 (search for similar items in EconPapers)
Pages: pages
Date: 2013-09-01
New Economics Papers: this item is included in nep-acc, nep-mac, nep-pbe, nep-pub and nep-tra
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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