Fiscal consolidation by intergovernmental transfers cuts? The unpleasant effect on expenditure arrears
On a large dataset of Italian municipalities for the period 2003–2014, we investigate unexplored effects of fiscal consolidation in decentralized public finance. Based on a simple, realistic theoretical model, we show that municipalities increase arrears on committed public investment expenditure as a response to intergovernmental transfer cuts. Then, we test our predictions controlling for potential sources of endogeneity, and find that a reduction in central government transfers causes a significant increase in arrears, besides other usual adjustments to local fiscal policy (e.g., tax revenues). Our results highlight a perverse effect of fiscal consolidation packages implemented by centrally imposed fiscal restraints.
JEL classification: H30; H72; H77; C33; C36.
Since 2008, the world economy has been facing consequences of the global financial crisis. One of them is rapid growth in public debt in most advanced economies, which resulted from an overoptimistic estimate of fiscal situation before the crisis, declining government revenue and increasing social expenditure during the crisis, costs of the banking system restructuring, countercyclical fiscal policies, etc.
For this reason, many governments are trying to determine a ‘safe’ level of fiscal deficit and public debt. However, this is not an easy task. There is no single standard of fiscal safety for all economies. Besides, a globalized economy and irregular business cycle make it difficult to find out in which phase of the cycle a given economy is at the moment, while this is essential to assess fiscal indicators.
Historical experience shows that default risk may materialize at different levels of public debt, sometimes seemingly very low. In fact, a ‘safe’ borrowing level is country-specific and depends on many factors and often unpredictable circumstances. However, given the tense situation in global markets, the ‘safe’ level of public debt is lower than it used to be a decade ago. Another argument for a cautious approach concerns a highly pro-cyclical nature of such measures as the fiscal deficit to GDP or public debt to GDP ratios.
Lessons of the latest crises also indicate importance of more accurate estimation of countries’ contingent fiscal liabilities, particularly of those relating to the stability in the financial sector. If looking into the future, a correct estimation of other contingent liabilities, particularly those related to social welfare systems (implicit debt of the public pension and health systems) are of primary importance in the context of the ageing society and population decline. These liabilities far exceed official statistics on the public debt in some counties. As a result, such statistics does not present an adequate picture of the nation's public debt and actual fiscal burden that will be imposed on the shoulders of the following generations of taxpayers.
Can self-assessments of health reveal the true health differentials between ‘rich’ and ‘poor’? The potential sources of bias include psychological adaptation to ill-health, socioeconomic covariates of health reporting errors and income measurement errors. We propose an estimation method to reduce the bias by isolating the component of self-assessed health that is explicable in terms of objective health indicators and allowing for broader dimensions of economic welfare than captured by current incomes. On applying our method to survey data for Russia we find a pronounced (nonlinear) economic gradient in health status that is not evident in the raw data. This is largely attributable to the health effects of age, education and location.
Why do some governments—in different countries and regions within them—employ more workers than others? Existing theories, which focus on the level of economic development, political redistribution, and social insurance may help to explain this. But they raise additional puzzles, do not fit all evidence, and fail to account for a global trend toward public employment decentralization. We propose a new theory, inspired by Russia’s recent experience, that locates one motive for subnational public employment growth in a political and fiscal game between central and subnational governments. In countries with weak legal systems, local and regional officials may deliberately set their employment levels beyond their fiscal capacity, prompting bailouts from the central government, which fears the political cost to it if wage arrears accumulate and provoke strikes. We model the logic of such brinkmanship, derive several propositions, and show that they—and the model’s assumptions—fit empirical evidence from Russia in the 1990s. Deficiencies of that country’s overstaffed, underequipped, irrregularly paid, ineffective, and strike-prone public sector appear to result in part from a system of dysfunctional incentives created by the way electoral pressures interact with the system of fiscal federalism. We suggest parallels with Latin American countries such as Argentina and Brazil.
Since 2008, the world economy has been facing the consequences of the global financial crisis. One consequence has been the rapid growth of public debt in many advanced economies, resulting from overly optimistic estimates of the fiscal situation before the crisis, declining government revenues and increasing social expenditures during the crisis, costs associated with the restructuring of the banking system, and countercyclical fiscal policies, among others. Emerging market economies appeared more resilient immediately after the 2008–2009 crisis; however, declining commodity prices and decelerating growth during 2014–2016 have weakened their fiscal positions. Faced with a growing debt burden, many governments have attempted to determine the “safe” level of fiscal deficit and public debt. However, this is not an easy task. There is no single standard of fiscal safety for all economies. Experience shows that default risk may occur at various, and sometimes seemingly very low, levels of public debt. Lessons from the latest crises also highlight the importance of more accurate estimations of countries’ contingent fiscal liabilities, namely those relating to the stability of the financial sector. Looking ahead, estimations of other contingent liabilities, particularly those related to social welfare systems (the implicit debts of the public pension and health systems) are of primary importance in the context of an aging society and a population decline. In most countries, these liabilities far exceed official public debt figures. That is, official debt statistics do not present an adequate picture of a nation’s public debt and the true fiscal burden that will be passed on to the next generations of taxpayers.
The aim of macroeconomic stabilization is restoring price stability and reducing monetary, fiscal, and balance-of-payment imbalances. Macroeconomic stabilization is particularly needed when a country suffers from high inflation or hyperinflation. To stop such an inflation one can choose between three types of anti-inflationary programmes: orthodox money-based, orthodox exchange rate-based, and heterodox. Other cases of macrostabilization policy include reducing excessive fiscal deficit and public debt before they become monetized, dealing with the deflationary consequences of the systemic banking crisis, reducing the excessive current account deficit, dealing with the consequences of a sudden stop in capital flows, and fighting chronic moderate inflation. Fiscal rules, and the independence of monetary and fiscal institutions such as central banks, play an important role in preventing macroeconomic instability. National macroeconomic policies are also monitored from outside, for example by the International Monetary Fund and European Commission (in the case of EU member states).
Smoking is a problem, bringing signifi cant social and economic costs to Russiansociety. However, ratifi cation of the World health organization Framework conventionon tobacco control makes it possible to improve Russian legislation accordingto the international standards. So, I describe some measures that should be taken bythe Russian authorities in the nearest future, and I examine their effi ciency. By studyingthe international evidence I analyze the impact of the smoke-free areas, advertisementand sponsorship bans, tax increases, etc. on the prevalence of smoking, cigaretteconsumption and some other indicators. I also investigate the obstacles confrontingthe Russian authorities when they introduce new policy measures and the public attitudetowards these measures. I conclude that there is a number of easy-to-implementanti-smoking activities that need no fi nancial resources but only a political will.
One of the most important indicators of company's success is the increase of its value. The article investigates traditional methods of company's value assessment and the evidence that the application of these methods is incorrect in the new stage of economy. So it is necessary to create a new method of valuation based on the new main sources of company's success that is its intellectual capital.