Balanced Budget Rules and Fiscal Outcomes: Evidence from Historical Constitutions

Abstract

Die Dis cus si on Pape rs die nen einer mög lichst schnel len Ver brei tung von neue ren For schungs arbei ten des ZEW. Die Bei trä ge lie gen in allei ni ger Ver ant wor tung der Auto ren und stel len nicht not wen di ger wei se die Mei nung des ZEW dar.Dis cus si on Papers are inten ded to make results of ZEW research prompt ly avai la ble to other eco no mists in order to encou ra ge dis cus si on and sug gesti ons for revi si ons. The aut hors are sole ly respon si ble for the con tents which do not neces sa ri ly repre sent the opi ni on of the ZEW. Balanced Budget Rules and Fiscal Outcomes:Evidence from Historical ConstitutionsAbstract This paper studies the long-run fiscal consequences of balanced budget rules (BBR) that are enshrined in a country's constitution. Using historical data dating back to the 19th century and applying a difference-in-difference approach we find that the introduction of a constitutional-BBR reduces government debt-to-GDP and expenditure-to-GDP ratios, on average, by around 11 and 3 percentage points, respectively. We do not find evidence that BBRs affect tax revenues. Our analysis indicates that such rules reduce the probability of experiencing a debt crisis and that the effective enforcement of BBRs can be conditional on the quality of democratic institutions. In addition, we implement an instrumental variable approach by instrumenting the probability of having budget rules on de jure constraints on changing the constitution. This and other tests suggest that the relations we find are largely causal going from BBRs to fiscal outcomes.

Accidental rivals? EU fiscal rules, NATO, and transatlantic burden-sharing

“…Shifting defense funds into personnel allows states to create or retain jobs without immediate fiscal consequences in the form of higher defense spending, and to shift burdens to allies in less visible ways. Fiscal rules ‘may discourage public investment’ (Astrayan, Castellón & Stratmann, 2018: 4). Because of its less direct effect on domestic economies, defense investment, and particularly equipment and O&M spending, is even more vulnerable to such effects than other forms of investment.…”

Revenue vs expenditure based fiscal consolidation: the pass-through from federal cuts to local taxes

“…Our paper also indirectly contributes to the literature on the effects of balanced budget rules, seeamong others-Grembi et al (2016),Azzimonti et al (2016),Asatryan et al (2018),Eliason and Lutz (2018). 9 As inGong and Zou (2002) andMieszkowski (1972) in our framework capital includes real estate property.…”

Does fiscal tightening (loosening) reduce public debt?

“…Other studies that found empirical evidence against fiscal tightening include Chick and Pettifor (2011); Guajardo (2014); Jorda and Taylor (2015); Chronis and Droucopoulos (2016); and Gray and Barford (2018). On the other hand, studies such as Alesina and Perotti (1997); Alesina and Ardagna (2010); Asatryan, Castellon, and Stratmann (2018) found evidence in support of fiscal tightening. In the case of sub‐Saharan Africa (SSA), Ganyaupfu and Robinson (2019) examined the effect of primary balance shocks on the public debt of South Africa by using the Impulse Response Function to analyse series covering 2007q4 to 2016q2.…”