Fiscal policy and economic growth: Evidence from Central and Eastern Europe

Abstract

This study aims to estimate the impact of three fiscal instruments (direct tax revenue, indirect tax revenue and government consumption expenditure) on the economic growth of ten new European Union member states from Central and Eastern Europe– Bulgaria, Czechia, Estonia, Hungary, Latvia, Lithuania, Poland, Romania, Slovakia and Slovenia. We examine the hypothesis about the effect of expansionary fiscal policy on economic growth. The study employs a vector autoregression and annual Eurostat data for the period 2007–2019. Four control variables (the shares of gross capital formation, household consumption, exports in GDP, and the economic growth in the euro area) are included in the model to account for the influence of non-fiscal factors on economic growth. The empirical results indicate that the real output growth rate in the ten new member states of the European Union is negatively affected by direct tax revenue, while economic growth in the euro area, exports and gross capital formation are positively related to economic growth. The results also imply that government consumption and indirect tax revenue have no significant impact on the growth rate of real output of the ten studied countries from Central and Eastern Europe. It may be inferred that policymakers in the new European Union member states can raise economic growth by encouraging exports and investment and by lowering the share of direct tax revenue in GDP. From the three analyzed fiscal instruments (direct taxes, indirect taxes and government consumption expenditure), only one has proven to be effective in the case of the new member countries.

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“…This result is consistent with the findings of several studies (e.g., Blanchard & Perroti, 1999;Mukhtarov et al, 2018;Hamdi & Sbia, 2013;Ritcher et al 2015;Stoilova & Todorov, 2021;Ahmed, 2011), which argue that an increase in tax revenues leads to a reduction in GDP. However, in the aforementioned studies, taxes were raised leading to a reduction in GDP contrary to Uganda's case where tax reliefs provided to firms and households reduced its GDP.…”

“…Separately, many studies done in Europe and the USA (Ritcher et al, 2015;Stoilova & Todorov, 2021;Mukhtarov et al, 2018;Hamdi & Sbia, 2013) found a positive relationship between government spending and economic growth, and a negative link with taxes. However, Hamza and Milo (2021) used a VAR and found that total public expenditure significantly affects GDP.…”

“…In addition, the choice of the study variables was informed by economic apriori and empirical literature from other studies, except for LCPI which introduces novelty to our study. For example, most empirical literature (Blanchard & Perotti, 2002, 2016Salako & Oyeleke, 2019;Ritcher et al, 2015;and Stoilova & Todorov, 2021), showed that the expected sign for LGDP is negative when reacting to the effect of domestic tax revenue shocks, and positive to government expenditure shocks.…”

Fiscal Policy, Institutional Quality and Economic Growth: Some Evidence from Pakistan

“…This is consistent with the expected reaction rate of GDP to the appearance of the sun. Stoilova & Todorov (2021) investigated the fiscal policy and growth and found that many costs have a direct influence on the tax rate and the show's aesthetic perception. In fact, I've come to realize that the entire concept is expanding.…”

Assessment of the Impact of Fiscal Policy on Economic Growth in the Republic of Armenia

“…Вопрос о том, могут ли изменения в фискальной политике повлиять на экономический рост, широко освещен в научной литературе [1][2][3][4][5][6]. Фискальная политика играет существенную роль в обеспечении экономического роста в стране [7,8].…”