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

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 anticyclical 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.

Short-term fiscal imbalance comparison in V4 countries using a dynamic conditional correlation approach

“…The first one, described as "standard", is an analysis of the traditional fiscal indicator in the form of a cyclically adjusted primary balance. The primary balance was used in order to eliminate the impact of past interest on public debt (Alesina & Ardagna, 2010) and to eliminate the effects of business cycles on the fiscal stance (Mirdala, 2013). To investigate the conditionality of implemented fiscal consolidation types an analysis of the period 1999-2016 was conducted, focused on the periods in which the consolidation took place, and the measures that the countries applied.…”

“…Condition "cold shower" (CD) an improvement of the cyclically adjusted primary balance (CAPB) of at least:1.5 % of GDP in one single year "gradual consolidation" (GC) an improvement of the cyclically adjusted primary balance (CAPB) of at least 1.5 % of GDP over a period of three years where in each single year the improvement of the CAPB is less than 1.5 % of GDP and the CAPB does not deteriorate by more than 0.5 % of GDP compared to the year before Source: Mihóková et al, (2016). 1998, 2001, 2003, 2013CZ 2004, 2013HU 1999, 2003, 2008, 2012PL 2011, 2012 Source: Authors, own processing based on data form Eurostat.…”

“…Development of fiscal imbalance in the EU has been pointing to an increasing deficit slope since the 70's of the 20th century (European Commission, 2000). Issues aimed at defining the type of fiscal consolidation, the determination of the specific components of one-side-oriented consolidation, and the determinants of individual components, came into the spotlight of a large part of the literature and empirical studies (Afonso & Jalles, 2016;Bröthaler & Getzner, 2015;Mirdala, 2013;Alesina & Ardagna, 2013;Nickel et al, 2010;Barrios et al, 2010;Guichard et al, 2007;OECD, 2007;etc.). According to the empirical research, the composition of consolidation seems to be one of the most important determinants of its success (Alesina & Ardagna, 2010).…”

Excessive Deficit Procedure in Visegrad Countries

“…1) практически вернулись на докризисный уровень. Однако от-дельные авторы отмечают, что не все закончилось удачно [так, в Словакии про-изошло достаточно существенное увеличение налоговой нагрузки и расходов БРП, что не позволяет считать словацкую консолидацию слишком успешной (Mirdala R., 2013)]. …”

Fiscal Consolidation Start and its Determinants Analysis Within European Member Countries

“…In addition to these factors, has been as one of the most important reasons for the fiscal consolidation considered the priority for public finances stabilization in order to ensure the sustainability of public finances. Issues aimed at fiscal consolidation are for these reasons more than desirable, what contributes to the fact that the topic is up to date and has come into the spotlight of a large number of the literature and empirical studies (Afonso and Jalles, 2016;Bröthaler and Getzner, 2015;Mirdala, 2013;Alesina and Ardagna, 2013;Nickel, Rother and Zimmermann, 2010;etc. ).…”