Towards a More Comprehensive Assessment of Fiscal Space

Abstract

The prolonged sluggishness in the world economy since the global financial crisis has led to growing calls for a reorientation of macroeconomic policies toward more supportive fiscal measures. Such calls inevitably invite the question of how much fiscal space governments actually have. This paper provides a systematic review of the most popular definitions and measures of fiscal space. It examines the evolution of fiscal space measures and discusses the pros and cons of each measure. It then outlines several key factors that could help to further strengthen existing approaches and allow a more comprehensive assessment of fiscal space. By illustrating how different measures paint considerably different pictures of an economy's fiscal space, the paper underscores the need to use a dashboard of indicators. JEL Classification: C82, E62, H60, H63

Forecasting stability and growth pact compliance using machine learning

“…We also include variables X40 to X42 for oil prices, bond yields, foreign currency and long‐term sovereign debt ratings.The fiscal space (X43) is simply measured as the difference between the level of public debt in a given country and the EU median (e.g. Cheng and Pitterle (2018) for an overview of fiscal space definitions). The fiscal space allows estimates of the flexibility of governments' public spending.…”

Who spends more to combat COVID‐19 social risks and why?

“…Because excessive spending could lead to financial stress or even a financial crisis, any government would have to consider “fiscal space” in its spending (Heller, 2005). While the issue of fiscal space has been discussed in previous literature, there is little consensus on its definition (Cheng & Pitterle, 2018; Kose et al, 2017; Nerlich & Reuter, 2015). The most widely cited definition described fiscal space as the “availability of budgetary room that allows a government to provide resources for the desired purpose without any prejudice to the sustainability of a government's financial position” (Heller, 2005, p. 3).…”

“…The most widely cited definition described fiscal space as the “availability of budgetary room that allows a government to provide resources for the desired purpose without any prejudice to the sustainability of a government's financial position” (Heller, 2005, p. 3). Others simply defined fiscal space as “[a] countr[y's] potential to expand [its] financing capacity” (Cheng & Pitterle, 2018, p. 3).…”

Fiscal policy and fiscal fragility: Empirical evidence from the OECD

“…For surveys over the recently developed measures of scal space see e.g Cheng & Pitterle (2018). andBotev, Fournier & Mourougane (2016).6 Usually, control variables are not necessary for local projections, but increase estimation eciency.However, while the shock should be orthogonal to the remaining data, interactions of the shock are not.To prevent an omitted variables bias and wrongly assigning the corresponding eects to scal fragility, we need the additional control variables.…”