The effect of monetary unification on public debt and its real return

We explore the implications of monetary unification for real interest rates and (relative) public debt levels. The adoption of a common monetary policy renders the risk-return characteristics of the participating countries’ public debt more similar. The implied reduction in the scope for risk diversification raises the average expected real return on the debt. Also, the share of the union-wide debt issued by relatively myopic governments or of countries that initially have a relatively dependent central bank increases after unification. This may put the political sustainability of the union under pressure. A transfer scheme that penalizes debt increases beyond the union average is able to undo the interest rate effect of unification, but magnifies the spread in relative debt levels.     

Budget institutions and taxation

While a number of different studies have explored the effects of budgetary procedures and the centralization of the budget process on government debt, deficits and spending, few of them have explored whether such fiscal institutions matter for public revenue. This article argues that centralizing the budget process raises the levels of taxation by limiting the ability of individual government officials to veto tax increases in line with common-pool-problem arguments regarding public finances. Using detailed data on budgetary procedures from 15 EU countries, the empirical analysis shows that greater centralization of the budget process increases taxation as a share of GDP and that both the type of budget centralization and level of government fractionalization matter for the size of this effect. The results suggest that further centralizing the budget process limits government debt and deficits by increasing public revenues as well as constraining public spending.     

Democracy,public debt transparency,and sovereign creditworthiness

Democratic Advantage (DA) arguments explicitly and implicitly assume that democracies have more transparent public debt, enhancing sovereign creditworthiness. This study questions the assumed link between transparent public debt practices and democracy in developing countries. It finds that such practices, which are crucial for investors, (a) do not depend on democratic governance and (b) largely erase the effect that DA variables regime type, rule of law, and property rights have on creditworthiness. In other words, transparent public debt and democracy should not be assumed to go together, and transparent debt practices affect creditworthiness more than DA variables. The findings identify public debt transparency as a statistical and theoretical confounder for current iterations of the DA thesis, which must be addressed to better understand the relationship between democratic governance and sovereign creditworthiness. The policy implication is to not assume that transparent public debt practices are only available to democracies.     

Public Debt,Economic Growth,and Public Sector Management in Developing Countries: Is There a Link?

The article investigates whether differences in public sector management quality affect the link between public debt and economic growth in developing countries. For this purpose, we primarily use the World Bank's institutional indices of public sector management (PSM). Using PSM thresholds, we split our panel into country clusters and make comparisons. Our linear baseline regressions reveal a significant negative relationship between public debt and growth. The various robustness exercises that we perform also confirm these results. When we dissect our data set into “weak” and “strong” county clusters using public sector management scores, however, we find different results. While public debt still displayed a negative relationship with growth in countries with “weak” public sector management quality, it generally displayed a positive relationship in the latter group. The tests for non‐linearity shows evidence of an “inverse‐U”‐shape relationship between public debt and economic growth. However, we fail to see a similar significant relationship on country clusters that account for PSM quality. Yet, countries with well‐managed public sectors demonstrate a higher public debt sustainability threshold. Copyright © 2015 John Wiley & Sons, Ltd.     

Serial payers,serial losers? The political economy of Argentina’s public debt

A global neoliberal architecture has enabled many countries to increase their public debts to meet their fiscal needs. But since 2008 a number of European and North American economies have faced financial crises induced by unsustainable debts. This paper analyses the case of post-default Argentina since 2001, so as to better comprehend the political economy of public debt, especially in cases where governments are elected on anti-austerity platforms. Presidents Néstor and Cristina Kirchner were committed to a debt-reduction policy, yet Argentina faced a new, ‘selective’, default in 2014. This paper analyses how the country has been trapped in a cycle of debt dependency, which can only be interrupted by a comprehensive audit of the debt’s legitimacy followed by debt cancellation. Critical lessons are provided for other countries facing similar situations.     

Fiscal Consolidation and Australia's Public Debt

Australia has experienced one of the fastest growing public debt levels in the world post‐Global Financial Crisis due to a series of large federal budget deficits driven by high government spending. In this paper we examine the balance sheet implications of this escalating public debt, before proposing some macro‐fiscal objectives for determining its sustainable level. These objectives are to (i) restore the federal government's solvency; (ii) eliminate foreign public debt; and (iii) achieve budgetary balance over the business cycle. Empirically, we first examine how much fiscal consolidation is required for debt stabilisation at current levels, before considering what sized budget balances are needed to achieve the target debt to GDP ratios consistent with the proposed objectives. The results show that no target debt to GDP level consistent with the optimal levels will be met on current fiscal settings in the medium term. This implies significantly greater fiscal consolidation is required to minimise future fiscal risk.     

Do citizens care about government debt? Evidence from survey experiments on budgetary priorities

Ever since the Great Recession, public debt has become politicised. Some research suggests that citizens are fiscally conservative, while other research shows that they punish governments for implementing fiscal consolidation. This begs the question of whether and how much citizens care about debt. We argue that debt is not a priority for citizens because reducing it involves spending and tax trade-offs. Using a split-sample experiment and a conjoint experiment in four European countries, we show that fiscal consolidation at the cost of spending cuts or taxes hikes is less popular than commonly assumed. Revenue-based consolidation is especially unpopular, but expenditure-based consolidation is also contested. Moreover, the public has clear fiscal policy priorities: People do not favour lower debt and taxes, but they support higher progressive taxes to pay for more government spending. The article furthers our understanding of public opinion on fiscal policies and the likely political consequences of austerity.     

Empirical examination of public debt sustainability in African economies: A panel data analysis

This study intends to investigate public debt sustainability across 29 Sub-Sahara African (SSA) economies, employing various econometric specifications, for the sampled years 1996–2020. The study employs Bohn's (Are stationarity and cointegration restrictions really necessary for the intertemporal budget constraint? Journal of monetary Economics, 54(7), pp.1837–1847.) framework of sustainability as the baseline model to assess public debt sustainability across the sampled Sub-Sahara African economies. As additional tests of public debt sustainability in order to support the baseline findings, the study also employs panel unit root and timeseries unit tests. The baseline findings from the OLS, panel quantile and instrumental panel quantile regressions show that public debt is sustainable across the panel of SSA economies. The positive and statistically significant response of primary balance under the Bohn's framework of sustainability manifest that the intertemporal budget constraint is not violated in the sampled economies. The consistency in the estimates under the OLS, panel quantile and instrumental panel quantile regressions also show that the estimates are robust throughout the estimation process. Also, utilizing the panel unit root test for public debt sustainability, the findings show that public debt is stationary over the sampled years which implies that intertemporal budget constraint holds and that public debt is sustainable across the sampled SSA economies. However, the timeseries analysis indicate that although majority of the SSA economies have sustainable public debt ratios, four countries namely Uganda, Sudan, Togo and Cote d'Ivoire have unsustainable public debt ratios. The study has important policy implications in terms of prudent public debt management and fiscal management for the sampled SSA economies.     

Corruption and State and Local Government Debt Expansion

Theories describing rent seeking in the public sector posit a number of negative fiscal outcomes that the choices of corrupt officials may generate. The evidence presented in this article shows that states with greater intensities of public corruption have higher aggregate levels of state and local debt. If corruption in the 10 most corrupt states were only at an average level, their public debt would be 9 percent lower, or about $249.35 per capita, all else being equal. Notably, institutional control measures may not have succeeded in restraining the expansion of state and local public debt in the presence of greater levels of corruption. State and local governments would achieve more efficient levels of fiscal discipline by curbing public sector corruption.     

THE IMPLICATIONS OF HIGH LEVELS OF PUBLIC SECTOR DEBT FOR ECONOMIC POLICY-MAKING: THE CASE OF SOUTH AUSTRALIA

Abstract: The relatively small and open South Australian economy has been facing the difficulties associated with the structural adjustment of its industry for over 15 years. In addition, the South Australian public sector has been contending with financial difficulties largely as a result of a reduction in grants from the commonwealth before the failure of the State Bank of South Australia. This paper reviews the growth and current level of government indebtedness in South Australia and discusses which group(s) is likely to bear the main burden of such debt. The main consequences of high levels of state public sector debt, including budgetary inflexibility, are also examined. The paper suggests that it will be necessary for relative wages and prices to adjust more freely if the negative impacts of an inevitable state government budgetary consolidation are to be minimised. If wages and prices are not free to adjust then unemployment will continue to take the brunt of the adjustment process. In addition, out-migration of businesses and people from South Australia will accelerate, leading to a further erosion of the taxation base. The State Bank indemnity arrangements and consequent levels of public sector debt incurred will require the state government to reduce the level and quality of services provided by the state public sector, sell state public sector assets and further improve efficiency and effectiveness. However, there are a number of important arguments why taxation should be an important means by which the South Australian government moves to retire public sector debt as soon as practicable. Not the least important of these arguments is the need to ensure accountability by elected representatives of government for their expenditure decisions.     

The effectiveness of institutional borrowing restrictions: Empirical evidence from Spanish municipalities

The need for restrictions on borrowing by subnational governments is a generally accepted notion that is justified both by public choice theory and by the fact that such restrictions are in force in the majority of decentralized countries. Furthermore, recent breaches of the Stability and Growth Pact of the European Union have led to the introduction of legislative tools aimed at balancing the budget at all levels of government have come to the forefront of interest in European public finance research. This paper is concerned with the financial situation and debt level of Spanish municipalities from 1988 to 2000. We have two main objectives: the first is to assess the value of mandatory limitations on municipal borrowing and past trends in the borrowing policies adopted by Spanish local authorities. The second is to develop an econometric model using panel data stratified by population size to measure indebtedness in Spanish municipalities. These measures enable us to formulate a series of hypotheses to explain municipal borrowing practices, which are then tested empirically. The evidence thus obtained appears to support the effectiveness of institutional borrowing restrictions to introduce some financial discipline in the borrowing policies adopted by local governments in Spain.     

The Impact of State Debt Management on Debt Activity

This article addresses the impact that state debt management has on the debt activity of a state debt program. A quantitative measure of state debt management is developed and used in analysis of state debt activity. The study finds that states with decentralized debt management issue more long-term debt as compared to states with other forms of debt management. The study also investigates the impact other institutional variables have on state debt activity and highlights the interaction effects of these variables with the institutional debt management variable. The study finds that the effects of previously tested variables such as the number of public authorities and constitutional debt limitations on debt activity are altered if the form of debt management is considered.     

Who is Afraid of the Big Bad Debt? A Modern Money Theory Perspective on Federal Deficits and Debt

The U.S. federal government's deficit is expected to grow to over one trillion dollars in fiscal year (FY) 2020, and the national debt held by the public will likely grow to over $16.7 trillion. Budgeting scholars in the field of public administration have expressed concern over the increasing debt levels. The field of public administration, however, is largely unaware of Modern Money Theory (MMT) and the mechanics of money, which is its focus. MMT argues that understanding the mechanics of money in the U.S. financial system should lead scholars to different conclusions regarding the debt and deficit. This article presents the core arguments of the MMT perspective in this regard, with the goal to trigger further debates about debt and deficit among the community of budgeting scholars.     

Debt intolerance and the 90 per cent debt threshold: two impossibility theorems

Abstract

Two propositions underpin the retreat from post-crisis fiscal expansion instituted by several G7 governments in the summer of 2010. One is that the threat of debt intolerance is general: the reasoning is that the sharp rise in government debt levels caused by post-crisis fiscal expansion will force investors to abandon government bonds in favour of some other asset class. The other proposition is that there is a one-size debt threshold: the reasoning is that no government, those of the G7 countries included, can escape the serious consequences of debt intolerance and the threat of exit should its debt to GDP ratio reach 90 per cent. This paper argues that neither of these propositions can have credibility at a time of continuing global economic slowdown and consequent contraction in the global supplies of investable assets. At such a time investors cannot possibly hold up the threat of intolerance to core economy governments because they have no choice but to store substantial portions of their wealth in the latter's bonds, a fact which in turn means that the debt thresholds for core economy governments cannot possibly be the same as the average for other governments.     

Municipal debt in Switzerland: new empirical results

Switzerland has experienced extensive institutional reforms at the local level that could influence local debt. These reforms have included municipal mergers, greater inter-communal cooperation, reformed political decision-making mechanisms, and the introduction of new public management measures. Many of these reforms originated at the cantonal level. However, the institutional diversity among Swiss municipalities hardly has diminished. A cross-sectional analysis for the 137 largest Swiss cities and villages in 2004 shows that direct democratic rights and a high degree of fiscal autonomy lead to a lower level of local debt. There is no statistical support for the hypothesis that reforms following the new public management guidelines had an effect on debt levels.     

Once more into surplus: Reforming expenditure management in Australia and Canada

Canadian and Australian federal government budgets have returned to surplus. Over the past two decades both countries have undertaken financial management and budgetary reforms in an effort to control expenditure growth and public debt. They exchanged ideas, borrowed techniques, and shared reform experiences. Yet during the mid-1980s and early 1990s they displayed markedly different levels of success in expenditure control. This article explains why relatively similar instruments of expenditure control and financial management produced different outcomes in Australia and Canada. The analysis suggests that budgetary techniques will have marginal impact unless they are congruent with broader policy management systems and administrative cultures. The comparative analysis provides important lessons for budget reformers in all jurisdictions.     

The Financial Crisis and Varieties of Pension Privatization Reversals in Eastern Europe

Since the global financial crisis, those East European countries that had partly privatized their pension systems in the 1990s or early 2000s increasingly scaled back their mandatory private retirement accounts and restored the role of public provision. What explains this wave of reversals in pension privatization and variation in its outcomes? Proponents of pension privatization had argued that it would boost domestic capital markets and economic growth. By revealing how pension privatization helped increase sovereign debt and how large a part of pension funds' assets was invested in government bonds, the crisis strengthened the position of domestic opponents of mandatory private accounts. But these actors' capacity and determination to reverse pension privatization depended on the level of their country's public debt and on pension funds' portfolio structure. Empirically, the argument is supported with case studies of Hungarian, Polish, and Slovak pension reform.     

Making rules credible: divided government and political budget cycles

Political budget cycles (PBCs) can result from the credibility problems office-motivated incumbents face under asymmetric information, due to the temptation to manipulate fiscal policy to increase their electoral chances. We analyze the role of rules that limit public debt, because borrowing is a necessary condition for aggregate PBCs. Since the legislature must typically authorize new debt, divided government can make these fiscal rules credible. Commitment is undermined by either unified government or imperfect compliance with the budget law, which can help explain why PBCs are stronger in developing countries and in new democracies. When divided government affects efficiency, voters must trade off electoral distortions and government competence.     

Do Debt Levels Influence State Borrowing Costs?

This article reports on research into the possible interest cost penalties when state governments impose increasingly high debt levels on their citizens. The potential effect of debt levels on borrowing costs is a material one, given the large amounts of state debt outstanding. At the same time that government borrowing is heavy, the demand for government obligations also appears to be strong. The authors examine state debt levels and borrowing costs over a six‐year period (2001–2006) and find little evidence of such an effect, despite rapidly growing debt burdens. Those concerned about state debt levels, the authors say, must look to sources other than investors for pressure to reduce debt issuance.     

Political and institutional determinants of fiscal policy in the European Community

In recent theoretical and empirical research the variation in political and institutional arrangements which may affect the process of national policy formation is examined, in order to explain cross-country differences with respect to fiscal policies pursued. In this paper we build upon this literature and examine whether and how cross-country differences in debt accumulation and public sector size of Member Countries of the European Community during the 1980s can be explained. We conclude that the growth of government debt is positively related to the frequency of government changes and negatively to sound budgetary procedures. In countries with left-wing governments the growth of the share of government spending in total output generally tends to be higher.