Politics of Fiscal Policy: A Global Perspective

Transcription

1 Politics of Fiscal Policy: A Global Perspective SANJEEV GUPTA DEPUTY DIRECTOR TOKYO FISCAL FORUM JUNE 5, 2017

2 Presentation Outline I. Motivation II. Politics and Fiscal Policy: Elections, Divisions and Ideology III. Fiscal Rules and Fiscal Institutions IV. Supranational Fiscal Politics V. Main Policy Messages 1

3 I. Motivation Economics and politics are co-determined, especially with regard to fiscal policy. The government s three core functions are inherently political in nature: Allocation Stabilization Redistribution 2

4 II. Politics and Fiscal Policy Fiscal Outcomes Political Factors Elections Political Divisions Ideology 3

5 II. First the Impact of Elections On fiscal deficits: up to 1% of GDP higher deficits during election years, with pressure coming from the wage side, particularly in emerging and developing countries. On budget s composition: consumption grows and investment declines as elections approach (Rogoff, 1990) Growth Rate of Public Consumption Growth Rate of Public Investment Source: Gupta and others (2016) 4

6 II. First the Impact of Elections On budget s composition: public wages grow before elections Change in Wage Bill (percent of GDP) AE EME LIDC No Election Source: Own elaboration (Data: Fiscal Politics, Chapter 6) Election 5

7 II. First the Impact of Elections Electoral investment cycles: the growth rate of public investment peaks about 28 months before elections. Growth Rate of Public Investment Source: Fiscal Politics, Chapter 5 Months to elections 6

8 II. First the Impact of Elections Electoral investment cycles (cont d): Institutions and governance matter. New Democracies Low Investment Efficiency Growth rate of public investment Old Democracies Growth rate of public investment High Investment Efficiency Months to elections Months to elections Source: Gupta, Liu and Mulas-Granados (2016) 7

9 II. Second the impact of Political Divisions Political divisions are associated with large deviations between promised adjustment in fiscal deficit and actual outcome. Size of Fiscal Consolidation Promise Gap Political Weakness Political Strength Percent of GDP Source: Fiscal Politics, Chapter 2 8

10 II. Second the impact of Political Divisions Weaker majorities are associated with larger debt accumulation in AEs and with smaller debt reduction in EME/LICDs, during the electoral cycle. 6 Change in Public Debt During Average Term 5 4 Percent of GDP High Margin of Majority AE EME/LIDC Low Margin of Majority Source: Fiscal Politics, Chapter 9 9

11 II. Second the impact of Political Divisions Big cabinets (with many ministers) accumulate much more public debt than small cabinets Percent of GDP Change in Public Debt during average term -6 Small Cabinet (Ministers) Big Cabinet (Ministers) Source: Fiscal Politics, Chapter 9 AE EME/LIDC 10

12 II. Finally the impact of Ideology IDEOLOGY AND TAXES: Right governments are more likely to increase the VAT rates during crises, while left governments prefer to increase top-personal income taxes. 9% 8% 7% Probability of Raising/Cutting Taxes during Banking Crises VAT PIT 6% 5% 4% 3% 2% PIT 1% 0% Right VAT Left 11

13 II. Finally the impact of Ideology IDEOLOGY AND SPENDING: Left-wing governments are associated with larger public investment booms Average size investment booms (percent GDP) Ideology: 0=Right; 1=Left Source: Gupta and others (2015) Now or Later? The Political Economy of Public Investment in Democracies, IMF Working Paper No.15/175 12

14 III. Can Fiscal Rules and Institutions be helpful? FISCAL RULES help reduce the electoral fiscal cycle Government Size and Spending Volatility Expenditure (percent of GDP) Expenditure (left axis) Volatility (right axis) Volatility 41 Average of three years prior to ER introduction Year of ER introduction Average of 3 years post introduction of ER 2.7 Source: Fiscal Politics (Chapter 12) 13

15 III. Can Fiscal Rules and Institutions be helpful? FISCAL COUNCILS can improve fiscal performance. Source: Fiscal Politics (Chapter 14) 14

16 IV. Supranational Fiscal Politics Supranational rules: effective when owned by country authorities Lack of ownership explains weak compliance in Euro Area 100 Euro Area: Share of Non-Compliers (1999=2015, EA-19) Source: Fiscal Politics (Chapter 18) Overall deficit Debt MTO 15

17 IV. Supranational Fiscal Politics IMF programs have shown a high degree of ownership. Countries with a program conditionality in the revenue area were successful in increasing public revenues. 40 Tax Revenue after a period of consecutive revenue conditionality Initial Tax Revenue low income Source: Fiscal Politics, Chapter 19 middle income 16

18 V. Main Policy Messages Politics has a decisive influence on fiscal policy formulation and performance. The impact of elections and political divisions is particularly significant. It seems that ideology has less of an impact. Budget institutions help soften the effect of politics on fiscal policy. External constraints work if owned by country authorities. 17

19 THANK YOU FOR YOUR INTEREST The essays in Fiscal Politics are gold mines... Thomas J. Sargent Professor, New York University and Nobel Laureate of Economics will be of interest to both researchers and policy makers. Timothy J. Besley Professor, London School of Economics A splendid and broad ranging contribution. Alberto Alesina Professor, Harvard University They uncover new answers to a range of interesting questions Torsten Persson Professor, Swedish Research Council and University of Stockholm This is a book that should be on the shelf of any policymaker Francesco Giavazzi, Professor, Bocconi University For more information on this title or to order a copy please visit 18