European Budgetary Rules, Deficits, and GDP Growth

There are two new articles that are interesting to pair together, one in Southern Economic Journal and the other in Public Budgeting and Finance.  I’m just going to put their title and abstract below:

Public budgetary rules and GDP growth: An empirical study on OECD and twelve european countries.” Southern Economic Journal, by Elton Beqiraj, Silvia Fedeli, and Francesco Forte. Abstract:

We study the long‐term effects of budgetary rules on GDP growth rate and analyse the determinants of the short‐term GDP growth dynamics. For both a sample of 19 OECD and a subsample of 12 European countries, we show that, in the long run, improvements in the cyclically adjusted budget balance, as well as increases in the tax burden, have negative effects on GDP growth. The highest effect of fiscal policy on GDP growth would be obtained if the structural deficits were used to increase the market size by reducing the tax burden. In line with Barro (1990), a deficit‐financed reduction of tax burden has a stronger effect for European than for OECD countries, because in Europe the government size with respect to market size is too large. Therefore, if GDP growth is a dominant policy objective, in Europe specific actions should redress the 2012 Treaty toward a reduction of the tax burden.

“Budgetary Balances Adjustments From Governmental Accounting to National Accounts in EU Countries: Can Deficits Be Prone to Management?” Public Budgeting & Finance, by Susana Jorge, Maria Antonia Jesus, Raul Laureano.

European Union (EU) countries are required to achieve deficit targets and are thus incentivized to use tools to keep within budgetary limits. This paper argues that accounting discretion might be used to manage some adjustments made during the translation of data from Governmental Accounting (GA) into National Accounts (NA), to window‐dress the final deficit/surplus reported to EUROSTAT. The empirical research shows there are certain circumstances that might facilitate the use of GA–NA “adjustment discretion.” EU authorities must pay special attention to these conditions to ensure the reliability of reported deficits. The main findings of this paper could also assist in future efforts to improve the integrity of the adjustment process.


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