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With the global financial crisis, the United Arab Emirates (UAE) experienced its own unraveling of macro-financial imbalances and thus presents an interesting case to analyze the underlying fragilities in federal governments. The purpose of this paper is to investigate the evolution of fiscal policy in the UAE at consolidated and subnational levels in the run-up and after the crisis, and provide pertinent insights about the importance of policy coordination in other federal fiscal systems – and monetary unions, as brought to light by the recent developments in Europe.

In measuring the cyclicality of fiscal balances at the consolidated and emirate level in the UAE, this paper uses the non-hydrocarbon primary budget balance, excluding interest spending and hydrocarbon revenues, investment income of the sovereign wealth fund, scaled by non-hydrocarbon GDP. The cyclically adjusted primary balance is estimated by deducting cyclical components from the actual balance. It is important to correct for cyclical changes because the budget balance tends to vary endogenously according the state of the economy – deteriorating during a bust and improving in a boom. Furthermore, since hydrocarbon revenues are dependent on the erratic behavior of hydrocarbon prices, the cyclically adjusted non-hydrocarbon primary balance is computed, using the elasticity of non-hydrocarbon revenues and primary expenditures relative to non-hydrocarbon GDP, to assess whether fiscal policy exacerbates economic fluctuations in the UAE at the aggregate and emirate levels.

The empirical findings show that procyclical fiscal policies prior to the crisis reinforced the financial sector cycle, exacerbated the economic upswing, and thereby contributed to the build-up of macro-financial vulnerabilities. The paper also sets out policy lessons to develop a rule-based fiscal framework that would help strengthen fiscal policy coordination between the various layers of government and ensure long-term fiscal sustainability and a more equitable intergenerational distribution of wealth.

The lack of fiscal policy coordination among subnational governments complicates macro-economic management at the federal level. Since the UAE has a pegged exchange rate regime and consequently a limited scope to use monetary policy, the burden of macro-economic stabilization falls on fiscal policy. Accordingly, this paper shows that procyclical fiscal policies prior to the crisis reinforced the “financial accelerator” effect, exacerbated the economic cycle, and thereby contributed to the build-up of economic and financial vulnerabilities in the UAE.

Deficits in fiscal and current account balances in a large number of countries reveal interesting implications of the causal relationship between internal and external imbalances. Empirical evidence about the occurrence of so-called twin deficits or twin surpluses provides crucial information about the validity of an intertemporal approach. However, most recent dynamic cyclical changes during the crisis period revealed many questions about the direct interconnection between macroeconomic performance and twin imbalances. In the paper we observe substantial features of twin imbalances in European transition economies. Event study (identification of large fiscal and current account changes and their parallel occurrence) and vector auto-regression methods will be employed to examine key aspects of twin imbalances. Our results suggest that current account deteriorations were predominately associated with negative public investment and savings balances (fiscal deficits), while current account improvements were predominately associated with positive private investment and savings balances, confirming empirical evidence about twin deficits in European transition economies.

Departing from the expansionary austerity literature, this study aims at examining how fiscal consolidation affects the economic growth in Tunisia using annual data over the period 1970–2018.

To revisit the fiscal consolidation-economic growth nexus, the ambiguous empirical findings in previous literature make useful the adoption of alternative econometric techniques. The authors use an extended nonlinear autoregressive distributed lag (ARDL) cointegration approach developed by Shin et al. (2014) and the Diks and Panchenko's (2006) nonlinear Granger causality test. Furthermore, a traditional approach based on changes in cyclically-adjusted primary balance was applied to define the fiscal consolidation episodes in Tunisia.

The empirical evidence reveal that fiscal adjustment in Tunisia may hurt the economy, both in the short- and long-run, through its contractionary effect on economic growth. Another important finding concerns the unidirectional nonlinear Granger causality running from fiscal consolidation to economic growth.

Fiscal adjustment in Tunisia is found to play a prominent role in reducing public debt; but at the same time, it may be costly and not beneficial to the economy. This view corroborates with the fact that fiscal consolidation is more likely to end successfully only under specific conditions. This calls for a deeper reflection upon new insights regarding the design of fiscal adjustment in Tunisia. To reach this end, it is suggested to combine the defensive consolidation strategy with offensive components such as investment, infrastructure, education and health.

The existing economic analysis on fiscal policy-growth nexus in Tunisia has often identified fiscal consolidation through the use of the actual fiscal balance. With the goal of more accurate estimation, this study bridges the gap by using the cyclically-adjusted primary balance (CAPB) as a much suitable indicator to investigate the non-Keynesian effect of fiscal consolidation in Tunisia. This indicator eliminates the influence of cyclical fluctuations and many other fixed expenditures such as the interest paid on the public debt.

Given the persistence of low oil prices and the continued shrinking of government revenues, Gulf Cooperation Council (GCC) countries continue to adapt to the new normal of the oil price environment, with a focus on pressing ahead with subsidies’ reforms and measures to increase non-oil revenues, as well as accelerating debt issuance, which raise concerns about fiscal sustainability and the implications on macroeconomic stability.

The purpose of this paper is to examine the sustainability of fiscal policy in GCC by exploring governments’ reaction to rising public debt accumulation via the estimation of a fiscal reaction function to higher debt. Subsequently, the paper compares the obtained results with other similar and non-similar groups, in terms of economic structures and oil dependency, to understand how some macroeconomic factors affect differently the fiscal policy responses, in a context of oil price shocks and high price volatility.

The results show that the coefficient of the lagged debt stock was significant and positive, which means that GCC are increasing the pace of reforms and the fiscal primary balance as they issue more debt to ensure a sustainable fiscal policy. The evidence is consistent with the theory that higher levels of debt warrant greater fiscal effort, but at lower debt levels, countries still have the space to increase spending without jeopardizing debt sustainability as long as they remain committed to fiscal reforms to increase the primary balance. The evidence supports the notion that the region’s public finances have improved in response to recent fiscal adjustments. However, national experiences differ considerably, especially given variation in the fiscal breakeven prices against the new normal of low oil prices. Moreover, the findings reveal that various measures of economic performance, as captured by economic growth, openness and the oil price, were also found to be important factors in explaining fiscal performance. The combined effects of low oil prices and high degree of openness warrant further efforts to reform the budget to increase the primary balance while safeguarding priority spending tomobilize non-energy growth and ensure debt sustainability in GCC.

Given recent experiences and the “low for long” oil price, policy priorities and reforms are necessary in oil-dependent economies, including GCC, to ensure macroeconomic sustainability. Sustaining the momentum of non-energy growth would reduce continued dependency of GCC economies on oil revenues and fiscal spending in the medium-term, creating a bigger scope for private sector participation in economic activity and increasing the prospects of further diversification away from long dependency on oil price volatility and their adverse implications on the fiscal budget and economic cycles.

This paper aims to develop a compound measure, which is fiscal vulnerability index, provides early warning signals of fiscal sustainability problems for Türkiye's economy.

The index is constructed using twelve distinct fiscal indicators and applying the portfolio method, which considers the time-varying cross-correlation structure between the subindices.

Dynamics of the fiscal vulnerability index indicate that it accurately predicts to the well-known fiscal crisis occurring in Türkiye's recent history. As a result, such a compound measure should be used in the early identification of fiscal vulnerability in Türkiye.

The main contribution of this paper, relative to existing papers, is that a fiscal vulnerability index was constructed by employing the most contemporaneous method and evaluating its performance in terms of capturing historical stress periods.

The aim of the paper is to evaluate fiscal adjustments that have occurred in the Economic and Monetary Union (EMU) countries in the last 35 years, and their consequences on the economic growth process by using the mean group (MG) estimators.

Our emphasis is on the effects of different composition of fiscal stimuli and consolidations. We compare the effects on the economic growth rate of different compositions of major fiscal changes. We use a cyclically adjusted value of the fiscal variables to leave aside variations of the fiscal variables induced by business cycle fluctuations.

Our empirical research of the effects of large changes in fiscal policy, both in case of a fiscal consolidation and of fiscal stimulus in the 18 EMU countries from 1980 to 2015, shows that adjustments by cutting current expenditures, rather than by tax increases are more likely to boost economic growth. It also shows that cuts of investment expenditures may reduce GDP growth. During fiscal stimulus episodes, tax cuts and public investments are more likely to increase growth than current public expenditure.

This is the first study devoted to the EMU countries. It should be underlined that the results obtained as for EMU countries are not necessarily applicable to other countries, as the different government size as well as different market institutions may influence the results.

This paper aims to understand the relationship in developing countries between fiscal consolidation and public investment – a flexible part of the budget that is easier to cut during consolidation effort, but with potentially negative growth effects. Analyzing in detail the case of Peru, the paper explores alternative fiscal rules and frameworks that might help create fiscal space for infrastructure investment.

The paper analyses trends in public and total infrastructure investment in six large Latin American economies, in the light of fiscal developments since the early 1980s. In particular, the paper explores the association between fiscal consolidations (improvements in the structural fiscal balance) and public infrastructure investment rates. In the second part, the paper analyzes recent changes in the fiscal framework of Peru and shows how they were conductive in creating additional fiscal space.

The authors argue that post-crisis fiscal frameworks, notably fiscal rules that are increasingly popular in the region, should not only consolidate the recent progress towards debt sustainability, but also create the fiscal space to close these infrastructure gaps. These points are illustrated in a detailed account of recent developments in the fiscal framework and public investment in the Peruvian case.

The paper contributes new evidence to the literature on fiscal consolidation and the composition of government expenditures. While the literature based on evidence from the 1990s has argued that fiscal consolidation plans in Latin America have almost always led to a significant reduction in public infrastructure investment, the paper finds less clear cut evidence when extending the analysis backwards (1980s) and forwards (2000s). The example of the case of Peru is used to explore fiscal institutions and rules that might be useful for other developing countries that face important infrastructure gaps.

In its recommendation on the 2004 update of the Broad Economic Policy Guidelines (BEPGs), the European Commission (2004) issued country-specific recommendations for fiscal policy in the Central and Eastern European (CEE) countries that have recently joined the European Union (EU) (henceforth the EU-10 countries). All countries except Estonia and Slovenia were urged to reduce their general government deficits, or to pursue low budget deficits in a credible and sustainable way within the multi-annual framework of EU budgetary surveillance. Some countries have received additional recommendations (the Czech Republic to reform its health care and pension systems, Estonia and Lithuania to avoid pro-cyclical policies, and Poland to reform its pension system). Most new Member States will consequently have to reduce their fiscal deficits and/or will have to avoid pro-cyclical fiscal policies to comply with the BEPGs, but also because of the required convergence within the Economic and Monetary Union (EMU). Bearing in mind that the government balance for the new Member States was –5.7 per cent of gross domestic product (GDP) in 2003, the required reduction of fiscal deficits will not be easy. This has been acknowledged by the Commission, which has argued that the need to reach and maintain sound budgetary positions will require an appropriate time path between the necessary consolidation and the appropriate fiscal stance supporting the transition. Particular attention will also need to be given to country-specific circumstances, in particular to initial budgetary positions, to ongoing structural shifts in the new Member State economies, and to the possible risks resulting from current account imbalances and strong credit growth.

The purpose of this paper is to empirically examine the relationship between fiscal consolidations and changes in income distribution.

Looking at a sample of 27 emerging market economies between 1980 and 2014, the authors resort to both static panel techniques as well as dynamic impulse response function analysis using local projection methods to uncover the direct impact of adjustments on inequality.

The authors find that fiscal consolidations tend to lead to an increase in income inequality and reduce the redistributive role of fiscal policy. Spending-based consolidations are more detrimental to income distribution than tax based ones and fiscal retrenchment during bad times raises inequality. In times of fiscal expansion inequality seems to rise in the medium term and this effect is larger if the economy is booming.

The distributional effects of consolidation, i.e. whether consolidation can confer benefits, must be balanced against the potential longer term benefits. It should be recognized that there is scope for improving the targeting and efficiency of public programs and that fiscal adjustments would not unavoidably run into such an efficiency vs equity trade-off.

The paper, applying a consistent methodology, documents the set of fiscal episodes emerging market economies experienced over time. The authors empirically examine both the static and dynamic links between fiscal consolidation and inequality. Since composition matters, the authors explore how spending and tax-based fiscal consolidations affect income distribution. The authors conduct several robustness checks including the use of alternative income distribution proxies and state-contingent estimations on the phase of the business cycle.

This paper investigates the joint relationship between economic growth, income inequality and fiscal adjustments using a panel of 47 Japanese prefectures from 1998 to 2017.

To assess jointly fiscal adjustment impacts on growth and inequality and to take into account the interdependence between these variables, the authors use a simultaneous equation model and estimate it by using the three-stage least squares estimation method.

The results show evidence of a trade-off between growth and inequality through fiscal adjustments. They reveal that first, fiscal adjustments have contractionary effects on growth. Second, they highlight the disparity between urban and rural taxpayers. Third, they provide evidence of a trade-off between fiscal adjustments and inequality through the labor market.

Based on the literature, the composition of fiscal adjustments is a crucial factor in analyzing fiscal adjustment impacts on economic growth and income inequality. The authors do not consider this aspect in the analysis; however, fiscal policy outcomes variables are included as a workaround for this.

These results suggest that authorities favor expenditure-based adjustments as they are less contractionary on the economy. Moreover, they should finance public expenditures through a tax on capital in order to mitigate fiscal adjustment impacts on inequality while promoting growth.

The paper is novel in testing the existence of a trade-off between economic growth and income inequality through fiscal adjustments at a sub-national level with an additional focus on urban and rural regions.