Business Services Industry
IV. Fiscal stance over the cycle: the role of debt, institutions, and budget constraints
OECD Economic Outlook, Dec, 2003
Appendix Table IV.1. Fiscal stance over the cycle:
baseline results, fiscal rules, and tax cuts
Dep. Var.: Cyclically-adjusted primary budget balance (a)
Baseline
Cyclical component of budget balance -0.24 *
(0.126)
Cyclical component in downturn (b) 0.43 **
(0.184)
Cyclical component in downturn (before 1992)
Cyclical component in downturn (between 1992-98)
Cyclical component in downturn (after 1999)
Cyclical component in downturn (no tax cuts)
Cyclical component in downturn (following tax cuts)
Lagged debt stock 0.06 ***
(0.020)
No. of observations 384
Sargan test (overidentification, p-value) 0.21
First-order autocorrelation (p-value) 0.00
Second-order autocorrelation (p-value) 0.27
Fiscal rules
Cyclical component of budget balance -0.51 **
(0.223)
Cyclical component in downturn (b)
Cyclical component in downturn (before 1992) 0.43
(0.363)
Cyclical component in downturn (between 1992-98) 0.70 *
(0.379)
Cyclical component in downturn (after 1999) 0.94 **
(0.457)
Cyclical component in downturn (no tax cuts)
Cyclical component in downturn (following tax cuts)
Lagged debt stock 0.06 ***
(0.011)
No. of observations 209
Sargan test (overidentification, p-value) 0.98
First-order autocorrelation (p-value) 0.00
Second-order autocorrelation (p-value) 0.02
Tax cuts
in upturn
Cyclical component of budget balance -0.22 *
(0.126)
Cyclical component in downturn (b)
Cyclical component in downturn (before 1992)
Cyclical component in downturn (between 1992-98)
Cyclical component in downturn (after 1999)
Cyclical component in downturn (no tax cuts) 0.44 **
(0.185)
Cyclical component in downturn (following tax cuts) 0.13
(0.368)
Lagged debt stock 0.07 ***
(0.020)
No. of observations 384
Sargan test (overidentification, p-value) 0.23
First-order autocorrelation (p-value) 0.00
Second-order autocorrelation (p-value) 0.27
(a) All models are estimated using the Arellano-Bond GMM estimator and
include a common intercept and the lagged dependent variable (not
reported). Standard errors are reported in parentheses. Statistical
significance at the 1, 5, and 10 per cent levels is denoted by
respectively (***), (**), and (*). The sample period is 1980-2002.
(b) The downturn indicator is defined as a dummy variable taking value
1 for the years in which the change in the output gap relative to the
previous year is non-positive and 0, otherwise.
Source: OECD.
Appendix Table IV.2. Fiscal stance over the cycle:
expenditure rigidity and political cohesion
Dep. Var.: Cyclically-adjusted primary budget balance (a)
Public
employ-
ment
Cyclical component of budget balance -0.22 *
(0.126)
Cyclical component in downturn (high public employment)
(b) 0.50 ***
(0.186)
Cyclical component in downturn (low public employment) 0.00
(0.302)
Cyclical component in downturn (high public investment)
Cyclical component in downturn (low public investment)
Cyclical component in downturn (majority)
Cyclical component in downturn (minority)
Cyclical component in downturn (high fragmentation)
Cyclical component in downturn (low fragmentation)
Lagged debt stock 0.07 ***
(0.020)
No. of observations 384
Sargan test (overidentification, p-value) 0.19
First-order autocorrelation (p-value) 0.00
Second-order autocorrelation (p-value) 0.31
Public
invest-
ment
Cyclical component of budget balance -0.23 *
(0.126)
Cyclical component in downturn (high public employment)
(b)
Cyclical component in downturn (low public employment)
Cyclical component in downturn (high public investment) 0.23
(0.232)
Cyclical component in downturn (low public investment) 0.54 ***
(0.196)
Cyclical component in downturn (majority)
Cyclical component in downturn (minority)
Cyclical component in downturn (high fragmentation)
Cyclical component in downturn (low fragmentation)
Lagged debt stock 0.07 ***
(0.020)
No. of observations 384
Sargan test (overidentification, p-value) 0.20
First-order autocorrelation (p-value) 0.00
Second-order autocorrelation (p-value) 0.31
Majority
in legis-
lature
Cyclical component of budget balance -0.41 **
(0.164)
Cyclical component in downturn (high public employment)
(b)
Cyclical component in downturn (low public employment)
Cyclical component in downturn (high public investment)
Cyclical component in downturn (low public investment)
Cyclical component in downturn (majority) 0.53
(0.288)
Cyclical component in downturn (minority) 0.81 **
(0.336)
Cyclical component in downturn (high fragmentation)
Cyclical component in downturn (low fragmentation)
Lagged debt stock 0.06 **
(0.024)
No. of observations 279
Sargan test (overidentification, p-value) 0.23
First-order autocorrelation (p-value) 0.00
Second-order autocorrelation (p-value) 0.11
Political
fragment-
ation
Cyclical component of budget balance -0.46 ***
(0.161)
Cyclical component in downturn (high public employment)
(b)
Cyclical component in downturn (low public employment)
Cyclical component in downturn (high public investment)
Cyclical component in downturn (low public investment)
Cyclical component in downturn (majority)
Cyclical component in downturn (minority)
Cyclical component in downturn (high fragmentation) 1.12 ***
(0.305)
Cyclical component in downturn (low fragmentation) 0.23
(0.296)
Lagged debt stock 0.07 ***
(0.024)
No. of observations 279
Sargan test (overidentification, p-value) 0.19
First-order autocorrelation (p-value) 0.00
Second-order autocorrelation (p-value) 0.09
(a) All models are estimated using the Arellano-Bond GMM estimator and
include a common intercept and the lagged dependent variable (not
reported). Standard errors are reported in parentheses. Statistical
significance at the 1, 5, and 10 percent levels is denoted by
respectively (***), (**), and (*). The sample period is 1980-2002.
(b) The downturn indicator is defined as a dummy variable taking value
1 for the years in which the change in the output gap relative to the
previous year is non-positive and 0, otherwise.
Source: OECD.
Appendix Table IV.3. Fiscal stance over the cycle
electoral systems and cycles
Dep. Vac: Cyclically-adjusted primary budget balance (a)
Electoral
system
Cyclical component of budget balance -0.41 *
(0.229)
Cyclical component in downturn (proportional
representation) (b) 0.77 **
(0.355)
Cyclical component in downturn (plurality) -0.32
(0.404)
Cyclical component in downturn (election year)
Cyclical component in downturn (not election year)
Lagged debt stock 0.06 **
(0.025)
No. of observations 264
Sargan test (overidentifieation, (p-value) 0.17
First-order autocorrelation (p-value) 0.00
Second-order autocorrelation (p-value) 0.06
Electoral
cycle
Cyclical component of budget balance -0.41 **
(0.165)
Cyclical component in downturn (proportional
representation) (b)
Cyclical component in downturn (plurality)
Cyclical component in downturn (election year) 0.68 **
(0.291)
Cyclical component in downturn (not election year) 0.56
(0.305)
Lagged debt stock 0.05 **
(0.024)
No. of observations 279
Sargan test (overidentifieation, (p-value) 0.23
First-order autocorrelation (p-value) 0.00
Second-order autocorrelation (p-value) 0.11
(a) All models are estimated using the Arellano-Bond GMM estimator and
include a common intercept and the lagged dependent variable (not
reported). Standard errors are reported in parentheses. Statistical
significance at the 1, 5, and 10 percent levels is denoted by
respectively (***), (**), and (*). The sample period is 1990-2002.
(b) The downturn indicator is defined as a dummy variable taking value
1 for the years in which the change in the output gap relative to the
previous year is non-positive and 0, otherwise.
Source: OECD.
Table IV.1. Sensitivity of fiscal stance to the cycle
For each percentage-point movement in the cyclical component of the
primary balance, the cyclically-adjusted primary balance changes by (in
percentage points): (a)
Sensitivity
Baseline
Upturns -0.2
Downturns 0.2
Fiscal rules: MT/SGP
Downturns before 1992 -0.5
Downturns between 1992-98 0.2
Downturns after 1999 0.4
Tax cuts
Downturns following tax cuts in previous
upswing -0.2
Downturns without tax cut in previous upswing 0.2
Expenditure rigidity
Downturns in countries/years with high public
employment share 0.3
Downturns in countries/years with low public
employment share -0.2
Downturns in countries/years with high public
investment share -0.2
Downturns in countries/years with low public
investment share 0.3
Political cohesion
Downturns in countries/years with
government majority in the legislature 0.1
Downturns in countries/years with
government minority in the legislature 0.4
Downturns in countries/years with high
political fragmentation 0.7
Downturns in countries/years with low political
fragmentation -0.5
Electoral systems and cycles
Downturns with an electoral regime based on
proportional representation 0.4
Downturns with an electoral regime based on
plurality -0.4
When election year coincides with a downturn 0.3
Downturns not in an election year 0.2
Fiscal stance
Baseline
Upturns Pro-cyclical
Downturns Counter-cyclical
Fiscal rules: MT/SGP
Downturns before 1992 Pro-cyclical
Downturns between 1992-98 Counter-cyclical
Downturns after 1999 Counter-cyclical
Tax cuts
Downturns following tax cuts in previous
upswing Pro-cyclical
Downturns without tax cut in previous upswing Counter-cyclical
Expenditure rigidity
Downturns in countries/years with high public
employment share Counter-cyclical
Downturns in countries/years with low public
employment share Pro-cyclical
Downturns in countries/years with high public
investment share Pro-cyclical
Downturns in countries/years with low public
investment share Counter-cyclical
Political cohesion
Downturns in countries/years with
government majority in the legislature Counter-cyclical
Downturns in countries/years with
government minority in the legislature Counter-cyclical
Downturns in countries/years with high
political fragmentation Counter-cyclical
Downturns in countries/years with low political
fragmentation Pro-cyclical
Electoral systems and cycles
Downturns with an electoral regime based on
proportional representation Counter-cyclical
Downturns with an electoral regime based on
plurality Pro-cyclical
When election year coincides with a downturn Counter-cyclical
Downturns not in an election year Counter-cyclical
(a) Based on the estimated coefficients reported in Appendix Tables
IV.1-3. The sensitivity parameters in downturns are reported relative
to the estimated coefficients in upturns.
Source: OECD.
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