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Budget deficits, public sector solvency and political biases in fiscal policy : a case study of Finland

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  • Giancarlo Corsetti

    (Department of Economics, University of Rome, Italy)

  • Nouriel Roubini

    (Department of Economics, Stern School of Business, New York University)

Abstract

The Finnish fiscal balances severely deteriorated during the deep recession of the early 1990s with large fiscal deficits and significant increases in the public debt to GDP ratio. On the external side, current account deficits led to a large accumulation of external debt. While part of the fiscal imbalance can be attributed to the cyclical conditions of the Finnish economy, this paper considers whether the size of the deficit can be explained exclusively by stabilization and/or taxsmoothing policies. The paper then highlights political and institutional factors which have increased public debt beyond what would be desirable from the vantage point of traditional economic theory. The argument for fiscal rules against discretion is re-assessed within a simple model of political bias towards deficit spending, allowing for tax-smoothing considerations as well as for international trade in goods and assets. The analysis of the Finnish data shows that political and institutional biases contribute to explain the significant internal and external deficits during the 1990s depression. A substantial fiscal retrenchment will soon be required in order to avoid the insolvency of the public sector.

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Bibliographic Info

Article provided by Finnish Economic Association in its journal Finnish Economic Papers.

Volume (Year): 9 (1996)
Issue (Month): 1 (Spring)
Pages: 18-36

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Handle: RePEc:fep:journl:v:9:y:1996:i:1:p:18-36

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Web page: http://www.taloustieteellinenyhdistys.fi
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Cited by:
  1. Kiander, Jaakko & Vartia, Pentti, 1994. "The Great Deperession of the 199s in Finland," Discussion Papers 526, The Research Institute of the Finnish Economy.
  2. Lars Jonung & Hans Tson Söderström & Joakim Stymne, 1996. "Depression in the north - boom and bust in Sweden and Finland, 1985-93," Finnish Economic Papers, Finnish Economic Association, vol. 9(1), pages 55-71, Spring.
  3. Leif Lybecker Eskesen, 2009. "The Role for Counter-Cyclical Fiscal Policy in Singapore," IMF Working Papers 09/8, International Monetary Fund.
  4. Jaakko Kiander, 2004. "Growth and Employment in Nordic Welfare States in the 1990s: a Tale of Crisis and Revival," Discussion Papers 336, Government Institute for Economic Research Finland (VATT).
  5. Korkeamaki, Timo & Koskinen, Yrjo & Takalo, Tuomas, 2007. "Phoenix rising: Legal reforms and changes in valuations in Finland during the economic crisis," Journal of Financial Stability, Elsevier, vol. 3(1), pages 33-58, April.
  6. Sebastian Hauptmeier & Martin Heipertz & Ludger Schuknecht, 2007. "Expenditure Reform in Industrialised Countries: A Case-Study Approach," Fiscal Studies, Institute for Fiscal Studies, vol. 28(3), pages 293-342, 09.

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