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Mandatory Expenditure and the Flexibility of Fiscal Policy in the Czech Republic

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  • Vojtěch Roženský
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    Abstract

    This paper deals with the development of mandatory expenditure and its effect on the flexibility of fiscal policy in the Czech Republic. Fiscal flexibility is measured by the Steuerle-Roeper index of fiscal democracy, which expresses the proportion of budgetary revenue that remains after covering mandatory expenditure, i.e. the proportion of resources available for discretionary spending. The lower the value of the index, the lower the flexibility of fiscal resources. A negative value indicates that tax revenue is not sufficient to cover mandatory expenditure and the government has no resources available for discretionary spending. The analysis of Czech fiscal data from the period between 1995 and 2009 shows, that even though the share of mandatory expenditure increases, the flexibility of fiscal policy is still substantially better compared to Germany. The results of the comparison with the United States are ambiguous, depending on methodology. Some of the possible determinants of fiscal flexibility were tested by OLS regression. The analysis confirmed a negative relation of unemployment rate with the index of fiscal democracy. Panel regression also indicates a positive effect of GDP growth and a negative effect of the debt-to-GDP ratio. The effect of population ageing was not confirmed.

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    Bibliographic Info

    Article provided by University of Economics, Prague in its journal Politická ekonomie.

    Volume (Year): 2012 (2012)
    Issue (Month): 1 ()
    Pages: 40-57

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    Handle: RePEc:prg:jnlpol:v:2012:y:2012:i:1:id:831:p:40-57

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    Related research

    Keywords: mandatory expenditure; index of fiscal democracy; fiscal policy;

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    References

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    1. Martin S. Feldstein, 2009. "Rethinking the Role of Fiscal Policy," NBER Working Papers 14684, National Bureau of Economic Research, Inc.
    2. Sala-i-Martin, Xavier, 1997. "I Just Ran Two Million Regressions," American Economic Review, American Economic Association, vol. 87(2), pages 178-83, May.
    3. Adi Brender & Allan Drazen, 2009. "Do Leaders Affect Government Spending Priorities?," NBER Working Papers 15368, National Bureau of Economic Research, Inc.
    4. Alan J. Auerbach, 2003. "Fiscal Policy, Past and Present," NBER Working Papers 10023, National Bureau of Economic Research, Inc.
    5. Leamer, Edward E, 1985. "Sensitivity Analyses Would Help," American Economic Review, American Economic Association, vol. 75(3), pages 308-13, June.
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