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Is Coordination of Fiscal Deficits Necessary?

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  • Harry Huizinga
  • Søren Bo Nielsen

Abstract

National budget deficits can create externalities through their effects on international interest rates. This paper examines the scope for fiscal rules restricting government borrowing for the case where government revenues (on the margin) stem from capital income taxation. There is no need to coordinate national borrowing, if governments have access to both a saving and an investment tax instrument. In the absence of a saving tax, however, national fiscal policies affect welfare abroad through the international interest rate. A reduction in first period deficits tied to increased government spending later is always welfare improving. Reducing first period deficits without further coordination of subsequent tax and spending policies will generally not improve welfare.

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Paper provided by Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics in its series EPRU Working Paper Series with number 98-05.

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Handle: RePEc:kud:epruwp:98-05

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  1. Bucovetsky, Sam & Wilson, John Douglas, 1991. "Tax competition with two tax instruments," Regional Science and Urban Economics, Elsevier, vol. 21(3), pages 333-350, November.
  2. Tabellini, Guido & Alesina, Alberto, 1990. "A Positive Theory of Fiscal Deficits and Government Debt," Scholarly Articles 3612769, Harvard University Department of Economics.
  3. Buiter, Willem H & Corsetti, Giancarlo & Roubini, Nouriel, 1992. "`Excessive Deficits': Sense and Nonsense in the Treaty of Maastricht," CEPR Discussion Papers 750, C.E.P.R. Discussion Papers.
  4. Jacob A. Frenkel & Assaf Razin, 1986. "The International Transmission and Effects of Fiscal Policies," NBER Working Papers 1799, National Bureau of Economic Research, Inc.
  5. Beetsma, Roel & Uhlig, Harald, 1997. "An Analysis of the 'Stability Pact'," CEPR Discussion Papers 1669, C.E.P.R. Discussion Papers.
  6. Persson, Torsten & Tabellini, Guido, 1995. "Double-Edged Incentives: Institutions and Policy Coordination," CEPR Discussion Papers 1141, C.E.P.R. Discussion Papers.
  7. Michael Keen, 1993. "The welfare economics of tax co-ordination in the European Community : a survey," Fiscal Studies, Institute for Fiscal Studies, vol. 14(2), pages 15-36, February.
  8. Huizinga, Harry & Nielsen, Soren Bo, 2002. "The coordination of capital income and profit taxation with cross-ownership of firms," Regional Science and Urban Economics, Elsevier, vol. 32(1), pages 1-26, January.
  9. Frenkel, Jacob A & Razin, Assaf, 1986. "Fiscal Policies in the World Economy," Journal of Political Economy, University of Chicago Press, vol. 94(3), pages 564-94, June.
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Cited by:
  1. Alexander Italianer, 1999. "The Euro and Internal Economic Policy Coordination," Empirica, Springer, vol. 26(3), pages 201-216, September.
  2. Andrés Leal Marcos & Julio López Laborda, 2009. "Efectos externos del endeudamiento sobre la calificación crediticia de las Comunidades Autónomas," Hacienda Pública Española, IEF, vol. 189(2), pages 81-106, June.
  3. Fritz Breuss & Andrea Weber, 1999. "Economic Policy Coordination in the EMU: Implications for the Stability Pact," EUI-RSCAS Working Papers 26, European University Institute (EUI), Robert Schuman Centre of Advanced Studies (RSCAS).

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