The Political Economy of the Revenue Deficit
AbstractA widely accepted hypothesis is that concessions demanded by and granted to vested interests are responsible for the steady decline in the government financial position. We argue that it was rather the supply-side shocks of the seventies combined with the political objective of protecting the poor that were responsible. We support our argument by examining time series of disaggregated government budget data, and the theory of incentives under imperfect information. The latter suggests that price controls in the presence of cost shocks would lead to systematic incentives to lower quality and investment. And therefore lower tax capacity and the ability to reduce poverty in the future. We illustrate these mechanisms at work in power, telecommunications, railways, roads, education, and tax collection. The analysis is hopeful, however, because if this causal mechanism were understood, a concerted attempt to rationalise user charges and improve quality would be more acceptable. The process would be helped by macroeconomic policies that keep interest rates low and prevent exchange rate volatility, while supply side policies keep inflation low.
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Bibliographic InfoPaper provided by University Library of Munich, Germany in its series MPRA Paper with number 29980.
Date of creation: 1999
Date of revision:
cost shocks; user charges; public goods; quality; deficits;
Find related papers by JEL classification:
- O23 - Economic Development, Technological Change, and Growth - - Development Planning and Policy - - - Fiscal and Monetary Policy in Development
- H3 - Public Economics - - Fiscal Policies and Behavior of Economic Agents
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