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Fiscal Sustainability of the European Welfare State: Evidence from Cumulative Excess of the Primary Balance

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  • Stoian, Andreea

    ()
    (Bucharest Academy of Economic Studies)

Abstract

Tanzi and Schuknecht (1997) pointed out that one of the key features of welfare state is to run large fiscal deficits and public debt. This can be explained considering the rise of the social transfers that led to an overall increase of the total government spending. Growing public debt can generate fiscal sustainability issues in the long run. Therefore, the aim of this paper is to study fiscal sustainability using an indicator named the Cumulative Excess of the Primary Balance (CEPB) that avoids the shortcomings induced by non-stationary time series or Structural breaks when applying classical econometric tools. CEPB is derived from a simple Dynamic model of public debt that allows estimating the primary balance that stabilizes public debt. Applying CEPB for annual data extracted for 1980-2007 period for two distinct European welfare regimes, we find that the Nordic welfare states are less exposed to fiscal Sustainability issues in the long run than the Conservative countries.

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Bibliographic Info

Paper provided by Universidade Portucalense, Centro de Investigação em Gestão e Economia (CIGE) in its series Working Papers with number 27/2012.

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Length: 13 pages
Date of creation: 12 Jun 2012
Date of revision:
Handle: RePEc:ris:cigewp:2012_027

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Postal: Universidade Portucalense – Economics and Management Department (CIGE – Centro de Investigação em Gestão e Economia), Rua Dr. António Bernardino de Almeida, 541-619, 4200 – 072 Porto, Portugal
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Keywords: Fiscal sustainability; budgetary deficit; primary balance; public debt; welfare state;

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  1. Uctum, Merih & Wickens, Michael R, 1997. "Debt and Deficit Ceilings, and Sustainability of Fiscal Policies: An Intertemporal Analysis," CEPR Discussion Papers 1612, C.E.P.R. Discussion Papers.
  2. António Afonso, 2005. "Fiscal Sustainability: The Unpleasant European Case," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 61(1), pages 19-, March.
  3. Bharat Trehan & Carl E. Walsh, 1988. "Testing intertemporal budget constraints: theory and applications to U. S. federal budget and current account deficits," Working Papers in Applied Economic Theory 88-03, Federal Reserve Bank of San Francisco.
  4. Olivier Jean Blanchard, 1990. "Suggestions for a New Set of Fiscal Indicators," OECD Economics Department Working Papers 79, OECD Publishing.
  5. António Afonso, 2000. "Fiscal policy sustainability: some unpleasant European evidence," Working Papers Department of Economics 2000/12, ISEG - School of Economics and Management, Department of Economics, University of Lisbon.
  6. Barr, Nicholas, 1992. "Economic Theory and the Welfare State: A Survey and Interpretation," Journal of Economic Literature, American Economic Association, vol. 30(2), pages 741-803, June.
  7. Alberto Alesina, 2000. "The Political Economy of the Budget Surplus in the United States," Journal of Economic Perspectives, American Economic Association, vol. 14(3), pages 3-19, Summer.
  8. Jocelyn Horne, 1991. "Indicators of Fiscal Sustainability," IMF Working Papers 91/5, International Monetary Fund.
  9. James Payne, 1997. "International evidence on the sustainability of budget deficits," Applied Economics Letters, Taylor & Francis Journals, vol. 4(12), pages 775-779.
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