IDEAS home Printed from https://ideas.repec.org/a/oup/cesifo/v53y2007i1p115-152.html
   My bibliography  Save this article

From Deficits to Debt and Back: Political Incentives under Numerical Fiscal Rules

Author

Listed:
  • Marco Buti
  • João Nogueira Martins
  • Alessandro Turrini

Abstract

Under numerical fiscal rules, such as those underpinning EMU, governments have strong temptations to use accounting tricks to meet the fiscal constraints. Given these political incentives, fiscal variables that in the past were regarded as a mere residual acquire a strategic role. This is the case of the so-called stock-flow adjustment (SFA) which reconciles deficit and debt developments. We develop a simple theoretical model where deficits and two distinct SFA components (one that could be used to reduce the deficit figures and the other to impact debt figures instead) are determined as a result of a constrained optimisation by fiscal authorities. Econometric evidence provides results consistent with the model findings. The SFA component related to the purpose to hide deficits rises with the recorded deficit, while the sales of financial assets designed to keep the debt under control rise with both debt and deficit. When deficits are in excess of the 3 percent limit, accounting gimmicks become more sensitive to the size of deficits. The SGP per se does not appear to increase the extent to which higher deficits trigger more accounting gimmicks. However, the SGP seems associated with a more intense use of accounting gimmicks irrespective of the level of deficit. Such accounting practices have greatly contributed to the loss of credibility of Economic and Monetary Union's fiscal rules. If properly implemented, the reformed Pact, which stresses durable adjustment and long-run sustainability, should help curb such perverse incentives. (JEL codes: E61, H62, H87) Copyright 2007, Oxford University Press.

Suggested Citation

  • Marco Buti & João Nogueira Martins & Alessandro Turrini, 2007. "From Deficits to Debt and Back: Political Incentives under Numerical Fiscal Rules," CESifo Economic Studies, CESifo, vol. 53(1), pages 115-152, March.
  • Handle: RePEc:oup:cesifo:v:53:y:2007:i:1:p:115-152
    as

    Download full text from publisher

    File URL: http://hdl.handle.net/10.1093/cesifo/ifm003
    Download Restriction: Access to full text is restricted to subscribers.
    ---><---

    As the access to this document is restricted, you may want to look for a different version below or search for a different version of it.

    Other versions of this item:

    References listed on IDEAS

    as
    1. Marco Buti & Paul Van Den Noord, 2004. "Fiscal Discretion and Elections in the Early Years of EMU," Journal of Common Market Studies, Wiley Blackwell, vol. 42(4), pages 737-756, November.
    2. von Hagen, Jurgen & Wolff, Guntram B., 2006. "What do deficits tell us about debt? Empirical evidence on creative accounting with fiscal rules in the EU," Journal of Banking & Finance, Elsevier, vol. 30(12), pages 3259-3279, December.
    3. Poterba, James M, 1994. "State Responses to Fiscal Crises: The Effects of Budgetary Institutions and Politics," Journal of Political Economy, University of Chicago Press, vol. 102(4), pages 799-821, August.
    4. Canova, Fabio & Pappa, Evi, 2006. "The elusive costs and the immaterial gains of fiscal constraints," Journal of Public Economics, Elsevier, vol. 90(8-9), pages 1391-1414, September.
    5. Marco Buti, 2006. "Will the new stability and growth pact succeed? An economic and political perspective," European Economy - Economic Papers 2008 - 2015 241, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.
    6. Milesi-Ferretti, Gian Maria, 2004. "Good, bad or ugly? On the effects of fiscal rules with creative accounting," Journal of Public Economics, Elsevier, vol. 88(1-2), pages 377-394, January.
    7. Buiter, W.H. & Corsetti, G. & Roubini, N., 1992. "Excessive Deficits: Sense and Nonsence in the Treaty of Maastricht," Papers 674, Yale - Economic Growth Center.
    8. Vincent Koen & Paul van den Noord, 2005. "Fiscal Gimmickry in Europe: One-Off Measures and Creative Accounting," OECD Economics Department Working Papers 417, OECD Publishing.
    9. Milesi-Ferretti, Gian Maria & Moriyama, Kenji, 2006. "Fiscal adjustment in EU countries: A balance sheet approach," Journal of Banking & Finance, Elsevier, vol. 30(12), pages 3281-3298, December.
    10. Fabrizio Balassone & Daniele Franco & Stefania Zotteri, 2006. "EMU fiscal indicators: a misleading compass?," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 33(2), pages 63-87, June.
    11. Fabrizio Balassone & Daniela Monacelli, 2000. "EMU fiscal rules: Is there a gap?," Temi di discussione (Economic working papers) 375, Bank of Italy, Economic Research and International Relations Area.
    12. Benoiˆt Coeure´ & Jean Pisani-Ferry, 2005. "Fiscal Policy in Emu: Towards a Sustainability and Growth Pact?," Oxford Review of Economic Policy, Oxford University Press, vol. 21(4), pages 598-617, Winter.
    13. von Hagen, Jürgen, 2005. "Fiscal Rules and Fiscal Performance in the EU and Japan," CEPR Discussion Papers 5330, C.E.P.R. Discussion Papers.
    14. Easterly, William, 1999. "When is fiscal adjustment an illusion?," Policy Research Working Paper Series 2109, The World Bank.
    15. William Easterly, 1999. "When is fiscal adjustment an illusion?," Economic Policy, CEPR;CES;MSH, vol. 14(28), pages 56-86.
    16. Forni, Lorenzo & Momigliano, Sandro, 2004. "Cyclical sensitivity of fiscal policies based on real-time data," MPRA Paper 4315, University Library of Munich, Germany.
    17. Jean Pisani-Ferry, 2005. "Fiscal policy in EMU- towards a sustainability and growth pact," Working Papers 52, Bruegel.
    18. James E. Alt & David Dreyer Lassen, 2005. "The Political Budget Cycle is Where You Can't See It: Transparency and Fiscal Manipulation," EPRU Working Paper Series 05-03, Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics.
    19. von Hagen, Jurgen, 1991. "A note on the empirical effectiveness of formal fiscal restraints," Journal of Public Economics, Elsevier, vol. 44(2), pages 199-210, March.
    20. Dafflon, Bernard & Rossi, Sergio, 1999. "Public Accounting Fudges towards EMU: A First Empirical Survey and Some Public Choice Considerations," Public Choice, Springer, vol. 101(1-2), pages 59-84, October.
    21. Bunch, Beverly S, 1991. "The Effect of Constitutional Debt Limits on Stage Governments' Use of Public Authorities," Public Choice, Springer, vol. 68(1-3), pages 57-69, January.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Timothy C. Irwin, 2015. "Defining The Government'S Debt And Deficit," Journal of Economic Surveys, Wiley Blackwell, vol. 29(4), pages 711-732, September.
    2. Roel M.W.J.Beetsma & Frederick van der Ploeg, 2007. "The political economy of public investment," European Economy - Economic Papers 2008 - 2015 276, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.
    3. Roel M.W.J. Beetsma & Frederick van der Ploeg, 2007. "Partisan Public Investment and Debt: The Case for Fiscal Restrictions," Economics Working Papers ECO2007/37, European University Institute.
    4. Bernardino Benito & Francisco Bastida & Cristina Vicente, 2013. "Creating Room for Manoeuvre: a Strategy to Generate Political Budget Cycles under Fiscal Rules," Kyklos, Wiley Blackwell, vol. 66(4), pages 467-496, November.
    5. von Hagen, Jurgen & Wolff, Guntram B., 2006. "What do deficits tell us about debt? Empirical evidence on creative accounting with fiscal rules in the EU," Journal of Banking & Finance, Elsevier, vol. 30(12), pages 3259-3279, December.
    6. Florian Dorn & Stefanie Gaebler & Felix Roesel, 2021. "Ineffective fiscal rules? The effect of public sector accounting standards on budgets, efficiency, and accountability," Public Choice, Springer, vol. 186(3), pages 387-412, March.
    7. Burret, Heiko T. & Feld, Lars P., 2018. "(Un-)intended effects of fiscal rules," European Journal of Political Economy, Elsevier, vol. 52(C), pages 166-191.
    8. Heiko T. Burret & Lars P. Feld, 2018. "Vertical effects of fiscal rules: the Swiss experience," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 25(3), pages 673-721, June.
    9. Kerstin Bernoth & Guntram B. Wolff, 2008. "Fool The Markets? Creative Accounting, Fiscal Transparency And Sovereign Risk Premia," Scottish Journal of Political Economy, Scottish Economic Society, vol. 55(4), pages 465-487, September.
    10. Reischmann, Markus, 2016. "Creative accounting and electoral motives: Evidence from OECD countries," Journal of Comparative Economics, Elsevier, vol. 44(2), pages 243-257.
    11. Markus Reischmann, 2016. "Empirische Studien zu Staatsverschuldung und fiskalischen Transferzahlungen," ifo Beiträge zur Wirtschaftsforschung, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, number 63.
    12. Heiko T. Burret & Lars P. Feld, 2016. "Effects of Fiscal Rules - 85 Years' Experience in Switzerland," CESifo Working Paper Series 6063, CESifo.
    13. Christian Henn & Maren Brede, 2018. "Finland’s Public Sector Balance Sheet: A Novel Approach to Analysis of Public Finance," IMF Working Papers 2018/078, International Monetary Fund.
    14. Ata Özkaya, 2014. "Hidden Overhang of Domestic Debt and Its Role in the This-Time-Is-Different Syndrome: An Empirical Contingent Liabilities Model," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 50(4), pages 73-94.
    15. Milesi-Ferretti, Gian Maria, 2004. "Good, bad or ugly? On the effects of fiscal rules with creative accounting," Journal of Public Economics, Elsevier, vol. 88(1-2), pages 377-394, January.
    16. Christofzik, Désirée I., 2019. "Does accrual accounting alter fiscal policy decisions? - Evidence from Germany," European Journal of Political Economy, Elsevier, vol. 60(C).
    17. Buso, Marco & Marty, Frederic & Tran, Phuong Tra, 2017. "Public-private partnerships from budget constraints: Looking for debt hiding?," International Journal of Industrial Organization, Elsevier, vol. 51(C), pages 56-84.
    18. Alesina, A. & Passalacqua, A., 2016. "The Political Economy of Government Debt," Handbook of Macroeconomics, in: J. B. Taylor & Harald Uhlig (ed.), Handbook of Macroeconomics, edition 1, volume 2, chapter 0, pages 2599-2651, Elsevier.
    19. Giuseppe BOGNETTI & Giorgio RAGAZZI, 2009. "EU new member countries: public sector accounts and convergence criteria," Departmental Working Papers 2009-20, Department of Economics, Management and Quantitative Methods at Università degli Studi di Milano.
    20. Milesi-Ferretti, Gian Maria & Moriyama, Kenji, 2006. "Fiscal adjustment in EU countries: A balance sheet approach," Journal of Banking & Finance, Elsevier, vol. 30(12), pages 3281-3298, December.

    More about this item

    JEL classification:

    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • H62 - Public Economics - - National Budget, Deficit, and Debt - - - Deficit; Surplus
    • H87 - Public Economics - - Miscellaneous Issues - - - International Fiscal Issues; International Public Goods

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:oup:cesifo:v:53:y:2007:i:1:p:115-152. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: . General contact details of provider: https://edirc.repec.org/data/cesifde.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Oxford University Press (email available below). General contact details of provider: https://edirc.repec.org/data/cesifde.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.