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Study on Quality of Public Finances in Support of Growth in the Mediterranean Partner Countries of the EU

Author

Listed:
  • Leonor Coutinho
  • Luc De Wulf
  • Santiago Florez
  • Cyrus Sassanpour

Abstract

Until the early 1990s, the discussions on fiscal policy primarily centered on the functions of economic stabilization, income redistribution and resource allocation. Long-term growth was not usually viewed as an end itself, and fiscal policy was often not sufficiently tailored to the different circumstances and priorities of countries at different stages of development. It is only relatively recently that the discussion has gradually focused on the links between different dimensions of quality of public finances and economic growth. Based on the conceptual framework for linking the quality of public finances and economic growth that has been developed by the European Commission and applied to the EU Member States, this study examines the conditions under which the budgetary policy, and more specifically expenditure, revenue and financing design would be supportive of growth in the Mediterranean partner countries of the European Union. The study also highlights some of the interlinkages between fiscal policy and growth and summarises empirical findings found in the literature with particular focus on Mediterranean partner countries of the European Union. The main findings of the study are similar to those that apply to the EU Member States and can be summarised as follows: • The way government expenditures are financed matters. Deficit and debt financing clearly undermines growth performance. • The composition of expenditure does matter however the efficiency of the expenditure undertaken is even more important for growth. For countries with good governance indicators the positive impact of the productive expenditures on growth was enhanced. The analysis was applied to the efficiency of education and health expenditures with basically similar results. • Notwithstanding the importance of 'fair' income distribution, when tax policy relies heavily on income taxation to do so, the analysis suggests a likely negative effect on growth. Specifically, consumption taxes were found to depress growth by up to four times less than income taxes. The study concludes by highlighting possible areas in the planning and execution of fiscal policy and governance where growth enhancing interventions can be applied.

Suggested Citation

  • Leonor Coutinho & Luc De Wulf & Santiago Florez & Cyrus Sassanpour, 2010. "Study on Quality of Public Finances in Support of Growth in the Mediterranean Partner Countries of the EU," CASE Network Reports 0094, CASE-Center for Social and Economic Research.
  • Handle: RePEc:sec:cnrepo:0094
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    References listed on IDEAS

    as
    1. Vito Tanzi & Howell H. Zee, 1997. "Fiscal Policy and Long-Run Growth," IMF Staff Papers, Palgrave Macmillan, vol. 44(2), pages 179-209, June.
    2. Semmler, Willi & Greiner, Alfred & Diallo, Bobo & Rezai, Armon & Rajaram, Anand, 2007. "Fiscal policy, public expenditure composition, and growth theory and empirics," Policy Research Working Paper Series 4405, The World Bank.
    3. Mr. Peter S. Heller, 2005. "Understanding Fiscal Space," IMF Policy Discussion Papers 2005/004, International Monetary Fund.
    4. Rajkumar, Andrew Sunil & Swaroop, Vinaya, 2008. "Public spending and outcomes: Does governance matter?," Journal of Development Economics, Elsevier, vol. 86(1), pages 96-111, April.
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    More about this item

    Keywords

    public finance; economic growth; Mediterranean region;
    All these keywords.

    JEL classification:

    • H1 - Public Economics - - Structure and Scope of Government
    • H2 - Public Economics - - Taxation, Subsidies, and Revenue
    • H3 - Public Economics - - Fiscal Policies and Behavior of Economic Agents
    • H5 - Public Economics - - National Government Expenditures and Related Policies
    • H6 - Public Economics - - National Budget, Deficit, and Debt
    • H7 - Public Economics - - State and Local Government; Intergovernmental Relations
    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
    • O1 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development
    • O2 - Economic Development, Innovation, Technological Change, and Growth - - Development Planning and Policy
    • O4 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity

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