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The Composition of the Government Budget and the Dynamics of Public Debt

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  • Walpurga Köhler-Töglhofer
  • Martin Zagler

Abstract

This paper investigates compositional effects on public-debt dynamics. Our contribution is twofold. First, we improve the methodology by taking explicit account of public-debt dynamics, eliminating a bias present in previous studies. Second, we estimate the evolution of debt dynamics induced by changes in the primary expenditure and revenue ratios - looking at all fiscal periods - not only consolidations as in the previous literature. Whilst we confirm that expenditure cuts are more important for debt reductions than are revenue increases, our findings contrast with the literature in that we obtain persistent debt-augmenting effects of tax reductions.

Suggested Citation

  • Walpurga Köhler-Töglhofer & Martin Zagler, 2007. "The Composition of the Government Budget and the Dynamics of Public Debt," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 63(2), pages 244-263, June.
    • Handle: RePEc:mhr:finarc:urn:sici:0015-2218(200706)63:2_244:tcotgb_2.0.tx_2-y
    DOI: 10.1628/001522107X220099
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    References listed on IDEAS

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    1. Alberto Alesina & Silvia Ardagna, 1998. "Tales of fiscal adjustment," Economic Policy, CEPR, CESifo, Sciences Po;CES;MSH, vol. 13(27), pages 488-545.
    2. Alberto Alesina & Roberto Perotti, 1997. "Fiscal Adjustments in OECD Countries: Composition and Macroeconomic Effects," IMF Staff Papers, Palgrave Macmillan, vol. 44(2), pages 210-248, June.
    3. Bertola, Giuseppe & Drazen, Allan, 1993. "Trigger Points and Budget Cuts: Explaining the Effects of Fiscal Austerity," American Economic Review, American Economic Association, vol. 83(1), pages 11-26, March.
    4. Alberto Alesina & Roberto Perotti, 1995. "Fiscal Expansions and Fiscal Adjustments in OECD Countries," NBER Working Papers 5214, National Bureau of Economic Research, Inc.
    5. António Afonso, 2006. "Sustainability of fiscal policy in the EU-15," ifo DICE Report, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 4(1), pages 34-38, 04.
    6. Alberto Alesina & Roberto Perotti & José Tavares, 1998. "The Political Economy of Fiscal Adjustments," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 29(1), pages 197-266.
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    Cited by:

    1. Stegarescu, Dan, 2013. "Does expenditure composition influence the debt level? Evidence from German federal states," Discussion Papers 52/2013, Deutsche Bundesbank.

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    More about this item

    Keywords

    public-debt dynamics; fiscal consolidations; fiscal expansions; excessive deficits;
    All these keywords.

    JEL classification:

    • H60 - Public Economics - - National Budget, Deficit, and Debt - - - General
    • H30 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - General
    • H11 - Public Economics - - Structure and Scope of Government - - - Structure and Scope of Government

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