Tax vs. Debt Management Under Entitlement Spending: a Multicountry Study

• Published in: Open economies review Vol. 30; no. 3; pp. 425 - 443
• Main Authors: Cerniglia, Floriana, Dia, Enzo, Hughes Hallett, Andrew
• Format: Journal Article
• Language: English
• Published: New York Springer US 01-07-2019; Springer Nature B.V
• Subjects: Debt management; Development Economics; Discipline; Economic Policy; Economics; Economics and Finance; Entitlement; European Integration; Government spending; International Economics; Macroeconomics/Monetary Economics//Financial Economics; Public debt; Research Article; Resting; Rules; Taxation; E62; Tax smoothing; H63; H53; Fiscal targets; Sustainable public debt; I38
• ISSN: 0923-7992; 1573-708X
• DOI: 10.1007/s11079-018-9517-9

In this paper we study the taxes vs. debt choice for public funding when spending is in large part predictable due to entitlement programs, but the necessary fiscal corrections may not be instantly and indefinitely elastic as usually assumed. We study fiscal behavior in a large sample of countries to determine what fiscal regimes have been used in practice, and what they reveal about the trade-off between raising taxes vs. issuing debt. Unsurprisingly, we find that fiscal discipline and the aims of fiscal rules have varied over the past 50 years. Discipline has generally weakened and there has been a greater tendency to use debt. But governments are no less forward looking than they were. Perhaps more surprising, the high debt countries were more disciplined than low debt economies—but with worse outcomes because of their poor starting positions and more persistent public spending. The low debt countries have exploited their stronger initial position to allow less discipline; a “resting on one’s laurels” approach.