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Governments have become an integral part of economics in modern societies. The extent of government involvement is not limited to legislation, foreign policy, or law and order. Governments intervene in economic affairs by collecting taxes and spending what they collect. The amount of taxes and who pays them, as well as the amount of government expenditures and who receives them, has a significant impact on income distribution. However, the main focus of the study of fiscal policy is on the overall economic impact of government involvement in the economy, instead of its distributional effects. While we know that when a person is taxed his or her utility is reduced, and when someone receives a payment, either because of selling something to the government or in the form of transfer payment, that person's utility increases. However, economic theory is not able to determine what happens to social utility when one person is taxed and another person receives the government payment. By not addressing the utility effect of government intervention in the economy the need for finding an answer to what happens to collective utility vanishes and allows us to focus on what happens to aggregate economic measures when the government intervenes in economic activities.

This paper assesses recent theorising and empirical evidence on the impact of fiscal policy—taxes, public expenditures and budget deficits—on long-run growth. It considers the relevance of recent advances in growth theory for low-income countries and compares the evidence for low-income countries with that for middle- and highincome (OECD) countries. Recent advances in endogenous growth theory have demonstrated that fiscal policy can have long-run effects on economic growth rates where some taxes distort investment decisions in the private sector (negative effect) and/or where some 'productive' public expenditures compliment private investment (positive effect). Increasing budget deficits can be expected to reduce long-run growth rates, unless tax-payers fully anticipate fiscal policy changes and adjust their savings behaviour accordingly—a condition unlikely to hold in low-income countries. Recent theory particularly stresses the importance for growth of the following. The composition of taxes and expenditures—distortionary versus nondistortionary taxes; productive versus unproductive expenditures. — The government budget constraint (GBC)—growth effects of additional public spending inevitably must be balanced against the growth effects of the taxes or deficits which finance them. — Distinguishing the short- and long-run. Since most growth models agree that fiscal-growth effects occur in the short-run, an important policy question becomes: for how long do fiscal-growth effects persist? There is a great deal of empirical evidence on the effects of fiscal policy on long-run growth. Much of this however is methodologically weak rendering results unreliable. Research prior to around 1997 (and some thereafter) generally ignores the GBC when testing for fiscal effects and as a result produces non-comparable or apparently nonrobust results. More consistent evidence is found (though almost all of this is for the OECD) when the growth effects of taxes, expenditures and deficits are examined simultaneously—as the GBC suggests. Negative effects of taxes which distort investment decisions (e.g. income taxes) and positive effects of 'productive' expenditures (e.g. capital spending such as infrastructure; education) are generally found. Taxes on domestic goods and services and government recurrent and/or welfare spending appear generally to have, at most, weak effects on long-run growth. Evidence on the effects of redistribution (of which fiscal policy is a part) on growth is ambiguous, consistent with the ambiguous predictions from current theorising. There is very little reliable evidence available for LICs; limited evidence for LDCs more generally suggests the possibility that fiscal-growth effects could be quite different from those observed in OECD countries. Robust evidence of a negative association between budget deficits and growth is beginning to emerge, though interpretations differ.

Fiscal policy in New Zealand has seen a consolidation of the Government's position and continuing refinements to the institutional framework and Budget processes. The key institutional change has been the introduction of the Fiscal Responsibility Act 1994. The paper sets out the background to the fiscal policy framework, including fiscal history and various institutional changes in the public sector. This paper is a companion paper to Treasury Working Paper 01/24 by Angela Barnes and Steve Leith. The key elements of the fiscal policy framework are explained and compared to various "fiscal rules" used internationally. The New Zealand framework differs from that used elsewhere, especially in its use of legislated "principles of responsible fiscal management" as opposed to mandatory targets. However, the Fiscal Responsibility Act 1994 does require Governments to set short-term fiscal intentions and long-term fiscal objectives for a range of fiscal aggregates. The paper discusses the experience with the framework including a comparison of fiscal outcomes with fiscal objectives. The New Zealand experience has seen the evolution of specific operational targets (the fiscal provisions) to help improve the consistency of short-term intentions with longer-term fiscal objectives. The paper concludes with a set of challenges facing the framework, both short- and long-term.

AbstractThe part of the UK fiscal framework which determines how UK government funding is allocated across the four home nations has undergone profound change since 2012, given tax and social security devolution. The UK government's post-Brexit plans for regional development funding, state aid, regulation and trade negotiations have led to significant disagreements about the nature of the devolved fiscal and constitutional settlement. And the COVID-19 pandemic provided a major shock to a fiscal system with limited flexibility for the Scottish, Welsh and Northern Irish devolved governments. This paper reviews the changes and challenges faced during these reforms and policy shocks. We find that: tensions about reforms to funding arrangements reflect the inconsistency of principles guiding the reforms; that the UK government's post-Brexit plans do reduce the policy autonomy of the devolved governments, but reflect powers central governments often have in even highly decentralised countries; and that temporary changes to rules and the nature of the COVID-19 pandemic prevented a subnational fiscal crisis, but that more systematic change may make the system more robust to future shocks. This suggests that a review of the principles underpinning the UK's subnational fiscal and economic policies would be highly worthwhile.

Woodford (2003) describes a popular class of neo-Wicksellian models in which monetary policy is characterized by an interest-rate rule, and the money market and financial institutions are typically not even modeled. Critics contend that these models are incomplete and unsuitable for monetary-policy evaluation. Our Banks and Bonds model starts with a standard neo-Wicksellian model and then adds banks and a role for bonds in the liquidity management of households and banks. The Banks and Bonds model gives a more complete description of the economy, but the neo-Wicksellian model has the virtue of simplicity. Our purpose here is to see if the neo-Wicksellian model gives a reasonably accurate account of macroeconomic behavior in the more complete Banks and Bonds model. We do this by comparing the models' second moments, variance decompositions and impulse response functions. We also study the role of monetary aggregates and velocity in predicting inflation in the two models.

This study analyses the link between fiscal frameworks and their budgetary impact. We look at different features of national numerical fiscal rules in combination with fiscal councils and medium-term budgeting frameworks. We construct our own time-varying dataset for national fiscal frameworks for the period 1990-2012 covering all 27 EU Member States and estimate a dynamic panel on aggregate and disaggregated fiscal policy variables. We find strong support that numerical fiscal rules help to improve the primary balance, and that the budgetary impact can be further strengthened when supported by independent fiscal councils and an effective medium-term budgeting framework.