In this report, we examine the long-run fiscal pressures that an independent Scotland may face, how these would differ from those facing the UK, and the size of the fiscal consolidation that may be required to put Scotland's public finances on a sustainable path. We do this using a model of the UK's and Scotland's long-run public finances, which is constructed in a similar way to the model that the Office for Budget Responsibility (OBR) uses to produce the forecasts presented in its annual Fiscal Sustainability Report (FSR). Such models seek to answer questions of the type 'What would be the fiscal consequences of continuing into the future with our current set of tax and spending policies?' or 'What scale of tax increases or spending cuts might be required to ensure long-term fiscal balance?'. Despite the considerable uncertainty surrounding the future path of borrowing and debt in Scotland, the main conclusion of our analysis is that a significant further fiscal tightening would be required in Scotland, on top of that already announced by the UK government, in order to put Scotland's long-term public finances onto a sustainable footing. An independent Scottish government might not need to implement such a fiscal consolidation immediately, but these long-run fiscal pressures should certainly form an important part of the backdrop to any discussions about the potential restructuring of Scottish taxation and public spending after independence, if the people of Scotland vote 'yes' to independence in September 2014.
The management of fiscal balance determines public debt sustainability, where a positive response of primary balance towards the debt ratio indicates a sustainable path. However, there might be asymmetry in the government's fiscal management between different phases of the debt trajectory and business cycle. This study examines the sustainability of fiscal imbalance and public debt in Indonesia using the fiscal reaction function with annual fiscal data from 1976 to 2019. We incorporate asymmetry by decomposing the lagged debt ratio and cyclical output variables into their positive and negative partial sums. We find that Indonesia's fiscal imbalance is on a path of weak sustainability as revenue grows more slowly than expenditure in the long run, with the bi-directional Granger causality between the two indicating fiscal synchronization. Long-run public debt sustainability is on a more sustainable path as primary surplus responds positively to the debt ratio. However, our asymmetric analysis suggests that this might be a false impression as primary balance decreases only in response to debt ratio decrease but increases less or fails to increase when the debt ratio rises, which is potentially dangerous.
Unfunded public pension and Other Post Employment Benefits (OPEB) liabilities impose major threats to local fiscal sustainability, which increases governments' default risk and crowds out funding for essential local services. To close the funding gaps, localities may apply a wide range of fiscal instruments, including increasing taxes, fees, and user charges, issuing debt and bonds, obtaining grants and/or decreasing expenditures. This research compares the US local fiscal choice behavior in the context of the fiscal federalism framework. The goal is to identify the ideal mix of constitutional fiscal rules to preserve local fiscal sustainability. Not only should the rules aim to minimize local adverse fiscal behavior pre-crisis, which may include excessive spending, large accumulations of unfunded liabilities, and over-reliance on external grants, but also allow strong local fiscal adaptive capacity post-crisis. The findings help localities identify any effective and prudent fiscal options available to close their pension funding gaps and contribute to the overall sub-national fiscal institutional reforms. Theoretically, this research introduces a novel analytical framework pertaining to local fiscal sustainability by separating pre-crisis and post-crisis institutional analysis and by consolidating two historically viewed as two competing paradigms, public choice and public finance. I argue that the two approaches are complementary rather than contradictory since public choice theory sets up an institutional prerequisite for normative outcomes to be realized and prevents the occurrence of extreme circumstances. The ideal mix of formal fiscal rules, thus, should induce the balanced budget rule that applies to all budget items, stringent spending and debt limits, and institutionalized local tax authority and stable tax structure, but not tax limits. Tax limits are less effective in constraining government than spending and debt limits due to fiscal gimmicks. Moreover, stringent tax limits could significantly limit local governments' ability to bounce back on their own. This research also found that cities do apply different fiscal strategies to reduce exogenous shocks, given their unique fiscal institutions in place. Furthermore, cities with fewer institutional constraints exhibit a faster speed of adjustment. However, certain institutional variables, such as public union size and tax authority, might not have the same fiscal implications as predicted by the theory. Cities often manage to cut their short-term spending regardless of the size of their public unions. A broad range of tax authority does not imply greater local revenue-generating capacity. Own source revenue autonomy might be a better indicator of local fiscal adaptive capacity. ; Doctor of Philosophy ; Unfunded public pension and Other Post Employment Benefits (OPEB) liabilities impose major threats to local fiscal sustainability, which increases governments default risk and crowds out funding for essential local services. To close the funding gaps, localities may apply a wide range of fiscal instruments, including increasing taxes, fees, and user charges, issuing debt and bonds, obtaining grants and/or decreasing expenditures. This research compares the US local fiscal choice behavior in the context of the fiscal federalism framework. The goal is to identify the ideal mix of constitutional fiscal rules to preserve local fiscal sustainability. Not only should the rules aim to minimize local adverse fiscal behavior pre-crisis, which may include excessive spending, large accumulations of unfunded liabilities, and over-reliance on external grants, but also allow strong local fiscal adaptive capacity post-crisis. The findings help localities identify any effective and prudent fiscal options available to close their pension funding gaps and contribute to the overall sub-national fiscal institutional reforms. Theoretically, this research introduces a novel analytical framework pertaining to local fiscal sustainability by separating pre-crisis and post-crisis institutional analysis and by consolidating two historically viewed as two competing paradigms, public choice and public finance. I argue that the two approaches are complementary rather than contradictory since public choice theory sets up an institutional prerequisite for normative outcomes to be realized and prevents the occurrence of extreme circumstances. The ideal mix of formal fiscal rules, thus, should induce the balanced budget rule that applies to all budget items, stringent spending and debt limits, and institutionalized local tax authority and stable tax structure, but not tax limits. Tax limits are less effective in constraining government than spending and debt limits due to fiscal gimmicks. Moreover, stringent tax limits could significantly limit local governments ability to bounce back on their own. This research also found that cities do apply different fiscal strategies to reduce exogenous shocks, given their unique fiscal institutions in place. Furthermore, cities with fewer institutional constraints exhibit a faster speed of adjustment. However, certain institutional variables, such as public union size and tax authority, might not have the same fiscal implications as predicted by the theory. Cities often manage to cut their short-term spending regardless of the size of their public unions. A broad range of tax authority does not imply greater local revenue-generating capacity. Own source revenue autonomy might be a better indicator of local fiscal adaptive capacity.
This paper analyses how fiscal adjustment comes about when both central and sub-national governments are involved in consolidation. We test sustainability of public debt with a fiscal rule for both the federal and regional government. Results for the German Länder show that lower tier governments bear a relatively smaller part of the burden of debt consolidation, if they consolidate at all. Most of the fiscal adjustment occurs via central government debt. In contrast, both the US federal and state levels contribute to consolidation of public finances.
Many countries in the Caribbean have been grappling with persistent fiscal imbalances and rising debt levels. The average debt to GDP ratio in the Caribbean in 2017 was 76.6 percent, higher than the negative debt-growth threshold of 60 percent of GDP. Also, the average fiscal deficit as a percent of GDP was 2.8 percent, but with significant heterogeneity across countries ranging from 0.5 percent to 11 percent. Using the inter-temporal budget constraint framework and various panel data econometric estimators, this article examines the issue of fiscal sustainability for a group of 10 Caribbean countries over the period 1991-2017. The evidence from panel co-integration models of government revenue and expenditure shows that past fiscal behavior is 'weakly' sustainable. The 'weak sustainability' finding is reinforced by evidence from an extended fiscal reaction function which showed that the primary balance improves by about 0.02 for every 1 percentage point increase in the debt ratio.
