Expansionary Versus Contractionary Government Spending

Makin, Anthony J.

doi:10.1111/coep.12051

Cited by 10 publications

(6 citation statements)

References 48 publications

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“…The fiscal contraction in the presence of public spending inefficiencies is, however, not necessarily effective. The productivity of government spending would ultimately determines whether government spending is expansionary or contractionary; unlike productive public investment, unproductive public investment and government consumption tend to be procyclical (Makin, 2014). Moreover, any fiscal consolidation will be more effective in bringing down debt only when it is adopted by efficient public sector and government apparatus (Heylen et al, 2013).…”

Section: Sem Model Resultsmentioning

confidence: 99%

“…The positive correlation of weak institutions with inefficiency can lead to fiscal policy procyclicality. Inefficient public spending tends to be procyclical compared to productive public spending (Makin, 2014). This procyclicality is apparent in developing countries, particularly those characterized by the corrupted and weak institutional environment (Alesina et al, 2008;Frankel et al, 2013).…”

Section: Implications Of These Resultsmentioning

confidence: 99%

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Further attempt to explain the oil curse mechanism using a debt overhang concept

Ghecham

2020

JES

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PurposeThis study aims at increasing the authors’ understanding how and why the oil curse takes place.Design/methodology/approachThe study uses a structural equation model (SEM) and stochastic frontier analysis (SFA) in order to underline the mechanism under which the oil curse operates.FindingsThe study shows that oil abundance could lead to inefficient resource allocation. This inefficiency is strongly correlated with a weak institutional setting which would lead to accumulated external debt and ultimately to poor economic performance.Research limitations/implicationsThe quality of institutions and governance plays a major role in defining government success in allocating public resources efficiently. In a weak institutional setting, characterized with lack of accountability oil rents can promote rent-seeking behavior of public agents; a type of behavior that promotes misallocation and waste of resources. This in turn undermines public finances and leads to external debt accumulation. Debt per se is not necessarily a bad thing, but it has a turning point beyond which it can be a source of economy for countries (particularly countries with limited diversified source of revenue and inefficient public sector). It is to note that the authors work does not refute the positive impact that the increase in oil value has on economic growth (e.g. Nusair, 2016). However, it reminds policy makers that in order to sustain this impact over long term, it is necessary to build a strong institutional framework that prevents inefficient use of resource allocation as it could result in rapid accumulation of debt over short period of time. The adoption of sovereign wealth funds (SWFs) by a number of oil rich countries has helped them to manage adverse oil shocks. Nonetheless, the effectiveness of these funds could be limited in a country whose institutions are not very strong. Characterized by a mediocre institutional setting, Algeria's sovereign fund, for example, has lost 67% of its reserves over just two years (2014–2015) before reaching the level zero by February 2017 following the drop of oil prices in 2015 (see Central Bank of Algeria, 2017). Also, the foreign exchange reserves of the country experienced a drop of more than 72% over a short period of time (2014–2020), leading to the resurgence of the idea of contracting external debt. Similarly, following the sharp drop in oil prices in 2015, the Saudi Arabia's external debt (% of GDP) has jumped by more than 150% over three years only, reaching a level of 28.85% in 2020 compared to a 10.62% in 2015 (https://Fred.stlouisfed.org/series/SAUDGDPGDPPT). The positive correlation of weak institutions with inefficiency can lead to fiscal policy procyclicality. Inefficient public spending tends to be procyclical compared to productive public spending (Makin, 2014). This procyclicality is apparent in developing countries, particularly those characterized by corrupted and weak institutional environment (Alesina et al., 2008; Frankel et al., 2013). This is conducive to output fluctuations where booms and busts are exacerbated (Frankel et al., 2013).Originality/valueOriginality of the study resides in the idea that external debt is an important element that could help to explain why oil curse could take place. The transmission mechanism that underpins the oil curse hypothesis is yet to be fully understood. In doing so, the paper, with the use of two sophisticated statistical techniques, reconciles between the concept of debt overhang and oil curse hypothesis. Similar research efforts are scant.

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Section: Sem Model Resultsmentioning

confidence: 99%

Section: Implications Of These Resultsmentioning

confidence: 99%

Further attempt to explain the oil curse mechanism using a debt overhang concept

Ghecham

2020

JES

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“…In this case, the fact that we owe the debt to non‐residents (as opposed to Australians in effect ‘owing it to ourselves’) is of concern because close to a billion dollars a month in public debt interest will be paid abroad in 2016–2017. Consistent with national accounting principles, this represents a net drain on Australia's national income (see Makin for elaboration).…”

Section: What Is the Sustainable Level Of Australia's Public Debt?mentioning

confidence: 92%

Fiscal Consolidation and Australia's Public Debt

Makin

Pearce

2016

Aust J Public Adm

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Australia has experienced one of the fastest growing public debt levels in the world post-Global Financial Crisis due to a series of large federal budget deficits driven by high government spending. In this paper we examine the balance sheet implications of this escalating public debt, before proposing some macro-fiscal objectives for determining its sustainable level. These objectives are to (i) restore the federal government's solvency; (ii) eliminate foreign public debt; and (iii) achieve budgetary balance over the business cycle. Empirically, we first examine how much fiscal consolidation is required for debt stabilisation at current levels, before considering what sized budget balances are needed to achieve the target debt to GDP ratios consistent with the proposed objectives. The results show that no target debt to GDP level consistent with the optimal levels will be met on current fiscal settings in the medium term. This implies significantly greater fiscal consolidation is required to minimise future fiscal risk.

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“…The literature suggests that the rising rates of debt are the consequence of an unsound fiscal policy and, in addition, the lack of regulating and implementing stricter policies (Kukeli, 2014). The weakness of financial institutions leads to the likelihood of fiscal distress in the form of continued lagging financial policies and elevated vulnerability to external shocks (Acemoglu & Robinson, 2008;Makin, 2015).…”

Section: Literature Reviewmentioning

confidence: 99%

“…For instance, an increase in expenditure would fuel local economic activities and some private investment groups (Ncanywa & Masoga, 2018), placing the economy under more strain and financial distress. In an acclaimed theory of Keynesian regarding expenditure, it stated that the increasing government expenditure is linked to higher national output, which leads to employment (Makin, 2015). However, the assets and funding available for investment may have been crowded out by the increased government expenditure; therefore, the aim of availing funding to pertain more economic growth through investments is hindered.…”

Section: Theories Of Expenditure and Debtmentioning

confidence: 99%

The Link Between Government Expenditure and Debt as Potential Drivers of Economic Growth in South Africa

Stiglingh¹,

Mothibi²

2019

Proceedings of the 52nd International Academic Conference, Barcelona

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The financial burden of public debt in the lives of South Africans has undergone considerable change and continues to evolve since the beginning of democracy in 1994. Many countries, specifically the OCED countries have experienced expanding levels of debt to GDP ratio since the global financial crises in 2008/2009, where South Africa's gross debt ratio averaged 44.8% in 2017. Making use of the autoregressive distributive lag model (ARDL), the study utilises data from 1980 to 2017 in order to investigate the relationship between government expenditure and debt as potential drivers of economic growth. Furthermore, the study's aim is to identify weather or not government expenditure and debt could be identified as positive or negative contributors towards economic growth in South Africa. The study further seeks to identify the link between government expenditure and debt since, government expenditure in South Africa has diligently surpassed its revenue, where the deficit is in most cases is funded through the accumulation of unsustainable debt. The findings of the study reveal a negative relationship between economic growth and government expenditure. In addition, the study also reveals a positive relationship between economic growth and government debt. This therefore indicates the need for stricter government expenditure and debt management policies, as unsustainable debt levels and unregulated government expenditure could be detrimental for the South African economy.

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Expansionary Versus Contractionary Government Spending

Cited by 10 publications

References 48 publications

Further attempt to explain the oil curse mechanism using a debt overhang concept

Further attempt to explain the oil curse mechanism using a debt overhang concept

Fiscal Consolidation and Australia's Public Debt

The Link Between Government Expenditure and Debt as Potential Drivers of Economic Growth in South Africa

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