Is the Budget Deficit “Too Large?”

Abstract

Yes. Specifically, we find that recent spending and taxing policies of the government–if continued–violate the government's intertemporal budget constraint. As a result, government spending must be reduced and/or tax revenues must be increased. These conclusions are based on tests of whether government spending and revenue are cointegrated. In addition to examining real spending and revenue, we also normalize these variables by real GNP and population. For a growing economy, these normalized measures are perhaps more pertinent. We also test and find support for the hypothesis that deficits have become a problem only in recent years.

On the sustainability of current account deficits: evidence from four ASEAN countries

“…The necessary condition (weak form) for the economy to satisfy its intertemporal budget constraint is the existence of a stationary error structure, that is, e t in equation (5) should be an I(0) process. On the other hand, failure to detect comovements between exports (inflows) and imports (outflows) would indicate the economy is not functioning properly and fails to satisfy its budget constraint, and therefore, is expected to default on its debt (Hakkio and Rush, 1991a). Hence, such a finding provides evidence against the sustainability of the current account balance.…”

“…Solving equation (3) by forward substitution, Hakkio and Rush (1991a) and Husted (1992) obtain the following relationship:…”

“…We adopt the theoretical model from Hakkio and Rush (1991a) and Husted (1992) and use the data of ASEAN countries to test for the sustainability of current account imbalances. Briefly, the intertemporal approach to current account balances looks at the long-run relationship between exports and imports.…”

Fiscal Sustainability in the Euro-Zone: Is There A Role for Euro-Bonds?

“…The methodology extends the framework proposed by Hakkio and Rush (1991) and Hamilton and Flavin (1986). The model assumes that a country's fiscal sustainability holds if the inter-temporal budget balance of the country is satisfied.…”

“…Hakkio and Rush (1991) argue that for a country to satisfy the strict budget deficit sustainability, there has to be a co-integrating relationship and the coefficient b of government expenditure inclusive of interest payments in equation (4) should be 0 < < 1.…”