Fiscal equalization schemes and fiscal sustainability

Arbeitspapier

Fiscal sustainability tests have largely ignored the institutional setting of fiscal policy making. Fiscal equalization schemes in federal states are one such institution. We examine whether German state governments pursue sustainable fiscal policies taking into account fiscal equalization transfers. Using panel data techniques we assess fiscal sustainability by investigating whether the debt-to-GDP-ratio has had a positive influence on the primary surplus (Bohn-model). Distinguishing between different measures of the primary surplus we show that including/excluding fiscal transfers changes the results of the Bohn-model. While fiscal equalization transfers do render the fiscal policy of the states sustainable they also provide the states with incentives to increase government spending which, eventually, might render the entire equalization scheme politically unsustainable.

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• Language: Englisch

References and Relationships

• Bibliographic citation: Series: CESifo Working Paper ; No. 3948

Classification and Topics

• Classification: Wirtschaft ; Intergovernmental Relations; Federalism; Secession ; State and Local Budget and Expenditures ; National Deficit; Surplus ; Single Equation Models; Single Variables: Panel Data Models; Spatio-temporal Models
• Subject: fiscal sustainability ; institutions ; fiscal equalization schemes ; panel data ; Finanzausgleich ; Länderfinanzen ; Nachhaltigkeit ; Deutschland

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Potrafke, Niklas ; Reischmann, Markus
• Event: Veröffentlichung
• (who): Center for Economic Studies and ifo Institute (CESifo)
• (where): Munich
• (when): 2012

Further information

• Handle: http://hdl.handle.net/10419/65383