Policy implications of budget deficit targets
I analyze in this paper a financial program found commonly in developing countries that are engaged in improving structural imbalances. Similar programs have also been adopted in industrialized countries, in the U.K. since 1980 and in the U.S. since 1984. A typical financial program consists of a target budget deficit, an independent monetary (domestic credit) policy, and the government budget constraint. For such a program, I Show that the endogeneity of the issuance of nominal bonds is not sufficient to satisfy both the government budget constraint and the deficit target. Such a program is feasible provided bonds are issued endogenously to satisfy the deficit target and either lump sum taxes and/or discretionary spending are adjusted endogenously to satisfy the budget constraint. Lump sum taxes are not dissimilar from U.K. government receipts from North Sea oil and gas production or proceeds from selling government assets. In the absence of ready access to such receipts, if taxes are not raised and/or spending is not cut, the policy package will be infeasible as the government budget constraint cannot be satisfied.Recent policy packages and the resulting fiscal performances ln the U.K. and in the U.S. economies provide empirical support to the analytical result of this paper. In particular, bonds and discretionary government expenditure have been used as two endogenous policies satisfying the constraint on the budget deficit and the budget balance. In the case of the U.K., increased receipts from the production of North Sea oil and gas in the early 1980s provided a temporary alternative to reducing government spending.
Year of publication: |
1991-04-24
|
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Authors: | Haque, M. Badrul |
Publisher: |
Department of Economics and Finance, University of New Orleans |
Subject: | Tax policy | Budget deficits |
Saved in:
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