On the Sustainability of Government Deficits: Some Long-Term Evidence for Spain, 1850-2000

Abstract

We provide a test of the sustainability of the Spanish government deficit over the period 1850-2000, from the estimation of a cointegration relationship between government expenditures and revenues derived from the inter-temporal budget constraint. The longer than usual span of the data allows us to obtain more robust results on the fulfillment of the inter-temporal budget constraint than most of the previous analyses. Two additional robustness checks are provided. First, we investigate the possibility of structural changes occurring along the period analyzed, using the new approach of Kejriwal and Perron (2008, 2010) to testing for multiple structural changes in co-integrated regression models. Second, we investigate whether the behaviour of fiscal authorities has been non-linear, by means of the procedure of Hansen and Seo (2002) based on a threshold co-integration model. Our results show that (i) the government deficit has been strongly sustainable in the long run, (ii) no evidence is found on any significant structural break throughout the whole period, and (iii) fiscal sustainability has been attained due to the non-linear behaviour of fiscal authorities, which have only acted on the budget deficit when it has exceeded around 4.5% of GDP.

Keywords: fiscal policy, sustainability, structural change, threshold cointegration, nonlinearity

JEL Classification: E62, H62