Fiscal Equalization Schemes and Fiscal Sustainability

34 Pages Posted: 3 Oct 2012

See all articles by Niklas Potrafke

Niklas Potrafke

CESifo (Center for Economic Studies and Ifo Institute) - Ifo Institute

Markus Reischmann

CESifo (Center for Economic Studies and Ifo Institute) - Ifo Institute

Date Written: September 28, 2012

Abstract

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.

Keywords: fiscal sustainability, institutions, fiscal equalization schemes, panel data

JEL Classification: H770, H720, H620, C230

Suggested Citation

Potrafke, Niklas and Reischmann, Markus, Fiscal Equalization Schemes and Fiscal Sustainability (September 28, 2012). CESifo Working Paper Series No. 3948, Available at SSRN: https://ssrn.com/abstract=2155612

Niklas Potrafke (Contact Author)

CESifo (Center for Economic Studies and Ifo Institute) - Ifo Institute ( email )

Poschinger Str. 5
Munich, 01069
Germany

Markus Reischmann

CESifo (Center for Economic Studies and Ifo Institute) - Ifo Institute ( email )

Poschinger Str. 5
Munich, 01069
Germany

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