Download deficit spending and stabilization behaviour in austria

VI.A. Austro-Keynesianism and deficit spending
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SCHRIFTENREIHE DES LUDWIG BOLTZMANN-INSTITUTS FÜR
ÖKONOMISCHE ANALYSEN WIRTSCHAFTSPOLITISCHER AKTIVITÄTEN
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Band 7
DEFICIT SPENDING AND STABILIZATION
BEHAVIOUR IN AUSTRIA
An empirical analysis of the budget balance in the central and
general government sector
Rainer Bartel
Gerald Pruckner
Wien 1992
Manzsche Verlags- und Universitätsbuchhandlung
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VI. SUMMARY OF RESULTS
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VI. Summary of results
VI.A. Austro-Keynesianism and deficit spending
Though Austro-Keynesianism has never been clearly defined as an all-encompassing theory of
economic policy, its components obviously go together well. Indeed, the individual concepts
appear rather heterogeneous when considering its dogmatic roots, its coming into being as
well as its unusual assignment of policy methods to the usual targets of stabilization policy.
Nonetheless, in its core period Austro-Keynesianism was marked by the following ideas due to
Keynes and his followers:
(a)
the principle of effective demand dominating economic policy decisions;
(b)
the endeavour to simultaneously realize high employment, low inflation and balanceof-payments equilibrium;
(c)
the priority of high employment whenever this major target threatened to conflict with
other targets such as budget consolidation;
(d)
the implementation of a "direct employment policy" to maximize production and
maintain high employment by hoarding employees in the public sector of the economy
even during long-lasting recessions;
(e)
the replacement of "cold turkey" as a means of combatting inflation by the Austrian
Economic and Social Partnership's stability-oriented incomes policy;
(f)
the basic idea of stabilizing expectations, lessening uncertainty and preserving business
confidence by stabilizing the development of macroeconomic key variables such as the
real wage rate, nominal interest rate, nominal exchange rate and aggregate demand.
From these characteristics it becomes obvious that Austro-Keynesian economic policy does not
rely on the notion of self-correcting market forces clearing the single markets and pushing
overall economic activity towards the full-employment level. Instead of reinforcing the
mechanism of relative prices in order to solve economic problems without government
interference, Austro-Keynesianism ascribes an active role to the state,and emphasizes the
importance of a large public sector for contributing to social goals through positive external
effects on the private economy. From this perspective, a close relationship can be established
VI.A. Austro-Keynesianism and deficit spending
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between Austro-Keynesianism and the Post-Keynesian school of economic thought. The latter
has been promoted particularly by economists prone to socialist ideologies. This is why
Austro-Keynesianism has been occasionally called Austro-Marxism though Austria's society
was always very distant from a Marxian system.
Clearly, Austro-Keynesianism does also not have very much in common with Neoclassical
economics: the policy of moderate real wage increases has not been adopted in the
Neoclassical sense of the real wage rate determining employment immediately. In fact,
economic liberalism and price competition have not been very marked in Austria. It seems
unnecessary to stress that Austro-Keynesianism has nothing to do with New classical
macroeconomics which proposes the ineffectiveness of government's demand-side policies.
Moreover, one cannot find strong evidence (sometimes contended) that the Austrian National
Bank pursued an Austro-Monetarist policy. Admittedly, Austrian monetary policy is
influenced by the effects of the German Federal Bank's monetarist policy through the
stabilized nominal exchange rate. However, institutional barriers to perfect mobility of capital,
the minor importance of the Austrian currency, larger increases in productivity and the longterm development of the real exchange rate between the Austrian Schilling and the German
Mark have granted (at least a moderate) autonomy in monetary policy which has never been
utilized for monetary targeting. The monetary base has been mainly determined by net capital
inflows and has not been neutralized through internal components of high-powered money.
Of course there have been also supply-side measures of promoting exports, investment and
employment in Austria. However, all these methods (except perhaps the 1988 tax reform)
were not intended in the sense of, and not arranged similar to, the US understanding of
supply-side economics (Reaganomics). Some of the Austrian supply-side measures actually
restrict the mechanism of relative prices.
Austro-Keynesianism rejects the notion of the Neoclassical synthesis which reduces Keynesian
problems of insufficient effective demand to problems of sticky prices and limits the relevance
of Keynesian economic policy to fighting only severe recessions. Finally, its Post-Keynesian
character makes the theoretical concept of Austro-Keynesianism surpass the doctrine of
hydraulic Keynesianism which contends the feasibility of stabilizing real output at a high level
only through a fine-tuning type of demand management. In the concept of AustroKeynesianism, deficit spending fulfils the function of compensating the restrictive demand-
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VI. SUMMARY OF RESULTS
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side effects of other policy elements such as the moderate incomes policy and the appreciating
exchange rate policy ("hard-currency policy").
Relating the features of the theoretical concept interpreted above to the different political
periods of Austrian post-war history one can confine the core period of Austro-Keynesianism
roughly to the one-party governments of the Socialist Party between 1970 and 1983. In the
course of the 80s the historically grown concept of Austro-Keynesianism has been increasingly
changed. New elements replaced some of the features of the original concept:
(a)
a changed fiscal attitude which tends to believe that (large?) budget deficits slow down
economic development;
(b)
a strict course of consolidating the budget (that is, reducing the net deficit step by step
to a certain deficit ratio to GDP);
(c)
the abstention from direct employment policy and an increased exposure of the public
enterprises to international competition at the expense of realizing non-commercial
(political) goals;
(d)
privatization and deregulation for reasons of enhancing efficiency and unburdening the
budget;
(e)
an increased readiness, or compulsion, to follow the interest rate policy of the German
Federal Bank.
In terms of Austria joining the European Economic Area or even the European Community,
the informal institution of the Austrian Economic and Social Partnership will have to be
thoroughly analyzed as to whether it conforms with the EC's understanding of market
competition.
VI.B. Budget policy in the light of the full-employment budget balance
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VI.B. Budget policy in the light of the full-employment budget balance
VI.B.1. The central government
The period under review can be divided into two distinct subperiods of budgetary policy:
(a)
the "contractive" or "pre-deficit" period (1960-1972) in which structural budget deficits
were rather low and occurred very seldom, and
(b)
the "expansionist" or "deficit" period (1973-1990) with permanent and considerable
structural budget deficits.
Therefore, it is argued that, in general, output gaps were not the factor that determined
whether a discretionary budget surplus or deficit was incurred. The countercyclical or
procyclical quality of the budgetary impacts, caused by a positive or negative full-employment
budget balance, respectively, was influenced more by the sign of the corresponding output
gap. The results show that 61 percent of the discretionary budget balances were
countercyclical - 69 percent in the contractive and 56 percent in the expansionist period.
A more appropriate measure of stabilization behaviour appears to be the amount of change in
the full-employment budget balance. Three quarters of these budgetary reactions can be called
countercyclical in the contractive period and only one third in the expansionist period. Over
the entire investigation period the relative frequency of discretionary countercyclical budget
reactions amounts to one half. Putting a somewhat higher demand on stabilization policy, by
stipulating that the danger of overshooting trend GDP through exaggerated budgetary
reactions be reduced, lowers the relative frequency of cyclically appropriate budgetary
reactions by 7 percentage points for the entire period of observation.
The fairly poor stabilization performance in the expansionist period is modified if you
hypothesize budgetary decision rules requiring that contractive discretionary reactions though countercyclical - are ruled out whenever the real growth rate of GDP declines and/or
the unemployment rate rises. Subject to (a) the real growth rate condition, (b) the
unemployment rate condition and (c) both conditions, the stabilization performance is not
improved at all in the pre-deficit period but it is substantially improved in the deficit period
raising the relative frequency of discretionary countercyclical reactions to (a) 50, (b) 56 and
(c) even 72 percent. The results in detail show that between 1973 and 1980 a falling rate of
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VI. SUMMARY OF RESULTS
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real growth and from 1983 to 1990 a rising rate of unemployment were important motivating
factors for avoiding countercyclical reductions of the structural budget deficit and stimulating
growth and employment through higher aggregate demand.
Both in the contractive and the expansionist period countercyclical reactions of discretionary
budget policy were more frequent in years with a negative than with a positive output gap.
Such an asymmetry of stabilization policy holds true if you only consider the years of onsetting
strains and recessions. The same asymmetry of stabilization behaviour reappears when you not
only calculate the frequency but also relate the amounts of change of the countercyclical to the
procyclical budgetary balances. Thus it is recognized that in the central government sector
policymakers stabilized aggregate demand more readily, more strongly and more quickly in
periods exceeding the trend GDP than in periods falling short of it.
In addition, stabilization performance has also been assessed under the premise that the
information basis of stabilization policy is lagged by one year. The results appear more
stabilization-motivated in the era after 1979 changing the ratio of countercyclical to
procyclical reactions of discretionary budget policy from 2:9 to 9:2. Hence one can conclude
that, due to a rising uncertainty in the markets after the second oil-price shock, expectation
formation became more backward-looking than forward-looking - a fact that might have
deteriorated stabilization performance substantially.
Considering the relative weights of the discretionary and the automatic component of the
budget balance, one can say that after 1974 automatic stabilization lost importance relative to
discretionary fiscal policy. This may be due to the comparatively small amplitudes and short
episodes of the cyclical deviations, as well as the substantially higer structural deficits in the
second half of our investigation period.
Stabilization performance is further assessed with regard to the different political subperiods
(inter alia the core period of Austro-Keynesianism from 1971 to 1983).
Regarding the budgetary impacts which were exerted by the amount of the full-employment
budget balance in the political periods, the conservative-led "old large coalition" governments
were stabilization-oriented to the highest degree (the structural budget balances were then
sufficiently small that their signs could be changed easily from year to year). The good and
mediocre results of the socialist governments and socialist-led coalition governments were
determined by the comparatively frequent occurrence of negative output gaps after 1974.
VI.B. Budget policy in the light of the full-employment budget balance
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Analyzing the discretionary reactions of budget policy, the general result is reached that the
later the political period occurred the less frequent were the countercyclical reactions or the
more important were other economic factors of budgetary decisions. In the seventies (roughly
during the SPÖ governments) it was the real growth rate condition and in the eighties
(approximately the period of SPÖ-led coalition governments) it was the unemployment rate
condition which, in retrospect, makes discretionary budget reactions appear more reasonable.
Hence one may conclude that the motives of short-run budgetary policy changed between the
terms of office of the conservative and conservative-led governments (just reduction of output
gaps), the socialist governments (in addition to output-gap reduction: stimulation of real
growth) and the socialist-led coalition governments (in addition to output-gap reduction:
stimulation of employment, at least before the target of budget consolidation was realized). If
reducing the danger of overshooting the trend is also required and the real growth as well as
the unemployment condition are observed, one gets the interesting result that the core period
of Austro-Keynesianism performs best and removes the ÖVP government from first position
in stabilization performance.
In terms of the asymmetry of stabilization policy, we have seen that, in general, negative
output gaps were more readily countervailed than positive ones. The only exceptions to the
rule represent the ÖVP government which fought more strains than recessions (in an era of
accelerating inflation) and the SPÖ-led "new large" coalition government which (in the
budget consolidation phase) dampened neither strains nor recessions. The same result is
reached when looking only at the beginnings of recessions and strains.
The overall assessment of stabilization behaviour, including discretionary budget impacts and
reactions, leads to the conclusion that the later the political period occurred the worse was its
government's stabilization performance. However, there remains one exception: the one-year
minority government of the SPÖ in 1970 performed best in any respect considered here, but
this might have easily been a "lucky strike".
Reviewing the relative importance of automatism and discretion associated with the budget
balance, one gets the results that the relative weight of automatic stabilization reached a
maximum during the ÖVP's one-party government and also dominated under the ÖVP-led
coalition governments, whereas discretion ruled under the SPÖ-led coalition governments.
The core period of Austro-Keynesianism lay between the extremes but can be characterized as
a period of mainly discretionary budget policy.
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VI. SUMMARY OF RESULTS
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In terms of the public-choice issue of expansionist budget policy before elections, it has to be
recognized that there is no general indication of strategic political behaviour in Austria.
Nonetheless, there are two marked exceptions to this: the 1983 elections ending the series of
socialist one-party governments and the elections of 1990. In both cases the SPÖ was firmly
expected to suffer heavy losses. On the other hand, both of these procyclical reactions could
have also been motivated by the rising unemployment rates that occurred at these points in
time.
Next, the orders of magnitude of the countercyclical and procyclical impacts and reactions of
discretionary budget policy are assessed. A marked rise in the long-term level of the ratio of
the full-employment budget balance to nominal trend GDP (FEBB ratio) is clearly discernible
after the first oil-price shock. Since 1987, the FEBB ratio has declined due to attempts at
budget consolidation.
Based on the ratio of countercyclical and procyclical impacts and reactions of discretionary
budget policy to the corresponding output gap, two straightforward measures of stabilization
performance are created: the "impact ratio" (RATIO6) and the "reaction ratio" (RATIO9).
Judging by the impact ratio,the one-party government of the ÖVP distinctly performs best, and
the core period of Austro-Keynesianism only ranks fourth. A similar result is reached when
you relate the full-employment budget balance to the volume of the budget. In general, it can
be concluded that the policy of permanent structural surpluses till 1972 was markedly more
appropriate for the cyclical conditions than the policy of uniform structural deficits was for the
period after 1972. One has to add though that the policy of continuous budget surpluses
(deficits) fitted better into the economic circumstances prevailing in the contractive
(expansionist) period than if the reverse had been the case. On the whole the results are quite
satisfactory with the impact ratio always being larger than unity (which means that the
countercyclical dominated the procyclical impacts) and mostly larger than 2.3. Only the "new
large coalition" government of SPÖ and ÖVP (i.e., the budget consolidation phase) performed
poorly achieving an impact ratio of just 1.1.
The reaction ratio actually yields the same results which were achieved when investigating
only the relative frequency of countercyclical discretionary reactions of the budget balance: the
later the fiscal and political periods, the worse was the stabilization performance of its
government(s). The ÖVP-led coalition governments (1961-1966) lead overwhelmingly; the
core period of Austro-Keynesianism is placed in the middle of the ranking. Again the general
VI.B. Budget policy in the light of the full-employment budget balance
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result is not bad, with the reaction ratio being greater than 1.7, and the only exception being
the "new large coalition" government which (in the budget consolidation phase) did not even
once react countercyclically to the business cycle situation.
The results given so far give the impression that the period of preponderantly positive
structural budget balances and flexible reactions to the output gaps was ended by the adverse
international supply-side shocks and their detrimental effects on economic confidence. In
Austria this fact was supposed to require a long-term policy of pronounced deficit spending in
order to secure high real growth and low unemployment rates. Perhaps such a "stronghold" of
effective demand contributed to an increased capacity for self-stabilization in the economy
resulting in shorter and smaller output gaps in the course of the eighties.
In fact, this type of expansionist attitude was only revised under the influence of the ÖVP as a
conservative, fiscally more restrictive, coalition partner. In spite of the (often declared)
intention of cutting the budget deficit, during the core period of Austro-Keynesianism the
concrete targets and the means of achieving them remained too vague to be effective for a long
time. The chance of consolidating the budget while the economy was booming between 1971
and 1974 was clearly missed. Unfortunately, four of the six measures for cutting the budget
deficit after the slump in 1975 were procyclical. Only one of these four procyclical
consolidation measures fell into the core period of Austro-Keynesianism, another one was by
the SPÖ-FPÖ government, and the remaining two were due to the "new large coalition's" firm
intention of reducing the net deficit come what may. In general, one can state that when
budget consolidation was achieved in the crisis-prone era after 1974, it mostly happened at the
wrong point in time with respect to the business cycle situation.
Initially, the primary motives of budget consolidation were the increasing share of interest
payments in public expenditures, the rising concern about the capacity of financing the fastgrowing deficits and the need to regain the "freedom of fiscal action" which enables
government to combat larger recessions in future. Later, under the "new large coalition"
governments, however, there were no longer arguments in favour of demand management.
Instead, government intended to focus on supply-side measures of modernizing and
"internationalizing" the economy in order to improve Austria's competitiveness which for a
long time had been supported by protectionist regulations and strong demand management. A
new fiscal perspective entered the concept of Austrian economic policy, namely, that budget
deficits impede the development of the economy. As a consequence, budget consolidation
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VI. SUMMARY OF RESULTS
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ceased to be considered harmful to employment and has been strictly pursued since 1987.
Thus the new fiscal attitude clearly differs from the one adopted during the core period of
Austro-Keynesianism.
Finally, we analyzed in what manner the decomposed full-employment budget balance
developed in relation to nominal trend GDP. Generally, one can say that the main components
of the full-employment budget balance (interest payments, public investment, transfers and
consumption) developed in the same direction.
Interest payments on public debt is the category of public expenses which deviated least from
the common development of discretionary public expenditures. Nonetheless, interest payments
did affect the structural budget balance and the public savings ratio, mainly during the
recession from 1967 to 1969 and to a markedly higher degree after the great slump in 1975. In
five of the 31 years of observation the influence of interest payments turned the fullemployment budget balance negative.
Gross public fixed investment only behaved more expansively than the other discretionary
public expenditures when, under the first two socialist one-party governments, public
infrastructure was extended and improved and when the SPÖ tried to minimize expected
losses in the 1983 elections. In general, public investment has not been an instrument used
particularly to win elections, fight recessions or consolidate the budget.
Public transfers by central government, most frequently and to the greatest extent, developed
more expansively than the other current expenditures. Extraordinary increases in public
transfers were brought about, especially when positive output gaps occurred. In the presocialist era public transfers were raised more than proportionately in every election year,
whereas in the socialist period such behaviour could be observed only in the election years of
1975 and 1983. (Both years, however, are characterized by an increasing rate of
unemployment.) The only periods of more than proportionate reductions in public transfers
were 1979-1981 and 1988-1990 (the latter being the budget consolidation phase).
Clearly, public consumption belongs to the comparatively expansionist components of current
public expenditures. The only distinctive period of less than proportionate increases or more
than proportionate reductions in public consumption can be observed between 1986 and 1990
(budget consolidation phase). Finally, excessive public consumption cannot be described as a
special feature of election years.
VI.B. Budget policy in the light of the full-employment budget balance
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In terms of the success of attempts at budget consolidation in the late eighties, it can be stated
that a reduction in the ratio of the full-employment budget balance (gross and net of interest
payments) to nominal trend GDP (FEBB ratio) was achieved after 1987. The same
consolidation success holds true for the net public savings ratio (net of interest payments). In
1989 and 1990 the FEBB ratio net of interest payments even became positive but the interest
payments left the FEBB ratio gross of interest payments negative. The public savings net of
interest payments have always been positive. The interest payments on public debt, however,
turned public savings into dissavings between 1976 and 1980 as well as after 1981. The public
savings ratio gross and net of interest payments has been successfully increased since 1988.
Budget consolidation measures have been directed at public transfers (since 1988), public
consumption (since 1986) and public investment (since 1984 though with interuptions in 1988
and 1990).
VI.B.2. The general government
The fiscal aggregate under review consists of the consolidated budgets of the central
government, the governments of the nine federal states, the municipal governments, the
Association of Municipalities, the Syndicate of Social Insurance Corporations under public
law and the chambers (profits and losses of the state enterprises under public law are included
in the governmental budgets).
Presenting the results for the general government sector the following characteristic fiscal
subperiods are distinguished:
(a)
the stabilization period (1956-1959), with changing signs of the structural budget
balance;
(b)
the contractive period (1960-1974), with exclusively positive full-employment budget
balances;
(c)
the expansionist period (1975-1990), with uniformly negative full-employment budget
balances.
It was only in the contractive period that the operation of automatic stabilizers turned a
procyclical into a countercyclical budgetary impact. The importance of discretionary budget
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VI. SUMMARY OF RESULTS
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policy relative to automatic stabilization increased from one fiscal subperiod to the next,
particularly from the point in time when the structural budget deficits started to be permanent.
With respect to the proper direction of the budgetary impacts, the stabilization period performs
best: the sign of the full-employment budget balance was flexibly adjusted to the business
cycle situation. The results for the two long-term periods of uniform signs of the discretionary
budget balance are very similar. They indicate that the policy of continuous surpluses and
deficits, respectively, were appropriate for the specific situations prevailing during the distinct
periods if you rule out the first-best solution of switching between structural budget deficit and
surplus from year to year according to the output gap. Obviously, this result is partly due to the
fact that the change from current and structural surpluses to deficits occurred exactly at the
point in time when real growth slumped after the first oil-price shock.
With regard to the relative frequency of the discretionary budget reactions to the business
cycle situation, budget policy was far more stabilization-oriented in the contractive than in the
expansionist period. During the stabilization period the budgetary reactions were mostly
procyclical, but there was no great need to react properly to the output gap as the budget
balance produced a countercyclical impact in three out of four cases. Over the entire
investigation period positive output gaps were more often countervailed than negative ones.
The opposite can be stated for the expansionist and stabilization period. However, if you
consider only the beginning of recessions and strains in the economy it can be seen that,
during the stabilization and contractive period, every recession (but not every strain) was
fought immediately. In the expansionist period, however, the countercyclical budget policy
reactions were symmetric for the onset of strains and recessions, but only a third of the initial
cyclical fluctuations were properly reacted to.
Our measure of satisfactory stabilization behaviour considers de-/stabilizing impacts and
reactions jointly. It yields that only in the contractive period was the general government's
stabilization behaviour preponderantly satisfying.
In addition, the quantitative aspect of budgetary impacts and reactions is dealt with, giving an
idea of the order of magnitude of the current and structural budget balance: their shares in
GDP reached a maximum in 1987 and have decreased since then. In more than two thirds of
our observations the structural budget balance was greater than the output gap (both expressed
in absolute terms).
VI.B. Budget policy in the light of the full-employment budget balance
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The "impact ratio" ("reaction ratio") is our measure which captures the relative size of the de/stabilizing impacts and reactions by relating the countercyclical to the procyclical impacts
(reactions) of discretionary budget policy (the budgetary impacts and reactions are measured
as percentage of trend GDP). It can be seen that the countercyclical outweighed the procyclical
impacts in every fiscal period. The stabilization performance expressed by the "impact ratio"
was about twice as high in the contractive period as in the other subperiods. It is interesting to
learn that, with regard to the size of the de-/stabilizing impacts, the stabilization period
performed even worse than the expansionist period (the former was termed stabilization
period because of the flexible sign of the discretionary budget balance and the high relative
frequency of countercyclical impacts).
A similar picture emerges when considering the relative size of the countercyclical and
procyclical reactions of discretionary budget policy. Again it is evident that in the contractive
period the general public sector tried its best to countervail the output gaps. In the stabilization
period the general government sector mostly produced countercyclical structural impacts but
reacted only once countercyclically. Moreover, the countercyclical reaction was very small and
the procyclical reactions overwhelmingly large.
Judging the stabilization performance of the general government sector with respect to both
the relative frequency and the relative magnitude of the impacts and reactions of discretionary
budget policy, yields that the stabilization task was clearly performed best during the
contractive period. In particular, this is true with regard to the quantitative aspect of
discretionary impacts and reactions was well as to the relative frequency of budget policy
reaction. Only with regard to the relative frequency of countercyclical impacts of discretionary
budget impacts did the other subperiods perform better. In the contractive period, however, the
structural budget surplus was kept at a level which was low enough for the automatic
stabilizers to operate effectively and give the budget balance the proper sign in five out of the
15 years. Including the effects of automatic stabilization would raise the relative frequency of
countercyclical impacts of budget policy in the contractive period to as high as 93 percent.
Looking at the pre-deficit period (1956-1974), one can state that there were only two years of
procyclical impacts of the current budget balance (1958 and 1962). The long series of
countercyclical budget balances only came to an end as late as 1977.
There were some successful attempts of consolidating the budget: to a rather modest extent in
the late seventies, to a more considerable extent in 1981, and even more so in 1984. For a long
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VI. SUMMARY OF RESULTS
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time, however, the success in consolidating the budget was only transitory. In 1987 the current
and the structural budget deficit reached a maximum with respect to both their amount and
their share in (trend) GDP. From 1988 onward the current and full-employment budget deficit
ratios to (trend) GDP were reduced every year. But after the first slump (1975/76) in the
deficit period, successful measures of reducing the discretionary deficit represented procyclical
reactions in two thirds of the observed cases. It must be conceded, though, that the
countercyclical impacts of the continuous full-employment budget deficits were always larger
than their procyclical reductions. In the expansionist period reductions in the structural deficit
were even over-represented in that they occurred more frequently than positive output gaps,
but only a minority of the budget consolidation measures were countercyclical. The reverse is
true for the contractive period, and in the stabilization period there were only reductions of the
structural budget balance.
In order to shed some light on the structural development of the full-employment budget
balance, several structural budget balance ratios are defined. Comparing them to each other,
the relative development of interest payments on public debt, gross public fixed investment,
public transfers and public consumption is described.
In more than three quarters of our observations the interest payments on public debt increased
more than proportionately or decreased less than proportionately to the remaining components
of the full-employment budget balance. In three of the years the interest payments rose
sufficiently to make the full-employment budget balance ratio decrease though it would have
increased without regard to interest payments. In the years 1975, 1978 to 1982 and 1984 to
1990 the influence of the interest payments even turned the full-employment budget surplus
into a deficit. Moreover, in the period between 1984 and 1990 the interest payments on public
debt even sufficed in turning public savings into dissavings.
The results for gross public fixed investment do not allow a general verdict about whether the
development of this spending category was comparatively strong or weak. You also cannot say
that public investment was particularly employed for countervailing output gaps. At least two
distinctive periods can be discerned. Between 1974 and 1979 as well as from 1987 to 1990
(the latter is the period of declared budget consolidation at the central government level) the
restrictive conduct of public investment policy contributed particularly to the reductionin the
full-employment budget deficit relative to trend GDP.
VI.B. Budget policy in the light of the full-employment budget balance
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In terms of the relative development of public transfers,it is apparent that in two thirds of our
observations this category of expenditures developed more than proportionately to the other
components in the public savings ratio. In 1957, 1964 and 1985, when there was a strain on
the economy, the expansionist development of public transfers even turned the public savings
net of interest payments into dissavings. On the one hand, the years following the first and
second oil-price shock were characterized by a particularly expansionist development of public
transfers. On the other hand, public transfers contributed considerably to the budget
consolidation achievements from 1988 to 1990. It has to be added, though, that after 1973
relatively restrictive measures in transfers policy were mostly adopted in years of negative
output gaps.
Finally, the relative development of public consumption shows that this spending category
belongs, like public transfers, to the relatively expansionist components of the public savings
ratio. In nearly two thirds of our observations public consumption showed a comparatively
strong development. In the periods from 1958 to 1961 and from 1987 to 1990 public
consumption, in particular, contributed to consolidating the budget.
Summing up it can be stated that the share of the structural budget deficit in mid-term trend
GDP was reduced after 1987 though the process of budget consolidation was clearly impeded
by the interest payments on public debt after 1977. The success in slowing the growth of the
current and discretionary budget deficit after 1987 was due to restrictive policies of public
investment (since 1987), public transfers (in 1986 and from 1987 onwards) and public
consumption (starting in 1987).
VI.B.3. A comparison of budget policy in the general and central government sector
With reference to the distinctive fiscal periods,there is no equivalent subperiod for the general
government's stabilization period (1956-1959) because the data series for the central
government starts as late as 1960. In the general government sector the expansionist period
began in 1975, whereas the continuous structural deficits in the central government's budget
had already started in 1973.
In every year of the entire observation period the current and structural budget balances in the
general government sector were greater than in the central government sector. At both
federative levels the current and structural budget deficits reached a peak in 1987 differing by
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VI. SUMMARY OF RESULTS
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0.69 percentage points of GDP and 0.97 percentage points of trend GDP, respectively. In the
general government sector the current and discretionary budget deficits decreased steadily
both as amounts and as shares in (trend) GDP after 1987. In the same period the current and
structural budget deficits in the central government sector also declined monotonically as a
percentage of (trend) GDP, but as amounts they rose again in 1990.
In the general (central) government sector the automatic stabilizers transformed the
procyclical impact of the discretionary budget balance into a countercyclical impact of the
current budget balance in five (three) cases all of which occurred in the course of the
contractive period. Our measures of automatism and discretion indicate that, in general, the
degree of automatism (discretion) was higher in the entire public sector than in central
government sector. Only in the contractive period did the measure of discretion yield nearly
the same results for both sectors.
One procedure of assessing the stabilization performance is to calculate the relative frequency
of countercyclical impacts and reactions of discretionary budget policy. For both of these
aspects, basically the same results are received. In general, the stabilization performance
hardly differed between the entire and the central public sector, whereas in the contractive
(expansionist) period the central (general) government sector performed better. It should be
added that at the central level of the federative state, the asymmetry of countercyclical
reactions of discretionary budget policy is clearly larger in that negative output gaps are more
frequently countervailed than positive ones. Our measure of overall stabilization performance
which jointly takes account of the relative frequency of the impacts and reactions of
discretionary budget policy, yields that over the entire period of observation the general
government sector actually performed slightly better than the central government sector
because the lead of the general on the central government in the expansionist period was
greater than the lead of the central on the general government in the contractive period.
Another procedure for assessing the stabilization performance, is to evaluate the magnitude of
countercyclical and procyclical impacts and reactions of discretionary budget policy relative to
the corresponding output gap ("impact ratio" and "reaction ratio"). In the contractive
(expansionist) period the stabilizing as well as the destabilizing impacts per countercyclical
and procyclical year, respectively, were larger in the general (central) than in the central
(general) government sector. With respect to discretionary impacts of the budget, the central
government performed somewhat better in both of the fiscal periods. In terms of the size of the
VI.B. Budget policy in the light of the full-employment budget balance
17
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discretionary budgetary reactions, it can be seen that in every subperiod the stabilizing and
destabilizing budgetary reactions per countercyclical and procyclical year, respectively, were
bigger in the general than in the central government sector. In the contractive period the
stabilization performance with respect to budgetary reactions was far better in the central than
in the general government sector. In the expansionist period, however, the general
government reacted a bit more powerfully to the business cycle situation. Assessing the
discretionary stabilization performance with regard to the magnitude of the stabilizing and
destabilizing impacts and reactions relative to the output gaps, reveals that over the entire
observation period (1960-1990) the general government sector was slightly more successful
than the central government sector.
In general, all components of the full-employment budget balance developed mostly in the
same direction. Deviations from the direction of the general development of the discretionary
expenditure categories were registered in the general (central) government sector in 11
percent (9 percent) of all observations. Such deviations are observed particularly with public
investment and consumption in the general government sector and with public transfers in the
central government sector.
Interest payments on public debt very often reduced the increase in the full-employment
budget balance ratio to a greater extent than all the other components of the structural budget
balance. More precisely, this holds true for the general (central) government sector in more
than three quarters (more than two thirds) of our observations between 1961 and 1990.
Interest payments sometimes even sufficed in turning the structural budget surplus into a
deficit. In the general (central) government sector this phenomenon occurred in 38 percent (16
percent) of our observations.
The development of public investment within the structural budget balance ratio to trend GDP
suggests that at the general and central government level gross fixed investment was neither
specifically designed to countervail output gaps nor was it an especially expansionist spending
category. Rather, public investment was employed for consolidating the budget in the
seventies and eighties.
In contrast, public transfers appear to be a spending category with the most expansionist
development among the components of the discretionary budget balance, especially in the
general government sector where the Syndicate of Social Insurance Corporations is
represented. Public transfers contributed specifically to consolidating the budget only at the
18
VI. SUMMARY OF RESULTS
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end of the seventies and early eighties at the central government level, and after 1987 at both
federative levels.
Public consumption also constitutes a relatively expansionist spending category, particularly at
the general government level. In both sectors the only distinctive periods of more than
proportionate decreases or less than proportionate increases in public consumption relative to
trend GDP occurred at the end of the fifties and in the early sixties in the general government
sector and in the second half of the eighties.
Attempts at budget consolidation were successful after 1987 in that the ratios of the
discretionary and current budget deficit to (trend) GDP were reduced in the general as well as
in the central government sector. In both of these sectors this was achieved by a restrictive
policy of public investment, transfers and consumption. Only at the central government level
were there some difficulties in slowing the pace of public investment. With respect to the
business cycle situation, attempts at budget consolidation are over-represented in the general
and under-represented in the central government sector. For both federative levels which were
distinguished the results achieved show that in the contractive (expansionist) period a clear
majority (minority) of the attempts at budget consolidation operated countercyclically.
Moreover, in this respect it can be stated that in both fiscal periods the central government
performed notably better than the general government.
VI.C. The identification of (full-employment) budget deficit determinants
After the analysis of the countercyclical or procyclical character of the discretionary budget
balance, a multiple regression model was applied to determine the main factors exerting an
influence on the level of (structural) budget deficits.
An overwhelming portion of government revenues depends on the level of macroeconomic
output. That is why the actual budget deficits are influenced by the prevailing business cycle
situation. This connection is reinforced by the inherently countercyclical nature of several
expenditure components and by a fiscal policy of effective demand pursued to resist the onset
of recessions.
Due to the fact that the emergence of public deficits causes credit costs, interest payments on
outstanding debts also play an important role in the planning of budget policy. Current
VI.C. The identification of budget deficit determinants
19
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interest rates and deficits incurred in past periods represent variables determining the extent of
debt servicing burden.
Another argument which has been often put forward is that different price levels in the private
and public economy account for a growing public sector. This hypothesis is based on Baumol's
"cost disease of public consumption" accompanied by a lag of labour productivity in the
government sector.
There are also political conditions which may help to illustrate the development of
government deficits over time. Such politico-economic effects comprise the number of parties
in the government, the tenure of ruling governments and the next election date as well as the
degree of centralization or decentralization of political power between federal and local
authorities and the potency of various interest groups. Several arguments are proposed to
stress that multi-party coalition governments are more willing to incur larger deficits. The
absence of a uniform objective function, the protection of specific groups of population
(political clientels) and the competition for votes between the democratic parties are held
responsible for the increase in government expenditures.
But a growing number of parties constituting the government could also exert an effect in the
opposite direction: if it is possible to strengthen mutual control mechanisms between coalition
partners, democratic parties will come into a position of being able to resist increasing
demands by their own interest groups by palming off the responsibility for budget cuts on their
partners.
Bearing all these considerations in mind, a simple multiple regression procedure was
implemented for the Austrian central government. For the period from 1960 to 1990 the
dependent variable (deficit-GDP ratio) was estimated as a function of the lagged dependent
variable, the unemployment rate, the growth rate of real GDP, the interest payments on public
debt and a political variable representing mutual control mechanisms.
All estimated coefficients showed the theoretically expected sign at a significance level of at
least 95 percent. The negative coefficient of the political variable confirms the results of
NECK and SCHNEIDER (1988).
Using the same specification, full-employment deficits related to trend output levels were
estimated in a second regression analysis. The resultant coefficients were very similar to the
20
VI. SUMMARY OF RESULTS
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parameters derived before. But the t-statistic for the GDP growth rate was reduced
substantially - a reference to the proposition that there is no definite evidence for the existence
of a countercyclical discretionary budget policy measured in growth rates of macroeconomic
output levels.
But there are remaining problems with respect to an economic interpretation of a single
estimation equation. The possibility of nonstationarity in the macroeconomic series under
question or the existence of co-integration between various economic variables are reasons for
a subsequent time series analysis of (full-employment) budget deficit ratios.1
After an introduction to the mathematical conditions of the stationarity of time series and a
presentation of appropriate statitical test procedures, we investigated the development of the
FEBD trend output ratio (FD) over time. We found that the existence of a unit root synonymous with nonstationarity - cannot be rejected. So the hypothesis of a random walk
model without a positive drift or a trend component was supported by an augmented DickeyFuller test. Furthermore, the same test procedure applied to first differences of FD resulted in
the differentiated series being stationary, which means that the ratio is integrated with order
one.
Suppose we have two time series yt and xt each of them being I(1). If there is a constant a with
the linear combination yt - axt yielding a stationary series I(0), the variables are said to be cointegrated and this causes statistical implications for dynamic econometric models. The
existence of co-integration between non-stationary time series can also be investigated by the
application of the Dickey-Fuller method. The procedure is based on a test of unit roots in the
estimated residuals of the co-integration equation.
Testing the co-integration between FD and the regressors of equation (8), it was found that the
variables are not co-integrated. That is why there is no need to establish an error correction
mechanism to model the budget deficits over time.
1
A further problem results from the fact that the different regressors in equation (8) do not represent exogenous variables
but rather are determined simultaneously. But the purpose of our analysis has been to gain a first insight into the
characteristics of Austrian budget policy. For a more detailed investigation it is indispensible to apply a macroeconomic
model including dynamic links and simultaneous relations between the relevant variables of economic (budget) policy.
VI.C. The identification of budget deficit determinants
21
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Taking into account these results and estimating relation (8) again in first differences, we
found little empirical evidence - with the exception of the rate of unemployment - that the
initial regressors play a major role in the determination of full-employment budget deficits.
The result that the evidence of structural relations is reduced dramatically in the presence of
stationary time series is aggravated by the argument that the regressors in the single equation
do not represent exogenous variables in the sense of theoretical macroeconomics.
VI.D. Concluding remarks
Our concluding remarks refer to the main items which have emerged from our analysis:
(a)
budget policy has been characterized by a long-run tendency of growing structural
deficits after a long period of discretionary surpluses - developments which
inparticular, suited the economic circumstances of the respective periods quite well;
(b)
there was no systematic policy of smoothing the course of the economy to the mid-term
trend value of real GDP;
(c)
nonetheless, the countercyclical quality of the discretionary budget reactions was better
than random outcomes of the change in the structural budget balance;
(d)
the unemployment rate (and perhaps also the growth rate of real GDP) appear to have
exerted a significant influence on the reactions of discretionary budget policy.
At the central government level, the era of structural budget surpluses was apparently ended
by the expansionist public infrastructure policy of the first socialist one-party governments and
by the expansionist demand management motivated by the adverse consequences of the first
oil-price shock. These events marked a substantial change in the development of public
finances in that a new fiscal attitude was created which basically accepted living with high
and growing deficits (even as a ratio to GDP). This change in fiscal attitude might have
enabled particular interest groups to get their demands on public funds through, and made
deficit spending a universal method of coping with slow growth and high unemployment.
Austria is well know to be a country in which pluralistic interests are densely organized and
interest groups seem to have great informal influence on the formal centres of power
(parliament, government and last but not least administration). Furthermore, bureaucratic
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VI. SUMMARY OF RESULTS
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behaviour in the sense of Leibenstein and Niskanen, which inevitably leads to waste and
increasing budgets, also becomes apparent when you look at the process of budgeting. It
constitutes a procedure for distributing the planned increase in public revenues (sometimes
under the restriction of a net borrowing limit) among the different ministeries each of which
can easily point out a few major projects that should not be curtailed for some commonsense
reason or other. This process is termed "budgetary incrementalism". As experience shows,
budgetary incrementalism can only be reversed permanently under the influence of a coalition
partner who has adopted a more restrictive fiscal attitude than the Socialist Party and by a
switch in public opinion giving higher priority to the target of "sound finance" (whatever this
slogan is supposed to mean).
Facing the adverse consequences of the oil-price shocks, it turned out to be a common problem
distinguishing to what extent the growth of natural output declined due to the productivity
shocks (structural unemployment), and hence to determine how much growth slowed down
due to the accompanying demand disturbances (cyclical unemployment). The verdict on the
change in the NAIRU clearly calls for a reassessment of demand management and the
importance of deficit spending (GORDON 1990, pp. 277-300). Obviously, the uncertainty
about the structural changes in the labour and product markets favours quite a strong increase
in budget deficits, especially under the conditions of a pluralistic democratic society.
In chapter I we tried to point out the close relationship between Austro-Keynesianism and
Post-Keynesianism. In Austria the neoclassical or bastard-keynesian concept of natural
unemployment, and hence the trade-off between high employment and low inflation, did not
affect demand-enforcing budget policy too much (at least in the core period of AustroKeynesianism). Moreover, wage-induced inflation was countervailed by a stability-oriented
policy of wage and price determination and a hard-currency policy. Finally, deficit spending
was obviously intended to stabilize optimistic expectations of aggregate demand.
These reasons, together with the uncertainty about the duration of the recessions following the
supply-side shocks, introduced a period of pronounced deficit spending which was reinforced
by the rising influence of the interest payments on public debt. Moreover, strong discretionary
deficit spending reduced the importance of automatic stabilization immensely. For quite a
long time deficit spending was not restricted lastingly because one was convinced of the
negative effects of budget consolidation on real growth and employment. On the one hand,
Austro-Keynesian economic policy can be called naive in that it mainly relied on demand-side
VI.D. Concluding remarks
23
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policies and put much less emphasis on supply-side measures to overcome structural
deficiencies of the economy. On the other hand, such a policy of strong effective demand
might have contributed to an increased capacity for self-stabilization in the economy resulting
in shorter and smaller output gaps, as were observed in the course of the eighties.
Unfortunately, the measures for reducing the budget deficit turned out to be mostly
procyclical. Attempts at budget consolidation were successful after 1987. The 1986 coalition
agreement between the Socialist Party and the People's Party set concrete quantitative targets
for budget consolidation which have been realized. However, the deficit reductions were not
only executed without regard to the business cycle situation but they were also realized mainly
through short-run measures that cannot be repeated frequently (e.g., sales of public property,
using financial reserves, window dressing, etc). This is why the method used for consolidating
the budget has been justly criticized (GANTNER and EIBL 1991, pp. 487-516).
As some investigations have indicated, there is still considerable potential for productivity
gains in the Austrian public sector. This refers to the production functions of corporations
under public law and public firms under private law as well as to the procedures for planning
the budget and managing public funds. As long as politics sticks to the traditional methods of
organizing public projects, activities and expenditures there will be no way out of the inherent
problems of budget maximizing behaviour and ill-considered expenditure cuts. In particular,
there are several major problems in the public sector that obviously call for solutions: the
retirement pension system, the system of medical aid and care, the system of agricultural
subsidies, the regulations concerning the public railways corporation (ÖBB), the effective
organization of public auditing, etc.
The only way of solving such fundamental problems and departing from incrementalism is to
put important allocative decisions in the public sector much more on the basis of economic
reasoning. This requires, inter alia, setting reasonable priorities for the fulfilment of public
purposes, that is, to set up a consistent plan of public projects in the short, medium and long
run (GANTNER and EIBL 1991) in order to modify the inexpedient structure inherited from
the past and preserved by incrementalism. Such an approach not only prevents measures such
as proportionately cutting expenditures and/or resorting to purely short-run consolidation
measures. It also opens up the opportunity of taking into account the business cycle situation.
Recessions can be fought without hesitation if the short-run budgetary reactions are
determined by the prevailing output gap. Stabilization policy would no longer be incompatible
24
VI. SUMMARY OF RESULTS
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with budget consolidation policy as the reduction in the deficit would be secured by the longrun measures of saving resources in the public sector through increasing productivity and
decreasing the relative price of collective goods provided by the state.
Experience has shown that concrete coalition agreements on policy targets and measures are
needed for conducting economic policy effectively. Such coalition agreements and
governmental declarations (which are advisable even in cases of one-party governments)
should not primarily refer to short-term budget consolidation targets but rather to long-term
plans of reforming the public sector and thereby consolidating the budget efficiently (with
regard to allocation and stabilization efficiency). This would render the proposed measure of
prolonging governmental terms of office unnecessary, particularly since there is little
empirical evidence for politico-strategic deficit spending before elections in Austria.
In our concluding remarks we have suggested measures which appear to be straightforward or
even trivial. Nonetheless, on the one hand, such points have to be made again and again
because reality is still far from being optimal and does not even try to find second-best
solutions. On the other hand we are aware of the fact that such suggestions can be easily made
but that they are at the same time very difficult to realize. A lot of further research remains to
be done in this direction.