Fiscal Revenue, Fiscal Space and Expenditure Cyclicality Patterns: A Comparison of Asia, Latin America, and OECD Countries,

Joint with: Yothin Jinjarak, and Hien Thi Kim Nguyen.

The unprecedented decline of policy interest rates and risk premia in the aftermath of the Global Financial Crisis markedly reduced the flow costs of serving the growing public and private debt, thus masking the growing fragility associated with rising aggregate leverage/GDP during the last 10 years. As such, the upward trajectory of OECD policy interest rates may impose growing fiscal challenges, thus testing the fiscal space of countries and their resilience. Against this background, we compare fiscal cyclicality across Asia, Latin America, and the OECD, and identify factors that explain countries’ fiscal space and fiscal fragility. Our study reveals a mixed fiscal scenery, where more than half of the countries are characterized by limited fiscal space, and fiscal policy is either pro- or acyclical. More limited fiscal capacity, as measured by public debt/tax base and its volatility are positively associated with fiscal cyclicality, while public debt/GDP and its volatility are not statistically significant in our estimation, suggesting that public debt/tax base provides a more robust explanation than public debt/GDP for government spending cyclicality. We simulate the impact of an enduring interest-rate rise on fiscal space, rank countries and regions by the fragility/robustness of their fiscal space to such a shock, and discuss policies to increase fiscal resilience.