Abstract
In the second half of the 20th century, Spain provides a case of political regime change, which according to some political economy models should also lead to a shift in the cyclical nature of fiscal policy. We find that in most of the pre-democratic era, there was a strong procyclical bias to fiscal policy. Eradication began in the last years of the autocratic regime under the influence of fiscal institutional reform and perhaps learning. It was completed after the transition to democracy when countercyclical fiscal policy was reinforced in the late 1980s by membership of the European Exchange Rate Mechanism. This experience, established by two separate econometric identification procedures, as well as a narrative drawing especially upon OECD and EIU reports, runs counter to the predictions of the political economy models of Lane (J Public Econ 87(12):2661–2675, 2003) and Alesina et al. (J Eur Econ Assoc 5:1006–1036, 2008).
Similar content being viewed by others
Notes
Measured by the proportion of years for which the output gap and the ‘fiscal impulse’—the improvement in the structural balance—have opposite signs.
A World Bank mission in 1962 identified over 1,600 autonomous official spending units with less than adequate reporting standards and was obliged to confine their discussion of Spanish public expenditure to central government spending, the only category for which they could obtain data (International Bank for Reconstruction and Development 1963).
In fact, after the emergency devaluations of 1976 and 1977, the Spanish governments showed a persistent ‘fear of floating’. Reinhart and Rogoff (2004) classify the Peseta exchange rate as a de facto 2 % crawling band around the Deutschmark from 1980 to 1994. Ledesma Rodríguez et al. (2005) also find that a de facto peg to the Deutschmark prevailed between 1978 and 1984, and again between 1986 and the 1993 crisis, and was temporarily abandoned only in 1985 in response to speculative attacks in the wake of Spain’s accession to the EEC. These results strongly suggest that Spanish monetary authorities worried about the pass-through from exchange rates to prices and systematically intervened to smooth fluctuations in the nominal exchange rate, even in the absence of a formal commitment to peg.
There has been some theorising about the effects of fiscal policy shocks under normative fiscal rules (summarised by Daban et al. 2003) but the reaction functions investigated here are not announced rules.
Also, a common finding of empirical economic growth models is that government consumption has a negative impact whereas education, often largely financed by the state, has a positive impact. For example, in Barro (1997), these two effects virtually offset each other.
In the case of a cyclical fiscal policy with constant tax rate and government expenditure, tax revenues and the primary balance are positively correlated with the cycle, but the GDP ratio of government expenditure is negatively correlated with the cycle, and the correlation of the GDP ratio of tax revenues is ambiguous, as it also turns the GDP ratio of primary balance. With procyclical fiscal policy (identified by falling tax rate and increasing expenditure in good times), the correlation of tax revenues and their GDP ratio with the cycle is ambiguous (the tax rate falls but the tax base increases) and the same happens to the GDP ratio of the primary balance.
The share of the industrial and constructions sector on total GDP at current prices hovered around 35 % for the whole period 1952–1986. Its contribution to real GDP growth decreased from 50 to 55 % in 1952–1974 to ca. 33 % in the late 1980s (Prados de la Escosura 2003, pp. 203–205). We prefer the industrial production index reported by INE (Instituto Nacional de Estadística) and international organizations such as the IMF (see Appendix for details) to the historical series of real GDP and industrial production reconstructed by Prados de la Escosura since the former was observable by the government and economic agents and is also comparable with industrial production indices of other European countries reported by the IMF.
As Kaminsky et al. (2004) note, only if a negative c(5) parameter is obtained can a procyclical discretionary tax policy be identified. A positive coefficient is unable to discriminate between procyclical or countercyclical behaviour. So we need to only find that c(5) is not negative after 1976 to corroborate the hypothesis of countercyclicality under democracy.
As a robustness check, we also estimate the reaction function under the alternative specification, that is, assuming that revenues decisions come first, which formally implies imposing c(2) = 0. Results do not change. They are not reported in order to save space but are available upon request.
Rigobon (2004) demonstrates that, assuming two countries with the same procyclical fiscal policy and standard Keynesian effects on output but different types of shocks, OLS estimates would lead to observe a procyclical fiscal policy in the country where fiscal shocks dominate on output shocks.
A similar approach is adopted by Jaimovich and Panizza (2007). Our instrumental variable is a weighted industrial production index of five ‘core’ European economies (France, West Germany, the Netherlands, Belgium and the UK). The first stage regression has good explanatory power (R 2 0.47) with coefficients and t-stats: 0.622 (2.56**) and 0.768 (4.01***) of contemporaneous and lagged foreign output growth, respectively. Unit root tests confirm that the series are stationary. Autoregressive lags are selected on the base of standard (Akaike and Schwartz) criteria.
Election year dummies are specified as 1 in the four quarters prior to a general election (including the quarter in which the election took place). We test for political budget cycles only using quarterly data because most Spanish elections were held in the first half of the year, so that an annual dummy would capture both pre- and post-election fiscal shocks. An additional problem with annual dummies is the limited number of observations and the absence of sufficient degrees of freedom.
References
Alberola E, González-Mínguez JM, Hernández De Cos P, Marqués JM (2003) How cyclical do cyclically-adjusted balances remain? An EU study, Hacienda Pública Española/Revista de Economía Pública 166(3):151–181
Alesina A, Campante FR, Tabellini G (2008) Why is fiscal policy often procyclical? J Eur Econ Assoc 6(5):1006–1036
Anderson CW (1970) The political economy of modern Spain. Policy-making in an authoritarian system. The University of Wisconsin Press, Madison
Andrés J, Domenech R, Fatas A (2008) The stabilizing role of government size. J Econ Dyn Control 32(2):571–593
Argimón I, Gómez Ángel L, Hernández De Cos P, Martí F (1999) El sector de las administraciones publicas en España. Estudios Económicos, Banco de España, n. 68
Bajo-Rubio O, Diaz-Roldan C, Esteve V (2010) The sustainability of government deficits in Spain 1850–2000. J Appl Econ 13(2):263–281
Barro RJ (1997) Determinants of economic growth: a cross-country empirical study. The MIT Press, Cambridge
Battilossi S, Foreman-Peck J, Kling G (2010) Business cycles and economic policy 1945–2007. In: Broadberry S, O’Rourke KH (eds) Cambridge economic history of modern Europe vol 2: 1870 to the present. Cambridge University Press, Cambridge, pp 360–389
Beltrán L, Oliart A (1967) Gasto Público en España. Moneda y Credito, Madrid
Blanchard OJ, Quah D (1989) The dynamic effects of aggregate demand and supply disturbances. Am Econ Rev 79(4):655–673
Boltho A, Toniolo G (1999) The assessment: the twentieth century–achievements, failures, lessons. Oxf Rev Econ Policy 15(4):1–17
Brender A, Drazen A (2005) Political budget cycles in new versus established democracies. J Monet Econ 52(7):1271–1295
Brender A, Drazen A (2007) Why is economic policy different in new democracies? Affecting attitudes about democracy. NBER working paper no. 13457
Canseco Canseco JE (1978) Política fiscal de España: estudio de la política económica pública española desde el plan de estabilización. Instituto de Estudios Fiscales, Madrid
Carreras A, Tafunell X (2004) Historia económica de la España contemporánea. Crítica, Barcelona
Chang H-C, Huang B-N, Yang CW (2011) Military expenditure and economic growth across different groups: a dynamic panel granger-causality approach. Econ Model 28(6):2416–2423
Comín F (2007) Reaching a political consensus: the Moncloa Pacts, joining the European Union, and the rest of the journey. In: Martinez-Vazquez J, Sanz–Sanz JF (eds) Fiscal reform in Spain. Accomplishments and challenges. Edward Elgar, Cheltenham, pp 8–58
Daban T, Detragiache E, di Bella G, Millesi-Ferretti GM, Symansky S (2003) Rules-based fiscal policy in France, Germany, Italy and Spain. IMF occasional paper 225
De Castro F, Hernandez De Cos P (2008) The economic effects of fiscal policy: the case of Spain. J Macroecon 30(3):1005–1028
Diallo O (2009) Tortuous road toward countercyclical fiscal policy: lessons from democratized sub-Saharian Africa. J Policy Model 31:36–50
Dolado JJ, Sebastián M, Vallés J (1993) Cyclical patterns of the Spanish economy. Investig Econ 17(3):445–473
Dow JCR (1964) The management of the British economy 1945–1960. Cambridge University Press, Cambridge
Encarnación O (1997) Social concertation in democratic and market transitions: comparative lessons from Spain. Comp Polit Stud 20(4):387–419
Escario R, Sabaté M, Gadea MD (2011) La sombra monetaria del déficit en la España de la peseta/Monetary Shadow of Deficit. Spain 1874–1998. Investigaciones de Historia Económica 19:151–181 (Revista de la Asociación Española de Historia Económica)
Escario R, Gadea MD, Sabaté M (2012) Multicointegration, seigniorage and fiscal sustainability. Spain 1857–2000. J Policy Model 34(2):270–283
Fatás A, Mihov I (2001) Government size and automatic stabilizers: international and intranational evidence. J Int Econ 55:3–28
Fatás A, Mihov I (2003) The case for restricting fiscal policy discretion. Q J Econ 118(4):1419–1447
Fatás A, Mihov I (2008) Fiscal discipline, volatility and growth. In: Irwin T, Perry G, Servén L, Suescún R (eds) Fiscal policy, stabilization and growth. Prudence or abstinence?. World Bank, Washington, pp 43–74
Fatás A, Mihov I (2009) The Euro and fiscal policy. NBER working paper, no. 14722
Friedman M (1997) John Maynard Keynes. Federal Reserve Bank Richmond Econ Q 83(2):1–23
Fuentes Quintana E (1990) Las reformas tributarias en España. Barcelona, Crítica
Galí J (1994) Government size and macroeconomic stability. Eur Econ Rev 38:117–132
Galí J, Perotti R (2003) Fiscal policy and monetary integration in Europe. Econ Policy 18:533–572
Galy M, Pastor G, Pujol T (1993) Spain: converging with the European community. IMF, Washington
Gavin M, Hausmann R, Perotti R, Talvi E (1996) Managing fiscal policy in Latin America and the Caribbean: volatility, procyclicality and creditworthiness. Inter-American Development Bank, RES working paper no. 4032
Gómez Giménez AL (1993) Indicadores de la política fiscal: una aplicación al caso español, Documento de Trabajo n. 9304, Servicio de Estudios, Banco de España
Gómez Giménez AL, Roldan Alegre JM (1995) Análisis de la política fiscal en España con una perspectiva macroeconómica (1988–1994), Banco de España, Estudios Económicos, n. 53
González Páramo JM (1990) Tres lustros de cambios estructurales en el sector público. In: García Delgado JL (ed) Economía Española de la Transición y la Democracia. CIS, Madrid, pp 245–271
Henisz W (2000) The institutional environment for economic growth. Econ Politics 12:1–31
Ilzetzki E, Vegh C (2008) Procyclical fiscal policy in developing countries: truth or fiction? NBER working paper no. 14191
International Bank for Reconstruction and Development (1963) The economic development of Spain: report of a mission. John Hopkins, Baltimore
Jaimovich D, Panizza U (2007), Procyclicality or reverse causality? Inter-American Development Bank, Working paper no. 599
Kaminsky G, Reinhart C, Végh C (2004) When it rains it pours: procyclical capital flows and macroeconomic policies. In: Gertler M, Rogoff K (eds) NBER macroeconomic annual 2004. MIT Press, Harvard
Lane PR (2003) The cyclical behavior of fiscal policy: evidence from the OECD. J Public Econ 87(12):2661–2675
Lane PR, Tornell A (1996) Power, growth and the voracity effect. J Econ Growth 1:213–241
Ledesma Rodríguez F, Navarro-Ibáñez M, Pérez Rodríguez J, Sosvilla Rivero S (2005) Implicit regimes for the Spanish peseta/Deutschmark exchange rate, Fedea Documentos de Trabajo, n. 2005-21
Lundberg E (1968) Instability and economic growth. Yale University Press, New Haven
Maddison A (1991) Phases of capitalist development. Oxford University Press, Oxford
Marín Arcas J (1997) Efectos estabilizadores de la política fiscal, Estudios Económicos, n. 58, Servicio de Estudios, Banco de España
Martínez-Vázquez J, Sanz–Sanz JF (eds) (2007) Fiscal Reform in Spain Accomplishments and Challenges. Edward Elgar, Cheltenham
Medhurst KN (1973) Government in Spain. The executive at work. Pergamon Press, Oxford
Mohanty MS, Zampolli F (2009) Government size and macroeconomic stability. BIS Q Rev 4:55–68
Mohr M, Morris R (2007) Uncertainty in measuring the underlying budgetary position and fiscal stance. Paper presented at the directorate general for economic and financial affairs 2008 workshop “Achieving & safeguarding sound fiscal positions”, European Commission, Brussels
Perotti R (2005) Estimating the effects of fiscal policy in OECD countries. In: Proceedings, Federal Reserve Bank of San Francisco, March
Prados de la Escosura L (2003) El Progreso Económico de España (1850–2000). Fundación BBVA, Bilbao
Prados de la Escosura L, Rosés J, Sanz-Villaroya I (2012) Economic reforms and growth in Franco’s Spain, J. Iber Lat Am Econ Hist 30(1):45–89
Reinhart C, Reinhart V (2008) Capital flow bonanzas: an encompassing view of the past and present. NBER working paper no. 14321
Reinhart C, Rogoff K (2004) The modern history of exchange rate arrangements: a reinterpretation. Q J Econ 119:1–48 Data Appendix
Rigobon (2004) Comments on Kaminsky, G., Reinhart, C., Végh, C. (2004), When it rains it pours: procyclical capital flows and macroeconomic policies. In: Gertler M, Rogoff K (eds) NBER macroeconomic annual 2004. MIT Press, Harvard
Rodrik D (1999) Where did all the growth go? External shocks, social conflict, and growth collapses. J Econ Growth 4(4):385–412
Romer CD, Romer DH (1989) Does monetary policy matter? A new test in the spirit of Friedman and Schwartz. In: Blanchard OJ, Fischer S (eds) NBER macroeconomics annual vol 4. MIT Press, Harvard
Royo S (2000) From social democracy to neoliberalism. The consequences of party hegemony in Spain 1983–1996. St. Martin’s Press, New York
Royo S (2001) The collapse of social concertation and the failure of socialist economic policies in Spain. South Eur Soc Politics 6(1):27–50
Schwartz P, González M-J (1978) Una Historia del Instituto Nacional de Industria (1941–1976). Tecnos, Madrid
Talvi E, Végh C (2005) Tax base variability and procyclicality of fiscal policy. J Dev Econ 78(1):156–190
Tornell A, Lane PR (1999) Voracity and growth. Am Econ Rev 89:22–46
Valle V (1990) El gasto público en España. In: E. Albi Ibañez (ed) La Hacienda Pública en la Democracia. Ariel, Barcelona, pp 170–179
Van den Noord P (2000) The size and role of automatic fiscal stabilizers in the 1990 s and beyond. OECD Economics Department working papers, no. 230
Vázquez JA (1990) Crisis, cambio y recuperación industrial. In: Garcia Delgado JL (ed) Economía Española de la Transición y la Democracia. CIS, Madrid, pp 81–117
Zapico Goñi E (1988) Financial management reform in Spanish Central Government. EIASM, Maastrich, no. 4
Acknowledgments
The authors are grateful for their useful comments and suggestions to anonymous referees and to participants in the Third Iberometrics Conference (Valencia), the European Historical Economics Society Conference (Lund), the XVIII Meeting of Public Economics (Malaga), where previous drafts of this research were presented. Battilossi acknowledges the financial support of the Spanish MICINN through projects ECO2008-02089 and ECO2011-25713, and the generous hospitality of the Department of Economic History at the LSE, where he spent a semester in 2010 as a Senior Visiting Fellow. Escario acknowledges financial support from the Spanish MICINN through project ECO2009-08204, the ‘Programa Europa XXI para estancias de investigación del Gobierno de Aragón y la Caja Inmaculada’, and Grupo de Excelencia de Investigación SEIM (SEC 269–124). The usual disclaimer of responsibility for remaining errors and omissions applies.
Author information
Authors and Affiliations
Corresponding author
Appendix: Data and sources
Appendix: Data and sources
1.1 Fiscal variables
1.1.1 Annual
Estadísticas Históricas de España. Siglos XIX–XX, A. Carreras, X. Tafunell, eds. (Fundación BBVA, 2005), c. 12, F. Comín, D. Diaz, ‘Sector público administrativo y estado del bienestar’, vol. II, pp. 873–964
Central government tax revenues:
-
1950–1961, Table 12.16 ‘Ingresos del Estado: clasificación económica’, p. 940 [includes indirect and direct tax revenue, monopolies, other current revenue (transfers among public administrations and other current transfers), capital tax revenues].
-
1962–1998, Table 12.21 ‘Estado: ingresos corrientes y de capital (movimiento de caja), clasificación económica’, p. 948 [includes indirect and direct tax revenue, current and capital transfers, interest revenue, dividends and other]. This series corresponds to the data reported in IMF International Financial Statistics, ‘Total revenue and grants’, ifs:s18481y.zf.
Central government expenditures:
-
1950–1961, Table 12.17 ‘Gastos del Estado: clasificación económica’, p. 943.
-
1962–1998, Table 12.22 ‘Estado: gastos corrientes y de capital (movimiento de caja), clasificación económica’, p. 949 [includes wages, purchases, current and capital transfers, investment, interest payments and other expenditures]. This series corresponds (with minor discrepancies) to the data reported in IMF International Financial Statistics, ‘Expenditures’ (net of lending and repayments), ifs:s18482zfa.
-
Social security: 1958–1998, Table 12.31 ‘Cuentas de la Seguridad Social’, pp. 958–959
-
Government debt: 1950–1998, Table 12.34 ‘Deuda pública en circulación’, pp. 962–963.
1.1.2 Quarterly
IMF International Financial Statistics
-
Central government tax revenues (1962Q1–1998Q4): ifs: s18481zfq
-
Central government expenditures (1962Q1–1998Q4): ifs: s18482zfq
-
Government debt (1958Q3–1998Q4): ifs: s18488zfq
1.2 Wholesale Price Index
1.2.1 Annual
IMF International Financial Statistics (1950–1998): ifs: s18463zf
1.2.2 Quarterly
IMF International Financial Statistics (1959Q1–1998Q4): ifs: s18463zfq
1.3 Industrial Production Index
1.3.1 Annual
Spain (1950–1998): Estadísticas Históricas de España. Siglos XIX–XX, A. Carreras, X. Tafunell, eds. (Fundación BBVA, 2005), c. 5, A. Carreras, ‘Industria’, vol. I, pp. 357–964, Table 5.11 ‘Índices de la producción industrial’, Series INE (Instituto Nacional de Estadística). This series tracks (with minor discrepancies) the industrial production index (s.a.) reported from 1960 by IMF International Financial Statistics, ifs: s18466czfa.
France, Germany, the Netherlands, Belgium and UK (1950–1998): IMF International Financial Statistics, ifs: s13266czf, s13466czf, s13866czf, s12466bzf, s11266czf, respectively.
1.3.2 Quarterly
Spain: IMF International Financial Statistics (1961Q1–1998Q4): ifs: s18466czfq
France, Germany, the Netherlands, Belgium and UK (1957Q1–1998Q4): IMF International Financial Statistics, s13266czfq, s13466czfq, s13866czfq, s12466bzfq, s11266czfq, respectively.
1.4 GDP
1.4.1 Annual
Spain (1950–1998): Prados de la Escosura L. (2003).
France, Germany, the Netherlands, Belgium and UK (1950–1998): The Conference Board Total Economy Database, http://www.conference-board.org/data/economydatabase/
1.5 SOURCES
EIU = The Economist Intelligence Unit, Quarterly Economic Reviews: Spain OECD = OECD Economic Surveys: Spain
Rights and permissions
About this article
Cite this article
Battilossi, S., Escario, R. & Foreman-Peck, J. Fiscal policy response to cycles under two regimes: Spain 1950–1998. Cliometrica 7, 267–294 (2013). https://doi.org/10.1007/s11698-012-0089-4
Received:
Accepted:
Published:
Issue Date:
DOI: https://doi.org/10.1007/s11698-012-0089-4