Skip to main content
Log in

Fiscal regime shifts in Portugal

  • Original Article
  • Published:
Portuguese Economic Journal Aims and scope Submit manuscript

Abstract

We estimate changes in fiscal policy regimes in Portugal with a Markov Switching regression of fiscal policy rules for the period 1978–2007, using a new dataset of fiscal quarterly series. We find evidence of a deficit bias, while repeated reversals of taxes making the budget procyclical. Economic booms have typically been used to relax tax pressure, especially during elections. One-off measures have been preferred over structural ones to contain the deficit during economic crises. The EU fiscal framework prompted temporary consolidation, but did not permanently change the budgeting process.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Fig. 1
Fig. 2
Fig. 3
Fig. 4
Fig. 5
Fig. 6
Fig. 7

Similar content being viewed by others

Notes

  1. A detailed description is provided in the Appendix.

  2. Note that a passive rule is not uniquely defined from the data generating process for surpluses and debt, and is observationally equivalent to an off-equilibrium behaviour that is consistent with active fiscal policies (Cochrane 1998).

  3. A more than proportional reaction of θ (for κ = 0), or a large surplus κ > 0 (for θ = 0) imply strong sustainability as the government would keep accumulating assets. Strictly speaking, both situations imply a violation of the budget constraint, but do not create problems for sustainability of debt.

  4. We take as an output measure the HP filtered output gap.

  5. There are a few examples in the literature of regime switching tests of fiscal behaviour on US data. Davig (2004) examines the time varying probability of high and low debt regimes; Favero and Monacelli (2005) test a fiscal rule similar to (6). EU studies are fewer: Thams (2006) estimates fiscal rules for Germany and Spain; Claeys (2008) does so for Sweden.

  6. All computations are done in MSVAR for Ox (Krolzig 1998).

  7. The total number of observations in each regime is calculated as the sum of the number of quarters times the probability of the regime in that quarter.

  8. Afonso and Claeys (2008) show that fiscal policy indeed contributes much more to the variance in output developments in Portugal than in other EU countries.

  9. Note that if we do not allow for a change in volatility, the estimated coefficients of the AR model are not stable and the switches are randomly distributed over the sample period.

  10. Results not reported, but available on request.

  11. As in Davig (2004), we also estimate an AR(4) model for the debt ratio. As debt is a non-stationary series, the regime estimates are not stable. This confirms our previous finding that fiscal policy is active.

  12. This model takes large fluctuations in tax bases as exogenous.

  13. The results are not reported, but are available upon request.

  14. These data come from Warwick (1994), Laver and Hunt (1992), and Huber and Inglehart (1995).

  15. Results not reported, but they are available upon request.

  16. This is further evidence that procyclical policies are not due to falling credit ratings.

  17. See the studies by Buti and Sapir (1998), Buti et al. (1998), EC (2001), von Hagen et al. (2002), and Balassone et al. (2008).

  18. Golinelli and Momigliano (2006) argue that the findings of asymmetric procylical policies depend on the way fiscal policy is modelled. Using real time data to test fiscal rules, they find that governments genuinely react in a countercyclical and symmetric way to the cycle.

  19. For example, a specific commission—under the aegis of the Central Bank—was created in 2002 to determine the size of the 2001 budget deficit. The revised number showed a much higher deficit than previously reported, and triggered the first EDP. A similar revision in 2005 doubled the initial deficit, and set off the second EDP.

  20. Manasse (2006) finds that fiscal rules tend to reduce procyclicality if the overall quality of budget institutions is low.

References

  • Afonso A (2005) Fiscal sustainability: the unpleasant European case. FinanzArchiv 61(1):19–44

    Article  Google Scholar 

  • Afonso A, Claeys P (2008) The dynamic behaviour of budget components and output. Econ Model 25(1):93–117

    Article  Google Scholar 

  • Afonso A, Sousa RM (2009) The macroeconomic effects of fiscal policy in Portugal: a Bayesian SVAR analysis. Department of Economics, ISEG-UTL, Working Paper n° 09/2009/DE/UECE

  • Aghion P, Bolton P (1990) Government domestic debt and the risk of default: a political–economic model of the strategic role of debt. In: Dornbusch R, Draghi M (eds) Public debt management: theory and history. CEPR, London

    Google Scholar 

  • Alesina A, Tabellini G (1990) A positive theory of fiscal deficits and government debt. Rev Econ Stud 57(3):403–414

    Article  Google Scholar 

  • Alesina A, Campante F, Tabellini G (2008) Why is fiscal policy often procyclical? J Eur Econ Assoc 6(5):1006–1036

    Article  Google Scholar 

  • Balassone F, Francese M (2004) Cyclical asymmetry in fiscal policy, debt accumulation and the Treaty of Maastricht. Bank of Italy Working paper No 531

  • Balassone F, Francese M, Zotteri S (2008) Cyclical asymmetry in fiscal variables. Bank of Italy Working Paper No 671

  • Bayar A, Smeets B (2009) Government deficits in the European Union: an analysis of entry and exit dynamics. Cesifo Working Paper No 2703

  • Bronchi C (2003) The effectiveness of public expenditure in Portugal. OECD Working Paper No 349

  • Bronchi C, Gomes-Santos J (2001) Reforming the tax system in Portugal. OECD Working Paper No 302

  • Buti M, Sapir A (1998) Economic policy in EMU: a study by the European Commission Services. Oxford University Press, Oxford

    Google Scholar 

  • Buti M, van den Noord P (2004) Fiscal discretion and elections in the early years of EMU. J Common Mark Stud 42(4):737–56

    Article  Google Scholar 

  • Buti M, Daniele F, Ongena H (1998) Fiscal discipline and flexibility in EMU: the implementation of the SGP. Oxf Rev Econ Policy 14(3):81–97

    Article  Google Scholar 

  • Claeys P (2008) Rules, and their effects on fiscal policy. Swed Econ Policy Rev 15(1):7–48

    Google Scholar 

  • Cochrane JH (1998) A frictionless view of US inflation. In: Bernanke B, Rotemberg J (eds) NBER Macroeconomics Annual 13(1). MIT Press, Cambridge

    Google Scholar 

  • Curristine T, Park C, Emery R (2008) Budgeting in Portugal. OECD J Budg 3:1–60

    Google Scholar 

  • Davig T (2004) Regime-switching debt and taxation. J Monet Econ 51:837–859

    Article  Google Scholar 

  • EC (2001) Public finances in EMU. European Commission

  • EC (2006) Public finances in EMU. European Commission

  • Favero C, Monacelli T (2005) Fiscal policy rules and regime (in) stability: evidence from the US. IGIER Working Paper No 282

  • Galí J, Perotti R, Lane PR, Richter WF (2003) Fiscal policy and monetary integration in Europe. Econ Policy 18(37):535–572

    Article  Google Scholar 

  • Gavin M, Perotti R (1997) Fiscal policy in Latin America. In: Bernanke B, Rotemberg J (eds) NBER Macroeconomics Annual 1997. MIT Press, Cambridge

    Google Scholar 

  • Girouard N, André C (2005) Measuring cyclically adjusted budget balances for OECD countries. OECD Working Paper No 434

  • Giuliodori M, Beetsma R (2008) On the relationship between fiscal plans in the European Union: an empirical analysis based on real-time data. J Comp Econ 36(2):221–242

    Article  Google Scholar 

  • Golinelli R, Momigliano S (2006) Real-time determinants of fiscal policies in the Euro area. J Policy Model 28(9):943–964

    Article  Google Scholar 

  • Guichard S, Leibfritz W (2006) The fiscal challenge in Portugal. OECD Working Paper No 489

  • Hallerberg M, Strauch R (2002) On the cyclicality of public finances in Europe. Empirica 29(3):183–207

    Article  Google Scholar 

  • Hallerberg M, von Hagen J (1997) Sequencing and the size of the budget: a reconsideration. CEPR working paper No 1589

  • Henisz W (2000) The institutional environment for economic growth. Econ Polit 12(1):1–31

    Article  Google Scholar 

  • Hercowitz Z, Strawczynski M (2004) Cyclical ratcheting in government spending: evidence from the OECD. Rev Econ Stat 86(1):353–361

    Article  Google Scholar 

  • Huber J, Inglehart R (1995) Expert interpretations of party space and party locations in 42 societies. Party Polit 1(1):73–111

    Article  Google Scholar 

  • Krolzig H (1998) Markov Switching vector auto-regressions. Springer, Berlin

    Google Scholar 

  • Lane P (2003) The cyclical behaviour of fiscal policy: evidence from the OECD. J Public Econ 87(12):2661–2675

    Article  Google Scholar 

  • Lane P, Tornell A (1996) Power, growth, and the voracity effect. J Econ Growth 1:213–241

    Article  Google Scholar 

  • Laver M, Hunt WB (1992) Policy and party competition. Routledge, New York

    Google Scholar 

  • Leeper E (1991) Equilibria under “active” and “passive” monetary and fiscal policies. J Monet Econ 27:129–47

    Article  Google Scholar 

  • Manasse P (2006) Procyclical fiscal policy: shocks, rules, institutions: a view from MARS. IMF Working Paper No 27

  • Marinheiro C (2006) Sustainability of Portuguese fiscal policy in historical perspective. Empirica 33(2–3):155–179

    Article  Google Scholar 

  • OECD (1995) Budgeting for results. OECD, Paris

    Google Scholar 

  • Perotti R, Kontopoulos Y (2002) Fragmented fiscal policy. J Public Econ 86(2):191–222

    Article  Google Scholar 

  • Pina A (2004) Fiscal policy in Portugal: discipline, cyclicality and the scope for expenditure rules. In: Proceedings of the 2nd conference on Portuguese economic development in the European context, Bank of Portugal, pp 11–12, 15–65

  • Sims C (1994) A simple model for study of the determination of the price level and the interaction of monetary and fiscal policy. Econ Theory 4(3):381–399

    Article  Google Scholar 

  • Talvi E, Vegh C (2000) Tax base variability and procyclical fiscal policy. NBER Working Paper No 7499

  • Thams A (2006) Fiscal policy effects in the European Union. SFB Discussion Paper No 649

  • Tornell A, Lane P (1999) The voracity effect. Am Econ Rev 89(1):22–46

    Article  Google Scholar 

  • von Hagen J, Hughes-Hallett A, Strauch R (2002) Quality and success of budgetary consolidation. In: Buti M, Martinez-Mongay C, von Hagen J (eds) The behaviour of fiscal authorities—stabilization, growth and institutions. Palgrave, London

    Google Scholar 

  • Warwick P (1994) Government survival in Western European parliamentary democracies. Cambridge University Press, New York

    Google Scholar 

Download references

Author information

Authors and Affiliations

Authors

Corresponding author

Correspondence to Peter Claeys.

Additional information

The opinions expressed herein are those of the authors and do not necessarily reflect those of the ECB or the Eurosystem. We are grateful to an anonymous referee for helpful comments.

UECE is supported by FCT (Fundação para a Ciência e a Tecnologia, Portugal), financed by ERDF and Portuguese funds.

Appendix—Data description and sources

Appendix—Data description and sources

GDP:

data are quarterly, seasonally adjusted, period: 1978: 1–2007:4. Source: Bank of Portugal.

Deflator:

all variables were deflated by the GDP deflator (2000 = 100). Data are quarterly, seasonally adjusted, period: 1978:1–2007:4. Source: Bank of Portugal.

Government Spending:

defined as Central Government primary spending (on a cash basis), i.e. the difference between authorized expenditure and debt interest payments. We seasonally adjust quarterly data using Census X12 ARIMA, period 1978:1–2007:4. Source: Bank of Portugal.

Government Revenue:

defined as Central Government total revenue (on a cash basis). We seasonally adjust quarterly data using Census X12 ARIMA, period 1978:1–2007:4. Source: Bank of Portugal.

Debt:

is defined as the stock of Direct State Debt. The original series are available as follows:

  1. 1.

    for the period 1997:12–1994:6, on a quarterly basis:

    1. (a)

      total internal debt

    2. (b)

      internal direct debt

    3. (c)

      total external debt

    4. (d)

      direct external debt

    5. (e)

      total public debt

    6. (f)

      effective public debt

  2. 2.

    for the periods 1991:12, 1992:12, and 1993:6–1995:11, on a monthly basis:

    1. (a)

      internal effective direct debt

    2. (b)

      total effective direct debt

  3. 3.

    for the period 1995:7–1998:12, on a monthly basis:

    1. (a)

      internal direct debt

    2. (b)

      total direct debt

  4. 4.

    for the period 1998:12–2008:4, on a monthly basis:

    1. (a)

      direct state debt

Source: Bank of Portugal, the Directorate-General of Treasury, and the Directorate-General of Public Credit.

We build the series for the Direct State Debt as follows:

  1. 1.

    for 1998:12–2008:4, as the series of direct state debt itself;

  2. 2.

    for 1995:7–1997:12, we use the ratio of direct state debt to total state debt in 1998:12 to back-out the series of direct state debt;

  3. 3.

    for 1993:6–1995:6, we use the ratio of total effective direct state debt to total direct state debt in the period 1995:7–1995:11 to get the series of total direct debt;

  4. 4.

    for 1977:12–1993:3, we use the ratio of (effective public debt minus non-direct debt) to total effective direct debt in the period 1993:6–1994:6 to back-out the series of total effective direct debt.

Given that the scale factors are very close to one, the time series of the Direct State Debt is smooth over time and we guarantee that there are not structural breaks. We build the quarterly series using monthly data (where available) and seasonally adjust it using Census X12 ARIMA. The constructed series comprise the period 1977:4–2007:4.

About this article

Cite this article

Afonso, A., Claeys, P. & Sousa, R.M. Fiscal regime shifts in Portugal. Port Econ J 10, 83–108 (2011). https://doi.org/10.1007/s10258-010-0065-5

Download citation

  • Received:

  • Accepted:

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1007/s10258-010-0065-5

Keywords

JEL Classification

Navigation